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Why Nations Fail: Q&A with Daron Acemoglu

by CIFAR Feb 28 / 13

On March 7, 2013, CIFAR hosts a Knowledge Circle event in Toronto featuring Senior Fellow Daron Acemoglu (MIT), who, together with Senior Fellow James Robinson, authored the New York Times bestseller Why Nations Fail.

daron-crop
Senior Fellow, Daron Acemoglu.

The book is stimulating widespread debate on theories that explain why some countries are wealthy and others not. At the CIFAR event, Acemolgu will be joined in conversation with The Globe and Mail’s international affairs columnist, Doug Saunders. CIFAR Exchange asks Acemoglu to introduce some of the concepts that he will present on March 7.

Q What led you and James Robinson to write Why Nations Fail?

The question ”why are some countries poor and others not?” is one of the most important questions in social science; yet, our understanding is still imperfect, to say the least.

As long ago as the late 18th century, thinkers like Adam Smith were concerned about a wide gap in the wealth of nations. At that time, wealthy countries were, on average, 4 or 5 times richer than poor countries. Today, that difference is now 40 fold. The puzzle that motivated Adam Smith is now much deeper.

James and I came to believe that the popular theories about the cause of disparity–such as a nation’s geography or culture–didn’t get us very far. For about 15 years prior to publishing the book, we collaborated on research papers to establish a better framework for explaining the underpinnings of today’s disparity. Many of those papers benefited from rigorous debate with our colleagues at CIFAR.

This book is the culmination of that research, but it also goes quite a bit further. First, we have attempted to develop a systematic theory for the impact of institutions on long-run economic development while creating a framework for understanding the origins and dynamics of these institutions. Second, we thought that these ideas are simple enough to be expressed in plain language and relevant to a broad audience.

Q Why do we need to go back so far in history to understand the world today?

Societies, and the institutions that provide their structure, change very gradually over time. Institutions, such as the laws that promote competition or protect property rights, have their origins in historical institutions and events. Moreover, history provides some of the best illustrations of how institutions shape prosperity and poverty of nations, and why institutions differ across societies.

The early colonization of North and South America illustrate both of these points. The different conditions under which the two Americas were colonized go a long way to explain the present-day disparity across these two continents. When the Spanish colonized South America they used, what we have termed, ”extractive” economic institutions to enslave the indigenous population to extract natural resources for their enrichment and benefit. But extractive economic institutions will not exist in a vacuum. They need to be supported by extractive political institutions designed to protect the interests of the elites. As a result, political institutions in South America also became highly extractive.

While in North America, attempts to exploit a workforce to the same extent, for the benefit of the elites, failed. Instead, a rebellious early community demanded “inclusive” economic institutions, such as secure property rights and free entry into occupations and businesses, and inclusive political institutions to ensure a more equal distribution of power among the settlers. (Note, however, that the distribution of political and economic rights did not flow to the indigenous population). The patent system provides one illustration. The fact that anyone could file for patent protection in the early days of the United States meant that many aspiring entrepreneurs, like Thomas Edison, were able to get a start.

Q With all the technological advances that we have experienced in the past century, why are the benefits of new economies not spread more evenly throughout the world?

In the book, we explain that a country can be caught in either a vicious or virtuous circle. In the case of the former, a low level of prosperity may persist if an elite group that benefits from the existing structure uses its political power to preserve the status quo. Technological progress is inevitably accompanied with what economist Joseph Schumpeter called ”creative destruction” because it destroys the businesses and the rents of established interests. But this implies that technological progress, critical to new economic growth, will often be resisted by current elites who stand to lose their rents and wealth. But perhaps more important is the political counterpart of creative destruction: existing elites will also fear losing their political power as a result of new economic activity and technologies. In extractive environments, for example when elites hold monopolies or when political power is highly concentrated, there will be great resistance to new innovations and technologies. This explains why the Industrial Revolution lagged behind in Eastern Europe compared to Western Europe, and also why it was not fully embraced in Latin America.

Different conditions that promote innovation still persist today.

Q In the book, you also explain that the small differences between nations at the time of critical junctures can lead to divergent trajectories of growth. Can you point to any critical junctures present in our world today, and which countries might stand to benefit?

It’s far easier to look in hindsight than to predict the future. We point to the Glorious Revolution in England as the precondition to the Industrial Revolution in that country. At that time, trade across the Atlantic Ocean had given rise to a mercantile class in England that demanded new political powers. When new technologies emerged, England’s new political landscape enabled the rapid entry of industrialists, which fueled the Industrial Revolution in that country. At that critical juncture, England had a small difference in its politics and this led to a substantial leap ahead in its prosperity relative to that of other countries, like France and Spain.

Today, one could argue that the rise of the knowledge economy in the 20th and early 21st centuries has created a critical juncture. It will be countries that enable the largest number of citizens to participate in new economic activities through inclusive economic and political institutions that will have the prosperity advantage in the 21st century. While there are many contingencies affecting future outcomes, differences in education access, democratic participation levels and how level the playing field is will likely have a significant influence over which counties in the future will be rich and which will be poor.