Why are some countries wealthier than others? Lately, this question has been receiving a lot of attention. The most recent debate centers around the role of institutions in economic development. Daron Acemoglu, a professor of Economics at MIT, and James Robinson, a government professor at Harvard, discuss this particular issue in their latest book on the topic, called “Why Nations Fail”. I myself reviewed it a couple of months ago. I found fault with many aspects of their argument, but I do agree with their main thesis: institutions are the cornerstone of sustained economic growth, or lack thereof.
From an empirical point of view, even those not well acquainted with economic and political theory of development would agree: growth depends largely on investments, and investments are made when companies or individuals have the right incentives; that is to say, where they have a supportive legislative and economic environment where they are assured their property rights will be protected. But the role of institutions is not merely to help private incentives. It is also to protect citizens from overzealous individuals and companies and enhance competition. So far, this is a basic understanding. It is a simple solution that has been around since the 1990’s yet rarely is discussed—an idea that Acemoglu and Robinson have made popular again.
Well, Bill Gates disagrees with this idea. He just recently reviewed “Why Nations Fail” and the authors consider his take on it to be the harshest and least constructive criticism of their work to date. It is hard to argue with that assessment. Gates’ review of the book, which includes some uninspiring assumptions about world history, can be read in two ways. On the one hand, it looks like a pathetic rebuttal of the books characterization of himself as one of many innovators who wanted to create a monopoly—one that was stopped by the United States’ strong, healthy, and inclusive institutions. On the other, it is the prayer of a man who truly hopes the billions he spent on international financial aid did not end up in the coffers of the corrupt, instead of in the hands of the people he hoped to help.
Just a few days after Bill Gates posted his review, the two authors came up with a response of their own. According to the two authors, not only has Gates not understood their point, but he has probably not read their book at all. They re-emphasize the points made in the book: historically, though geography and culture certainly impact development, it is institutions that provide the ultimate recipe for growth. South Korea, with its inclusive institutions that protect property rights and personal wealth in addition to helping investors, has fared so much better than North Korea, even though the two countries share a common history and geography. Colonies overtaken by extractive institutions put in place by the colonizers still face trouble today because of the culture of institutional work that has been crated.
Furthermore, the West, with policies of financial aid and intervention, has not helped. According to the authors, in a study administered in Uganda and Afghanistan, only 10% of the aid given by developed states and charities reaches its target. The rest is lost to corruption and bureaucracy. According to a talk by Ernesto Sirolli, a self-made Italian businessman, not only does the West put too much trust in bad institutions, it also fails to listen to those who draw attention to the ineffectiveness of their aid. Funds are usually either sucked up by leaders, or used the way charities or western businessmen, unfamiliar with the needs and culture of the country in which they are investing, see fit. As such, their money is wasted on barren land and education in places where child mortality is high. What policy-makers outside the regions they are trying to help should do is stop and listen. Solutions come from within, be they from institutions or the people.
This latest spat is but a morsel of the great debate that populates the academic world on the development of nations. The power of institutions is but a single facet of the discussion, and Bill Gates’ criticism is one of the many that Acemoglu and Robinson have received since publishing their work. It is a debate we should continue to have, since understanding why nations fail is the key to better policies in developing countries in the future—and we are nowhere near close to it. But if the debate is left to academia, regardless of whose argument is strongest, there will not be much progress.
The best way to read “Why Nations Fail” is to view it as a big piece of a puzzle that has been constructed throughout the years by brilliant minds. It is not the whole picture, but it does help us better understand the history of economic development. Acemoglu and Robinson have created an ambitious work and theory. They do not merely dismiss geography and culture, key to other academics’ theses—they help explain why institutions can tie all these important elements together. Collaboration, even among ideas, is the key to progress.