Science 6 July 2012:
Vol. 337 no. 6090 pp. 35-36
DOI: 10.1126/science.1222452
BOOKS ET AL.
ECONOMICS
It's the Politics
Geoffrey Garrett
Why Nations Fail The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson Crown, New York, 2012. 541 pp. $30. ISBN 9780307719218. Profile, London. 464 pp. ￡25. ISBN 9781846684296.
The reviewer is at the Business School and the United States Studies Centre, University of Sydney, NSW 2006, Australia.
E-mail: geoffrey.garrett@sydney.edu.au
Why some countries are richer than others has long preoccupied some of the world's great minds. Their answers reflect two schools of thought. Some, like Jared Diamond, think geography is destiny. Others believe human agency is the root cause of success and failure. Why Nations Fail falls squarely in the latter category, but in a novel way. Adam Smith argued that countries that follow free market principles do better. Max Weber thought a cultural work ethic was needed to make the market work. The book's fundamental proposition is that while markets and culture matter, both, in the jargon of social science, are “endogenous” to the political system.

Put simply, Daron Acemoglu and James Robinson argue that free markets and a culture of enterprise and innovation only thrive in political systems that are open and “inclusive” (of anyone who wants to participate). In contrast, countries run by a narrow elite will fail, because the elite will entrench “extractive” practices that benefit them at the expense of their societies as a whole. In turn, development trajectories tend to be path dependent. Once a country is on a good or a bad track, it is hard to change because of the powerful interests invested in the status quo.

Acemoglu (an economist at the Massachusetts Institute of Technology) and Robinson (a political scientist at Harvard) see England's 17th-century Glorious Revolution not only as the dawn of democracy—it also made possible the Industrial Revolution. America's revolutionaries not only evicted the monarchy. They also created an economic system that made Apple and Google possible.

In contrast, the authors argue, Mexico's extractive political system has committed it to enduring poverty—at least relative to its northern neighbor. Half a millennium ago, Mexico's Spanish colonizers put in place a political system in which a small, unaccountable, and corrupt elite pillaged the country's rich natural resources for its own benefit at the expense of the country's long-term development. Acemoglu and Robinson believe it is the political border between the United States and Mexico, not any other differences, that explains the two countries' radically divergent development trajectories. The several inches difference in average heights between North and South Koreans offers an even more striking example of their politics-matters thesis.

More generally, Acemoglu and Robinson contend that political institutions laid down in the 16th and 17th centuries have had enduring economic effects. The British and French democratic revolutions were the “killer app” that transformed a struggling and warring northern Europe into an economic titan and made possible the successful Anglo new worlds of America, Australia, and Canada. Whereas when Spain's imperialists found gold and other valuable commodities, they entrenched political systems designed only to extract resources, not to develop new economic opportunities.

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Test case: 21st-century China (here, Shanghai).
CREDIT: JAMES BREY/ISTOCKPHOTO.COM
The authors can't scientifically test their bold and sweeping thesis because one can't experiment on world history. Instead, they embark on a journey through history that is breathtakingly sweeping and erudite as well as reasoned and reasonable.

How convincing is their narrative that, to turn the famous Bill Clinton aphorism on its head, “It's the politics, stupid”? Adherents of other big-picture approaches are unlikely to be persuaded, because history is overdetermined. Mexico, for example, suffers from the problems of many tropical countries, such as poor water, crops that perish, and rampant disease. Its brand of Catholicism is light years from Weber's protestant work ethic. And its economic policies would have Adam Smith scowling in his grave. The continental United States is more temperate, more Protestant, and better governed economically. In this rendering, political variables are superfluous.

But there is a bigger challenge to the Acemoglu-Robinson thesis—the fact that today's economic world doesn't seem to fit their model at all neatly. For example, Greece's economic problems seem to stem from too much political inclusion, not too little. People who worry about India's economic future believe the subcontinent's major problem is too much democracy.

China's three decades and counting economic miracle is an even bigger prima facie challenge to their argument, and Acemoglu and Robinson know it. That is why they spend the last part of their book reinterpreting the Middle Kingdom. According to them, China has grown so spectacularly not because its post-Mao leaders have been benign authoritarians who have used the levers of the state to drive development. Instead, they argue that China has been able to grow at 10% a year for 30 years because of a propitious combination of demography and development. China's rapidly growing working-age population—turbocharged by urbanization unlike anything the world has seen before and coupled with the poverty in which most of the country was mired before Deng's reforms in the late 1970s—has given the country a massive pool of low-cost labor that it has parlayed into becoming the world's most competitive assembler and manufacturer.

Because of the one-child policy, China's labor force has already peaked and will soon begin to decline. At the same time, China is increasingly less a low-cost producer than a country of middle-class consumers. How will China continue to grow when it is an aging middle-class country? Here Acemoglu and Robinson argue that unless it becomes a more inclusive political system, China will soon become mired in the “middle income trap.” They don't say inclusive political change is inevitable—quite the opposite, given their faith in the path dependency of vested interests. But they do make the big call that absent real political reform, China's economic miracle will end.

Acemoglu and Robinson may well be proved right about China, and perhaps that will convince skeptics of the power of their politics-matters-most thesis. Regardless, their fascinating and thought-provoking book should be read, discussed, and debated far beyond the ranks of social scientists.