A critical Review of Why Nations Fail, a book by Daron Acemoglu and James A. Robinson
By Francisco Gil Diaz
“Why
Nations Fail”, the recent impressive opus by Acemoglu-Robinson (A&R), has already
had a profound influence on the economics profession and on laymen. It builds
on a tradition of institutional-historical research key to understand the
causes of economic growth and welfare. It is a path-breaking reinterpretation
of the economic history of many parts of the world with a central hypothesis
that is confirmed again and again, an admirable contribution indeed. Their work
goes beyond the mechanistic and dry set of tools we economists have been taught
and are frequently content with. A&R brilliantly expand on the seminal work
among others of Douglass C. North and Robert P. Thomas[1].
Other indispensable contemporary companions to their work are Deirdre McCloskey[2] and Ronald Coase with Ning Wang[3].
Their work will surely inspire policy makers and professional economists.
A&R point out how critical historical
junctures and/or institutional circumstances are decisive to understand how a
country will go down a certain path or another. A similar event will send
societies through a growth or a regressive path given their institutional
framework (extractive or non extractive).
Their rich and well- documented historical comparisons provide a
conclusive proof of the role of institutions, particularly of the rule of law,
as well as of the serendipitous effects of certain shocks and their combination
and interactions with the prevailing institutional framework.
That said their book contains a few questionable
factual observations.
I begin with comments on Mexico, a country
whose comparisons with the US play such a useful role in their book. The
authors use Mexico as a reference if not as a whipping boy. One of the many
examples of how they trivialize the sources of Mexico’s difficulties is found
on P57: “For example. In surveys Mexicans
typically say they trust other people less than the citizens of the United
States say they trust others. But it is not a surprise that Mexicans lack trust
when their government cannot eliminate drug cartels or provide a functioning
unbiased legal system”. Their skepticism regarding Mexico´s legal system
hits the bulls’ eye, but living in the US they should know that Mexico’s drug problem
originates with unfettered US consumption and with an infinite supply of
assault weapons sold to be smuggled across the border.
Like A&R I shall deal with the “Spanish strategy of colonization”….”first
perfected by Cortés in Mexico, it was based on the observation that the best
way for the Spanish to subdue opposition was to capture the indigenous leader”,
P11. Scholarly research on Cortés[4]
is ignored. His was a complex personality, torn between allegiance to the king
and respect for the Indians and their culture. Cortés tried and in the end failed
to achieve a community respectful of indigenous rights. The Crown had other
plans. Furthermore, while he did capture their king to hold the Aztecs at bay,
the essence of his military triumph was his ability to engage the people from
Tlaxcala, cruelly subjugated by the Aztecs, as his allies. Thus Cortes detonated
a civil war and was able to be on the winning side. The entry into Mexico of
the Spanish under the leadership of Cortes cannot therefore be characterized as
a “Spanish Strategy of colonization”, even if Cortes’ plans were with time
aborted and Mexico was converted into a colony with subjugated indigenous
people. The manner in which the conquest of Mexico materialized was not a
Spanish model for the rest of the Americas, but rather quite unique.
From the conquest A&R follow into
independent Mexico. On pages 31 and 32 they point out the problems posed by
“highly insecure property rights” as a result of 19th C political
instability and its consequence for the country’s dismal economic performance.
While this interpretation of the facts is unquestionable, an historian should
point out whence the instability came from.
Mexicans came out of their 19th
C. long war of independence involved in internal struggles. One of the key
contentious items regarded the definition of the constitutional framework.
A&R rightly point out the instability created by 19th C frequent
shifts between liberal and conservative constitutions. For instance the
ephemeral adoption of the liberal Cadiz constitution and its immediate
replacement upon independence by the central-monarchic conservative one favored
by emperor Agustin de Iturbide. Lack of agreement amongst such opposite
ideologies led to continuous strife, even civil wars within a legal void that
lasted until the constitution of 1857, whose fruits were only partially reaped
when in 1867 Benito Juarez finally assumed the powers of the presidency. Weak
governments rose and fell continuously and constitutions were legislated and
abrogated depending on the faction in power. But there are significant contributing
factors to this disarray omitted from A&R’s narrative: the chronic weakness
of public finances[5] and
the pernicious intrusions of US diplomats into Mexican politics.
Weak government revenues led to bouts of
indebtedness and to defaults, with their expected fallout into political
instability. This budgetary fragility was an “original sin”, not something to
be attributed solely to the presidential musical chairs when “Between 1824 and
1867 there were fifty-two presidents in Mexico” P31. Government income prior to
independence had relied upon border tariffs and taxes on silver output. The war
of independence led to the neglect of silver mines with their consequent
flooding, or destruction by their persecuted Spanish owners. It would take considerable
time and effort to get the mines back to normalcy. This important contributory fact to fiscal
and political instability is left out of A&R’s book, and while it could be
argued that the powers that be are ultimately responsible for solving budgetary
problems, there was another disturbance that contributed to nurture the incessant
19th C. political infightings and changes of governments mentioned
by A&R: US meddling into Mexican politics.
A&R portray the contrasts between two
border cities, the US’s and Mexico’s Nogales, as a reflection of the
institutional differences between the US and Mexico. While I have no quarrel
with their analysis and conclusions, as the thorough historians that they are
they should have recognized that a non-negligible part of the economic
differences of the 2 countries lies in the unfortunate and unfair diplomatic
intrusions into Mexico by its northern neighbor.
Joel Roberts Poinsett, a US envoy to Mexico
at the very start of its independence in 1822, was present in Mexico in various
official capacities until 1830. Poinsett was a strong perturbing influence into
19th C Mexican politics. He did so through his membership and
connections with one of the masonic groups[6].
His name does not appear in A&R’s book, not even in their vast index.
Mexico’s political parties clustered at the
time into either of two masonic lodges. Poinsett belonged to the ferociously
anti catholic and anti Spaniard York masonic
(from the so called Great Philadelphia Lodge) faction and influenced
strongly to create and fortify the Mexican branch in a country with an
overwhelming catholic majority. It did so against the other masonic lodge, the
Scottish one, that was neither anticlerical nor anti Spanish. He planted thus
the seeds for continuous strife within Mexico, nurtured by an outlook related
to the protestant-catholic divide that was still so vivid in US and European
society. Poinsett’s interventions were numerous; he succeeded for instance in
aborting a trade treaty between Mexico and the UK and in preparing the
groundwork for the annexation of Texas by the US. Poinsett’s Mexican legacy is
one of continuous political conflicts, including his friendship and sponsoring
of the infamous Antonio Lopez de Santa Ana, 11 times president of Mexico and
directly and indirectly responsible for the loss of Texas and other territories
to the US.
A&R do not dwell either into the US
role regarding the intervention of the US government when it contributed to the
ouster of Mexico’s long time dictator, Porfirio Diaz, only to conspire
afterwards to bring down his democratic successor, Francisco I Madero. The US
ambassador, Henry Lane Wilson, colluded with president Madero’s Secretary of
Defense, Victoriano Huerta, to oust and assassinate the president. Instead of
the hopefully peaceful transition heralded by Madero’s election, the betrayal
led into the Mexican Revolution of the 20th C. Ten more years of
economic destruction and internal warfare with millions of lives lost (estimates
range between 1.9 and 3.5 million [7])
ensued, lasting from 1910 until 1920.
Another questionable assertion related to
Diaz (no kin of mine) has to do with his supposed overthrow by force. P 35. In
fact Diaz left the country peacefully to avoid a violent confrontation.
Still regarding Mexico, A&R make a
reference to its telecom market. P40. A segment of the economy that could
contribute to greater economic growth but that has been constrained more than
others by extractive policies that favor Mexico’s richest man in the world.
A&R explain Slim’s monopoly power because of his ability to use the courts
to prevent government restraints on his predatory practices. The authors relate
Slim’s judicial successes to his abuse of Mexican legislation “stays” or habeas
corpus (the “amparo”). In fact Slim´s ability to protect his empire has little
to do with the amparo. It is true that Telmex has used the courts to its
advantage, but the source of its monopoly power lies more within the
Communications Department (SCT), and the Telecom and Competition Commissions[8].
There is a regulatory capture in the Stigler sense. The extractive situation
regarding telecoms in Mexico follows the blueprint detected by A&R to a degree
greater than what they point out and has more to do with the connivance of the
authorities. A&R allege that Slim cannot compete without government support
when they mention his failed investment in COMPU-USA. They are wrong. Good
businessmen have failures and there are many instances of Slim doing well in
unregulated markets. Take for instance his US operation with Tracfone and other
US brands owned by America Movil[9],
a successful wireless-phone business. Mr. Slim evidently is talented enough not
to need government support; the latter simply fattens his results.
One more instance of Mexico as straw man or
favored whipping boy is their comment on P57 regarding Mexico’s failure to
“…eliminate drug cartels…” An incredible statement coming from the authors
whom, as US residents, know well where the demand for the substances produced
and distributed by the cartels comes from and where that US’s armories are clustered
on the Mexican border to provide powerful assault weapons to Mexican criminals
and to US citizens. Their analysis of the African slave trade in the 18th
century provides a parallel they could have used to describe how US-Mexico drug
trade has consequences similar to their depiction of the African tragedy. On
pages 252-253 A&R state: “The
increase in warfare was fueled by huge imports of guns and ammunition, which
the Europeans exchanged for slaves. By 1730 about 180,000 guns were being
imported every year just along the West African coast, and between 1750 and the
early nineteenth century, the British alone sold between 283,000 and 394,00
guns a year”. And: “All this warfare
and conflict not only caused major cause of life and human suffering but also put
in motion a particular path of institutional development in Africa”. Finally:
“Second, as a consequence but,
paradoxically, in opposition to the first process, warring and slaving
ultimately destroyed whatever order and legitimate state authority existed in
sub-Saharan Africa”. The recent increase in drug related violence in Mexico
is another case in point. The failure or unwillingness of the US to control its
forbidden drug consumption has converted Mexico into a transfer route. This
failure has led to an accumulation of tragic consequences, because of drug
trafficking trough Mexico thousands of lives have been lost and the country has
experienced an internal surge in addictions.
The above contains all my comments
regarding Mexico. From them one should be able to understand some of the more
negative shocks that have altered the course of Mexico’s economy and society.
It is impossible to deny that several extractive policies have prevailed within
Mexico with their strangling effects on welfare, and that such policies are the
result of government capture by vested interests, confirming the essence of
A&R analysis. However, the counterfactual, what would have happened had the
country not been derailed of its path, is impossible to conjecture, but the
historical record should be set straight.
Mexico is a recurrent theme but A&R
provide an incredibly rich and valuable portfolio of country research. Not all
of it as scientifically buttressed as the rest. To comment on some of the other
countries covered in the book, an important assertion concerning the Soviet
Union has to be qualified: “The Soviet Union is an even more worthy
example, growing rapidly between 1930 and 1970, but subsequently experiencing a
rapid collapse”P48. Also in P92: “Political
and economic institutions were highly extractive, and markets were heavily
constrained. Nevertheless, the Soviet Union was able to achieve rapid economic
growth because it could use the power of the state to move resources from
agriculture, were they were inefficiently used, into industry”. A similar
statement appears on P126. A&R deal with other cases under the same
assumption: that there is a growth model based on brutal capital accumulation
and/or forced reallocation of resources, such as in pre Deng China.
There is another way of looking at such
performances. North& Thomas define growth as increases in income per
person, not as growth in output, as the metric of economic growth. Only
personal income increases reflect improvements in people’s welfare. Huge
increases in investment to create a war machine or any other statist objective
have turned out to be self-defeating and should not be labeled growth unless
people’s welfare increases. Therefore one should not mislabel examples that
only prove how oppression and forced Soviet transfers from satellite countries
(COMECON) can generate output but not growth. Something discovered with the
Soviet Union’s collapse when the world was able to observe the squalor in which
ordinary Russians lived and had lived.
A%R also deal with an explanation of
economic differences favored by many: geography, and dismiss these hypothesis.
I believe the rejection of nature as a contributory factor to economic
differences is dismissed too lightly. Geography may not be determinant but combined
with other elements it can be helpful, or detrimental.
While their central thesis is unassailable,
their vast historical documentation is solid and convincing, one cannot put
aside or dismiss advantages conferred by nature. To take just one paragraph
among many: “The population became
educated and railways spread out across the Great Plains in stark contrast to
what happened in South America. This cannot be explained by pointing to
differential geographic endowments of North and South America, which if
anything, favored South America”. P53
Mexico and Central America are not South
America so perhaps A&R accept that the forbidding mountains of this region
did prevent a US sort of railway expansion. But what about the mountain ranges
of Peru, Colombia and Ecuador? Could a train have been built in the vast Amazon
region of Brazil? Have they looked at the topography of Bolivia and Ecuador?
And how about Chile’s huge and barren Atacama Desert? Perhaps parts of
Argentina and most of Uruguay are suitable for a US type of railway expansion,
but no country enjoys the navigable river mesh on the eastern side of the US
that complements closely its railway network, and, speaking of geographic
advantages, facing its biggest market: Europe. Another obvious instance of a
geographical source of national wealth are of course the oil resources of some
of Arab countries.
Other questionable assertions have to do
with their interpretation of China’s recent economic explosion. On P63 A&R
mention that Deng Xiaoping promoted market reforms “first in agriculture and then in industry”, and on P68: “Instead,
Deng Xiaoping and his allies, who were no less self interested than their
rivals but who had different interests and political objectives, defeated their
powerful opponents in the Communist Party and masterminded a political
revolution of sorts, radically changing the leadership and direction of the
party. The economic reforms, which created market incentives in agriculture and
then subsequently in industry, followed from this political revolution. It was
politics that determined their switch from communism and toward market
incentives in China, not better advice or a better understanding of how the
economy worked”. Also on Ps 93&94:
“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 above are strange conclusions regarding
Chinese performance, difficult to understand because of A&R’s meticulous research,
vast bibliography, and professional scholarship. Perhaps the explanation is
that they did not look into the book “How China Became Capitalist” by Ronald
Coase and Ning Wang (C&NW). These authors’ research arrives at conclusions that
contrast 180 degrees with A&R’s regarding the China phenomenon. According
to C&NW, China’s awakening was a bottoms-up market type of process more
than a blueprint planned and dictated by the communist leadership. Furthermore
increases in food consumption, in the percentage of people in the new Chinese
middle class, higher wages, better health and education, improved housing,
etc., are manifestations of growing per capita income. Improved personal income is economic growth, hard to achieve under
extractive economic institutions. It is true that Deng Xiaoping was instrumental
in easing the road to new economic institutions and policies, but to an
important degree Deng was a follower who rode and facilitated a wave of reform.
Deng was inspired by the success peasants achieved when they decided
spontaneously to allocate communal land to families, and not as before, to the
commune. The book referenced turns upside down the usual interpretation of the
astounding Chinese economic revolution. Perhaps the book came out after their
opus was finished, but two other important sources that support the C&NW
hypothesis were published several years before[10].
Paradoxically, while C&NW’s interpretation contradicts A&R’s
understanding of China’s economic performance, it supports their general
hypothesis regarding the roots of economic success.
Other examples hard to accept are ones they
provide for Argentina and Chile. According to the authors Argentina and Chile
were lucky in their neglect from the conquistadores because they had no mineral
resources to ship back to Europe and because they had few indigenous people to
exploit as slave labor. P114. How that “luck” translated into economic welfare
looking at these countries’ performances is hard to understand. For many years
after its colonization Chile had slow growth and recurring bouts of high
inflation, even hyperinflation, until it embarked on free market reforms.
Argentina has gone from one set of bad policies into another, with an economy occasionally
held up by episodes of improved terms of trade when the products of its
exceptionally rich and vast land resources enjoy high international prices.
Another puzzling statement has to do with
their interpretation of Israel’s economic success P142: “Syria and Palestine are relatively poor parts of the modern world, and
the prosperity of Israel was largely imported by the settlement of Jewish
people after the Second World War and their high levels of education and easy
access to advanced technologies”. According to a careful study[11]
of Israel’s remarkable performance, which is based on the export and use of
technology, the continuous flow of inventions coming from Israel is due to a
peculiar combination: discipline and education within the army combined with
the inflow of highly qualified Russian Jewish immigrants. This is a recent
development, not a postwar one, and it has catapulted Israel despite the
inefficiencies provided by the Kibbutz organization and the many socialist
ingredients prevailing in its institutions. Furthermore, there was no “easy”
access to advanced technologies; it has taken a considerable amount of
homegrown efforts to create such technologies within Israel.
[1]
North, Douglass C. and Thomas, Robert Paul. 1973. The Rise of the Western World: A New Economic History. Cambridge
University Press
[2] McCloskey, Deirdre. 2010. Bourgeois
Dignity: Why Economics Can't Explain the Modern World. University of Chicago Press.
[4]
For an in-depth historical and biographical research (30 years work) on Hernan
Cortes.: Miralles, Juan. 2001. Hernan
Cortes, Inventor de Mexico. Tusquets. 2001. Also: Duverger , Christian.
2005. Cortes. Aguilar.
[5] Quoted
from the Historical Text Archive: Rodriguez O., Jamie. 1980. Down From Colonialism: Mexico's 19th Century Crisis:
“During these years, government revenue dropped from an
1806 high of 39 million pesos to a low of 5.4 million in 1823. In the last two
decades of the colonial period government income had averaged annually 24
million pesos compared to 12.2 million in the Republic's first decade. The
average revenue increased in 1834-1844 to 23 million pesos a year, but not
until the 1880's did collections surpass late colonial averages.
The decline in government income reflected Mexico's
post-independence economic depression. Mining provides a graphic example of
this crisis. Mineral production fell from an annual average of 25 million pesos
in the late colonial period, to a low of 6.5 million in 1819, averaging 11
million a year for the next four decades. This dramatic decline was due to
decreased production, not to a drop in the price of silver. In
1801-1810, New Spain extracted 5.5 million kilograms, while in 1821-30 Mexican
silver production had fallen to 2.6 million kilograms”
“The wars of independence severely damaged agriculture,
commerce, industry, and mining, as well as the nation's complex but delicate
infrastructure. Lamentably, the most serious fighting occurred in central
Mexico, the richest agricultural and mining area of the country. Rebels burned
farms, killed livestock, wrecked mining equipment, and paralyzed commerce.
Royalist forces retaliated with counter terror devastating regions which had
capitulated to or supported the insurgents. The Viceregal government lost
control of most of the country to rebel bands or to royalist military leaders
who acted without regard for law or the needs of the economy. By 1821, when
Mexico achieved independence, the nation was in chaos and the economy in
ruins.16 Although it is impossible to assess the full impact of the struggle
for independence, Quiros provides the best estimates of the losses caused by
the fighting between 1810-1816. He, like others, maintains that agriculture
suffered great damage. But as he demonstrates, the most severe blow to the
Mexican economy was the loss of capital; money either fled the country or was
withdrawn from circulation All published travel accounts report similar
devastation. Perhaps the great silver mining region of Guanajuato demonstrates
most accurately post-war Mexico's changed conditions. During 1801-1809 its
mines produced silver worth 47,000,000 pesos, but yielded only 22,000,000 in
the following decade." In 1820 the flooding of Valenciana, the greatest
silver mine in the world, proved catastrophic because as the Ayuntamiento
observed, Valenciana, the incomparable Valenciana, ... the only mine that has
for some time continued to support almost all our population, though with hardship,
will be utterly stopped...
It is believed that the remains of what used to be our
numerous population will now flee the city to emigrate, to seek sustenance
somewhere else, for here, when the mines and refineries do not function there
is absolutely nothing to do”.
[6] There are many
bibliographical references related to Poinsett’s interferences into Mexican
life and politics. A good compendium: Herrera, Jose Maria. 2007. The Blueprint for Hemispheric Hegemony: Joel
Roberts Poinsett and the First United States Diplomatic Mission to Mexico. PhD
thesis. Purdue University:
[7] McCaa, Robert,
2001. University of Minnesota Population Center. To give an idea of the
relative magnitudes involved, Mexico's population in 1910 stood at 15 million.
[8] To provide 2 examples of several possible:
a) When long distance was opened to competition in 1995, two firms were created
to compete with Telmex: Alestra and Avantel. The juiciest market at that time
came from the huge settlement income related to calls entering from the United
States into Mexico. To protect Telmex from competitive pricing, the
Communications Department issued a rule that limited service providers the
revenue from that market to their internal market share. This way price
competition was prevented and Telmex’s lion’s share of the market was protected.
B) Despite Telefonica being a small competitor to dominant Telcel, the
Competition Commission prevented Telefonica to obtain frequencies in a the
bidding process that took place in 2005, only Telcel was allowed. Telefonica
became thus gradually strangled to provide fast data downloading services in
the largest Mexican geographic market: the metropolitan area of Mexico City.
[10] McMillan, John.
2002. Reinventing the Bazaar: The Natural
History of Markets. W.W. Norton and Company New York-London, E.U. These
authors refer to the experiences derived from reform in the village “Small
Hill” in the Anhui province. A reform
initiated by the peasants themselves. C%NW point out that although this reform
is more frequently quoted, the first private farming experience occurred two
years before Anuhi’s in a village named “Nine Dragon Hill”. This earlier
incident occurred because of the initiative of the local cadre. Both had
spectacular results in additional farm production and in an overflow of demand
that led to the appearance of small service outfits.
[11] Senor, Dan and Singer, Saul. 2009. Start-Up Nation, the Story of Israel’s
Economic Miracle. 12 Hachette Book Group.
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