"Why Nations Fail": A Debate Between Jeffrey Sachs and the Authors -- Daron Acemoglu and James A. Robinson

Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson, 2012, Crown Publishing, New York, NY

I summarized this book in 2013 while working in USAID Yemen. It cites the primary importance of institutions in determining national success or failure.  Focusing on the vast differences between income and standard of living of the developed world versus the developing world (making direct side-by-side comparisons such as Nogales Mexico and Nogales Arizona, and North and South Korea), the authors state that the root of poverty is the control of power by an elite few.  Institutions that exclude the majority limit decision-making and consolidate power among elites creating a situation that stifles innovation, limits technology diffusion, and creates disincentives for investment.  The economist Jeffrey Sachs disagreed with the authors, and I tried to capture the debate they had in dueling publications and responses by the authors to a piece written by Sachs published in Foreign Affairs.

The authors of "What Nations Fail" contend that elite capture of a country's political and economic institutions usually results in slower economic growth and worldwide inequality.  While acknowledging other factors -- geography and natural resources, cultural traits of a society or people, and knowledge of monetary policies and systems -- the book points to the importance of broad political changes and vibrant democratic institutions as central to sustainable development.  Failing to create these systems allows the development of extractive institutions, which is cited as the primary reason nations fail economically. Inclusive institutions are centralized and pluralistic, while extractive institutions are absolutist, closed, and lack a unifying structure (a description of the differences between inclusive and extractive institutions is described on pp 76 - 83 of the book).  

Inclusive economic institutions create inclusive markets -- innovation is encouraged, property rights are protected, and increased productivity is rewarded.   With these primary engines of prosperity engaged -- markets, innovation/productivity, and education -- nations tend to grow economically and see a rise in their standard of living.  Extractive institutions, on the other hand, lack guarantees for property rights, limit economic mobility (elite are protected from competition), and provide few, if any, of the services aimed at promoting prosperity (infrastructure is lacking, education is not supported, healthcare is insufficient, etc.).  These institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.  While the overall economy falters and the nations fall behind countries with inclusive institutions, the elite group maintains power and benefits from this arrangement.  

Only broad political change will put in place the conditions needed in these societies for sustainable economic growth.

Why Nations Fail contains 15 chapters:

Chps. 1 - 4 - Provide a history of development and the difference between the onset of the Industrial Revolution in England (what institutions were in place to make that happen) and Egypt's development history under the Ottoman Empire and later under absolutist rulers (Nassar, Sadat, and Mubarak).  Highlight the impact of institutions, the incentives those institutions create (or disincentives), and how the past shapes the future.

Chps. 5 - 9 -  Discussion of economic growth under countries with extractive institutions (China, Russia, Mayan city-states, etc.) and how that growth is unsustainable due to the inherent characteristics of a closed, absolutist system (it will inevitably lead to elite capture).  The history of the Industrial Revolution was reviewed in terms of opposition it created in some nations due to elite reluctance to relinquish power (if at the cost of decreased national economic growth). A discussion was provided of how some countries overcame opposition and created, in some cases from the ground up, the types of inclusive institutions needed to sustain economic growth.

Chps. 10 - 15 - Review of diffusion of prosperity and a comparison of how some countries fail and others succeed through positive and negative feedback loops ("virtuous circle" vs. "vicious circle").  A review of the impact of institutions, a discussion of how some countries have broken out of the vicious circle, and a final chapter on understanding prosperity and poverty in terms of the institutional setting and what can be done (or avoided) to promote economic development.

Jeffrey Sachs wrote a review of Why Nations Fail. Please take a look at his review at Foreign Affairs on Sept./Oct. 2012. He argues that Acemoglo and Robinson's simplistic approach is too narrowly focused. Sachs summarizes the book well but disagrees with its premise that institutions are the key factor in determining economic development. Sachs cites many factors—government, geography, and resources—that impact development but derides the book's approach as simplistic.  

Sachs writes: According to the economist Daron Acemoglu and the political scientist James Robinson, economic development hinges on a single factor: a country's political institutions. More specifically, as they explain in their new book, Why Nations Fail, it depends on the existence of "inclusive" political institutions, defined as pluralistic systems that protect individual rights. These, in turn, give rise to inclusive economic institutions, which secure private property and encourage entrepreneurship. The long-term result is higher incomes and improved human welfare.

In contrast, what Acemoglu and Robinson call "extractive" political institutions place power in the hands of a few and beget extractive economic institutions, which feature unfair regulations and high barriers to entry into markets. Designed to enrich a small elite, these institutions inhibit economic progress for everyone else. The broad hypothesis of Why Nations Fail is that governments that protect property rights and represent their people preside over economic development, whereas those that do not suffer from economies that stagnate or decline.

Their causal logic is that economic development depends on new inventions (such as the steam engine, which helped kick-start the Industrial Revolution), and inventions must be researched, developed, and widely distributed. Those activities happen only when inventors can expect to reap the economic benefits of their work. The profit motive also drives diffusion, as companies compete to spread the benefit of an invention to a broader population. The biggest obstacle to this process is vested interests, such as despotic rulers who fear that a prosperous middle class could undermine their power or owners of existing technologies who want to stay in business.

This tale sounds good, but it is simplistic. Although domestic politics can encourage or impede economic growth, so can many other factors, such as geopolitics, technological discoveries, and natural resources, to name a few. In their single-minded quest to prove that political institutions are the prime drivers or inhibitors of growth, Acemoglu and Robinson systematically ignore these other causes. Their theory mischaracterizes the relationship between politics, technological innovation, and development. However, what is most problematic is that it needs to accurately explain why certain countries have experienced growth while others have not and cannot reliably predict which economies will expand and which will stagnate.

After you read the Jeffrey Sachs review, please see the response from the authors of  Why Nations Fail below (the excerpt below is from their 2013 blog "Why Nations Fail." 

1. Sachs says: “Dictators have sometimes acted as agents of deep economic reforms, often because international threats forced their hands.”  -- Response: Perhaps we are not as deferential to dictators as Sachs would like us to be, but this is very much what we argue in our discussion of growth under extractive institutions. Such growth occurs when elites find it in their interest to allow new technologies and institutional changes necessary for economic growth. Chapter 5 is devoted to this, and we return to this issue several times in the book, including the last chapter.

2. He continues: “The authors also conflate the incentives for technological innovation and those for technological diffusion.”  -- Response: We do no such thing. We emphasize that growth under extractive institutions is exceedingly feasible, as in China today, when it can proceed rapidly by importing existing technologies from other economies. One of our central arguments is that inclusive institutions are necessary for sustained innovation, but technology import can sometimes occur under extractive institutions. Does this look like ignoring the difference between innovation and diffusion? We also go to pains to discuss how, when they feel threatened, rulers and elites in Ming and Qing China, the Ottoman Empire, and 19th-century Russia and Austria-Hungary have opposed the diffusion of technologies. Our point is that innovation requires inclusive institutions, not extractive ones. However, extractive regimes sometimes allow the use of existing technologies but will often block the import of technology because this can also threaten existing power-holders."

3. He goes on: “What’s more, authoritarian political institutions, such as China’s, can sometimes speed, rather than impede, technological inflows.” This is a fair point, which one of us has argued theoretically and empirically in past work, but in the end, whether catch-up growth under extractive political institutions can be as fast or a little faster than growth under inclusive political institutions is secondary for anything we discuss in Why Nations Fail.  

4. Sachs then charges: “The book misinterprets the causes of growth in another way…. a state’s power depends… on adequate resource base…”  Response: Well, not really. There is no evidence we are aware of that a state’s powers depend on resources. Sure, Sachs has run some kitchen sink growth regressions where some geography-related variables correlate to significant growth (but state’s power? We have never heard him make that point before). In any case, these regressions do not stand up to scrutiny— and, of course, are notoriously ill-identified. 

5. And then: “Not only can unfavorable geography cripple states; it can also slow the development and diffusion of technology.”  Then comes the coup de grace: “The overreaching effect of these analytic shortcomings is that when Acemoglu and Robinson purport to explain why nations fail to grow, they act like doctors trying to confront many different illnesses with only one diagnosis.”  -- Response: Well, we are not doctors. Sachs probably thinks he is one (though we didn’t think his doctorate was medical). Our purpose was not to write a doctor’s or even a practitioner’s manual but to provide a framework. We think, and perhaps Sachs disagrees, that a framework that says there are 17 factors, each of them hugely important, is no framework. The power of a framework comes from its ability to focus on the most critical elements at the exclusion of the rest and, in so doing, provide a way of thinking about these elements, how they function, how they have come about, and how they change. Those elements were related to institutions and politics, and we have focused on them.

7. Sachs then charges that “Extraordinary claims require extraordinary evidence. Yet Acemoglu and Robinson do nothing of the sort” and argues that we provide no evidence. -- Response: Right, we do not in the book. But that’s because a book for a general audience is not the proper forum for presenting academic research, and we spent many years of our lives precisely on writing academic papers providing exactly the sort of evidence.  It's funny that Sachs ignores this. One of our papers is even called “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”, which sounds as if it might have something to do with the competing geography and institutions hypotheses. What’s more, another one of those papers, “The Colonial Origins of Comparative Development,” shows precisely the type of historical persistence in colonial institutions that is the basis of our framework in Why Nations Fail and shows that, at least in the sample of former European colonies, once the effect of institutions is adequately controlled for, there is no room for geography in explaining the considerable cross-country differences in income per capita.  Yes, it is funny that Jeffrey Sachs ignores this because when this paper came out, he was so troubled that he decided to comment on it. He asked us for our data and rushed to produce what he thought was a devastating comment (which, interestingly, did not question our approach).  It was also funny (or sad) that Sachs couldn’t even properly do the regression analysis with the data we gave him. Our argument was about institutional variation within colonies, but he included Britain and France in his sample, the colonizers, to obtain nonsensical results! (See the discussion in here). It's funny that we haven’t heard about that paper since. And that Sachs himself seems to have forgotten about it, too.  And these are not the only relevant pieces of research. Other works by us and others have also shown that once institutions' historical role is properly factored in, geography doesn’t seem to matter at all or much. So yes, we don’t provide the econometric evidence in the book, which isn’t the right place to do it, but econometric evidence is abundantly loud in the way it speaks on these topics.

8. Sachs goes on: “There are also countries that possess both inclusive political and inclusive economic institutions yet never achieved much development, often due to geographic barriers” and mentions Botswana and claims that it was fated to stagnation at independence, and its growth is just due to diamonds, which we (supposedly) ignore.  -- Response: Well, again, we do nothing of the sort. In Why Nations Fail, we write:  When the diamonds came on stream in the 1970s, they did not lead to civil war but provided a solid fiscal base for the government, which would use the revenues to invest in public services. There was much less incentive to challenge or overthrow the government and control the state. Inclusive political institutions bred political stability and supported inclusive economic institutions. (Page 413).  It sure doesn’t look like we don’t know Botswana has diamonds. We have written a paper entitled “An African Success Story: Botswana” on Botswana’s growth experience, much of it about diamonds. And, of course, diamonds are essential for Botswana’s growth, as noted in that paper and Why Nations Fail. Still, Sierra Leone and Angola also have diamonds, and Nigeria has plenty of oil.  What’s funny here again is that Jeffrey Sachs has argued that natural resources are a curse and a significant contributor to the disappointing growth performance of countries like Nigeria, Sierra Leone, and Angola. Now he says diamonds are a blessing, and Botswana is rich because of them.

9. Sachs then says we have Nogales all wrong because rather than showing the futility of geographic explanations, which Sachs loves, of course, Nogales is all about geography. He says, “The case of the two Nogaleses is about geography and nothing else. Only geography can explain why the desert city of Nogales, Sonora, even exists”.  -- Response: Well, we don’t know where to start. First, as explained in the book, Nogales exists because it was formed on the border between the US and Mexico, and it was defined by the Gadsden Purchase of 1853. By 1880, there was a trading post on the border at present-day Nogales, and by 1883, there was a US post office. So, Nogales exists for historical reasons that are very much related to a political boundary.  Second, we never said that geography is irrelevant — how would one otherwise explain why there aren’t holiday resorts in Antarctica? We argued and demonstrated that the geography hypothesis, which links the substantial cross-country differences in prosperity to geography, is wrong and unhelpful — precisely the geography hypothesis that Jeffrey Sachs endorsed and argued, for example, here.  So, what Sachs is doing here is to shift the goalposts by claiming that Nogales proves geography matters. If by “geography matters,” he means that a border town next to a rich country is more likely to develop than other parts of the country, that’s an entirely different proposition from the geography hypothesis, which claims that geographical factors are a crucial determinant of cross-country or cross-region income differences. The latter would have no explanation for Nogales Arizona being so much richer than Nogales Sonora, and the latter is the one that Jeffrey Sachs used to espouse but perhaps no longer.  Of course, geography can explain that border towns such as Nogales Sonora are attractive for those planning to open a business in Mexico that will import technology or trade with the United States. But that deepens the challenge to the geography hypothesis. Nogales Sonora is poor despite that advantage, a point we clearly make in the book, but Sachs conveniently chooses to ignore it.  

10. Sachs continues: “Yet Acemoglu and Robinson seem generally unwilling to think dynamically in spatial terms.”  -- Response: We don’t know what “think dynamically in spatial terms” means. Still, while Sachs was talking about some places being permanently disadvantaged, which doesn’t seem very dynamic, we distinguished in “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution” between the simple and sophisticated geography hypotheses the latter allowing the importance of geography to depend on time and the state of technology and provided evidence against it being a crucial determinant of the historical evolution of prosperity differences across countries. Moreover, our book approaches world inequality by looking precisely at the historical dynamics of institutions. It explains, for instance, the poverty of Africa by the fact that it has been caught in an institutional vicious circle, factoring in historical processes of state formation, the slave trade, and colonialism. This seems more dynamic — and incidentally also hopeful — than trying to establish that Africa is condemned to poverty by latitude and malaria.

11. Sachs also asserts: “Outside Europe, in the 19th century, industrialization spread successfully to places with good geography”. -- Response: Really? Such as Argentina and Uruguay? What’s so great about Australia’s geography, which is essentially cut off from the rest of the world, with vast swathes of desert and tropics, and very sparsely settled with enormous transportation challenges? Indeed, a famous historical account of Australia is called “The Tyranny of Distance.” What’s so much better about Mauritius’s geography, the most significant success concerning industrialization in Africa? And what is it that is so bad about Mexico’s geography? Whatever that was, it did not prevent Mexico from building one of the most complex civilizations before Columbus, as we argue in Why Nations Fail and have argued elsewhere.

12. Sachs then charges: “As for the future of development, Acemoglu and Robinson’s narrow focus on political institutions offers insufficient predictive help…. At the start of 1980, an economist basing his judgment on future economic performance on political and civil rights during the preceding decade might have foolishly bet on Gambia, Ecuador, or Suriname and almost entirely missed the rapid growth of authoritarian used Asia, most notably China.”  -- Response: We much rather leave the predictive game to Sachs, who, for example, seemed to think that IMF-style adjustment policies (combined with repression of any opposition) he advocated in Bolivia were the secret to growth. Perhaps he is right in some twisted way. After the reforms Sachs advocated got all of them fired, Bolivian tin miners went to the Chapare Valley in Eastern Bolivia to grow coca. That helped provide the social basis of the coca growers union, which became a critical political base for President Evo Morales and his MAS party. As we argued in a previous post, there might be some hope that the MAS party is changing Bolivian institutions in an inclusive direction. So perhaps Sachs has played an essential role in this, but not through the mechanism he had in mind.  But we digress. Sachs is again misrepresenting our views. First, much of the book is about the difficulty of building inclusive institutions out of the ashes of extractive ones. So Gambia, Ecuador and Suriname would not have been our ideal inclusive societies, perhaps they are Sachs’s. Moreover, as noted, we emphasize extractive growth in Chapters 14 and 15.  In contrast to Sachs, we first emphasize the difficulty of making any prediction when we talk about future growth. We then point out that rapid growth will likely come from several countries, such as Ethiopia and Rwanda, which have achieved some political centralization and are now jumping on the extractive growth bandwagon — not from Gambia, Ecuador, and Suriname.