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To riches or ruin

Blame it on politics, says the latest analysis of why some countries are wealthier than others

books Updated: May 04, 2012 19:15 IST

Why Nations Fail: The Origins of Power Prosperity and Poverty

Daron Acemoglu and James A Robinson

Crown Business

Rs 1,782  pp 529

The Nobel-winning economist Paul Krugman once wrote that the reason why an economy grows is one of the two fundamental issues that his tribe doesn’t understand. If economists did crack that code, obviously governments would just implement whatever was the formula required and, in theory, watch the indices rise forever.

This is the latest volume to lay out a theory as to why some countries become rich and others don’t. As the authors, Daren Acemoglu from the Massachusetts Institute of Technology and James A Robinson from Harvard, write: “Most economists and policymakers have focused on ‘getting it right’, while what is needed is an explanation for why poor nations ‘get it wrong’.”

What differentiates this from theories of ‘guns, germs and steel’ or the Washington Consensus is the belief that, above all, it’s politics that rules the roost. History has a role too, but in shaping the politics that shapes the institutions that shape the economy that develops. “While economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.”

The right policies for growth aren’t too difficult to determine. The question is why some regimes deliberately follow a perverse path to economic ruin. The answer: politics. “Poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.” These decisions lead societies to develop what the authors call “extractive” institutions that “keep poor countries poor”.

The primary reason to take such decisions? An unwillingness of whoever is king of the hill at that point to allow the rise of other groups that might endanger his position. An extractive political economy does not “enforce property rights, create a level playing field and encourage investments in new technologies and skills that are more conducive to economic growth”.

This is not a new argument. David Landes, in his Wealth and Poverty of Nations, makes the case that fragmented political authority and the strength of civil society helped propel Europe to its recent position of mastery. Douglass North, John Wallis, and Barry Weingast have a model in Violence and Social Orders about societies that allow limited or open access to opportunity.

The bulk of Why Nations Fail is a huge corpus of historical examples and comparative economics. North Korea, the heart of darkness, is compared to South Korea, the Asian supertiger. The description of the rise and fall of the Venetian city-state is almost letter perfect in how it fits the contours of the present theory. Some will find so many examples eye-glazing, others enlightened by the parallels drawn between the dynamic Bushong and the slothful Lele, two tribes on opposite banks of an African river. How the chiefs of present-day Botswana outfoxed arch-imperialist Cecil Rhodes should be a game theory case study.

These historical nuggets are not divorced from the theory. The second stage of the authors’ argument is that the past plays an important part in deciding whether a society is extractive or inclusive. “Rich nations are rich largely because they managed to develop inclusive institutions at some point during the past 300 years.”

This does not mean a nation with a history of dictators and oligopolists is doomed. However getting into a virtuous cycle of inclusivity, more wealth and thus more inclusivity is a lot more difficult. An interaction between existing institutions and “critical junctures” is one way it can be done, but such junctures have to extremely disruptive: the Black Death and the industrial revolution are the sort of scale that can work.

How do they judge the new kid on the block? The new China is much more inclusive than Mao Zedong's Middle Kingdom. But as long as the party declines to loosen its grip, “growth with creative destruction and true innovation will not arrive.”

Sadly, Acemoglu and Robinson have no perspective on post-liberalisation India. Given the spread of entrepreneurship among Dalits or the churn in the ranks of India’s corporations, the picture seems to be one of expanding inclusivity. But it can be argued that political decentralisation has reached a state where India’s economy is as paralysed as an extractive polity. For those who despair of the present state of affairs in India, this book provides grounds to be reassured that, in the long run, we are all likely to be well-off.