Your Book Review: Why Nations Fail
Finalist #15 in the Book Review Contest
[This is one of the finalists in the 2023 book review contest, written by an ACX reader who will remain anonymous until after voting is done. I’ll be posting about one of these a week for several months. When you’ve read them all, I’ll ask you to vote for a favorite, so remember which ones you liked]
In which I argue:
Why Nations Fail is not a very good book.
Its authors' academic papers are much better, so I steelman their thesis as best I can, but it's still debatable.
Even if correct, it is much less interesting and useful than it appears.
Epistemic status: I have a decade-old PhD in economics (not in the field of economic growth) and a handful of peer-reviewed papers in moderately-ranked journals. I'm not claiming to make any original technical points, or to give a comprehensive evaluation of the economic growth literature. My criticisms are largely straight from the authors' own mouths.
1. What is this book about? Why is it not very good?
Acemoglu and Robinson (AR) argue that countries are rich or poor because of their political institutions, not culture, geography or policy ignorance.
I'll do this as much as possible in AR’s own words. Why Nations Fail was written during the Arab Spring, so the preface begins with Egypt.
Some stress that Egypt’s poverty is determined primarily by its geography, by the fact that the country is mostly a desert and lacks adequate rainfall, and that its soils and climate do not allow productive agriculture. Others instead point to cultural attributes ... Egyptians, they argue, lack the same sort of work ethic and cultural traits that have allowed others to prosper, and instead have accepted Islamic beliefs that are inconsistent with economic success. A third approach, the one dominant among economists and policy pundits, is based on the notion that the rulers of Egypt simply don’t know what is needed to make their country prosperous, and have followed incorrect policies and strategies in the past.
Unsurprisingly, those other economists and policy pundits turn out to be wrong and the authors turn out to be right.
In this book we’ll argue that the Egyptians in Tahrir Square, not most academics and commentators, have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people.
And the Egyptian lesson turns out to be general.
Whether it is North Korea, Sierra Leone, or Zimbabwe, we’ll show that poor countries are poor for the same reason that Egypt is poor. Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.
What are “institutions” anyway? (The economic and political kind, not the prison and mental hospital kind.) Basically, AR mean politics.
The word "institutions" occurs over 1000 times in Why Nations Fail. I'll just focus on how AR use it without worrying about the dictionary, different schools of economics, or other social sciences.
They begin with what institutions do rather than what they are.
Nogales, Arizona, is in the United States. Its inhabitants have access to the economic institutions of the United States, which enable them to choose their occupations freely, acquire schooling and skills, and encourage their employers to invest in the best technology, which leads to higher wages for them. They also have access to political institutions that allow them to take part in the democratic process, to elect their representatives, and replace them if they misbehave.
The word is used dozens more times before ARattempt a more general definition.
Each society functions with a set of economic and political rules created and enforced by the state and the citizens collectively. Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.
So while economic and political institutions can be separated, it is the political institutions that matter in the long run. The good kind of institutions that lead to economic growth are "inclusive", as opposed to "extractive".
To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers. ... such rights must exist for the majority of people in society.
Political pluralism is necessary, but not sufficient without a strong centralised state.
... political institutions that distribute power broadly in society and subject it to constraints are pluralistic. ... the key to understanding why South Korea and the United States have inclusive economic institutions is not just their pluralistic political institutions but also their sufficiently centralized and powerful states. A telling contrast is with the East African nation of Somalia.
I am still a bit hazy as to the relative importance of de jure written rules versus the de facto struggle for power. AR are somewhat circular:
Politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions ... When there is conflict over institutions, what happens depends on which people or group wins out in the game of politics ... The political institutions of a society are a key determinant of the outcome of this game. They are the rules that govern incentives in politics.
But overall, you could just say ‘politics’ and not be too far off. AR do this themselves occasionally.
South Korea ended up with very different economic institutions than the North because different people with different interests and objectives made the decisions about how to structure society. In other words, South Korea had different politics.
AR's academic reputation is based on statistical analysis, but Why Nations Fail tries to do narrative history, IMHO not very well.
When Jeffrey Sachs reviewed the book, he complained:
They never define their key variables with precision, present any quantitative data or classifications based on those definitions, or offer even a single table, figure, or regression line to demonstrate the relationships that they contend underpin all economic history. Instead, they present a stream of assertions and anecdotes about the inclusive or extractive nature of this or that institution.
AR replied baldly:
Sachs ... argues that we provide no evidence.
Right, we do not in the book. But that’s because a book for a general audience is not the right forum for presenting academic research, and we spent many years of our lives precisely on writing academic papers providing exactly the sort of evidence. ...
So yes, we don’t provide the econometric evidence in the book, which isn’t of course the right place to do it, but econometric evidence is abundantly loud in the way it speaks on these topics.
So, don't expect Why Nations Fail to be an accessible explanation of AR's academic work, which is what I was hoping for when I first read it.
What do they spend over 500 pages on then? Well, after the preface, there's fifteen chapters of, as Sachs says, "assertions and anecdotes". Not just about "the inclusive or extractive nature of this or that institution", to be fair, but how institutions can change at "critical junctures" such as the Black Death or colonisation, and why it can be in elites’ interests to block economic innovation if it threatens their power, so that growth under extractive institutions is unlikely to be sustained.
These chapters are not particularly good – I found them poorly organised and repetitive – but not particularly bad, if you are willing to accept the underlying premise that institutions are the main determinant of economic growth. Cumulatively they have an effect similar to the Old Testament, if you are willing to accept the underlying premise that the fortunes of the nation of Israel are determined by the LORD.
Only the second chapter, ‘Theories that Don't Work’, makes a sustained argument against alternative theories. Geography is disposed of by noting the stark differences at the US-Mexican, North-South Korean and East-West German borders, and the reversal of fortune by which the present day US and Canada only became richer than Mexico, Central and South America following European colonisation. Culture is hand-waved away with the assertion that institutions determine the any relevant cultural behaviours, not the other way around, referring to the same border examples, the rapid catch up of Catholic Europe despite Weber's Protestant Ethic, the malign influence of the European and Ottoman empires on Africa, the range of outcomes within the former British Empire, and the more European population of Argentina and Uruguay versus the US and Canada, or of Columbia versus Ecuador and Peru. Not a bad list of anecdotes, but one could equally well point to the cross-border success of Ashkenazi Jews, overseas Chinese, or Baltic and Volga Germans.
Ignorance is simply dismissed with the assertion that "if ignorance were the problem, well-meaning leaders would quickly learn what types of policies increased their citizens’ incomes and welfare, and would gravitate toward those policies." Various good and bad policy changes are explained as the result of political pressures rather than improved knowledge. The implication seems to be that good policies are so obvious they don’t require expert knowledge or advice, or that the experts never get it wrong. This appears most implausible in the debate over socialism and economic planning. Writing off the entire Communist experience as simply another elite trying to preserve its power feels inadequate, especially considering that some distinguished bourgeois economists thought central planning was a plausible road to riches until quite late in the day.
Genetics or race is not mentioned, but would presumably attract the same counterexamples as geography and culture. Another theory AR do not discuss is crude exploitation: while colonial empires are excoriated, it is for setting up persistent extractive political institutions rather than for a direct theft of resources. The prosperity of white-owned South African farms next to poverty-stricken Bantustans is explained by the better quality of the institutions available to whites under apartheid, not relative population densities and land quality.
For the rest of the book, I'll just list a few nitpicks to signal I read the whole thing and know a bit of history, but feel free to skip this – the real evidence for AR's thesis is in their academic papers, and I'll discuss those in the next section.
I think AR overrate the importance of the Glorious Revolution, to the point of claiming it "created the rule of law" – after all, Parliament had already deposed and executed a king, then brought back the king’s son on their own terms after a decade of republican government. No less a luminary than Edmund Burke asserted "The Revolution was made to preserve our ancient indisputable laws and liberties, and that ancient constitution of government which is our only security for law and liberty." Also, strong signs of British economic uniqueness – the abnormal growth of London and reliance on coal as a fuel – predated 1688.
Despite quoting E.P. Thompson a lot, they make astounding assertions about the inclusiveness of 18th century British institutions and that aristocrats were "the clear economic losers from industrialization." The rate of (male) electoral enfranchisement in the UK was actually lower than that in Poland of the same period, and a few hundred thousand handloom weavers would have begged to differ. It might be easier to write a narrative in which the emergence of industrial capitalism was an elite project requiring extensive repression of the masses. Oh, wait, looks like some people already have.
Venice was supposedly "on the brink of becoming the world’s first inclusive society". Even sticking with a purely Eurocentric view, Athens and the early Roman republic seem strong contenders, whatever unspecified threshold is used.
The preface has Egypt passing seamlessly from the Ottomans to Napoleon to British colonialism, while chapter 2 describes Muhammed Ali's rule (1805-48) as "a path of rapid economic change". Tarring Nasser's regime as "another elite as disinterested in achieving prosperity for ordinary Egyptians as the Ottoman and British had been" also seems unfair – whatever his faults, he did redistribute land to peasants, build the Aswan dam, and push an extensive program of industrialisation.
Jared Diamond's Guns, Germs and Steel is treated with similar inconsistency: while initially admitting it is "a powerful approach to the puzzle on which he focuses" (why the Old World colonised the New instead of vice versa), AR eventually claim
… it is not even historically or geographically or culturally predetermined that Europeans should have been the ones colonizing the world. It could have been the Chinese or even the Incas.
The Chinese perhaps, but Diamond's thesis is completely inconsistent with the Incas.
Soviet growth apparently "did not feature technological change". As an economist I assume they mean that statistical measures of total factor productivity did not grow. But by any ordinary meaning of "technological change" this statement is patently ridiculous: horses were replaced with tractors, employment shifted from agriculture to industry, the production of steel, electricity and machine tools grew exponentially, and city dwellers moved into highrise apartments with radio, TV and refrigerators. (I once travelled a bit in Central Asia and the newly ex-Soviet 'stans felt like developed countries that had fallen on hard times. Nepal didn’t.)
Similarly, Chinese growth is described as lacking "creative destruction and true innovation". If sacking tens of millions of workers from state-owned enterprises, allowing capitalists into the Communist Party, and leading the development of 5G does not count, I am not sure what would.
"IMF/World Bank policies are not adopted and not implemented, or are implemented in name only" rather understates the extent of privatisation, trade liberalisation and financial deregulation imposed by those institutions. It might be truer to say you cannot shrink a functioning state to the point where a corrupt elite will not find a way to steal from it.
2. If Why Nations Fail isn't very good, why have multiple Nobel prize winners written it nice blurbs and why might the authors still get a Nobel prize of their own?
Well, I don't have an insider's view of the backscratching in elite academia, and remember economics is a discipline where Nobel prize winners call each other camp following whores.
But AR's research output is certainly much more impressive than Why Nations Fail conveys. So I'll try to do a better job in less space of explaining their general methodology and a few of their most famous papers.
How do AR measure a country's institutions? By only focusing on one or two dimensions.
Measuring institutional quality has turned into a field of its own, with complicated multi-dimensional indexes put out by major institutions like the World Bank. AR's seminal papers, however, were done with much simpler measures. The Colonial Origins of Comparative Development and Reversal of Fortune used other researchers’ indexes of protection against expropriation (an economic institution), and constraint on executive power (a political institution). In Consequences of Radical Reform: The French Revolution AR constructed their own index based on the dates of adoption of civil law codes, agrarian reform, abolition of guilds, and Jewish emancipation.
Why are AR so sure institutions cause economic growth, and not the other way around? Instrumental variables.
Assuming we can measure institutions, how can we tell if they make countries rich? Even if countries with good institutions tend to be rich, how do we know if good institutions make you rich, being rich lets you buy good institutions, or if there's something else that causes both?
This is the $64 question in many fields that don't lend themselves to lab or field experiments. Economics has tried to deal with this in different ways, but the fashion when AR were in their prime was instrumental variables. If you want to prove variable X causes variable Y, find a third variable Z, the 'instrument', that you think affects X but does not otherwise affect Y. In this case, find some variable that you think affects institutions, but does not otherwise affect economic growth. Then those changes in institutions that can be explained by Z will tell you the causal effect of institutions on growth. This is basically the same intuition as a natural experiment, but instead of separate control and treatment groups you can use a continuous range of Z values.
(Alert readers may notice a problem here. If you don't know if X causes Y or vice versa, how can you possibly tell if Z causes X and doesn't otherwise affect Y? You can't. All you can prove statistically is that Z is correlated with X. In reality, what you are mainly hoping for is that the causal effect of Z through X on Y is more intuitively appealing to journal editors and referees than the simple effect of X on Y. This is why economics is such fun and has such a high reputation among non-economists. Also, the camp-following whores thing.)
ARs academic success was basically down to finding, early and often, a series of clever instrumental variables for institutions at a time when this was the academic fashion, and the necessary datasets and computing techniques were mature enough to be usable and credible but still new enough to be exciting. (I don't mean to make this sound easy. Elon Musk's career success was basically down to building a clever electric car when electric cars were the fashion and the necessary battery technology was newly matured.)
‘Colonial Origins’ used "the mortality rates of [European] soldiers, bishops and sailors stationed in the colonies between the seventeenth and nineteenth centuries". The argument was that in colonies where Europeans died quickly, they would try to grab as much as possible as quickly as possible and then go home – in other words, set up extractive institutions. In colonies where Europeans had a reasonable life expectancy, they would be more likely to settle permanently and set up inclusive institutions for themselves, even if they had to fight the mother country to do it. Since institutions tend to be highly persistent, the effect of initial settler mortality can still be seen in contemporary institutions and through them, contemporary income levels. AR argued that, since indigenous populations have a high degree of immunity to the tropical diseases that killed Europeans – for example, native soldiers in India had a lower mortality rate than British soldiers in Britain – they should not have a direct effect on contemporary incomes, making European mortality rates a valid instrument.
In ‘Reversal of Fortune’, AR pointed out that the urbanisation rates and population density of societies later colonised by Europeans in 1500 is negatively correlated with contemporary per capita income, and argue that this again reflects the options chosen by European colonisers: if there was a large native population to exploit, they would set up extractive institutions to do so. If not, they had to set up inclusive institutions to attract voluntary migrants. AR used both urbanisation rates and population density in addition to mortality as instruments for contemporary institutions, and again find that institutions have a significant effect on contemporary income.
‘French Revolution’ exploited whether or not a German state was conquered by the French during the Revolutionary and Napoleonic Wars. AR argued that the conquests were not determined by an area's future growth potential, but by immediate military needs and the claim to France's 'natural frontiers'. Furthermore, the positive effects on urbanisation, income (where available), railway expansion and industrial employment are only seen after 1850.
Dependent variable (Y)
Institutional variable (X)
Instrumental variable (Z)
Per capita GDP (1995)
Expropriation risk (1985-95)
Settler mortality (17th-19th centuries)
Per capita GDP (1995)
Expropriation risk + Constraint on executive (1990, independence)
Settler mortality + Urbanisation, population density (1500)
Reforms index (1700-1900)
French occupation (1792-1815)
Note that, while AR's chosen instruments often go back centuries, their data on institutions and income is mostly from the late 20th century, except for ‘French Revolution’, and even it only has meaningful variation in the 19th century. Nevertheless, the book assumes the same relationships hold for centuries in the past, with only vague anecdotes as to institutional quality. Also, the papers argued that institutions were especially important for industrialisation – extractive colonies were often richer than inclusive colonies in the 18th century – while in the book the dominant role of institutions is presented as a universal truth.
Why are AR so sure that institutions are the ONLY important cause of long-run growth? Adding control variables to their models. Is this any more convincing than for any other issue? No.
Actually, I have no idea why AR are so sure, but it's probably nothing to do with their modelling. But the models are the main piece of evidence they can hold up, so I'll focus on them. It's also worth noting that AR strawman their opponents a bit: I don't think there are many economists who think institutions don't matter at all, the debate is whether they are the sole dominant factor, to the point where other explanations can be ignored.
'Colonial Origins' is the only one of the three papers that does an extensive statistical horse race versus other explanations. These are in three groups, tested separately. The first (somewhat miscellaneous) includes latitude, the colonising power, what type of legal system, religion. The second, largely geographic, includes temperature, humidity, share of population of European origins, soil quality, resources, whether the country is landlocked, and ethnolinguistic fragmentation. The third set of health variables includes malaria, life expectancy, and infant mortality. Overall AR conclude that "our results change remarkably little ... and many variables emphasised in previous work become insignificant". But "remarkably little" is not the same as "not at all", and "many variables" is not "all variables". Again, in the book these nuances are swept under the rug. Also, they never throw the full kitchen sink of control variables in a single model. With only 64 countries and one observation per country, they would be running out of statistical degrees of freedom, but it does remind one that there are more theories of growth than countries to test them on.
Of course, many other people have estimated different models with different results. The potential variations are almost infinite, with corresponding room for specification searching and p-hacking: different dependent, control and instrumental variables, different data for the same variables, growth rates instead of levels, etc. I won't pretend to have any special insight into this – AR haven’t had to retract and are still in Nobel contention, but the critics are still active. If you are interested, the Sachs review and rejoinder, and these ACX comments, are as good a place to start as any.
The last decade of data doesn’t add much, but doesn't look great for AR.
We probably shouldn't judge this book too much on hindsight, given it's about the long run and AR were prudent with their predictions: "the fact that the extractive regime of President Mubarak was overturned by popular protest in February 2011 does not guarantee that Egypt will move onto a path to more inclusive institutions." Even so, the clear implication was that the Arab Spring was on the right track and Brazil was setting itself up for the long run better than China.
THE RISE OF BRAZIL since the 1970s was not engineered by economists of international institutions instructing Brazilian policymakers on how to design better policies or avoid market failures. It was not achieved with injections of foreign aid. It was not the natural outcome of modernization. Rather, it was the consequence of diverse groups of people courageously building inclusive institutions. Eventually these led to more inclusive economic institutions.
3. Even if they're right, how much does it matter?
AR's focus is so long-run it excludes most 'growth miracles' ...
It is well known that countries' relative income levels are quite stable over time: most of today's rich countries were rich (by contemporary standards) a century ago. It is less well known that even the poorest countries often have a decade or two of rapid growth somewhere in their past (which, incidentally, is a strong argument against 'poverty trap' theories). What is rare is a poor country sustaining rapid growth for multiple decades, to the point where it climbs significantly in the relative income rankings. This is why Japan and the Asian tigers were considered special and the poster children for various growth theories, whether industry policy, culture, or good old fashioned capitalism and hard work.
AR have such a restrictive definition of sustained growth that it even excludes episodes of this length: South Korea before democratisation (1960-94), the Soviet Union (1930s to 1970s), Argentina (late 19th to early 20th century), and China (1978-?) are all explicitly written off as unsustainable growth under extractive institutions. This is consistent with their theory but rules out what most people would consider key data points.
... while small or even medium sized improvements, worthy of a lifetimes' work or an entire academic discipline, are insignificant noise.
AR’s thesis is extremely pessimistic regarding not just the utility of economics as a discipline but any purposeful action to make things better. It's institutions all the way down, and extractive institutions are hard to change because they benefit those at the top, who will fight tooth and nail to defend them. You might have to wait a lifetime (or several) for a "critical juncture" to come around, and even then most revolutions fail to build inclusive institutions. So while AR affirm the primacy of politics, they don't provide encouragement for any but the most masochistic individual to take up political activism. Development aid and the poverty action lab approach are no good either, since
... the institutional structure that creates market failures will also prevent implementation of interventions to improve incentives at the micro level. Attempting to engineer prosperity without confronting the root cause of the problems—extractive institutions and the politics that keeps them in place—is unlikely to bear fruit.
While ‘French Revolution’ might seem to favour humanitarian invasions (AR themselves do not suggest this), more recent experience in Afghanistan, Iraq and even the former Yugoslavia do not. But doing nothing and hoping that development will bring democracy won’t work either:
... while nations that have built inclusive economic and political institutions over the last several centuries have achieved sustained economic growth, authoritarian regimes that have grown more rapidly over the past sixty or one hundred years ... have not become more democratic.
There may be a lot of truth in all this pessimism – to be honest, I found it rather bracing – but how much do you expect from an academic discipline, NGOs, or even national governments and the UN? The difference between poor and rich countries is so large, both quantitatively and qualitatively, that as Robert Lucas said, once you start thinking about them it is very hard to think about anything else. The flipside, however, is that even very significant and worthwhile improvements – the aforementioned "unsustainable" growth episodes, recovering from the Great Depression like Germany rather than France or the Global Financial Crisis like Iceland rather than Greece – can appear insignificant if they do not close this gap. The Nordic model is promoted as offering less inequality than the American while preserving output per hour worked, with less labour and more leisure. Should it be written off because it does not also promise an order of magnitude increase in wealth? Should foreign aid be abandoned, even if it alleviates much human suffering, because it is not a reliable way of making poor countries rich? In the same spirit, should economists stop worrying about ideal policy because politics inevitably waters it down (best case) or perverts it (worst case)?
Conclusion: game not worth the candle?
Overall, while anyone interested in economic growth should familiarise themselves with AR’s arguments, I don’t recommend reading Why Nations Fail. It is simply too much work to slog through without explaining the authors’ real evidence base, with little in the way of style or historical insight in compensation. I do not think this is too much to ask from a popular book: Clark’s Farewell to Alms, for instance, does a much better job of presenting basic statistical evidence for a more controversial (genetic) theory. At the other end of the spectrum, Galbraith, Landes and Mokyr give more readable narrative arguments for the importance of culture and technology.
Fortunately, AR’s three key papers are quite accessible and a fraction the length of the book. Even if you have to gloss over some of the equations and tables, you can get a pretty good idea of their arguments from reading the text, or even just the introductions and conclusions. You will not be left with as strong an impression that political institutions are the sole driving force of all recorded history, but perhaps that is just as well.
Most geographic theories I have seen focus on disease and transport. Agriculturally, the Nile Valley has been famously productive for millennia.
To be precise, 1314 times including blurbs and references.
The trend since then has been to focus on questions where you can run experiments, with a consequent narrowing of the scope of the questions, while running head-on into the replication crisis.
There are things called overidentification tests which can help a little. If you have more than one potential instrumental variable and are willing to assume that one of them works as advertised, you can test if the other(s) are valid. But as AR themselves note in ‘Colonial Origins’, "such tests may not lead to a rejection if all instruments are invalid, but still highly correlated with each other."
Or import slaves, which would add a bit of noise but not reverse the relationship with population density.