Sunday, April 13, 2014

Book Spotlight #1: "Why Nations Fail"

"Why Nations Fail: The Origins of Power, Prosperity, and Poverty" 
by: Daron Acemoglu & James A. Robinson

Quote Highlight: referring to why nations fail, "What they all share is extractive industries. In all these cases the basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society." (page 399)

I recently finished reading this book on why nations have failed to obtain growth. Specifically, this book attempts to answer the question of, why are countries still lacking economic growth in an age of unprecedented wealth? What has been the focal point of much research by many political scientists and economists specializing, is why have developing countries that gained Independence in the last 50 years actually gone in reverse in terms of wealth and progress. In particular, countries in Sub-Saharan Africa that upon Independence were on par in terms of GDP per capita with the countries such as South Korea. Since then, many countries have spiraled into a far worse state, meanwhile, today South Korea can no longer be considered a developing economy, it's joined the ranks of the industrialized west. Now, your smartphone might be produced by a large South Korean firm that you have probably heard of, Samsung. In the same context, Sub-Saharan Africa is looted for commodities that end up making up the parts to that very smartphone produced by Samsung. The result is that South Korea has a GDP per capita level that of many western countries, while the poorest people in the world are stuck in a "vicious cycle" taking place in Sub-Saharan Africa. This book tries to answer why this phenomenon has occurred, though it does so rather broadly, with an "institutional" theory. I'll attempt to quickly explain what this theory means and then summarize the book and my thoughts. 

The authors of this book distinguish between two types of institutions in the world, inclusive & extractive. This refers to the governing and civil institutions of a country, or the lack of governance separated into these two categories. Generally speaking, a society with inclusive institutions features a free press, a responsive government, a broad coalition of political inclusiveness and participation, property rights, public infrastructure projects, and public spending on healthcare and education. Conversely, an extractive institution is one in which there is no public infrastructure projects, there may be a lack of property rights, there is little political responsiveness to the public, and there is an elite group that maintains power and sees all the economic and political benefits of the system. Ultimately, the inclusive institutions create incentives for economic activity and thus bring about growth while extractive institutions siphon off all economic benefits of society to the controlling elite while killing any incentive to work. Put another way, why should a farmer invest in new technology or attempt to increase output if the government or warlords can come at anytime and take his crops, increase his tax burden exponentially or seize his land. Citing case studies ranging from Sub-Saharan Africa, Latin America, to East Asia, the authors speculate that the reason many countries remain poor today is solely because of the lack on inclusive institutions. The problem is, once extractive institutions are in place, it is very difficult for a country to break the mold and escape. There are huge incentives for other groups or factions to try to gain control of the extractive institution for its own benefit. Furthermore, there is no incentive for the system to be reformed when so many members of the elite are benefiting greatly, and any change may threaten their power, either economically or politically. Hence, countries get stuck in a "vicious cycle" where the extractive institution remains in place year and year, only changing hands between dictators or other groups.

This book is a good read if you find yourself interested in the economic development of the third world today. Increasingly, new literature is coming out against the use of foreign aid to developing countries, against the IMF and the World Bank policy programs, and more towards focusing on the internal institutional problems within those countries. This book has the view that foreign aid can help keep an elite group in control of the control by providing it with the funds to pay off supporters and increase its military capabilities for crackdowns, thereby limiting any economic activity. Compared with another book I read on the topic, Paul Collier's "The Bottom Billion" this book offers a different angle of attack and provokes a lot of thought about the role that institutions play. Collier focuses more on resource rich countries and the "resource trap", something I find convincing. Studying both explanations, you can begin to understand why countries are stuck in a poverty trap and why there seems to be little change year and year. This book also paints a very broad picture over large parts of history in its hypothesis, seemingly jumping to certain conclusions and giving the repeated explanation that inclusive institutions are necessary over and over again. I found the argument for exactly "why" these inclusive institutions developed in some parts of the world and not others lacking substance at some points. The authors immediately dismiss theories involving, geography, cultural, and poor economic policy decisions in the second chapter book. In my opinion, the development of inclusive institutions can be seen as somewhat "lucky" for many countries. I'll need to write an entire paper dissecting this statement I know but let me finish on this book first. On the whole, the Industrial Revolution came at a "critical juncture" as the authors put it, and those countries that were in a position to take advantage of this are the rich countries of today, while those that did not (because the institutions of the country forbid it) are still poor. Because technology moves so rapidly, the divergence between the really rich and really poor seems greater than ever. But how we have countries with no prior experience of inclusive institutions form them in a today's world, I'd be interested to know, for the authors do not provide any specific ideas.

This book was published in March 2012.