Spending nearly half of January out of the country was a good idea. I not only missed most of the bad weather but I also got around to reading Why Nations Fail, as number of you suggested I should.
It is, as most reviewers have said, a fascinating and thought-provoking read. And its argument is clear. What makes some nations rich and other poor, say the authors, is not geography, climate or abundance of resources. It is man-made political and economic institutions.
Countries in the same region, with similar resources, often have vast differences in standards of living. Most obviously, North and South Korea, until 60 years ago a single country, now have a huge gap in wealth, health and life expectancy between them. It is, say Professors Acemoglu and Robinson, institutions that make the difference.
Countries, they argue, either have inclusive political and economic institutions, in which power and opportunity are distributed, or extractive ones, where power and opportunity are monopolised by self-perpetuating elites.
Extractive political systems can be autocracies, where repressive state power excludes outsiders or, at the opposite extreme, those lacking central authority, allowing warlords and chieftains to establish mini-states. In both cases, investment and innovation by those outside the ruling elites is almost unknown. Under extractive regimes, outsiders, for the most part, don’t have access to education or capital. Even if, against the odds, they manage to create successful enterprises, they run the risk of them being confiscated by the ruling elite or looted by robber barons.
Inclusive political systems, on the other hand, have enough central authority to maintain order, the rule of law and property rights but power and opportunity are distributed. The distribution may not be equal but there is enough diversity to ensure that no single group has too much power. It is in the interests, even of the competing elites, that the rule of law should apply to all. In inclusive systems, therefore, the opportunity to innovate and develop new businesses is available to a wider range of people. Once you have established your business, you are secure in the knowledge that you have legal protection and that the president’s son or the local militia leader is not going to come and take it away from you. For this reason, inclusive systems innovate and create wealth more quickly than extractive ones.
Britain developed inclusive institutions early because, although it didn’t have anything close to democracy, it had competing elites and a relatively strong and centralised state. The development of colonies and Atlantic trade enriched merchant classes who were outside the traditional aristocratic ruling class. They were therefore able to resist royal power and along with other powerful groups, impose the constitutional settlement of 1688 on the monarchy. Crucially, though, none of these groups was powerful enough to take over the state themselves. The political and legal systems therefore balanced a number of interests rather than becoming the tool of just one. Even those who could not vote benefitted from this. British people had rights before they had the franchise. This, say Acemoglu and Robinson, is why the industrial revolution happened in Britain.
Contrast this with regimes in eastern Europe. To the aristocratic elites of the Austrian and Russian Empires, industrialisation was a threat. New classes of merchants and industrialists, they feared, would challenge the power of the ruling elites and so new industry was discouraged and even suppressed. The paradox of extractive systems is that they enrich the ruling elite but gradually make the country as a whole poorer. By discouraging industrialisation, therefore, the aristocracies of Austria and Russia bolstered their position in the short-term while almost guaranteeing that their countries’ backwardness would lead to their eventual collapse during the First World War.
It is a persuasive argument and the book contains examples from every continent showing how and why inclusive political and economic institutions ultimately make for wealthier and more stable societies than extractive ones. Even where extractive oligarchies succeed in the short run, such as in Argentina, they eventually fail. For this reason, argue Acemoglu and Robinson, despite its recent rapid growth, China’s rulers will either have to democratise the country or see it stagnate, as autocracies inevitably must.
It’s this last bit that I find the least convincing.
Why Nations Fail provides plenty of evidence that, in general, societies with inclusive institutions are more likely to succeed than those run by extractive elites. But does it necessarily follow that autocracies must always fail? Is it really not possible for an authoritarian elite to share enough economic power to enable a country to keep growing while maintaining its grip on political power – which is essentially what the Chinese communist party has been trying to do for the last thirty years.
The major disparity in wealth between countries opened up after some successfully industrialised and others didn’t. We are only talking here about a small group of major industrial nations; roughly today’s G7. The USA, France and Britain became industrialised under inclusive political systems but Germany, Japan and Italy developed much of their industry under autocratic regimes. The sharp-eyed among you will no doubt have spotted that the latter all ended up on the losing side in the Second World War. It is tempting to see this as the vindication of one system over another. The democracies won and the dictatorships lost. OK, the biggest dictatorship, the U.S.S.R., didn’t lose until 1989 but it still lost in the end, thus proving that inclusive democracies are better than elite-run dictatorships.
But is that really true. Imperial Germany, for example, managed to combine a form of market capitalism with autocratic royal power. In the late nineteenth and early twentieth centuries, its economic growth outstripped that of every other country apart from the USA. It was well ahead of France and Britain. By the standards of the time, the benefits of this growth were widely shared. The German welfare and pensions systems were established during this period. But, while businessmen became rich, power was still very much in royal hands. If anything, German economic growth strengthened the position of the existing oligarchy.
Acemoglu and Robinson would no doubt argue that, had it not been for the First World War, Imperial Germany would eventually have stagnated like the Soviet Union, or pressure from the aspiring middle classes would have forced a transition to an inclusive democratic state. They might also argue that it was precisely because Germany was an autocracy that it threw up a vainglorious leader like Wilhelm II who drove it to its ruin.
It’s comforting, especially for those of us that have grown up in the west, to believe that pluralist democracies will win out in the end. But looking at the history of Imperial Germany, and of its Nazi successor, I struggle to convince myself that their demise was ultimately due to being beaten by a superior system. Both German regimes came very close to winning their respective world wars. But for a couple of blunders, rubbish allies and the odd bit of bad luck, the Kaiser or Hitler could have ended up running Europe. If the Nazi regime was hampered by autocracy’s tendency to stifle innovation it didn’t show. The Germans were the first to develop the jet fighter, the assault rifle and the ballistic missile. Historians disagree over whether Germany, had it been victorious in Europe in the early 1940s, might have beaten the USA to the development of nuclear weapons. Thankfully, it’s something we’ll never know.
What is clear, though, is that Germany, under both its Imperial and Nazi autocracies, managed to develop dynamic, innovative and rich societies. These failed not because they were confronted by superior systems but, largely, because of strategic bad luck and bad judgement. Might China succeed where Germany failed? It’s certainly not doing too badly at the moment and, as Timothy Garton Ash pointed out last week, autocratic China is currently beating democratic India hands down.
Is it really not possible to build a rich, stable and successful state rule by an autocratic oligarchy? Must China run out of steam, as the authors of Why Nations Fail claim? To quote one of its early leaders, it’s too soon to say.
In general, I think Acemoglu and Robinson’s arguments are persuasive. Other things being equal, inclusive states tend to fare better than those run by extractive autocracies or oligarchies. What I am less convinced by, though, is the assertion that all autocracies must necessarily fail. That, until now, most of them have may simply just be down to luck.
Left Outside on the China question.