Why Nations Fail

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.

Further reading:

Reviews: Economist, Guardian, LSE, Oxfam Blog, New York Times, World Bank, Al Jazeera

Lecture slides from the authors.

Why Nations Fail blog.

Left Outside on the China question.

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15 Responses to Why Nations Fail

  1. Pingback: Why Nations Fail - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. StephenBoydSTUC says:

    Great post Rick; your views on WNF are very similar to my own. The debate between WNF authors and ‘Poor Economics’ development economists Duflo & Banarjee is fascinating – Michael Heller provides a good summary of the issues and some intriguing comment here http://www.project-syndicate.org/blog/the–poor-economics–in–why-nations-fail-

  3. Juli says:

    Great post, Rick. Perhaps Acemoglu and Robinson’s next book could deal with ‘inclusive democratic states’ which are becoming increasingly extractive due to both old and modern strands of elitism…

  4. Acemoglu and Robinson’s case rests on a false dichotomy between what they categorise as extractive and inclusive systems. The stark Korean example is unrepresentative because of the atypical nature of the North – a failed state only kept going by covert Chinese support. In reality, most societies are a combination of extractive and exclusive. Indeed, institutions themselves give rise to extractive practice (i.e. rent-seeking) and restrictive access. Consider the legal profession or the City of London.

    The notion that inclusive practice inevitably leads to democracy is self-justifying Whig history. The privileging of institutions and pluralism reflects an anglocentric liberal worldview. As you note, the foundational issue for industrialisation (or more generally capitalism) is the state’s guarantee of property rights, but this can equally be achieved by a political system that values order over liberty, as Willhelmine Germany did. A restricted franchise and a privileged military caste are wholly compatible with a compromise between big capital, small capital and labour, as Bismarck’s career (a balancing act between conservative and liberal policies) illustrates. Nazi Germany in turn showed that such a deal could marginalise labour and ignore political plurality.

    Their belief that the Chinese system will crumble from within is just an updating of de Toqueville’s contention that political systems are at their most vulnerable when living standards are rising and expectations growing. This is ultimately a reactionary consolation – autocrats should not compromise because it only encourages more demands from below – but it has become a liberal article of faith because it serves the idea that gradual reform is possible by buying off the “emerging middle classes”. Consider the popularity of that trope in the reporting of China and other developing nations. What this fails to acknowledge is the degree to which the middle classes are already complicit in the state. The paradox is that in a one-party state, the party is necessarily an inclusive institution as it has to accomodate (or at least constrain) all the powerful interests within society. If you want to get on, whether by starting an innovative business or securing a sinecure, you need a party card. Inclusive and extractive happily co-exist.

    • Rick says:

      F.A.T.E. – I found the dichotomy an oversimplification too – though I can see what they were getting at. Models used in this way tend to simplify to get a point across.

      I think there is something in the argument that ideas like the rule of law helped countries in Northern Europe industrialise. What I’m less sure of is that this means societies run along western lines will always lead.

      I’d love to believe that pluralism and democracy and a reasonable balance between order and liberty will be rewarded but I’m far from convinced.

  5. margecsimpson says:

    Great post, haven’t read WNF myself but am currently reading The Traumatised Society by Fred Harrison where he gives a critique of WNF (P116 – 118) as follows:

    “The inclusive/extractive model developed by two star scholars leaves policy makers bewildered. It is supposed to point governments in the direction of policies that would equalise power, increase prosperity and reduce poverty. In fact, compliance with the model would cause rich nations to sustain the status quo…….The Acemoglu and Robinson theory, which eulogises Western dynamism turns out to be a contradiction in terms. Their inclusive nations (with some exceptions) are shamed by a history of extractive behaviour, practices which continue to this day.”

    • Rick says:

      Thanks Marge. To be fair, the authors concede that, even those countries which developed inclusive models at home, like Britain and France, still ruled their empires in an autocratic/extractive way. Although Acemoglu and Robinson don’t say so, the same could probably be said for the USA and some of the states in its sphere of influence. Chile springs to mind!

  6. vincelammas says:

    I read Paul Kennedy’s Rise and Fall of the Great Powers many years ago. In this book he highlighted repeating patterns through history of Great Powers arising through the growth of economic strength leading to increased military capability with, later, imperial over-extension in the face of younger economic and military powers.

    I love material that helps understand the huge sweeps of major historical, social and economic forces that shape our past and future and this sounds like one for my reading list – even if some of the conclusions look a bit shaky. I seem to remember his suggestion was the dominance of the West arose from the competitive political nature of smaller European nations – acting as a spur to technological and economic progress in a way that neither Asian nor Middle East powers experienced.

    I know this isn’t a point central to your article but I feel compelled to point out that Nazi Germany didn’t lose WWII because of a couple of blunders and a bit of bad luck. After the United Kingdom evaded a potential political collapse following defeats in 1940, Hitler’s strategic (and horrendously ill-informed) decision, immediately and without effective preparation, to attack the USSR was an enormous gamble – an error exacerbated by disastrous strategic military leadership.

    Defeat eventually came because both the United States and the Soviet Union were able, over time, to effectively convert their enormous strength in manpower and economic capacity into military combat power.

    By the end of 1941, military opportunism and exemplary tactical skills had run their course against unprepared enemies. Once two nascent superpowers, allied against Germany, worked out how to fight a “modern war” against the experienced forces of the Luftwaffe and Wermacht, it was really only a matter of time before that tyranny was overwhelmed. Of course this doesn’t support the propositions in WNF as the Soviet Union itself was as ghastly a tyranny as Germany.

    Like many commentators here, I doubt the suggestion that a lack of democracy is the same as “an extractive” social system. This linkage seems too convenient and self-serving. I can’t imagine the Roman Empire as anything like an inclusive society and yet with managed to prevail for centuries over its neighbours.

    It will be fascinating to watch the Chinese government’s attempts to walk the tightrope of economic prosperity and increasing choice combined with strong central political control. I don’t think that will be easy path and I suspect at some point, political freedoms may well spill out in unintended ways. Who knows, as the years pass, this might seem less dangerous to their political elite, as did gradual emancipations in the West.

    • Rick says:

      OK, Vince, perhaps ‘blunder’ was a bit of an understatement when describing the decision to declare war on two huge countries before finishing off the wobbling colonial empire on the doorstep but that was what I meant.

      There was nothing inevitable in Germany’s defeat though. Had it taken its time and fought its enemies one-by-one, things might have been different. It’s the suggesting that all dictatorships must fail that I don’t buy in Why Nations Fail.

  7. patrickhadfield says:

    A fascinating post. It sounds like Acemoglu and Robinson’s thesis is pretty flawed – as if they are trying to justify (and shore up?) the west’s position in an unequal world.

    And I’m impressed by the quality of the comments, too! (This one aside, obviously.)

  8. One confounding factor with respect to China is that cultural differences may mean that inclusiveness is not the same as democracy. Generally, decision-making there is more about the interests and identity of a group than it is here – the family or even the village. Thus, one could argue that since every village has its representative in the Party, power is in fact shared widely.

    It’s possible to overstate these cultural differences (as well as using them to excuse some forms of tyranny) so I wouldn’t push too hard on this argument. But the differences do exist, and could explain some of China’s stability to date. It seems, anecdotally, that some of the (small) successes in dispersing power from the centre, at least those which haven’t provoked a repressive reaction, have come from action at the level of village or town, rather than from groups of individuals linked by non-geographical interests (of course there could be other explanations for this).

  9. Needs2Cash says:

    Time comes when the King or the Party has to be confident enough to let go of power to sustain their nation. Sustainability may then come from a network of wealth creators, institutions and markets to enable workers to create wealth and to prosper themselves.

    Does this confidence come from the effective rule of law? Or from a strong network of sub-rulers? Or does it come from leaders understanding the needs of stakeholders and giving them the power to become successful? It may come over many years of applying the recommendations of a standard that represents centuries of lessons learned (see BTW below).

    Tribal differences undermine any sense of nationhood further constraining any chance of change for the common good. As the Hawaiian’s realized, warring tribes may never become successful nations.

    People holding the power eventually destroy their nation when they keep or tighten their grip on power and ignore the needs of others adversely affected by their rule. Bloody revolution may cause the people to value their freedoms so much they never revert to autocratic leadership.

    BTW, ISO 26000 applies to companies, institutions and governments. It provides leaders of all these organizations guidance on sustaining their nation through social responsibility. My question is “Will the freedoms given by an Invader, the UN, ISO or any well-meaning NGO actually be valued strongly by the people for them to stop the slide into autocracy?

  10. guthrie says:

    I took this out my local library recently, and never finished it.
    The thing is, from my own varied reading of disparate bits of development history, history of Britain, Europe, History of Economics etc, I agree with the broad outlines of their thesis.

    But, and it’s quite a big but, their examples read exactly like just so stories. I found myself saying “no, it’s more complex than that” far too often. Not that I am an expert or anything, but it was obvious that a massive amount of complex detail, individual and mass decisions, were left out of the sweeping statements about what was necessary for development. So I got bored, because if I wanted sweeping statements I’d go and read some moronic columnist in a ‘newspaper’.

    Since I never got to the end, do they consider the obvious way that western economies have, however you define it, turned extractive with the impoverishment of many through the financial system, reduced wages and profits from increased productivity going to the top 0.5% or so?

  11. Marc says:

    And in which direction is Britain travelling? The PM, London Mayor and now Archbishop of Canterbury all went to the same school – and some well known people you probably didn’t realise as this B-movie spoof shows: The Invasion of The Old Etonians!

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