Why Nations Fail: The Origins of Power, Prosperity, and Poverty

Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoğlu
My rating: 4 of 5 stars

Why Nations Fail is a contribution in the field of Development Economics. Daron Acemoglu and James Robinson elaborate a thesis trying to explain "why some nations are prosperous while others fail and are poor". Their thesis of the difference between extractive and inclusive institutions is intellectually appealing and provides a framework for a analysis of the chances for current states to improve. However they can't explain the emergence of these institutions and concedes that their existence is the fragil product of a Darwinian process.

"However, when a critical junction arrives, these small differences that have emerged as a result of institutional drift may be the small differences that matter in leading otherwise quite similar societies to diverge radically"

There are some fundamental ideas where I disagree with Acemoglu and Robinson. The first is the title itself. For a nation to fail it first had had to succeed. The natural condition of most human societies through history is poverty and some states have thrived and prospered. At present time more and more nations have progress, a shift in history that is not accknowledge in the book. This problem is fundamental because in some of the cases the description is incomplete and inaccurate. For instance what we now know as Perú was better than the north of America 500 years ago. It is correct that the USA is way much better than Perú, and itself 500 years ago; but Perú is also better today than Perú 500 years ago. Perú didn't fail, but it didn't succeed like the USA.

"Peru is so much poorer than Western Europe and the United States today because of its institutions... five hundred years ago the Inca Empire, which occupied contemporary Peru, was richer, more technologically sophisticated, and more politically centralized than the smaller polities occupying North America."

I also find the institutional framework problematic and incomplete. The thesis is that inclusive political institutions and economic institutions are the cause of prosperity. This creates a four state model, being inclusive-inclusive the best and extractive-extractive the worst. Combinations of extractive-inclusive and inclusive-extractive yield mixed results, sometimes short-term prosperity or eventual political collapse. So far the model is OK. If institutions are so important, why didn't Acemoglu deepen in what institutions are important? Maybe because they can't.

"The outcome of political conflict is never certain, en even if in hindsight we see many historical events as inevitable, the path of history is contingent."

It is up to the reader to try to figure out from the cases what common elements may define the correct institutions. On the political side Acemoglu and Robinson favor democracy and not so much rule of law. A unbounded democracy can easily turn into a tyranny of the majority (see following issue). Among the economic institutions they favor private property which is a very static concept and overlooks entrepreneurship and price system.

A third issue is the predictive power of the model. A theory that fits to the past but can't predict to the future is not strong. For instance, Acemoglu and Robinson picture Brazil, after its inclusive democracy, as a success story which is not. Democracy in Brazil switched the balance of power but didn't transform the nature of the institutions. Poor respect for property rights and rule of law left the door open to corruption and populism. The turmoil in Brazil in 2017-18 and many Latin American nations give some hope but reality is that agendas remain populist. The problem with the predictive power of the model is that it has no power.

"extractive institutions can be replaced by inclusive ones. But it is neither automatic nor easy. A confluence of factors,..., is often necessary..... In addition some luck is key, because history always unfolds in a contingent way." (emphasis is mine)

The model of virtuous and vicious circles are easy to agree with Acemoglu and Robinson. They provide an explanation of the inertia that prevents institutional changes and help sustain the status quo, while giving hope for positive change and a warning for the fragility of inclusive nations.

"The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions. But neither the vicious nor the virtuous circle is absolute."

As a friend, Michael Strong, says "given MIT economics' traditional neglect of institutions,... Acemoglu should be regarded as a hero relative to his peers". Overall Acemoglu and Robinson provide a model to build on. Why Nations Fail description of history, although not accurate, is a point of reference to discuss what changes truly make nations prosper.

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