By Daron Acemoglu &
James A. Robinson
I
Economics not long
ago was at risk of becoming obscure and irrelevant. The perfectly informed and
rational human agents of mainstream theory were nowhere to be found in the
bubbles, financial crises and economic upheavals of recent times. All too
often, Western policy-makers and market practitioners have been stunned when
sensible economic prescriptions are blindsided by politics.
Emerging from the
consequent angst in academic circles is an approach that broadens the forces
and influences seen to shape economic outcomes. Nobel-prize winner Daniel
Kahneman's Thinking, Fast and Slow marries insights from the field of social
psychology and neuroscience to economic behaviour.
Blending prehistory,
geography and anthropology, The Origins of Political Order by Francis
Fukuyama's distills three ingredients for a successful and enduring nation: the
rule of law, a strong state and accountability.
Older but in keeping
is Albert O. Hirschman's classic text Exit, Voice, and Loyalty which contrasts
the choices citizens make when trapped in failing organizations and states.
'Exit' is voting with your feet, taking your business elsewhere. Voice' is staying
put and fighting for reform from within.
II
Daron Acemoglu &
James A. Robinson, professors at MIT and Harvard University respectively, make
a compelling addition to this trend in contemporary economics. Why Nations Fail
draws widely across the globe and vividly into history to answer some big
questions. Why do some societies prosper while others persist in poverty? Why
does the global map of the richest and poorest countries look remarkably the
same today as fifty, hundred and two hundred years ago with sub-Saharan Africa
and Central America much poorer than Western Europe, North America, Australia
and New Zealand. Without oil, the Middle East countries are also all poor.
Traditional
development economics (the 'dual economy' thesis, modernization theory, 'market
failures') ignore politics. Therein lies their failure for it is politics,
argue the authors, that drive everything. Get the politics right and all else
follows.
And what is right'
are 'inclusive' institutions which incentivize citizens and create virtuous
circles of innovation, expansion and widely-held wealth. Elements vital to
keeping the virtuous circle going are pluralism where many, varied groups exist
to check each other's power, laws applied equally, universal education, a free
media to inform and empower, secure property and patent rights that encourage
investment and open markets free of monopolies and progressive taxes.
However, where
'extractive' institutions prevail allowing a narrow elite to monopolise
economic gains, technological advances are blocked, productivity deteriorates
and a vicious circle of enduring backwardness sets in. There is great and easy
profit to be made merely by controlling power, expropriating the assets of
others and setting up monopolies. Hence, the hostility to new technologies
whose impact is both creative and destructive. Favouring new skills and
economic groupings, innovation invariably undermines the power and privileges
of the old, vested elites.
However, inclusive
institutions that adapt to allow ever broader sections of society to generate
and share in the new wealth trigger a path of rising prosperity. On the other
hand, extractive societies are ultimately unsustainable. Blocking newer, more
efficient ways, old sources of wealth are rendered obsolete by more vibrant
competition elsewhere. As the pie shrinks, infighting among elites for control
intensifies.
III
Acemoglu & Robinson's
central thesis is that these institutional differences become crucially
important at critical junctures, major events that disrupt the existing balance
of power in a nation. The Black Death of 1346, expansion of world trade after
1600, the Industrial Revolution in the late eighteenth century and European
colonization were among such defining moments.
Hence why did the
Industrial Revolution take off first in England followed by its settler
colonies (the US, Canada, Australia), France and Spain but fail elsewhere? The
authors trace the roots to the bubonic plague in 1346 which transformed and
split Europe. Halved in numbers, the peasantry in Western Europe gained in
bargaining power. Not so in Eastern Europe. Serfdom hardened to leave the
medieval feudal order intact and the masses destitute.
In England however
the masses were further empowered by Glorious Revolution of 1688. Power shifted
from the monarchy to Parliament which acted to open economic access to a broad
cross section of society. England rationalized property rights, enacted patents
for ideas, protected law & order and abolished monopolies and arbitrary
taxation.
Thus by the 18th
century, England had already developed the world's first set of inclusive
political and economic institutions. This plurality of interests and freedom
under a growing market economy allowed entrepreneurs and innovators to emerge
and commercialise the scientific knowledge that had accumulated in Europe over
several centuries. The impact was dramatic. The Industrial Revolution improved every
aspect of the English economy: transportation, metallurgy, steam power and
mechanization of textile production. The French Revolution in 1789 then led the
institutions of Western Europe to converge with those of England.
In contrast,
absolutist rule continued in the nineteenth century in Eastern Europe, the
Ottoman empire, Africa and most of Asia blocking the spread of
industrialization. China was a major naval power centuries before the
Europeans. But by the fifteenth century, the Ming emperors had abandoned global
voyages fearing that trade and new ideas would threaten their rule.
Subsequently, independent cities, merchants and industrialization were
non-existent in China for two centuries. Though never formally colonized, a
weakened China was defeated in the Opium wars and forced into humiliating trade
concessions by the European powers.
Conditions were no
less hospitable in India with society constrained under a rigid caste system,
absolutist Moghul rule and the arrival of English colonial rule. In Southeast
Asia, initial progress from a thriving spice trade reversed under the
extractive plantations of the Dutch and English East India Companies. Only
Japan played out differently in Asia. Like China, Tokugawa rule since 1600 was
feudal, absolutist and banned international trade. However the arrival of the
Americans in 1853 cemented opposition and led to a political revolution. The
Meiji Restoration enabled more inclusive institutions and modernized Japan,
laying the foundations for subsequent rapid growth.
In the Americas,
European colonization set the stage for divergence. In contrast to the
inclusive institutions modelled after England that developed in the US and
Canada, highly extractive ones emerged under the Spanish conquistadors on lands
occupied by the once majestic Aztecs, Incas and Maya civilisations, forcing
their living standards down to subsistence level. These institutions endure
till today condemning the region to poverty.
Africa was the part
of the world least able to capitalize on the Industrial Revolution. Already
lacking centralized states resulting in lawlessness and unstable borders (a
continuing handicap shared with Afghanistan, Nepal and Haiti), the Atlantic
slave trade decimated human and property rights and compounded Africa's backwardness.
Ironically, while the discovery of the Americas helped England develop
inclusive institutions by emboldening the merchants opposed to the Crown, it
made Africa more extractive. lindependence, rather than creating a critical
juncture to improve their institutions, has opened up a cycle of revolutions
and radical movements that merely replace one tyranny with another (dubbed the ‘iron
law of oligarchy’).
With these vivid trajectories from the past
five hundred years, the authors show how critical junctures served as a double
edged sword in that how political institutions in various nations responded
determined if they set off on a path of rising prosperity or poverty.
Fascinatingly, small initial differences became more significant over time.
IV
Seeing institutions
and incentives as the cause, Acemoglu & Robinson are dismissive of views
that poor countries are poor because of their geography or culture, or because
their leaders are ignorant.
Witness the yawning
gap between North and South Korea, identical twins in geography and culture but
divided at the 38th parallel six decades ago to evolve under very
contrasting political regimes. Or East and West Germany before the fall of the
Berlin Wall in 1989. Perhaps the most controlled experiment is in the
little-known town of Nogales. Divided by a mere fence, residents on the north,
belonging to the United States, face lower crime, live longer and earn three
times the south side, part of Mexico.
Hence it is not
Islam that keeps the Middle East poor but the extractive nature of Ottoman and
European colonial rule bequeathed upon today's authoritarian regimes. Could
European descent be at the root of success? Yet Argentina, more 'European' than
the immigrant populations of the US and Australia, has fallen mightily from the
richest ranks at the turn of the twentieth century. Meanwhile, Japan and
Singapore, with miniscule European heritage, are now as prosperous as Western
Europe.
Western policy
circles (the IMF, World Bank, aid agencies) also come in for criticism with
their approach assuming that merely enlightening political rulers about sound
economics will 'engineer' prosperity. The politically powerful make economic
choices that enrich themselves at the expense of the majority because they can
get away with it, not because they are ignorant.
V
But history is not
destiny. Crossing into the 20th century, there are striking examples
of countries 'breaking the mold'. In the US South, the empowerment of black
Americans through the civil rights movement coupled with intervention by
federal institutions finally ended the domination of the southern white elites.
In 1940, southern states were at half the average US national income. By 1990,
the gap had vanished and in 2008, the nation elected its first black president.
The rebirth of China
is no less remarkable. Impoverished for three decades under Mao's disastrous
policies of the Great Leap Forward and Cultural Revolution, China reversed
course to embark on the most rapid growth in the world. It was Deng Xiaopeng's
brilliant political coup that freed the way to introduce more inclusive market
incentives in agriculture and industry, and allow foreign investment into
selected cities.
The common
ingredient: political reform that seized the day to shape more inclusive
economic institutions and incentives. While admittedly few, it is in these
examples that the lessons of the book have their most appeal, offering a way
forward to douse the fires burning in Egypt, Turkey and Brazil.
