Friday, April 20, 2018
Perspective

Nations fail, but is this why?

Why Nations Fail by Daron Acemoglu and James Robinson is getting lavish praise. Mostly, the book deserves it.

A kind of antidote to Jared Diamond's megaselling Guns, Germs, and Steel, it asks why some countries are rich and others poor. The answer isn't geography, as Diamond argued — ingeniously though implausibly. It isn't culture either, as others say. According to Acemoglu and Robinson, it's politics. Get the politics right, and you'll prosper.

It's admirable to grapple with a question of such vast consequence and offer such a big, bold answer. The authors make getting there a rare intellectual treat. Nonetheless, I dare to be disappointed. Why Nations Fail goes wrong, I think, in a couple of important respects.

The book's geographical and historical range is remarkable. It describes the varying economic and political impacts of the Black Death in Europe; the legacy of British colonialism in the United States and the shockingly different imprint it left on Africa; the contrast in the 1500s between, on the one hand, the Charruas and Querandi of what is now Argentina and, on the other, the Guarani of what is now Paraguay; political unrest in England in the 18th century; and political unrest in Egypt in 2011. One chapter is described as: "What Stalin, King Shyaam, the Neolithic Revolution, and the Maya city-states all had in common and how this explains why China's current economic growth cannot last."

Timid it is not. And no reader will suspect these authors of bluffing. The scholarship is carried lightly — the book is an easy, engaging read — but wide and deep.

Better still, the truth the authors keep coming back to is one whose importance would be hard to exaggerate. Prosperity depends not on culture or geography or rulers' expertise but on "institutions, institutions, institutions," and on these above all: property rights, economic freedom, equality before the law, and trusted enforcement of contracts. Markets aren't enough. For economies to prosper, governments must supply these institutions, and only governments can. Without them, people have no incentive to work, invest and innovate.

The trouble is, as an explanation of development, "institutions matter" may be true, but it isn't new. To have a theory of development to call their own, the authors needed to go further. They do this by arguing in effect that politics is more fundamental than economics. You need property rights — but how does a system come to create property rights? Through politics, obviously. So the challenge isn't so much to create the right economic institutions. It's to create the right political institutions. Do that, and the right economic institutions will emerge.

As for what those right political institutions might be, the authors' answer is that they should be "inclusive" — meaning, essentially, more democratic rather than less. The best protection against the depredations of an elite through slavery, arbitrary confiscation, punitive taxation and history's many other systems of extraction is inclusive politics. Empower the broad mass of people, and property rights, contract enforcement and freedom of choice will follow.

Aside from lending the authors' ideas the desired novelty, this shift of emphasis from economics to politics has a nice presentational benefit. It subdues a right-wing talking point (what matters is property rights and incentives) and dials up one more congenial to the left (empower the masses). Clever. Here's a theory of development that everyone can love.

The trouble is, these extensions are less convincing than the simpler idea we came in with — that institutions matter. For one thing, the priority of politics over economics calls for a sharp distinction between the two. That's not easy. Is secure title on your property an economic liberty or a political liberty? It's both.

The authors' insistence that politics is the deeper force also has a chasing-the-tail quality. Why did England move toward universal education and the beginnings of a welfare state? Politics: The masses were enfranchised in the Reform Acts of the 19th century. But surely it was economics that made those reforms possible: The Industrial Revolution had given new power to a broader mass of the citizenry. Well, politics lay behind that, too: The Industrial Revolution happened when and where it did because the Glorious Revolution of the 17th century gave England a relatively pluralist political system. True, but that was because the English elite gained economic power from the expansion of the Atlantic trade during the 16th century. No doubt, but that was because the Tudor monarchs …

You get the idea. In a sequence like this, who knows whether the economics or politics came first? And who cares, actually?

The limit of this kind of regression is to argue — as the authors do, in fact — that politics preceded economics in the domestication of peas and lentils in what is now Syria, circa 9500 B.C. "The evidence indeed suggests that the Natufians developed a complex society characterized by hierarchy, order and inequality — beginnings of what we would recognize as extractive institutions — a long time before they became farmers."

That's interesting, and the authors seem to think it matters for the novel part of the theory they're advancing. But I can't see that the importance of property rights in post-Soviet Russia (say) hinges in any significant way on whether the Natufians got lentils before they got hierarchy or the other way round.

The worst thing, though, is that word "inclusive." No right-thinking person could be against anything inclusive. The term demands approval and deadens the critical faculties in the same way as sustainable development, good corporate citizenship and change you can believe in.

What does it even mean? The book asks the idea to carry a truckload of analytical weight, but its content is never carefully unpacked.

For that matter, consider progressive taxation as a remedy for inequality. Up to a point, if the proceeds are spent on valuable public goods, it promotes growth as well as leveling incomes. But keep raising taxes and you do so much harm to incentives that the policy becomes self-defeating even for the putative tyrant collecting the cash. The authors would call the first kind of progressive taxation inclusive and the second kind extractive, but this sheds no light on the trade-offs involved. The idea of inclusion imparts a warm fuzzy feeling that invites you not to think about it.

The late Mancur Olson, a pioneer of the "institutions matter" school, wrestled with this and with the political economy of democracy and despotism more generally. I was surprised Acemoglu and Robinson found his ideas unworthy of discussion.

What they call inclusive institutions, Olson called market-augmenting government — a less seductive term, but more informative. Olson agreed that democracies are better guardians of economic freedom, and had a deeper explanation of why this is. But he also had a lot to say about rival economic interests within democratic systems, how they compete at the expense of others to redistribute income in their direction, and why some democracies therefore do better than others. This harder-headed perspective, I think, is more productive than "inclusion is good."

Still, I want to end on a note of praise. The strength of Why Nations Fail is its ambition, its range and above all its fabulous richness of examples. The authors have brought off an extraordinary undertaking. On the main things, moreover, they're right. I just wish they hadn't said "inclusive."

© 2012 Bloomberg News

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