Book Review: Why Nations Fail by Daron Acemoglu and James A. Robinson
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| Title: Why Nations Fail: The Origins of Power, Prosperity, and Poverty Authors: Daron Acemoglu and James A. Robinson Publisher: Crown Publishing Group Release Date: March 20, 2012 |
Introduction:
In Why Nations Fail, the authors try to study what factor contributes in a country’s political and economical success or failure. Their main argument is that the emergence of prosperity and poverty correlates with man-made political and economic institutions. They tried to achieve this by functioning on two levels. First is differentiating between extractive and inclusive economic and political institutions. Second is their explanation for why inclusive institutions emerge in some parts of the world and not in others. Their theory is the link between inclusion economic and political institution and prosperity. According to both Acemoglu and Robinson, “states differ in in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people” (2012, p.73).
Furthermore, the authors define inclusive institution when the citizens have a say in the decision-making process in politics. The United States and South Korea are countries that allow and encourage public participation in economic and political activities. Other factors such as secure private property, unbiased system of law, provision of public service, and flexible business and career venture for its citizens should also be present in a state in order to be considered an inclusive economic institution. While extractive institutions permits the ruling elites to rule over and exploit the masses by extracting wealth from them. These ruling elites are unwilling to change and are afraid of creative destruction. Creative destruction is a term coined by economics Joseph Schumpeter, which is the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one" (1942). Schumpeter decline the conceptualization of perfection competition over competition between big oligopolies pushes the state to greater technological mastery. By replacing the old with the new, new companies could attract resources and take business away from old established ones.
In addition, this book also discusses the authors’ two major theories, which are the drivers of democratic and dictatorial regimes, and the correlations between democratic regimes and the promotion of economic growth while dictatorial regimes obstructs it. In the first theory they conclude that in a non-democratic state the threat of revolution constantly motivates the rich to democratize. Next, their framework shows a domino effect in which economic growth will alter the distribution of economic resources that would then influence political institutions.
In answering the main question of the book, the authors states “that nations fail today because of their extractive economic institutions do not create the incentives needed for people to save invest, and innovate”. And that “extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction”.
Background of US economics:
As one of the world’s largest economy, the United States makes up approximately 17 to 22 percent of the world’s gross domestic product. The US is a mixed economy meaning it has an economy system with a combination of private interest and state interventionist. In addition, natural resources, agriculture, and industrial products benefits their economy. After their independence with Great Britain, the United States economy progress due to its extensive agrarian and industrial production.
By the 19th century, the U.S began to experience whirlwind economic booms. In the 20th century, the U.S economy underwent into its first economic recession with its declining GDP and the Wall Street Crash called the Great Depression. This caused poverty, deflation, and unemployment. The U.S government then implemented political and social policies in regards with the Great Depression. These policies include the New Deal policies, which was programs such as public work projects, regulations, and financial reforms, with reference to the Trickle-Down Theory. The Trickle-Down Theory recommends reducing the taxes on business and the wealthy society in order to stimulate business investment that would help the country in the long run. President Reagan advocated tax reduction in order to stimulate economic growth and reduce government spending. These include cutting the budget of Medicaid, federal education programs, food stamps, and the United States Environmental Protection Agency (EPA).
In present, the US economy is one of the largest economy in the world. Slichter (1959), considers it to be a good economy. He explained three principal economic characteristics that make the US economy good. First is that it is highly productive. Next is that it distributes the fruits of production broadly. And lastly, it provides a rather stable demand for goods. As of 2016, the economy has recovered from the Great Recession, which was the greatest U.S economic downturn ever since the Great Depression. According to Shatz (2016), the country still faces economic challenges such as creating the condition for people to succeed in the labor market, and solving medium to long-term fiscal imbalances. But despite domestic problems, the country’s international economic engagement contributes largely to the U.S. growth and innovation and the increasing incomes.
Analysis of the text:
In the book, the authors used a comparative method by comparing countries in order to study what factor contributes in a country’s political and economical success or failure and its correlation to political and economic institutions. In the first chapter, So Close and Yet So Different, They compared the Nogalez, Arizona (United States) and Nogales, Sonora (Mexico). They wanted to understand why these two countries despite its close proximately with one another have differences in terms of the quality of life and the effectiveness of their respective government.
In Arizona, most teens are in school and adults have a high school diploma. The average income per household is $30,000 a year. The citizens are healthy, have a high life expectancy, and have Medicare. Their government is also effective in providing services such as sewage system, water supply, and law and order. Unlike in Sonora wherein it is the complete opposite, students are out of school and many adults do not even finish their high school education. Citizens deal with high rates of infant mortality, poor public health conditions, no access to public amenities, and the lack of law and order. The absence of democracy is also apparent with the corruption by the politicians especially the Institutional Revolutionary Party (PRI).
In addition, businesses and entrepreneurs are more like to invest in an environment such as the United States then of Mexico due to the incentives and safety in the institution of the United States. This then causes ‘Creative Destruction’ in the United States because innovations will always be needed in the competitive environment that would then help the economy. According to Fisher (1939), “general prosperity is supported on a very broad base and is the result of a whole series of technological, managerial, and economic factors and conditions, which stimulates growth and expansions of old industries as well as the development of new ones”. Therefore Nogalez, Arizona (United States) has an inclusive institution because their citizens have access to economic and political institutions such as access to education and the right to take part in democratic process like electing their representative and replacing if deemed unworthy. While Nogales, Sonora (Mexico) has an extractive institution; the citizens are left to fend for themselves while the corrupt officials gets richer. Moreover, growth of state with an extractive institution is possible case in point the Middle East due to oil but if oil prices fall, the prices would also fall.
Furthermore, Acemoglu & Robinson showed some historical background on how the United States became to possess inclusive institution, while Mexico has an extractive institution. The Spaniard who colonized Mexico set up an extractive system for their benefit. While in the Jamestown settlers in Virginia established an inclusive system in order for them to survive and avoid extinction. In addition, they also showed that poverty does not originate from a country’s geography, culture, & ignorance but rather it is the people who have power that makes decisions that generate poverty. But still there are flaws in their argument. Diamond (2012) criticize the book by only tackling institutions and not including geography. He states that geographical factors shows a relationship on why countries are rich and poor today. This criticism by Diamond coincides with the Brandt Line. The Brand Line shows how the developed countries are in the northern part of the world while in the underdeveloped are in the south, except Australia and New Zealand (See Picture 1). In addition, Easterly (2012), emphasises the lack of statistical evidence to support the authenticity of the Acemoglu and Robinsons’ historical case study.
To assert, the writers’ argument is plausible especially in the case of the United States because of its inclusive institution, which helps flourish its economic. In an inclusive institution, the citizens are motivated to work hard because of incentives and opportunities to invest. This productivity thus leads to a good economy. In the United States, labor productivity is increasing from 106.4 index points in 2016 to 109.05 in 2018 as seen in table 1 (Trading Economics, 2018). Technology is a key factor in the high productivity in the United States. Technology, especially new innovations, helps labourers do their work effectively and efficient. In a study by Basu, Fernald, & Shapiro (2001), they saw a correlation between the increase in productivity growth and technological change. Furthermore, this book helps us in looking at poverty and economic prosperity in a bigger picture.
Appendix
Source: https://cpb-us-e1.wpmucdn.com/blogs.yis.ac.jp/dist/8/650/files/2014/09/BrandtLine-19mcjbg.png
Picture 1: The Brandt Line
Table 1
References:
Acemoglu, D. & Robinson, J.A., (2012). Why Nations Fail: The Origins of Power, Prosperity,
and Poverty. Crown Business
Basu, S., Fernald, J.G., & Shapiro, M.D., (2001). Productivity Growth in the 1990s:
Technology, Utilization, or Adjustment? NBER Working Paper No. 8359. Retrieved from: https://www.nber.org/papers/w8359
DuBrul, S.M., Hance, W.D., & Fisher, W.E., (1939). Expansions and Contraction in the
American Economy. The American Economic Review, Vol. 1, No. 1. American Economic Association. Retrieved from: https://www.jstor.org/stable/1806951
Schumpeter, J., (1942). Capitalism, Socialism and Democracy. S.l.: Wilder Publications
Shatz, H. J., (2016). The U.S International Economic Strategy in the Turbulent
World:Strategic Rethink. RAND cooperation. Chapter: The U.S Economy Today.
Retrieved at: https://www.jstor.org/stable/10.7249/j.ctt1d4txf0.9
Slichter, S.H., (1959). Observations on the American Economy. The MIT Press. Daedalus,
Vol. 88, No. 3, pp. 499-504. Retrieved from: https://www.jstor.org/stable/20026517
Trading Economics, (2018). United States Nonfarm Labour Productivity 1950-2018.
Retrieved from: https://tradingeconomics.com/united-states/productivity
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