Why Nations Fail And why India and China dont fit the story

Why Nations Fail by Daron Acemoglu and James Robinson is becoming a mustread for development economists. But this column argues that the central thesis of the book fails to explain two big development stories: those of India and China. Why Nations Fail, by Professors Daron Acemoglu and James Robinson has deservedly gained right of entry to the pantheon of big books on economic development. Like the pantheons other occupants, most recently Jared Diamonds Guns, Germs and Steel, and Ian Morriss Why the West Rules for Now, Acemoglu and Robinsons work tackles one of the biggest questions facing humanity: why some countries are rich and others poor. The book is daringly ambitious in the simplicity of its answer; and yet its scholarship is serious and it offers a deep and plausible insight about development. Why Nations Fail does not draw upon as breathtakingly broad a range of disciplines as those in either Diamonds or Morriss work. This stems from the different time scales of inquiry. Diamond starts the development clock around 13,000 BCE, and Morris more than a million years ago. But the Acemoglu and Robinson story begins only about 700-800 years ago, necessarily ruling out from their account evidence from genetics, evolution, paleo-biology, and archaeology, which are staples in both Diamond and Morris. Colonialism and development Why Nations Fail is both a derivative and a development of an academic paper that Acemoglu and Robinson co-authored in 2000 with MIT Professor Simon Johnson (full disclosure: Professor Johnson is my colleague and co-author). In The Colonial Origins of Comparative Development (Acemoglu et al. 2000), one of the most-widely cited and justly influential academic papers on economic development in the past fifteen years, the trio argued that the quality of economic institutions was the key long-term determinant of economic prosperity (measured broadly in terms of per capita GDP). Good economic institutions protected property rights and guaranteed the sanctity of contracts,

which are key prerequisites for private sector investment and entrepreneurship. In Why Nations Fail, however, Acemoglu and Robinson go one step further in arguing that economic institutions in turn are determined by politics. The more concentrated political power is, the more a small group in society tries to extract wealth for itself to the detriment of the rest: this is a world of extractive institutions. Conversely, dispersed political power as exists in democracies is conducive to contestability and competition, which create the conditions for broadly shared prosperity (a world of inclusive institutions). Thus, Acemoglu and Robinsons parsimonious explanation for the disparities in wealth across the world is: political institutions. There have been many insightful reviews and critiques of the book by Frank Fukuyama, Jared Diamond, Martin Wolf and the Economist1, as well as thoughtful responses from these authors on their respective blogs. My aim is not so much to review all aspects of the book as to offer one perspective on it. Why Nations Fail -- And why India and China dont fit the story Invoking the very spirit of Occams Razor that imbues the book, I would like to explain Why Nations Fail in light of the figure below: economic development (proxied by per capita GDP) is measured on a y-axis and that an index of political institutions (higher values denote more representative or inclusive ones) on the x-axis. The choice of axes is very important because the book asserts that causation runs from politics (the independent variable on the xaxis) to economic development (the dependent variable on the y-axis). The authors are unsympathetic to causation running the other way. That is, they reject the modernisation hypothesis, which asserts that improvements in standards of living will lead to more democratic politics, stemming for example, from increased demand for political freedom and participation. For Acemoglu and Robinson, political institutions bear the deep imprints of history, and although they are not immutable, their susceptibility to change induced by economic development is limited. Figure 1. Why Nations Fail in a single picture

This figure is based on a sample of 141 countries (excluding the major oil exporters). Data are for 2009. GDP per capita data are from the Penn World Tables (version 7), and data for the democracy index are from the Polity IV database. The upward-sloping line in our figure reflects a strong relationship (on average) between political institutions and economic development, validating the central argument of Why Nations Fail. However, India and China stand as outliers (they are far away from the line drawn by Acemoglu and Robinsons function). And the interesting thing is that each of these countries is an exception to, or even a challenge to, their thesis in opposite ways. India (which is way below the line) is too economically underdeveloped given the quality of its political institutions, and China (which is well above the line) is too rich given its lack of democratic institutions. Acemoglu and Robinson can mount two defenses. First, they can contend that all countries should be treated equally because every political unit is only one experiment, and thus one data point (regardless of size). After all, their thesis holds true for a vast majority of countries (that is why the line is upward sloping). Therefore the authors must be allowed some exceptions, given they have daringly embraced a mono-causal explanation of what is clearly a complex relationship between politics and economics. Still, at a basic level, explaining economic development while leaving out one-third of humanity from it is not entirely satisfying. Second, Acemoglu and Robinson can contend that theirs is a claim about the

medium to long run. These horizons are never clearly specified but would rule out criticisms based on relationships observed for only, say, 20 to 30 years. Reproducing the figure for 1980, for example, would show China near the line (although India would still be far from it). The Chinese anomaly is a result of the past 30 years of astonishingly rapid growth. Wait for another 20 years, Acemoglu and Robinson might plead, and the anomalies in the figure will fade away or at least move in the direction predicted in their book. This defense is more problematic. Suppose that we were to re-visit the book in 2030. What would have to happen to China and India for them to be consistent with the relationship predicted by Acemoglu and Robinson? India in 20 years would have to slide into authoritarian chaos and become the equivalent of countries such as Venezuela today politically, or it would have to boom to become the equivalent of countries such as China in terms of standards of living. Conversely, China would either have to become a near-Jeffersonian democracy or suffer a dramatic collapse in output (that is, post negative growth). None of these four outcomes is impossible, but none is likely either. Thus, even 20 years from now, China and India are unlikely to be adequately explained by Acemoglu and Robinsons thesis. But one could make an even stronger critique of the book. Even if China and India were to move rapidly in the direction predicted over the next 20 years, it would still beg the question of how China managed to sustain 30 to 50 years of historically unprecedented rapid growth (and poverty reduction) under repressive political conditions and how India squandered 30 or 40 years of democracy with its Hindu rate of growth. Of course, there are answers but the point is that they would have to be different from, and even orthogonal to, the central thesis of Why Nations Fail. In other words, the inability of Acemoglu and Robinson to explain the development trajectories of these two large countries is a fault not of their rich and excellent book but of the unusual, uncooperative reality of Chinese and Indian history. This column was originally published in American Interest. Notes: 1. Diamond (2012), Economist (2012), Fukuyama (2012) and Wolf (2012).

Further reading Acemoglu, D, S Johnson and J Robinson (2000), The Colonial Origins of Comparative Development: An Empirical Investigation, The American Economic Review, 91(5):1369-1401, published 2001. Acemoglu, D and J Robinson (2012), Why Nations Fail: The Origins of Power, Prosperity and Poverty, Profile Books. Diamond, J (1998), Guns, Germs and Steel: A short history of everybody for the last 13,000 years, Vintage. Diamond, J (2012), What Makes Countries Rich or Poor?, The New York Review of Books, 7 June. Economist (2000), The Big Why [1], 10 March. Fukuyama, F (2012), Acemoglu and Robinson on Why Nations Fail, theamerican-interest.com, 26 March. Morris, I (2010), Why The West Rules For Now: The Patterns of History and what they reveal about the Future, Profile Books. Wolf, M (2012), The wealth of nations: Do political institutions hold the key to a countrys economic success?, Financial Times, 3 March.

1. http://www.economist.com/node/21549911