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Arvind Subramanian: Which nations failed?

Last Updated: Mon, Nov 12, 2012 19:40 hrs

Why Nations Fail (WNF) by Professors Daron Acemoglu and James Robinson (AR) has deservedly gained right of entry to the pantheon of Big Books on economic development.

Like the pantheon’s other occupants – most recently Jared Diamond’s Guns, Germs and Steel (GGS) and Ian Morris’ Why the West Rules for Now (WWR) – WNF tackles one of the biggest questions facing humanity: why some countries are rich and others poor. It is daringly ambitious in the parsimony of the answer; its scholarship is serious while avoiding the modern bane of narrow erudition; and above all, it offers a deep and plausible insight about development.

GGS was dazzlingly pioneering. WWR had the additional virtue of heavy subject matter being leavened by light and fluid prose, thanks to frequent appearances by Asimov, Kipling, Dickens, and the likes. And, WNF does not draw upon as breathtakingly broad a range of disciplines as those in either GGS or WWR. This stems from the different timescales of enquiry. Professor Diamond starts the development clock around 13,000 BC and Professor Morris more than a million years ago. But the AR story begins “only” about 700-800 years ago, necessarily ruling out evidence from genetics, evolution, paleo-biology, archaeology, which form the staple in both GGS and WWR.

WNF is both a derivative and development of an academic paper that AR co-authored in 2000 with Professor Simon Johnson (MIT) (full disclosure: Professor Johnson is my colleague and co-author). In “The Colonial Origins of Comparative Development”, one of the most-widely cited and justly influential academic papers on economic development in the last 15 years, the trio argued that the quality of economic institutions was the key long-run determinant of economic prosperity (measured broadly in terms of per capita GDP). Good economic institutions protected property rights and guaranteed sanctity of contract, which are the key pre-requisites for private sector investment and entrepreneurship.

In WNF, though, AR go one step further in arguing that economic institutions in turn are determined by politics. The more concentrated is political power, the more a small group in society tries to extract wealth for itself to the detriment of the rest: this is a world of “extractive” institutions. And, conversely dispersed political power as in democracies is conducive to contestability and competition, which creates the conditions for broadly-shared prosperity (a world of “inclusive” institutions). Thus, their parsimonious explanation for the disparities in wealth across the world is: political institutions.

Invoking the very Occam’s razor spirit that imbues the book, WNF can be explained in the figure above (see graph). Economic development (proxied by per capita GDP) is measured on the y-axis and an index of political institutions (higher values denote more representative or inclusive ones) on the x-axis. The choice of axes is very important because WNF asserts that causation runs from politics (the independent variable on the x-axis) to economic development (the dependent variable). The authors are unsympathetic to causation running the other way. That is, they reject the modernisation hypothesis, which asserts that improvements in standards of living will lead to more democratic politics, stemming, for example, from increased demand for political freedom and participation. For AR, political institutions bear the deep imprints of history, and although they are not immutable, their susceptibility to change induced by economic development is limited.

The upward-sloping line in the figure reflects a strong relationship (on average) between political institutions and economic development, validating the central argument of WNF. However, China and India stand out as outliers (they are far away from the line). And, the interesting thing is that each of these countries is an exception to, or even a challenge to, the AR thesis, but in opposite ways. India (which is way below the line shown in the graph) is too economically underdeveloped, given the quality of its political institutions and China (well above the line) is too rich, given that it is still so undemocratic.

AR can mount two defences. First, they could contend that all countries should be treated equally because every political unit is one experiment, one data point (regardless of size). After all, their thesis holds true for a vast majority of countries (that is why the line is upward sloping), and they must be granted some leeway, given they have daringly embraced a mono-causal explanation of what a complex relationship. Second, AR would contend that theirs is a claim about the medium- to long-run horizons, which are never clearly specified but which rule out criticisms based on relationships observed for say 20-30 years. Reproducing the graph for 1980 would show that China was not an outlier (although India was). Wait for another say 20 years, AR might plead, and the anomalies in the figure will fade away or at least move in the direction predicted in their book.

This defence is more problematic. Suppose that we were to revisit the book in 2030. What would have to happen to China and India for them to be consistent with the relationship predicted by AR? India in 20 years would have to slide into authoritarian chaos and become the equivalent of countries such as Venezuela today politically; or it would have to boom to become the equivalent of countries such as China in terms of standards of living. And conversely, China would either have to become a near-Jeffersonian democracy or suffer a dramatic collapse in output (i.e. post negative growth). None of these four outcomes is impossible, but none is likely either.

One could make a stronger critique of AR. Even if China and India were to move rapidly in the direction predicted by them over the next 20 years, it would still beg the question of how China managed to sustain 30-50 years of historically unprecedented rapid growth (and poverty reduction) under repressive political conditions, and how India squandered 30-40 years of democracy with its Hindu rate of growth. Of course, there are answers, but the point is that they would have to be different from, and even orthogonal to, AR’s central thesis.

In other words, the inability of Acemoglu and Robinson to explain the development trajectories of these two large countries is a fault not of their rich and excellent book, but of the sui generis, uncooperating realities of Chinese and Indian history.

The writer is a senior fellow at the Peterson Institute for International Economics and at the Centre for Global Development.
He is the author “India’s Turn: Understanding the Economic Transformation” and “Eclipse: Living in the Shadow of China’s Economic Dominance”

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