Coercion Doesn't Pay
Why Nations Fail: The Origins of Power, Prosperity, and Poverty
By Daron Acemoglu & James A Robinson (Profile Books 529pp £25)
It's the institutions, stupid. This is the message of this accessible book, written by two of the world's leading political economists. It is a welcome tonic for a world shaped by economists who never ask how markets develop in the first place. Development economists, foreign aid agencies, the IMF, the World Bank and Coalition forces in Afghanistan have been mesmerised by the idea that if you pour infrastructure spending in and open markets up, miracles will follow. They fail to understand that markets depend on secure property rights and contracts, and the freedom for newcomers to enter while the inefficient fail. The crux of the development problem lies upstream, not in economics but in politics. For Daron Acemoglu and James A Robinson, open and pluralistic political institutions prevent the powerful and their cronies from crushing efficient new entrants to the market. Or stealing their property. Or violating their contracts. In other words, without free politics, there is no free market. Nations with free, broad-based institutions get rich while countries without freedom stay poor. The Chinas and Vietnams, who think they can grow as rich as the West while power remains concentrated in the hands of a few, are kidding themselves.
The most obvious example of coercion creating poverty is an extractive institution. These occur when a small number of powerful people use force to extract wealth for themselves from the mass of the population. Slavery, dictatorship, warlordism and corruption remove the incentive for people to work hard and to innovate. Why take risks to produce more if there is a good chance it will be confiscated? The authors do a remarkable job of traversing the globe from Liberia to China, Botswana to Britain, in search of data points. They go back to imperial Rome and forward to Siaka Stevens's Sierra Leone to make a simple point: coercion doesn't pay.
A consistent theme is that civilisations that grow rich by conquering or discovering resources are living on borrowed time. The Roman economy, especially after the fall of the Republic, funnelled resources to a narrow elite and discouraged productive agriculture. Spain enjoyed a mineral-fuelled orgy when it exploited the New World but this did little to spur technological innovation and productivity. By contrast, Venice, like England later on, became wealthy because its commenda contracts allowed men of talent to participate in trading missions, gain capital, and become investors themselves. The new rich provided the dynamism behind the Venetian economy, and pressed for a greater share of political power. As they prised open the gates of power, this further relaxed the grip of the Venetian political elite on the economy, strengthening contract law and promoting further growth. Virtuous circles like this are common in economic development, remark the authors, yet vicious circles are far more common. Creative destruction is viewed as a threat by established interests, who will turn to politics when they are being defeated on a level playing field. This is what happened in Venice, beginning on 5 October 1286, when a proposal was passed that restricted membership in the governing Great Council to only those approved by the patrician elite. From then on, Venice's polity, and subsequently its economy, began to seize up and move in an extractive direction.
The authors are renowned for their work on sub-Saharan Africa. In their view, its tragic economic performance has nothing to do with its geo-climatic location or culture. Instead, it is poor because it has a long history of extractive institutions. Beginning with the slave trade, continuing under colonialism, and flourishing in the half-century since, these pernicious political structures have reproduced themselves to the detriment of the continent's people. On this interpretation, Mobutu and Mugabe were merely grasping tools passed to them from King Leopold and Cecil Rhodes. Africans get rich if the incentives are right, suggest the authors. They point to the economic dynamism of Ciskei and Transkei in South Africa as British law displaced tribal authority in the late nineteenth century. Racist land and labour laws, enacted in 1913, removed the incentives and caused these Xhosa homelands to revert to poverty. Again, politics is key: once freedom is lost, this transforms the economy from inclusive dynamo to extractive backwater. There is no more dramatic a portrait of this than the divergent performance of North and South Korea since 1953.
The dismal performance of Africa raises the question of how economies ever develop. Here the book's answers offer cold comfort. Institutions replicate themselves, changing slowly through an indeterminate process of 'institutional drift', which is punctuated by random 'critical junctures' like new technologies, wars or great leaders. Like the lightning strike required to start Doc Brown's time machine in Back to the Future, only the right combination of luck and drift can break through the inertia of extractive institutions to bring liberty. Junctures on their own are not enough. Revolutions usually reshuffle the chairs at the top while the masses remain excluded from the true sources of power and wealth. Even when change brings power to the many, progress is often fragile, susceptible to Robert Michels's 'Iron Law of Oligarchy' in which the dictates of large organisations always lead to the concentration of power.
Rarely do a field's leading boffins write for a general audience. Acemoglu, of MIT, hailed at age forty-three as one of the world's 100 leading thinkers by Foreign Policy magazine, and Robinson, of Harvard, have made their reputations on the back of articles dripping with summation signs and game theory. Though they are both products of the London School of Economics, they have been shaped by the rational-choice world of elite American political science. As a political scientist, I know only too well how much we would love to knock the economists off their policy perch. Is this the book to strike the fatal blow? On balance, probably not.
Though the authors make a resounding case for why politics matters, their contribution to policy is to argue that political freedom, which is impossible to engineer, is needed to guarantee wealth. This is an important point, and it flies in the face of those who applaud the seemingly successful rise of authoritarian China. But its policy implications are opaque. More importantly, the book's argument fails to mark its limitations. The most glaring of these is the book's blinkered tendency to pretend that mankind lives by bread alone, while history is decided by rational actors making decisions subject only to institutional constraints. I applaud simplicity and parsimony, but for the authors to fail to acknowledge alternative explanations is to commit an act of hubris that detracts from their strong arguments.
The account that Britain lucked out because neither the nobility nor the king could dominate the other is convincing when it comes to explaining Magna Carta. One might even buy the notion that luck struck twice when the forces of freedom won the Glorious Revolution. But to pretend that a shared Anglo-Saxon liberal culture had nothing to do with the emergence of liberal democracy in Australia and the United States is to stretch the bounds of credulity. Yet this the authors blatantly do, claiming that America would be as poor as Peru if there had been natives to enslave and no open spaces for settlers to flee to. No one can deny that the extractive southern states were poorer than the northern ones because they exploited African-Americans, but this doesn't explain why even the South was many times wealthier than Peru.
Do people always act rationally in their material self-interest or are their motivations occasionally emotional and symbolic? Are the Renaissance, Reformation and Enlightenment beside the point? The idea of 'ancient English liberties' or American freedom can be written off as self-serving froth, but these 'sacred values' - to use Scott Atran's term - have a powerful hold on many people. So they matter. Liberalism rests on more than a lucky alignment of interests, but is grounded in myths and symbols of identity. Protestantism and nationalism greatly benefited the liberal meme in England while Wahhabi Islam challenges it in Saudi Arabia. The success of the Arab Spring depends in large part on whether political freedoms can be legitimised within Islam and defended from the charge of being Western imports. So determined are the authors to deny the role of culture, they assert that successful Botswana's ethnic homogeneity - rare in Africa - is a product of its politics. In fact, recent research demonstrates that ethnic diversity has far more to do with geography than politics. Throughout the book there are numerous signs of theoretical overstretch. The authors rightfully laud Botswana's economic success but overstep the mark by ignoring the fact that it is one of the most unequal societies on earth. Singapore, a standing rebuke to the comforting notion that China must democratise to prosper, is brushed under the carpet. In short, when it comes to explanatory ambition, less would have been more.
Though it contains flaws, Why Nations Fail is powerful and fascinating, informed by decades of careful scholarship. No one can deny that institutions and interests matter; balancing these interests is pivotal at certain times and places. If this book can push institutions up the list of policymakers' priorities, it will do us all a great service.
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Eric Kaufmann is Professor of Politics at Birkbeck College. His latest book is Political Demography, published this month.