Why nations fail

London, United Kingdom – In their recent book, Why Nations Fail: The Origins of Power, Prosperity and Poverty, Daron Acemoglu and James Robinson set out to do away with some of the myths that still bedevil development economics. In a wide-ranging historical account, they do their best to do away with explanations for poverty that rest on geography, culture or “incorrect policies or strategies in the past”. The key to general prosperity, they argue, is political.

In this, as they note, they are in agreement with the protesters in Tahrir Square last year, who had no doubt that a regime that made multibillionaires of a few could spare only scraps for the many. As the authors put it: “Egypt is poor precisely because it has been ruled by a narrow elite that have organised society for their own benefit at the expense of the vast mass of people.”

Their argument won’t come as a shocking revelation to many with firsthand experience of the wealth and poverty of nations. Nevertheless, it is heartening that a broadly sensible book has had some impact. Star economists have lined up to praise it. Steven Levitt called it “truly awesome” and Gary Becker described it as “a study of great vitality on one of the crucial questions in economics and political economy”. Meanwhile, Niall Ferguson found it “compelling and highly readable”.

It is always tempting to find fault with a book that Niall Ferguson calls “compelling”. And there are some problems with Why Nations Fail. The authors place enormous emphasis on property rights, for example. But property, too, is fundamentally a political matter. The aristocrats who seized common land in 18th century England did so because they controlled parliament. They violated centuries of custom and practice because they could. The settlers who created a society of independent farmers in the American colonies did so because those very same English aristocrats were too far away to stop them. The violation of property rights in North America promoted widespread prosperity because it shifted economic opportunity from the few to the many. Property must be considered in the context of political economy as a whole.

Most strikingly, Why Nations Fail has very little to say about the politics of international trade and investment. I remember asking a British diplomat who spent much of his time in Africa why so many countries in the region were poor, while countries such as South Korea, which had once been poor, had successfully raised general incomes. He thought for a while and gave a two-word answer. “Political weakness,” he said.

The Koreans were strong enough politically to protect their native industries from foreign competition until they were able to compete. And rather than allowing domestic producers to enjoy easy profits behind tariff barriers, Korea’s political elite drove them to modernise and export. All rich industrial countries have followed a similar path. In countries where the majority are poor, on the other hand, foreign interests often work with local elites in an arrangement that suits them both – but is a disaster for everyone else. Industry is strangled at birth and vast mineral and oil wealth finds its way offshore. It is odd that the authors don’t feel able to set this out in plain terms.

But the book is correct on the key point: Economic development is determined by political factors. We should all be relieved that the economics establishment is finally willing to acknowledge the fact.

And of course the point has implications for countries that have achieved general prosperity. In Europe and North America inequality has been growing for the past generation or so. In the United States, median hourly earnings have scarcely increased in real terms since 1972. Stock markets and executive pay, on the other hand, have boomed. More widely, in the rich, industrialised world, the percentage of GDP captured by all workers in the form of wages fell from 75 per cent in the mid-1970s to 66 per cent in the first decade of this century. For a generation now, the owners and controllers of capital – the financial sector in particular – have secured the lion’s share of the new wealth.

This steepening inequality is not inevitable; it is a political achievement. Like their ancestors in 18th century England, successive governments have crafted legislation and distributed state patronage in the interests of the wealthy and the well connected. The unions have been stripped of bargaining power and large companies have shifted both production and profits offshore. The state has paid for technology and then given it to private corporations. This new technology has reduced the need for unemployment and boosted profits. Meanwhile, the tax levied on large companies and rich individuals has fallen, and the rest of us have had to make up the shortfall through increases in sales taxes and cuts in public services.

From the point of view of the majority, the US and Britain are in trouble, and have been for some time. From the point of view of the people who wield power, things are working out pretty well. They are reaping the rewards of policies that condemn everyone else to unemployment, underemployment or chronic insecurity. We still have formal democracy in Britain and the United States. But it is not yet clear if we can make our democratic institutions serve the interests of the majority. If we can’t, I am afraid that we will find ourselves joining the ranks of Acemoglu and Robinson’s nations that fail.

Dan Hind is the author of two books, The Threat to Reason and The Return of the Public. His pamphlet Common Sense: Occupation, Assembly, and the Future of Liberty, was published as an e-book in March. He is a member of the Tax Justice Network.

Follow him on Twitter: @danhind