USA Africa Dialogue Series - Fwd : What Makes Countries Rich or Poor?

http://www.nybooks.com/articles/archives/2012/jun/07/what-makes-countries-rich-or-poor/


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Why Nations Fail: The Origins of Power, Prosperity, and Poverty
by Daron Acemoglu and James A. Robinson
Crown, 529 pp., $30.00

Gary Knight/VII

Women in Darfur returning from Kutum market to the Fata Borno camp for
internally displaced persons under the protection of African Union
soldiers, January 2007; photograph by Gary Knight from Questions
Without Answers: The World in Pictures by the Photographers of VII.
The book has just been published by Phaidon.

The fence that divides the city of Nogales is part of a natural
experiment in organizing human societies. North of the fence lies the
American city of Nogales, Arizona; south of it lies the Mexican city
of Nogales, Sonora. On the American side, average income and life
expectancy are higher, crime and corruption are lower, health and
roads are better, and elections are more democratic. Yet the
geographic environment is identical on both sides of the fence, and
the ethnic makeup of the human population is similar. The reasons for
those differences between the two Nogaleses are the differences
between the current political and economic institutions of the US and
Mexico.

This example, which introduces Why Nations Fail by Daron Acemoglu and
James Robinson, illustrates on a small scale the book's subject.*
Power, prosperity, and poverty vary greatly around the world. Norway,
the world's richest country, is 496 times richer than Burundi, the
world's poorest country (average per capita incomes $84,290 and $170
respectively, according to the World Bank). Why? That's a central
question of economics.

Different economists have different views about the relative
importance of the conditions and factors that make countries richer or
poorer. The factors they most discuss are so-called "good
institutions," which may be defined as laws and practices that
motivate people to work hard, become economically productive, and
thereby enrich both themselves and their countries. They are the basis
of the Nogales anecdote, and the focus of Why Nations Fail. In the
authors' words:
The reason that Nogales, Arizona, is much richer than Nogales, Sonora,
is simple: it is because of the very different institutions on the two
sides of the border, which create very different incentives for the
inhabitants of Nogales, Arizona, versus Nogales, Sonora.
Among the good economic institutions that motivate people to become
productive are the protection of their private property rights,
predictable enforcement of their contracts, opportunities to invest
and retain control of their money, control of inflation, and open
exchange of currency. For instance, people are motivated to work hard
if they have opportunities to invest their earnings profitably, but
not if they have few such opportunities or if their earnings or
profits are likely to be confiscated.

The strongest evidence supporting this view comes from natural
experiments involving borders: i.e., division of a uniform environment
and initially uniform human population by a political border that
eventually comes to separate different economic and political
institutions, which create differences in wealth. Besides Nogales,
examples include the contrasts between North and South Korea and
between the former East and West Germany. Many or most economists,
including Acemoglu and Robinson, generalize from these examples of
bordering countries and deduce that good institutions also explain the
differences in wealth between nations that aren't neighbors and that
differ greatly in their geographic environments and human populations.
There is no doubt that good institutions are important in determining
a country's wealth. But why have some countries ended up with good
institutions, while others haven't? The most important factor behind
their emergence is the historical duration of centralized government.
Until the rise of the world's first states, beginning around 3400 BC,
all human societies were bands or tribes or chiefdoms, without any of
the complex economic institutions of governments. A long history of
government doesn't guarantee good institutions but at least permits
them; a short history makes them very unlikely. One can't just
suddenly introduce government institutions and expect people to adopt
them and to unlearn their long history of tribal organization.

That cruel reality underlies the tragedy of modern nations, such as
Papua New Guinea, whose societies were until recently tribal. Oil and
mining companies there pay royalties intended for local landowners
through village leaders, but the leaders often keep the royalties for
themselves. That's because they have internalized their society's
practice by which clan leaders pursue their personal interests and
their own clan's interests, rather than representing everyone's
interests.
The various durations of government around the world are linked to the
various durations and productivities of farming that was the
prerequisite for the rise of governments. For example, Europe began to
acquire highly productive agriculture 9,000 years ago and state
government by at least 4,000 years ago, but subequatorial Africa
acquired less productive agriculture only between 2,000 and 1,800
years ago and state government even more recently. Those historical
differences prove to have huge effects on the modern distribution of
wealth. Ola Olsson and Douglas Hibbs showed that, on average, nations
in which agriculture arose many millennia ago—e.g., European nations—
tend to be richer today than nations with a shorter history of
agriculture (e.g., subequatorial African nations), and that this
factor explains about half of all the modern national variation in
wealth. Valerie Bockstette, Areendam Chanda, and Louis Putterman
showed further that, if one compares countries that were equally poor
fifty years ago (e.g., South Korea and Ghana), the countries with a
long history of state government (e.g., South Korea) have on the
average been getting rich faster than those with a short history
(e.g., Ghana).

An additional factor behind the origin of the good institutions that I
discussed above is termed "the reversal of fortune," and is the
subject of Chapter 9 of Why Nations Fail. Among non-European countries
colonized by Europeans during the last five hundred years, those that
were initially richer and more advanced tend paradoxically to be
poorer today. That's because, in formerly rich countries with dense
native populations, such as Peru, Indonesia, and India, Europeans
introduced corrupt "extractive" economic institutions, such as forced
labor and confiscation of produce, to drain wealth and labor from the
natives. (By extractive economic institutions, Acemoglu and Robinson
mean practices and policies "designed to extract incomes and wealth
from one subset of society [the masses] to benefit a different subset
[the governing elite].")

But in formerly poor countries with sparse native populations, such as
Costa Rica and Australia, European settlers had to work themselves and
developed institutional incentives rewarding work. When the former
colonies achieved independence, they variously inherited either the
extractive institutions that coerced the masses to produce wealth for
dictators and the elite, or else institutions by which the government
shared power and gave people incentives to pursue. The extractive
institutions retarded economic development, but incentivizing
institutions promoted it.
The remaining factor contributing to good institutions, of which
Acemoglu and Robinson mention some examples, involves another paradox,
termed "the curse of natural resources." One might naively expect
countries generously endowed with natural resources (such as minerals,
oil, and tropical hardwoods) to be richer than countries poorer in
natural resources. In fact, the trend is opposite, the result of the
many ways in which national dependence on certain types of natural
resources (like diamonds and oil) tends to promote bad institutions,
such as corruption, civil wars, inflation, and neglect of education.

An example, mentioned in Chapter 12, is the diamond boom in Sierra
Leone, which contributed to that nation's impoverishment. Other
examples are Nigeria's and the Congo's poverty despite their wealth in
oil and minerals respectively. In all three of those cases, selfish
dictators or elites found that they themselves could become richer by
taking the profits from natural resources for their personal gain,
rather than investing the profits for the good of their nation. But
some countries with prescient leaders or citizens avoided the curse of
natural resources by investing the proceeds in economic development
and education. As a result, oil-producing Norway is now the world's
richest country, and oil-producing Trinidad and Tobago now enjoys an
income approaching that of Britain, its former colonial ruler.

Those are the main sets of institutional factors promoting power,
prosperity, or poverty, and their roots. The other large set consists
of geographic factors with direct economic consequences not mediated
by institutions. One of those geographic factors leaps out of a map of
the world in Why Nations Fail that depicts national incomes. On that
map, both Africa and the Americas resemble peanut butter sandwiches,
with thick cores of poor tropical countries squeezed between two thin
slices of richer countries in the north and south temperate zones.

In the New World the two north temperate countries (the US and Canada,
average incomes respectively $47,390 and $43,270) and the three south
temperate countries (Uruguay, Chile, and Argentina, respectively
$10,590, $10,120, and $8,620) are all richer—on the average five times
richer—than almost all of the intervening seventeen tropical countries
of mainland Central and South America (incomes mostly between $1,110
and $6,970). Similarly, mainland Africa is a sandwich of thirty-seven
mostly desperately poor tropical countries, flanked by two thin slices
each consisting of five modestly affluent or less desperately poor
countries in Africa's north and south temperate zones (see map).

Mike King

Mainland Africa's 'peanut butter sandwich' of national wealth.
Tropical African countries constitute a thick core between two thinner
slices of countries in the north and south temperate zones. All
temperate mainland African countries except landlocked Lesotho in the
south have average annual incomes above $2,400 (gray), ranging up to
over $12,000. All except three tropical mainland African countries—
Equatorial Guinea, Gabon, and Angola— have average incomes below
$2,200 (red), ranging down to as low as $170 (Burundi).

While institutions are undoubtedly part of the explanation, they leave
much unexplained: some of those richer temperate countries are
notorious for their histories of bad institutions (think of Algeria,
Argentina, Egypt, and Libya), while some of the tropical countries
(e.g., Costa Rica and Tanzania) have had relatively more honest
governments. What are the economic disadvantages of a tropical
location?

Two major factors contribute to the poverty of tropical countries
compared to temperate countries: diseases and agricultural
productivity. The tropics are notoriously unhealthy. Tropical diseases
differ on average from temperate diseases, in several respects. First,
there are far more parasitic diseases (such as elephantiasis and
schistosomiasis) in tropical areas, because cold temperate winters
kill parasite stages outside our bodies, but tropical parasites can
thrive outside our bodies all year long. Second, disease vectors, such
as mosquitoes and ticks, are far more diverse in tropical than in
temperate areas.

Finally, biological characteristics of the responsible microbes have
made it easier to develop vaccines against major infectious diseases
of temperate areas than against tropical diseases; we still aren't
close to a vaccine against malaria, despite billions of dollars
invested. Hence tropical diseases impose a huge burden on economies of
tropical countries. At any given moment, much of the population is
sick and unable to work efficiently. Many women in tropical areas
can't join the workforce because they are constantly nursing and
caring for babies conceived as insurance against the expected deaths
of some of their older children from malaria.
As for agricultural productivity, it averages lower in tropical than
in temperate areas, again for several reasons. First, temperate plants
store more energy in parts edible to us humans (such as seeds and
tubers) than do tropical plants. Second, diseases borne by insects and
other pests reduce crop yields more in the tropics than in the
temperate zones, because the pests are more diverse and survive better
year-round in tropical than in temperate areas. Third, glaciers
repeatedly advanced and retreated over temperate areas, creating young
nutrient-rich soils. Tropical lowland areas haven't been glaciated and
hence tend to have older soils, leached of their nutrients by rain for
thousands of years. (Young fertile volcanic and alluvial soils are
exceptions.) Fourth, the higher average rainfall of tropical than of
temperate areas results in more nutrients being leached out of the
soil by rain.

Finally, higher tropical temperatures cause dead leaves and other
organic matter falling to the ground to be broken down quickly by
microbes and other organisms, releasing their nutrients to be leached
away. Hence in temperate areas soil fertility is on average higher,
crop losses to pests lower, and agricultural productivity higher than
in tropical areas. That's why Argentina in South America's south
temperate zone, despite its conspicuous lack (for most of its history)
of the good institutions praised by economists, is the leading food
exporter in Latin America, and one of the leading ones in the world.

Thus, geographical latitude acting independently of institutions is an
important geographic factor affecting power, prosperity, and poverty.
The other important geographic factor is whether an area is accessible
to ocean-going ships because it lies either on the sea coast or on a
navigable river. It costs roughly seven times more to ship a ton of
cargo by land than by sea. That puts landlocked countries at an
economic disadvantage, and helps explain why landlocked Bolivia and
semilandlocked Paraguay are the poorest countries of South America. It
also helps explain why Africa, with no river navigable to the sea for
hundreds of miles except the Nile, and with fifteen landlocked
nations, is the poorest continent. Eleven of those fifteen landlocked
African nations have average incomes of $600 or less; only two
countries outside Africa (Afghanistan and Nepal, both also landlocked)
are as poor.

The remaining major factor underlying wealth and poverty is the state
of the natural environment. All human populations depend to varying
degrees on renewable natural resources—especially on forests, water,
soils, and seafood. It's tricky to manage such resources sustainably.
Countries that excessively deplete their resources—whether
inadvertently or intentionally—tend to impoverish themselves, although
the difficulty of estimating accurately the costs of resource
destruction causes economists to ignore it. It helps explain why
notoriously deforested countries—such as Haiti, Rwanda, Burundi,
Madagascar, and Nepal—tend to be notoriously poor and politically
unstable.

These, then, are the main factors invoked to understand why nations
differ in wealth. The factors are multiple and diverse. We all know,
from our personal experience, that there isn't one simple answer to
the question why each of us becomes richer or poorer: it depends on
inheritance, education, ambition, talent, health, personal
connections, opportunities, and luck, just to mention some factors.
Hence we shouldn't be surprised that the question of why whole
societies become richer or poorer also cannot be given one simple
answer.

Within this frame, Acemoglu and Robinson focus on institutional
factors: initially on economic institutions, and then on the political
institutions that create them. In their words, "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." In particular, they stress
what they term inclusive economic and political institutions:
"Inclusive economic institutions…are those that allow and encourage
participation by the great mass of people in economic activities that
make best use of their talents and skills and that enable individuals
to make the choices they wish." For example, in South Korea but not in
North Korea people can get a good education, own property, start a
business, sell products and services, accumulate and invest capital,
spend money in open markets, take out a mortgage to buy a house, and
thereby expect that by working harder they may enjoy a good life.

Such inclusive economic institutions in turn arise from "political
institutions that distribute power broadly in society and subject it
to constraints…. Instead of being vested in a single individual or a
narrow group, [inclusive] political power rests with a broad coalition
or a plurality of groups." South Korea recently, and Britain and the
US beginning much earlier, do have broad participation of citizens in
political decisions; North Korea does not. Inclusive economic and
political institutions provide individuals with incentives to increase
their economic productivity as they think best. Such inclusive
institutions are to be contrasted with absolutist political
institutions that narrowly concentrate political power, and with
extractive economic institutions that force people to work largely for
the benefit of dictators. The ultimate development of inclusive
political institutions to date is in modern Scandinavian democracies
with universal suffrage and relatively egalitarian societies. However,
compared to modern dictatorships (like North Korea) and the absolute
monarchies widespread in the past, societies (such as eighteenth-
century Britain) in which only a minority of citizens could vote or
participate in political decisions still represented a big advance
toward inclusiveness.

From this striking dichotomy, the authors draw thought-provoking
conclusions. While absolutist regimes with extractive economic
institutions can sometimes achieve economic growth, that growth is
based on existing technology, and is nonsustainable and prone to
collapse; whereas inclusive institutions are required for sustained
growth based on technological change. One might naively expect
dictators to promote long-term economic growth, because such growth
would generate more wealth for them to extract. But their efforts are
warped, because what's economically good for individual citizens may
be bad for the political elite, and because economic growth may be
best promoted by political institutions that would shake the elite's
hegemony.

Why Nations Fail offers case studies to illustrate these points: the
economic rises and subsequent declines of the Soviet Union and the
Ottoman Empire; the resistance of tsarist Russia and the Habsburg
Empire to building railroads, out of fear that they would undermine
the landed aristocracy's power and foster revolution; and, especially
relevant today, the likely future trajectory of Communist China, whose
growth prospects appear unlimited to many Western observers—but not to
Acemoglu and Robinson, who write that China's growth "is likely to run
out of steam."

In their narrow focus on inclusive institutions, however, the authors
ignore or dismiss other factors. I mentioned earlier the effects of an
area's being landlocked or of environmental damage, factors that they
don't discuss. Even within the focus on institutions, the
concentration specifically on inclusive institutions causes the
authors to give inadequate accounts of the ways that natural resources
can be a curse. True, the book provides anecdotes of the resource
curse (Sierra Leone cursed by diamonds), and of how the curse was
successfully avoided (in Botswana). But the book doesn't explain which
resources especially lend themselves to the curse (diamonds yes, iron
no) and why. Nor does the book show how some big resource producers
like the US and Australia avoid the curse (they are democracies whose
economies depend on much else besides resource exports), nor which
other resource-dependent countries besides Sierra Leone and Botswana
respectively succumbed to or overcame the curse. The chapter on
reversal of fortune surprisingly doesn't mention the authors' own
interesting findings about how the degree of reversal depends on prior
wealth and on health threats to Europeans.
Two major factors that Acemoglu and Robinson do mention, only to
dismiss them in a few sentences, are tropical diseases and tropical
agricultural productivity:

Tropical diseases obviously cause much suffering and high rates of
infant mortality in Africa, but they are not the reason Africa is
poor. Disease is largely a consequence of poverty and of governments
being unable or unwilling to undertake the public health measures
necessary to eradicate them…. The prime determinant of why
agricultural productivity—agricultural output 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.
These sweeping statements, which will astonish anyone knowledgeable
about the subjects, brush off two entire fields of science, tropical
medicine and agricultural science. As I summarized above, the well-
known facts of tropical biology, geology, and climatology saddle
tropical countries with much bigger problems than temperate countries.

A second weakness involves the historical origins of what Acemoglu and
Robinson identify as inclusive economic and political institutions,
with their consequences for wealth. Some countries, such as Britain
and Japan, have such institutions, while other countries, such as
Ethiopia and the Congo, don't. To explain why, the authors give a just-
so story of each country's history, which ends by concluding that that
story explains why that country either did or didn't develop good
institutions. For instance, Britain adopted inclusive institutions, we
are told, as a result of the Glorious Revolution of 1688 and preceding
events; and Japan reformed its institutions after 1868; but Ethiopia
remained absolutist. Acemoglu and Robinson's view of history is that
small effects at critical junctures have long-lasting effects, so it's
hard to make predictions. While they don't say so explicitly, this
view suggests that good institutions should have cropped up randomly
around the world, depending on who happened to decide what at some
particular place and time.

But it's obvious that good institutions, and the wealth and power that
they spawned, did not crop up randomly. For instance, all Western
European countries ended up richer and with better institutions than
any tropical African country. Big underlying differences led to this
divergence of outcomes. Europe has had a long history (of up to nine
thousand years) of agriculture based on the world's most productive
crops and domestic animals, both of which were domesticated in and
introduced to Europe from the Fertile Crescent, the crescent-shaped
region running from the Persian Gulf through southeastern Turkey to
Upper Egypt. Agriculture in tropical Africa is only between 1,800 and
5,000 years old and based on less productive domesticated crops and
imported animals.

As a result, Europe has had up to four thousand years' experience of
government, complex institutions, and growing national identities,
compared to a few centuries or less for all of sub-Saharan Africa.
Europe has glaciated fertile soils, reliable summer rainfall, and few
tropical diseases; tropical Africa has unglaciated and extensively
infertile soils, less reliable rainfall, and many tropical diseases.
Within Europe, Britain had the further advantages of being an island
rarely at risk from foreign armies, and of fronting on the Atlantic
Ocean, which became open after 1492 to overseas trade.

It should be no surprise that countries with those advantages ended up
rich and with good institutions, while countries with those
disadvantages didn't. The chain of causation leading slowly from
productive agriculture to government, state formation, complex
institutions, and wealth involved agriculturally driven population
explosions and accumulations of food surpluses, leading in turn to the
need for centralized decision-making in societies much too populous
for decision-making by face-to-face discussions involving all
citizens, and the possibility of using the food surpluses to support
kings and their bureaucrats. This process unfolded independently,
beginning around 3400 BC, in many different parts of the ancient world
with productive agriculture, including the Fertile Crescent, Egypt,
China, the Indus Valley, Crete, the Valley of Mexico, the Andes, and
Polynesian Hawaii.

The remaining weakness is the authors' resort to assertion unsupported
or contradicted by facts. An example is their attempt to expand their
focus on institutions in order to explain the origins of agriculture.
All humans were originally hunter/gatherers who independently became
farmers in only about nine small areas scattered around the world. A
century of research by botanists and archaeologists has shown that
what made those areas exceptional was their wealth of wild plant and
animal species suitable for domestication (such as wild wheats and
corn).

While the usual pattern was for nomadic hunter/gatherers to become
sedentary farmers, there were exceptions: some nomadic hunter/
gatherers initially became nomadic farmers (Mexico and lowland New
Guinea) while others never became farmers (Aboriginal Australia); some
sedentary hunter/gatherers became sedentary farmers (the Fertile
Crescent) while others never became farmers (Pacific Northwest
Indians); and some sedentary farmers reverted to being nomadic hunter/
gatherers (southern Sweden about four thousand years ago).

In their Chapter 5, Acemoglu and Robinson use one of those exceptional
patterns (that for the Fertile Crescent) to assert, in the complete
absence of evidence, that those particular hunter/gatherers had become
sedentary because, for unknown reasons, they happened to develop
innovative institutions through a hypothesized political revolution.
They assert further that the origins of farming depended on their
preferred explanation of institutional innovation, rather than on the
local availability of domesticable wild species identified by
botanists and archaeologists.

Among arguments to refute that widely shared interpretation, Acemoglu
and Robinson redraw in their Map 5 on page 56 the maps on pages 56 and
66 of archaeobotanists Daniel Zohary and Maria Hopf's book
Domestication of Plants in the Old World, depicting the distributions
of wild barley and of one of the two hybrid ancestors of one of the
three wheats (which Acemoglu and Robinson misleadingly identify just
as "wheat"). They take these maps to mean that "the ancestors of
barley and wheat were distributed along a long arc" beyond the Fertile
Crescent, hence that the Fertile Crescent's unique role in
agriculture's origins "was not determined by the availability of plant
and animal species."

What Zohary and Hopf actually showed was that wild emmer wheat is
confined to the Fertile Crescent, and that the areas of extensive
spread of wild barley and wild einkorn wheat are also confined to the
Fertile Crescent, and that the wild ancestors of all the other
original Fertile Crescent crops are also confined to or centered on
the Fertile Crescent, and hence that the Fertile Crescent was the only
area in which local agriculture could have arisen. Acemoglu and
Robinson do themselves a disservice by misstating these findings.

My overall assessment of the authors' argument is that inclusive
institutions, while not the overwhelming determinant of prosperity
that they claim, are an important factor. Perhaps they provide 50
percent of the explanation for national differences in prosperity.
That's enough to establish such institutions as one of the major
forces in the modern world. Why Nations Fail offers an excellent way
for any interested reader to learn about them and their consequences.
Whereas most writing by academic economists is incomprehensible to the
lay public, Acemoglu and Robinson have written this book so that it
can be understood and enjoyed by all of us who aren't economists.

Why Nations Fail should be required reading for politicians and anyone
concerned with economic development. The authors' discussions of what
can and can't be done today to improve conditions in poor countries
are thought-provoking and will stimulate debate. Donors and
international agencies try to "engineer prosperity" either by foreign
aid or by urging poor countries to adopt good economic policies. But
there is widespread disappointment with the results of these well-
intentioned efforts. Acemoglu and Robinson pithily diagnose the cause
of these disappointing outcomes in their final chapter: "Attempting to
engineer prosperity without confronting the root cause of the problems—
extractive institutions and the politics that keeps them in place—is
unlikely to bear fruit."

1. *
Full disclosure: I provided a book jacket quote of praise. I co-edited
one book and co-organized two conferences with James Robinson. ↩


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