Conditions for sustainable development

Beginning with a description of Nogales, Arizona, and Nogales, Sonora, the authors question the reasons for the dramatic difference in living standards on either side of the wall separating the two cities.^[15] The book focuses on how some countries have managed to achieve high levels of prosperity, while others have consistently failed. Countries that have managed to achieve a high level of well-being have demonstrated stable high rates of economic growth for a long time: this state of the economy is called sustainable development. It is accompanied by a constant change and improvement of technologies — a process called scientific and technological progress. In search of the reasons why in some countries we observe this phenomenon, while others seem to have frozen in time, the authors come to the conclusion that for scientific and technological progress it is necessary to protect the property rights of wide strata of society and the ability to receive income from their enterprises and innovations (including from patents for inventions).^[16] But as soon as a citizen receives a patent, he immediately becomes interested in that no one else patented a more perfect version of his invention, so that he can receive income from his patent forever. Therefore, for sustainable development, a mechanism is needed that does not allow him to do this, because together with the patent he receives a substantial wealth. The authors come to the conclusion that such a mechanism is pluralistic political institutions that allow wide sections of society to participate in governing the country.^[17] In this example, the inventor of the previous patent loses, but everyone else wins. With pluralistic political institutions, a decision is made that is beneficial to the majority, which means that the inventor of the previous one will not be able to prevent a patent for a new invention and, thus, there will be a continuous improvement of technologies.^[18][19] The interpretation of economic growth as a constant change of goods and technologies was first proposed by Joseph Schumpeter, who called this process creative destruction.^[11][20][21] In the form of an economic model, this concept was implemented by Philippe Aghion and Peter Howitt in the Aghion–Howitt model, where the incentive for the development of new products is the monopoly profit from their production, which ends after the invention of a better product.^[22] Since only pluralistic political institutions can guarantee that the owners of existing monopolies, using their economic power, will not be able to block the introduction of new technologies, they, according to the authors, are a necessary condition for the country's transition to sustainable development. Another prerequisite is a sufficient level of centralization of power in the country, because in the absence of this, political pluralism can turn into chaos. The theoretical basis of the authors' work is presented in a joint article with Simon Johnson,^[23] and the authors also note the great influence of Douglass North's^[24][25][26] work on their views.^[11]

The authors support their position by analyzing the economic development of many modern and already disappeared countries and societies: the USA; medieval England and the British Empire; France; the Venetian Republic; the Roman Republic and the Roman Empire; Austria-Hungary; Russian Empire, USSR and modern Russia; Spain and its many former colonies: Argentina, Venezuela, Guatemala, Colombia, Mexico and Peru; Brazil; colonial period of the Caribbean region; Maya civilization; Natufian culture; the Ottoman Empire and modern Turkey; Japan; North Korea and South Korea; the Ming and Qing empires, and modern China; the sultanates of Tidore, Ternate and Bakan, the island state of Ambon and other communities on the territory of modern Indonesia, and the consequences of the impact of the Dutch East India Company on them; Australia; Somalia and Afghanistan; the kingdoms of Aksum and modern Ethiopia; South Africa, Zimbabwe and Botswana; the kingdoms of the Congo and Cuba, and the modern Democratic Republic of the Congo; the states of Oyo, Dahomey and Ashanti, and modern Ghana; Sierra Leone; modern Egypt and Uzbekistan. Reviewers unanimously note the wealth of historical examples in the book.^{[2][27][28][29]}

Contrasting two types of institutions

The decisive role for the development of countries, according to the authors, is played by institutions — a set of formal and informal rules and mechanisms for coercing individuals to comply with these rules that exist in society.^[30] Acemoglu and Robinson divide institutions into two large groups: Political and economic. The first regulate the distribution of powers between the various authorities in the country and the procedure for the formation of these bodies, and the second regulate the property relations of citizens. The concept of Acemoglu and Robinson consists in opposing two archetypes: the so-called “extractive” (“extracting”, “squeezing”^[31]) and “inclusive” (“including”, “uniting”^[32]) economic and political institutions, which in both cases reinforce and support each other.^{[27][33][34][35]}

Inclusive economic institutions protect the property rights of wide sections of society (not just the elite), they do not allow unjustified alienation of property, and they allow all citizens to participate in economic relations in order to make a profit. Under the conditions of such institutions, workers are interested in increasing labour productivity. The first examples of such institutions are, for example, the commenda in the Venetian Republic and patents for inventions. The long-term existence of such economic institutions, according to the authors, is impossible without inclusive political institutions that allow wide sections of society to participate in governing the country and make decisions that are beneficial to the majority.^[35] These institutions that are the foundation of all modern liberal democracies. In the absence of such institutions, when political power is usurped by a small stratum of society, sooner or later it will use this power to gain economic power to attack the property rights of others, and, therefore, to destroy inclusive economic institutions.^[27][33][34]

Extractive economic institutions exclude large segments of the population from the distribution of income from their own activities. They prevent everyone except the elite from benefiting from participation in economic relations, who, on the contrary, are allowed to even alienate the property of those who do not belong to the elite.^[36] Examples include slavery, serfdom, and encomienda. In the context of such institutions, workers have no incentive to increase labour productivity, since all or almost all of the additional income will be withdrawn by the elite.^[35] Such economic institutions are accompanied by extractive political institutions that exclude large sections of the population from governing the country and concentrate all political power in the hands of a narrow stratum of society (for example, the nobility). Examples are absolute monarchies and various types of dictatorial and totalitarian regimes, as well as authoritarian regimes with external elements of democracy (constitution and elections), which are so widespread in the modern world, where power is supported by power structures: the army, the police, and dependent courts. The very fact that there are elections in a country does not mean that its institutions cannot be classified as extractive: competition can be dishonest, candidates' opportunities and their access to the media are unequal, and voting is conducted with numerous violations, and in this case the elections are just a spectacle, the ending of which is known in advance.^[8][33][34]

Analysis of the economic development of different countries

Acemoglu and Robinson analyze the factors that contribute to the success or failure of states in their book. They argue that commonly cited explanations such as geography, climate, culture, religion, race, or the ignorance of political leaders are insufficient.

To support their thesis, the authors compare case studies of different countries. They highlight examples like North and South Korea, where similar factors led to divergent economic outcomes. They also examine border cities to analyze the impact of institutional environments on prosperity.

The main argument of Acemoglu and Robinson is that inclusive economic and political institutions are crucial for economic prosperity. Inclusive institutions allow for broad participation in decision-making and provide incentives for talent and creativity. On the other hand, extractive institutions, which benefit a small elite, hinder economic growth.

The authors use historical examples, such as the Glorious Revolution in Great Britain, to illustrate the importance of democratic pluralism for economic development. They also discuss China's economic boom, attributing it to increasingly inclusive economic policies.

According to Acemoglu and Robinson, economic growth can lead to changes in political institutions. They caution that if China does not improve its political balance, it may face a collapse similar to the Soviet Union in the 1990s.

Drivers of democracy

Acemoglu and Robinson's theory on the driving forces behind democracy is based on their previous work in game theory.^[37] Their paper examines the historical democratization of Western Europe and Latin America and highlights the role of revolution threats and elite desires for economic redistribution in the transition to democracy.

The authors make several assumptions in their game theoretic model. They assume that society is divided into a rich class and a poor class, that regimes are either democratic or nondemocratic, and that people's preferences are solely based on monetary redistribution. They also consider people's concerns for future redistribution and the fluctuation of a country's economic output. Additionally, individuals in society aim to maximize their own utility.

In their model, a country starts as a nondemocratic society where a small rich group controls the wealth and rules over the poor majority. The rich determine the taxation rate and the poor can either accept the redistribution offered or choose to revolt, which comes with a cost. The outcome of the game depends on the rich's taxation proposal and the poor's decision to revolt or not.

Democratization occurs when the rich voluntarily increase monetary redistribution and franchise to the poor to avoid revolution.

The analysis suggests that the constant threat of revolution motivates the wealthy to democratize. This theory aligns with a paper by Clark, Golder, and Golder, which discusses how governments decide whether to exploit or protect citizens based on the benefits, while citizens can choose to leave, stay loyal, or voice their concerns through protests.^[38] Similarly, this game also provides insights into how variables like exit payoff, cost of voicing and value of loyalty change state's behavior as to whether or not to predate.

How democracy affects economic performance

The second part of the story in Why Nations Fail explores the connection between inclusive political institutions and economic growth. This idea was previously discussed in a paper by Acemoglu and Robinson titled Institutions as the Fundamental Cause for Long-Run Growth.^[39] Acemoglu and Robinson's theory explains the varying levels of economic development in countries using a single framework.

Political institutions, like a constitution, determine the written distribution of political power, while the distribution of economic resources determines the actual distribution of political power. Both the written and actual distribution of political power impact economic institutions and how production is conducted. They also shape future political institutions. Economic institutions also determine the distribution of resources for the future. This framework is time-dependent, as today's institutions determine tomorrow's economic growth and institutions.

For example, before the Glorious Revolution, political power in Europe, particularly in England, was concentrated in the hands of the monarch. However, the increasing profits from international trade led to the emergence of a commercially engaged nobility and a rising merchant class. These groups played a significant role in the economy and contributed a substantial portion of tax income to the monarch. As a result, political and economic institutions began to favor the merchant class, eventually leading to the downfall of the monarchical system in England and the establishment of efficient economic institutions.

In another paper with Simon Johnson at Massachusetts Institute of Technology called The Colonial Origins of Comparative Development: An Empirical Investigation,^[40] the authors use a natural experiment in history to show that different institutions result in different levels of economic growth. They analyze the institutional choices made during the colonial period of several nations and their impact on present-day economic development. The study reveals that in countries where the disease environment made it difficult for colonizers to survive (high mortality rate), they established extractive regimes, resulting in poor economic growth today. Conversely, in regions with lower mortality rates, colonizers settled down and replicated institutions from their home countries, as seen in the successful colonization of Australia and the United States. Therefore, the mortality rate among colonial settlers hundreds of years ago has determined the economic growth of present-day post-colonial nations by setting them on divergent institutional paths.

The theory of interaction between political and economic institutions is further reinforced by Acemoglu, Johnson and Robinson in The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth,^[23] which covers the economic rise of Europe after 1500. The paper shows that the Transatlantic trade after 1500 increased profits from trade and thus created a merchant class that was in a position to challenge monarchical power. Through regression analysis, the authors also reveal a significant interaction between the Atlantic Trade and political institutions. Specifically, the presence of an absolutist monarch hinders the economic impact of the Atlantic Trade. This explains why Spain, despite having access to the same trade, lagged behind England in economic development.

Acemoglu and Robinson have explained that their theory is largely inspired by the work of Douglass North, an American economist, and Barry R. Weingast, an American political scientist. In North and Weingast's paper in 1989, Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,^[41] they conclude that historical winners shape institutions to protect their own interests. In the case of the Glorious Revolution, the winning merchant class established property rights laws and limited the power of the monarch, which essentially promoted economic growth. Later on, North, Wallis and Weingast call this law and order open access, in their 2009 paper Violence and the Rise of Open-Access Orders.^[42] With open access, equality and diversity in thought—societies are more able to flourish and prosper.

Arvind Subramanian

Indian economist Arvind Subramanian points out the potential problem of reverse causality in Acemoglu and Robinson's theory in his publication in The American Interest.^[43] He argues that Why Nations Fail assumes that political institutions cause economic performance, but modernization theory suggests that economic modernization can also lead to improvements in political institutions. The book does not address why this alternative perspective is not valid. However, a 2001 paper by Acemoglu and Johnson attempts to answer this question using a two-stage regression test, cited in the book.

According to Subramanian, the book also fails to explain the recent economic development in China and India. China, under an authoritarian regime, has achieved rapid economic growth, while democratic India has lagged behind. This challenges the book's theory of inclusive and extractive political institutions. It is unsatisfying that the theory cannot explain the situation of such a large portion of the world's population, and it is unlikely that China or India will change significantly in the near future according to the book's prediction.

Acemoglu and Robinson counter^[44] that their theory distinguishes between political and economic institutions and that it is not political institutions that contribute to growth directly but economic institutions shaped by the political institutions. In China, they note, political institutions have played a role in driving economic reform since 1978 when Deng Xiaoping implemented the opening up policy. This supports the idea that changes in political institutions can shape economic institutions and impact economic performance. It is expected that China's economic growth will also influence its political institutions in the future. However, if China remains an authoritarian regime despite becoming as wealthy as the US or Germany, it would be an exception to this theory.

In the case of India, the authors argue that there is a distinction between inclusive political institutions and electoral democracy. India's political system has been dominated by the Congress Party, and there are issues with corruption, criminal charges against lawmakers, and caste-based inequality. The poor quality of democracy and flawed political institutions in India contribute to its poor economic institutions and hinder economic growth.

David R. Henderson

David R. Henderson wrote a generally positive review in Regulation^[27] but criticized the authors for inconsistency regarding the role of a central government in promoting development. The authors attribute the failure of states like Afghanistan, Haiti, and Nepal to the lack of a strong central government, but also embrace weak government for growth, as seen in the example of Somalia. Henderson also points out two errors made by the authors regarding the United States. Firstly, they falsely accuse "monopolists" like Rockefeller of being extractive powers, when in reality Rockefeller lowered the price of oil to gain market share. Secondly, they overlook mainstream scholarship on American economic history between the Civil War and civil rights movements, failing to recognize that the South was actually converging with the North.^[27]

Francis Fukuyama

In his article in The American Interest,^[45] Francis Fukuyama criticized Acemoglu and Robinson's argument for being similar to a book by North, Wallis, and Weingast in 2009.^[46] Fukuyama agrees with the book's conclusion that failed economies are often due to institutions benefiting elites. However, he argues that the approach oversimplifies the issue by grouping different institutions together and making flawed comparisons between societies. Fukuyama also disagrees with the historical evidence used to support the argument. He specifically mentions that the argument does not apply to modern China.

Acemoglu and Robinson responded to Fukuyama's comments, stating that their work builds on and complements North et al.'s work.^[47] Second, they defend the oversimplification as a way to analyze complex political institutions. They also attribute China's economic growth to some level of inclusiveness but predict that it will not reach the same level of per-capita income as Spain or Portugal with its current extractive institutions.

Jared Diamond

In Jared Diamond's book review on The New York Review of Books,^[36] he says the book's theory focuses solely on institutions and overlooks other factors like geography. One issue with the authors' argument is endogeneity: what explains good political institutions if they are the cause of economic growth? Diamond proposes a theory of geographical causes for developmental differences, comparing tropical and temperate areas. He suggests that differences in wealth are due to weather conditions, such as higher disease rates and lower agricultural productivity in tropical areas. Diamond also criticizes Acemoglu and Robinson for their narrow focus on small historical events, like the Glorious Revolution, while ignoring prosperity in Western Europe.

In response to Diamond's criticism,^[48] the authors reply that the arguments in the book do take geographical factors into account but that geography does not explain the different level of development. Acemoglu and Robinson view geography as an initial factor for a country, but its impact on development is determined by institutions. They introduce the theory of Reversal of Fortune, which explains how previously poor countries like the U.S., Australia, and Canada have become wealthy despite limited natural resources. They also reject the theory of the "resource curse," emphasizing the importance of institutions in shaping a country's use of its natural resources throughout history.

Diamond disagreed^[48] with Acemoglu and Robinson's response and reiterated his argument about the book's inaccuracies. He emphasized the significance of geographical factors in determining a country's wealth or poverty. For instance, he pointed out that the prevalence of tropical diseases in Zambia leads to prolonged illness among male workers, greatly reducing their productivity. Diamond also highlighted how geography influences the establishment of local plantations and the development of ancient agricultural practices. These practices, in turn, shape sedentary lifestyles and social interactions, which ultimately give rise to distinct social institutions and varying economic outcomes among nations.

Diamond's review was excerpted by economist Tyler Cowen on Marginal Revolution.^[49]

Jeffrey Sachs

According to Jeffrey Sachs,^[50] an American economist, the major problem of Why Nations Fail is that it focuses too narrowly on domestic political institutions and ignores other factors, such as technological progress and geopolitics. For example, geography plays an important role in shaping institutions, and weak governments in West Africa may be seen as a consequence of the unnavigable rivers in the region. Sachs also questions Acemoglu and Robinson's assumption that authoritarian regimes cannot motivate economic growth. Several examples in Asia, including Singapore and South Korea, easily refute Acemoglu and Robinson's arguments that democratic political institutions are prerequisites for economic growth. Moreover, Acemoglu and Robinson overlook macroeconomic factors like technological progress (e.g. industrialization and information technology).

In response to Sachs' critique, Acemoglu and Robinson replied on their book blog with twelve specific points. First, on the role of geography, Acemoglu and Robinson agree that geography is crucial in shaping institutions but do not recognize a deterministic role of geography in economic performance. Second, on the positive role authoritarian governments can play in economic growth, especially in the case of China, the fast economic growth could be part of the catch-up effect. However, it does not mean that authoritarian governments are better than democratic governments in promoting economic growth. It is still way too early, according to Acemoglu and Robinson, to draw a definite conclusion solely based on the example of China. Last, on industrialization, they argue that industrialization is contingent upon institutions. Based on Acemoglu and Robinson's response, Sachs wrote a rebuttal on his personal website.^[51]

Paul Collier

Development economist Paul Collier from the University of Oxford reviewed the book for The Guardian.^[52] Collier's review summarizes two essential elements for growth from the book: first, a centralized state and second, inclusive political and economic institutions. Based on the case of China, a centralized state can draw a country out from poverty but without inclusive institutions, such growth is not sustainable, as argued by Acemoglu and Robinson. Such process is not natural, but only happens when the elites are willing to cede power to the majority under certain circumstances.

Peter Forbes

Peter Forbes reviewed the book for The Independent: "This book, by two U.S. economists, comes garlanded with praise by its obvious forebears – Jared Diamond, Ian Morris, Niall Ferguson, Charles C. Mann – and succeeds in making great sense of the history of the modern era, from the voyages of discovery to the present day."^[53] Besides singing high praises for the book, Forbes links the message of the book and contemporary politics in developed countries like the United States and the United Kingdom. Though the two countries are by far some of the most inclusive economies in the world, various parts of them are, by nature, extractive—for instance, the existence of a shadow banking system, of conglomerate manufacturers, and so on. He warns against extractive practices under the guise of an inclusive economy.

Warren Bass

Warren Bass reviewed the book for the Washington Post, writing: "It's bracing, garrulous, wildly ambitious and ultimately hopeful. It may, in fact, be a bit of a masterpiece."^[33] Despite his applause, Bass also points out several imperfections of the book. First of all, the definition of extractive and inclusive institution is vague in a way that cannot be utilized in policymaking. Second, though Acemoglu and Robinson are ambitious in covering cases of all nations across history, this attempt is subjected to scrutiny of regional experts and historians. For example, their accusation of Ottoman Empire as "highly absolutist" might not be correct, given the level of tolerance and diversity inside the Empire as compared to its European counterparts.

William Easterly

In a mixed review of the book in the Wall Street Journal, William Easterly was generally supportive of the plausibility of the book's thesis but critiqued the book's failure to cite extant statistics-based evidence to support the validity of the historical case studies.^[54] For example, in the book's example about Congo, the stated reason Congo is impoverished is that Congo is close to slave trade shipping points. The approach of this historical case study only offers one data point. Moreover, Easterly also points out the danger of ex-post rationalization that the book only attributes different levels of development to institutions in a way a bit too neat. For example, to explain the fall of Venice, it could be the extractive regime during the time or it could also be the shift from Mediterranean trade to Atlantic trade. The historical case studies approach might be biased.