Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00

Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why Nations Fail, Daron Acemoglu (Killiam Professor of Economics at the Massachusetts Institute of Technology) and James A. Robinson (David Florence Professor of Government at Harvard University) contend that none of the aforementioned factors adequately explains economic disparities between nations. The focus, they contend, should be on various nations’ economic and political institutions, specifically those that give people proper incentives, allow people to choose their careers freely, and engage in the democratic process.

Early in this engaging recent work, the authors take the case of the city of Nogales, divided by the U.S.-Mexico border, with a Nogales, Arizona and a Nogales, Sonora. Nogales is a metaphor for the authors’ thesis. Both cities have the same geography. Culturally, they aren’t all that different. What, then, explains the difference? Different economic and political institutions that provide individuals with different incentives do.

Similarly, the stark differences in the standards of living between the two Koreas, the totalitarian North Korea and the democratic, capitalist South Korea, can be explained by different economic and political institutions. “The economic disaster of North Korea, which led to the starvation of millions, when places against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.” After all, the institutions of communist North Korea are about as far as one can imagine from what one would expect to provide incentives for individuals to work, to invest productively, and to motivate people to prepare for the future.

The authors distinguish between inclusive, and extractive, economic and political institutions. Inclusive institutions allow for broad economic opportunities, promote secure property rights, and create inclusive markets, wherein people have economic opportunities to choose their own paths in life. They allow for mass participation in electoral democracy, allowing voters to replace their leaders. They also allow for technology and education. By contrast, extractive institutions do not allow for freedom. Rather, “such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.” Politics matters.

Inclusive institutions, along with some centralized form of state power and public services, will provide for greater prosperity than deeply fragmented polities in which leaders extract wealth from the population and deny them economic opportunities. Thus, political leaders of a nation may actually prefer extractive institutions because this would allow them, or their clan, to retain political power. This can be seen in nations in which a small elite uses highly non-democratic political institutions to control a country’s wealth.

“The central thesis of this book,” write the authors in Chapter 3, “is that economic growth and prosperity are associated with economic and political institutions, while extractive institutions typically lead to stagnation and poverty.” They qualify their thesis and note that this does not “imply that neither extractive institutions can never generate growth nor that all extractive institutions are created equal.” The Soviet Union, for instance, is an example of a nation that did grow under extractive institutions. Those who say that government can never foster rapid economic growth, even for decades, have a prime counterexample in the U.S.S.R. between the first Five-Year Plan in 1928 and the 1970s. This was done, of course, at a great cost to human life.

The authors wrote How Nations Fail for a general audience and contend that their work has real-world implications. After all, if geography is the determinant factor in shaping a nation’s prosperity, then why bother doing anything to change the status quo? If institutions matter as much as the authors believe, then one can’t change a poor country’s economic trajectory without first changing the country’s economic and political institutions.

Overall, the authors make a very convincing case for their thesis that institutions, rather than geography, culture, or ignorance of the best policies best explain why some nations fail, while others succeed. For those have been academically trained either as historians or as lawyers, much of the material will not be particularly groundbreaking. Those who devoted their careers to studying the Soviet Union, for instance, are well aware that economic and political institutions matter for understanding the country’s rapid economic ascent and industrialization, as well as its decline and ultimate collapse under its own weight. Furthermore, lawyers understand that property rights, as well as an impartial system to adjudicate property disputes, matter greatly in allowing for economic growth.

In conclusion, Why Nations Fail is a solid work of scholarship. It is particularly well written. The authors do an excellent job of demonstrating how political institutions can determine a country’s economic success or failure. Still, one is left wondering whether the world is simply too complex and history too fluid for any overarching thesis, or grand narrative, that attempts to explain why some nations fail. Maybe, in some cases, geography actually is the determinant factor. And maybe culture and religion aren’t as unimportant as the authors think. That said, the authors should be commended for writing a work that surely is to provoke considerable debate in the days and months ahead.

Jon Lewis (c) 2012