Why Nations Fail: Suggested Reading for Rainforest ArchitectsPosted: September 8, 2013
In the ongoing discussion of innovation ecosystems, a couple of themes appear with sufficient frequency to warrant basic introduction and commentary. One is the tradition of thinking about the growth and collapse of states and civilizations. Here, I’ll summarize and contextualize some of the basics of one recent book on the topic.
For those working in economic development, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (Crown, 2012), is particularly relevant. Daron Acemoglu, an economist at MIT, and James Robinson, a Harvard political scientist, have written a compelling analysis of the reasons for which some countries enjoy rapid growth, while others fall into cyclical poverty and corruption. (Click the image to navigate to the authors’ website.)
The central point is the contrast between “extractive” and “inclusive” institutions. Extractive institutions, as the name suggests, are institutions or practices that extract resources and labor from a broad population in a way that benefits only a small elite. The authors cite many examples, including societies emerging from the yoke of colonialism, where extractive practices became the norm, thus condemning those societies to centuries of endemic poverty. Inclusive institutions, by contrast, are ones that allow large portions of the population to enjoy the fruits of innovation and growth. Societies with inclusive practices establish stable property rights and rule of law, and they attempt to create an even playing field for its citizens.
The focus on human institutions and practices is, at least in part, an argument against the work of bio-geographer Jared Diamond. In Guns, Germs, and Steel (1999), Diamond proposed that physical geography is a central and overlooked factor in the relative wealth and success of societies. Later, in Collapse (2005), he also explained how the mismanagement of natural resources led to the collapse of many civilizations. Diamond’s work has been instrumental in overturning exclusively racial or cultural arguments, and he got people to start taking geography seriously when thinking about economic behavior.
But Acemoglu and Robinson argue that this isn’t enough, since there are some important cases in which neighboring societies have drastically different levels of economic development and success – even though the geography, ethnic makeup, and cultures are nearly identical. The case of North and South Korea comes to mind, as well as the older case of East and West Germany.
See co-author James Robinson’s interview on BBC HARDtalk (YouTube).
Throughout Why Nations Fail, the authors consider societies that diverge in their paths toward economic development. Spanish colonialism in South America, with its encomienda system of labor, bequeathed a form of social organization in which a small ruling elite would remain in power, even after the dissolution of the Spanish empire. Meanwhile, the early British colonists in North America, faced with starvation, were forced to experiment with more inclusive property rights and shared responsibilities.
Like the Black Death in Europe centuries earlier, the near starvation of the Jamestown colonists was a catastrophic event—one that set in motion the kind of institutional changes necessary for an inclusive, pluralistic society. But there are also instances of less catastrophic shifts, like the broad systemic changes that rippled across the world in the wake of the Industrial Revolution.
In the absence of catastrophic events, a slow form of institutional “drift” can occur, and their effects are magnified if they occur during critical junctures in history. In such cases, the system moves toward a tipping point—a point of diminishing returns, where the cost for a small ruling elite to maintain power is outweighed by the benefits of broader, more inclusive societal wealth.
A subtler point here is the extent to which growth can sometimes occur even in extractive systems. The Soviet Union, despite highly extractive institutions, achieved rapid growth by funneling resources from agriculture into industry. In South Korea, by contrast, General Park’s regime was quite authoritarian, but its power base did not depend on extractive practices. In an economy heavily supported by the U.S., the growing equality of incomes reduced one of the most powerful rationales for maintaining an extractive system: “the economic elite had little to gain from their own or the military’s dominance of politics.” This prepared the way for the country’s transition to fully inclusive practices and institutions.
This comparison of South Korea and the Soviet Union is pertinent to thinking about prominent cases of emerging markets and developing economies today: “As in the Soviet Union in its heyday, China is growing rapidly, but this is still growth under extractive institutions, under the control of the state, with little sign of a transition to inclusive political institutions. The fact that Chinese economic institutions are still far from fully inclusive suggests that a South Korean-style transition is less likely—though of course not impossible.” (Ch. 3, “The Making of Prosperity and Poverty”)
Despite the occurrence of growth under extractive systems, such growth cannot be sustained long-term, particularly as the need for greater innovation and “creative destruction” becomes more pronounced (Ch. 15, “Understanding Prosperity and Poverty”). The question, then, is what factors are decisive in the transition to inclusive systems and pluralism, and what factors are conducive to their flourishing.
Why Nations Fail offers many examples of both successful and failed transitions, and the authors consider in some detail the various factors that influenced the outcome. For our purposes, it’s worth applying this paradigm of thought to our ongoing discussions about innovation; we can learn to see how our local efforts, at the micro-level of small ecosystems, fit into the macro-level of broad, societal change.
- Francis Fukuyama’s review and critique of Why Nations Fail (The American Interest)
- Jared Diamond’s response to Why Nations Fail (New York Review of Books)
- Simon Johnson’s critique of Why Nations Fail (New York Times)