To say that Why Nations Fail is an ambitious book would be like saying the Indian Ocean has some water in it. And to say that the book has received worldwide attention would be like saying that Warren Buffett is an above-average stock picker.
What Daron Acemoglu (an MIT professor of Economics) and James A Robinson (a Harvard professor of Government) attempt to do in their book is to provide an elegant and simple explanation for why some nations have prospered while others have not. For this they have trawled the depths of Sub-Saharan and Aztech antiquity; brought to life the merchant guilds of Venice and the slave traders of Africa; laid out the reasons why the industrial revolution started in England and not elsewhere; explained why the United States, and not Mexico, is a global superpower; and dissected why Eastern Europe trails Western Europe. And that's only for starters.
The central thesis of the book is one that will warm the hearts of democrats everywhere: that prosperous societies have a central political authority with inclusive rather than extractive institutions which ensure that power is not concentrated in the hands of an elite and is, instead, widely distributed. Conversely, societies that fail are those that have not managed to create a central authority - like, say, Sudan or Afghanistan - or have a narrow elite controlling the levers of power with few checks on them - like say, North Korea or Zimbabwe. The book goes to great lengths to dismantle all alternative explanations for prosperity: that it is determined by culture (as argued by Max Weber), or by geography (as argued by Jeffrey Sachs) or by the availability of domesticatable plants and animals and other resources (as argued by Jared Diamond) or even the availability of good policy advice (as believed by experts at the World Bank and the International Monetary Fund).
The analytical tool the authors have used most often is the juxtaposition of two regions with similar culture, geography and resources but with widely differing economic outcomes. For example, they look closely at the town of Nogales that is divided by the border between Mexico and US. On one side is prosperity and on the other, poverty. The authors pile argument upon argument to prove that Nogalese, Arizona, is richer than Nogales, Sonora, only because of the very different institutions, both political and economic, which create very different incentives for the inhabitants on either side.
Isn't what is required then, good policy advice on institution-building? Not really. As an Indian, the sharpest insight you carry from this book is that it's not lack of knowledge that prevents narrow elites in poor countries from reforming their institutions; they don't want to change things because that might loosen their grip on power and who in their right mind would want to do that!
How exactly then, do some nations come to have inclusive institutions while others end up with extractive ones? Acemoglu and Robinson use three concepts to explain that: critical junctures; initial differences; and virtuous/vicious cycles. The argument goes like this: Now and then, the world, or a region, goes through a critical juncture that has transformative potential: like the Black Death, that killed off half the population in Europe, or the discovery of the Americas that opened up whole new possibilities.
How different countries respond to these critical events is shaped by small differences in their situations and, over time, this ends up causing large institutional differences because of virtuous or vicious cycles. For example, the Black Death caused a severe shortage of labour in all of Europe. In western Europe, this led to the dismantling of serfdom as peasants were able to demand better treatment and even rise up in revolt. In eastern Europe, however, where landholdings were already somewhat larger, the landlords responded with greater tyranny and greater consolidation of landholdings. These differing responses, argue the authors, led to the development of more and more inclusive institutions and finally democracy in Western Europe, while Eastern Europe got left behind.
Similarly, Britain's response to the discovery of the Americas was very different from that of Spain or Portugal because the Glorious Revolution of 1688 had limited the powers of the King. While the monarchs in Spain and Portugal were able to completely control the trade with the Americas and thus siphon off the gains, in Britain, trade with the Americas led to the emergence of thousands of new traders with the capital and the incentives to jumpstart the industrial revolution.
In the Americas, say the authors, the United States ended up with more inclusive institutions than countries in South America because the colonial elites in South America had the option of exploiting the natives and extracting gold and silver. North America had neither a large enough population of natives nor gold and silver in abundance. The colonisers of North America had no option but to depend on their own hard work and that led to the creation of institutions that were far more inclusive.
If you haven't already figured it out, this book is a must read for anyone who wants to engage in a discussion on development from here onwards. Whether you agree with the authors or not (and there are indeed times when the definition of "inclusiveness" seems too lax, or the case studies seem forced), you will have no option but to engage with their ideas. Jeffrey Sachs is already doing that - obviously in a furious manner and you can find it by Googling it -, while Jared Diamond is graciously supportive of the authors.
Two questions remain: what do the authors have to say about India and China? About China, they are unequivocal: they don't think China can sustain its growth without making substantial changes to its extractive system. But how come China has grown so fast for so long? The authors argue that even with extractive institutions, it is possible for countries to grow at a fast pace for some time, like the USSR did, by forcibly deploying capital from less productive areas (such as agriculture) to more productive areas (such as industry), but once the country reaches middle income levels, this process will run itself out. Extractive institutions ultimately fail, argue the authors, because the elites in power are afraid of the creative destruction that is the inevitable result of all innovation, and there cannot be sustained growth without innovation.
As far as India is concerned, the authors don't have much to say. I suspect this is because, as usual, India has proved to be a difficult country for theorists to crack. On the one hand, we do have political institutions that look inclusive. On the other hand, who can deny that our institutions are extractive? So I don't blame the authors for not wanting to stick their hands in this particular hive.
WHY NATIONS FAIL:
THE ORIGINS OF POWER, PROSPERITY AND POVERTY
Author: Daron Acemoglu & James A. Robinson
Price: Rs 599