Book Review: ‘Why Nations Fail,’ by Daron Acemoglu and James Robinson

Source: Business Week

Somewhere in Beijing there must be an incinerator for burning reports from outsiders telling China’s leaders what to do. In February the World Bank, in cooperation with an arm of the Chinese government, issued a report called China 2030 that included this gem: “Where contract disputes arise … the disputants should have access not only to legal recourse but also to a transparent and effective judicial system that imparts justice without fear or favor.” It’s hard to imagine President Hu Jintao slapping his forehead in wonderment upon reading this: “But of course! Why didn’t we think of that? Stop the theft of intellectual property at once!”

As silly as it is, the “ignorance hypothesis”—the assumption that people in power would do right by their citizens if only they knew better—“still rules supreme among most economists and in Western policy-making circles,” Massachusetts Institute of Technology economist Daron Acemoglu and Harvard University political scientist James Robinson write in their new book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Nations fail, the authors argue, because “those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.” For the brutal few, hanging on to power and wealth outweighs all else.

Creative destruction, the driving force of modernization, terrifies those in power—and almost always has. In 1589, Queen Elizabeth I rejected the request of one William Lee for a patent on a knitting machine. “Thou aimest high, Mister Lee,” she told him. “Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.” What really worried Elizabeth, the authors say, was that the labor-saving technology would be politically destabilizing “and threaten royal power.”

Ranging from imperial Rome to modern Botswana, this book will change the way people think about the wealth and poverty of nations. The authors’ second book together is as ambitious as Jared Diamond’s Guns, Germs, and Steel: The Fates of Human Societies yet draws different lessons from history. The authors say Diamond’s geographic determinism, which argues countries got ahead based on their natural endowments, can’t explain why, for example, Peru has remained poor despite getting access to the wheat, barley, and horses that gave Spaniards an early edge. (Despite the criticism, Diamond supplied an enthusiastic blurb for the back cover of Why Nations Fail.)

Like children scarred in infancy, countries feel the effects of tyranny long after the original tyrants have died. The Peruvian province of Acomayo is within the area from which Spanish conquistadors dragooned Incas for forced labor; nearby Calca is outside that area. Today, the authors write, “the road to Calca is surfaced, the one to Acomayo is in a terrible state of disrepair.” People in Calca sell crops for cash; those in Acomayo merely subsist on them. And that’s after more than 400 years.

If overlords cling to power, and the new bosses are the same as the old, then how do Acemoglu and Robinson explain the rise of democracies and free markets? Time and luck. They describe a virtuous spiral taking hold in certain countries—England, for example—and building over centuries. For autocrats, “each step is small, and it makes sense to give in to a small demand rather than create a major showdown,” the authors write. This slow drift is punctuated by “critical junctures”—chance events that can either speed the process along or set it back.

The Black Death of the 14th century was one such critical juncture. The pandemic killed so many people in Europe that there were labor shortages. Sought-after workers in England gained bargaining strength that they built upon in the centuries that followed. The Black Death also produced labor shortages in eastern Europe, but there the landlords managed to win the struggle. They intensified their control, achieving a “second serfdom.” So the plague—a chance event—fatefully accentuated what had been only minor differences between western and eastern Europe.

The inventions that kicked off Britain’s Industrial Revolution—the steam engine, spinning jenny, etc.—might never have occurred in a society that suppressed creative destruction and denied property rights. Evidence: In 1705, Dionysius Papin, a Frenchman living in the German state of Kassel, built the world’s first steamboat, but it was destroyed by the boatmen’s guild that controlled traffic on the Fulda and Weser rivers. He died a pauper. Decades later the Scotsman James Watt persevered in perfecting the steam engine, knowing he would be able to get a secure patent and sell into a big market.

Undemocratic, fast-growing China might seem to disprove Acemoglu and Robinson’s thesis. They say it doesn’t. First, China’s economic institutions are “incomparably more inclusive today than three decades ago.” Second, because China remains authoritarian at the core, its growth “is likely to run out of steam” eventually. Plus, they say, concentration of power breeds instability as factions fight for the spoils. The turmoil in advance of the 18th Communist Party Congress in October—including the ouster of former rising star Bo Xilai—seems to support their point.

Books like this usually wind up with exhortations to do the right thing. Acemoglu and Robinson avoid this trap. They assess the likelihood that tigers will change their stripes—and conclude they probably won’t. China and Russia, they say, “are likely to reach the limits of extractive growth before they transform their political institutions in a more inclusive direction.” The conclusion is presaged early. “Sadly,” the authors write, “there are few heroes in this book.”


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