In the current New York Review of Books, Jared Diamond, author of Guns, Germs, and Steel, has a thought-provoking review of Why Nations Fail, by Daron Acemoglu and James Robinson. The book focuses on the importance of long-term stable institutions in the success of nations, using as an opening example a comparison of the two sides (one in Mexico, one in the US) of the city of Nogales.
Diamond, who agrees with much of what the authors write, but thinks that there are other factors (environment, for instance) that play roles the authors don’t get quite right, summarizes some of their conclusions:
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.
This list of factors made me think of the impact of the era of Jim Crow and slavery before that on the black community in this country– lacking protection of property rights, enforcement of contract, for instance. The lessons about how failing institutions can take down an economy don’t just apply between nations.
Jared also notes the book’s interesting conclusion about China:
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.”