BOOK REPORT: Why Nations Fail

There are massive differences in the living standards all over the globe today. Increasing growth rates of economies worldwide seemed to be the primary agenda of economists, policy makers, and governments alike. It wasnt until recently that it came to light that the trickle-down-effect associated with economic growth (whose primary indicators include Gross domestic product and Per capita income) may have been over estimated. The vast dissimilarities between how different countries have fared is a matter of crucial interest. It is this question that Acemoglu and Robinson have attempted to answer in their book, Why Nations Fail. This book is a grand historic and economic narrative and it centers on the complex joint evolution of political and economic institutions. The basic theme of the book is that factors that matter most in explaining why some nations fail and others succeed are not entities such as economic policies, geography, culture, or value systems as has been argued previously by many other scholars but rather institutions; more precisely the political institutions that determine economic institutions. The basic case that the authors seek to make in the book is a simple one, namely that nations with extractive political and economic institutions (institutions in which a small group of individuals do their best to exploit, as Karl Marx previously explained, the rest of the population) are likely to be poor, whereas those with inclusive institutions (institutions in which many people are included in the process of governing hence the exploitation process is either attenuated or absent) are likely to be rich. Politics is of paramount importance and the existence of centralized and pluralistic political institutions is the key to the sustained existence of inclusive economic institutions. They argue that for any economic success, political institutions must also be sufficiently centralized to provide basic public services including justice, the enforcement of contracts, and education. Given that these functions are carried out, inclusive institutions enable innovative energies to emerge and lead to continuing growth as exemplified by the Industrial Revolution.

While a degree of economic growth may be possible under extractive institutions as well, such growth is not sustainable, as shown by the cases of the later Roman Empire and the Soviet Union. The presence of extractive institutions even defeats the purpose of foreign aid and any external assistance is absorbed by these corrupt institutions. But once a nation has started to move towards inclusive institutions, a positive feedback loop may help to keep them in place, but extractive institutions are also sustained by path dependence, with those in power being fearful thus resistant of the creative destruction generated by change, producing a vicious circle. Moreover, the book emphasizes that there is a real sense in which history as well as the future is random. Many small unpredictable incidents or small differences in initial circumstances can lead to either inclusive or exclusive institutions - or more broadly success or failure. This puts the book clearly within the realm of modern economic theory, especially evolutionary theory, which emphasizes the importance of unpredictable events and puts it against more traditional analyses which deemphasize the random component. Both by highlighting the importance of randomness in theory and substantiating it with evidence and anecdotes this book does helps one understand both history and the future. It is certainly hard to dispute the claim that institutions matter; the authors themselves have played a major role in demonstrating the significance of colonial institutions, for example, in shaping the economic development of colonized countries, and in the primacy of political institutions in shaping economic ones. However, there is the phenomenon of oversimplification that is inevitably associated with almost any mono-causal explanation, and the indiscriminate rejection of other competing explanations of historical development. For example, their depiction of the determinism associated with geographical or cultural explanations prevents them from acknowledging the subtle historical interplay between geographical factors, culture and institutions, whether extractive or inclusive. The authors own account shows that a major reason why the extractive institutions of the Spanish could not be copied in North America was the very absence of gold and silver that could be plundered. Other than natural resources, land locked nations are clearly at a disadvantage. According to Adam Smith, productivity gains achieved through specialization are the means to the wealth of nations. But for these gains to materialize, manufacturers or even retailers must have access to markets where they can sell their specialized output and buy other goods; obviously, the larger the market, the greater the scope for

specialization. However, in today's global marketplace, most industrial products require inputs from various locations around the world. In addition to that, the final product is also sometimes made available in international markets. Therefore, if transportation costs are high, local companies will be at a disadvantage in accessing the imported inputs they need and in getting their own goods to foreign markets. Historically, the opening of Atlantic trade routes which created enormous profit opportunities for many in Western Europe was also only possible because Europe has access to open sea. Natural resources such as coal and iron facilitated the industrial revolution. Geography also determines weather patterns which in turn affect agricultural production. Certain temperate environments can be conducive to parasitic diseases. Granted that these factors alone cannot make or break nations but neither can they be deemed entirely inconsequential to the performance of any nation. In conclusion, it can be said that though factually beyond reproach and the examples cited in the book are nothing short of persuasive, an underlying framework of case-study approach can be noted. In retrospect, one can choose the historical countries that satisfy ones hypothesis and Acemoglu & Robinson seem to have done that. The East Asian countries, for example, whose economic progress is commonly, referred to as the East Asian miracle, all experienced rapid growth in the absence of inclusive institutions. The use of selective examples can also be determined by examples that are not used in the book; for example the extractive Mayan Empire which continued to generate wealth over more than six centuries. Despite these minor inconsistencies, the book itself is definitely worth reading as it broaches topics such as poverty and equitable prosperity while incorporating economic history which is a crucial aspect of development studies.