‘It’s the politics, stupid!’

IN ADVANCE of the arrival of James Robinson (Harvard), coauthor with Daren Acemoglu (MIT) of “Why Nations Fail,” the World Bank sent me a copy of this bestseller. And I am in good company—with Michael Spence, 2001 Nobel Laureate in economics—when I say that it is a book that is hard to put down once taken up to read.

It comes extremely well-recommended, by well-known authors and academics, including five other Nobel Laureates in economics, any one of whose recommendations would have been sufficient encouragement for the reader to obtain a copy (their reviews are printed right at the beginning of the book). And it has also been panned, of course (critical reviews not included in the book)—the most notable one being that leveled by economist Jeffrey Sachs in FOREIGN AFFAIRS, which the authors felt compelled to answer (the reader can google it).

Robinson’s visit to the Philippines is courtesy of the World Bank (WB), and it is easy to understand why:  The thesis of “Why Nations Fail” (WNF) is that nations prosper because their political and economic institutions are “inclusive” (a term that is almost a mantra for the WB), and others fail because these institutions are “extractive”.

And what does the WNF mean when it talks about inclusive versus extractive? “Inclusive economic institutions, such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talent and skills and that enable individuals to make the choices they wish. 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.”

Extractive economic institutions, on the other hand, are those which have opposite properties from what are called inclusive. They are called extractive because “such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.”

With respect to political institutions, inclusive institutions are those which are both sufficiently centralized, and pluralistic (pluralistic meaning that power is distributed “broadly in society and subject to constraints,” instead of being vested in a single individual or a narrow group). Extractive political institutions obviously “concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power.”

Does that strike a chord somewhere?

WNF goes one step further: While economic institutions determine whether an economy prospers or fails, these economic institutions are in turn formed by political institutions. In other words, as Harvard’s Dani Rodrik puts it, “It’s the politics, stupid! That is Acemoglu and Robinson’s simple yet compelling explanation for why so many countries fail to develop…. The authors demonstrate history and geography need not be destiny. But they also document how sensible economic ideas and policies often achieve little in the absence of fundamental political change.”

Does that strike a chord somewhere?

And the documentation is what is fascinating—historical examples that span centuries. The book’s first chapter begins with a comparison of the city of Nogales, one half of which is in Arizona in the United States, and the other half in Sonora, Mexico. With the same people, the same culture and the same geography, the part that is in the United States has three times the average income of the part that is in Mexico. And that’s just for starters.

South and North Korea are brought into the picture, as are North and Latin America, West and East Germany (before the unification), and many others—all to demonstrate that “poor countries are poor not because of their geographies or cultures, or because their leaders do not know which policies will enrich their citizens.” It’s just that the leaders are not interested in enriching their citizens but in enriching themselves.

Does that strike a chord somewhere?

In the chapter “Theories That Don’t Work,” the authors, talking about the geography argument about a country’s poverty, make a categorical statement:  “[A]s we’ll show, the prime determinant of why agricultural productivity—agricultural ouput per acre—is so low in many poor countries, particularly in sub-Saharan Africa, has little to do with soil quality. Rather, it is a consequence of the ownership structure of the land and the incentives that are created for farmers by the governments and institutions under which they live.”

Does that strike a chord somewhere?

WNF also talks about Virtuous Circles (positive feedback loops that further entrench inclusive political and economic institutions), and Vicious Circles (negative feedback loops that perpetuate the extractive ones). And naturally, it describes how a few countries (read Botswana in Africa) “broke the mold”—a story involving “critical junctures” that are very much part of the process of change.

A particularly interesting chapter is Chapter 5, which discusses the Stalin regime, among others (King Shyaam, Neolithic Revolution, Maya city-states), and then uses these to explain why they think that China’s current economic growth cannot last. That really makes one sit up and take notice.

Robinson is scheduled to conduct a working session here with top political leaders. I hope it bears good fruit.