Q&A: Daron Acemoglu, economist, on why nations fail

The question has puzzled economists for ages: Why do some nations succeed while others fail?

The average Egyptian has an income level of around 12 percent of the average American and can expect to live for ten fewer years—what accounts for such inequality? Many have pointed to differences in culture, geography and even knowledge, but economists Daron Acemoglu and James Robinson believe they have the answer: Nations crumble when their political and economic institutions fail.

In their new book, Why Nations Fail, the economists outline their theory of why institutions (which they define as either inclusive or extractive) are the cause of poverty or prosperity and how different parts of the world ended up in such different situations.

I caught up with MIT economist and co-author, Daron Acemoglu, to learn what exactly accounts for the vast differences in global prosperity.

Here is our exchange.

SmartPlanet: How exactly do you differentiate between inclusive and exclusive institutions and why do the two result in such different outcomes?

Daron Acemoglu: At the root of it, it’s actually quite simple. Inclusive institutions are those that have economic institutions that encourage innovation and investment. They provide secure property rights and eliminate significant entry barriers. They create a level playing field so that the majority, or ideally all, of the citizens of a given nation can take part in economic activity.

In contrast, extractive institutions do the opposite. The elite are able to grab things from others or distort allocations and are far from creating a level playing field. A few control political power at the expense of the rest of society. And these institutions are not there by mistake. They are designed, as the name extractive suggests, for the interest of those who have the political power in the society and can do the extracting at the expense of the rest.

SP: Why would these leaders be so resistant to technological change and innovation? Such developments should benefit a nation.

The answer is simple: the decisions are based not on what would be good for their citizens or the nation at large, but for their own bottom line—the ability to line their pockets and make huge fortunes. Dictators all over the world from Mubarak to Mobutu have been able to do this. Innovation is often a threat to their political power. They resist changes that will unleash the economic potential of a nation because those are often associated with processes that destabilize their power base.

SP: In Why Nations Fail, you mention that many experts get it wrong when trying to aid other nations by offering policy advice and foreign aid. Are there things more successful nations can do to help failing ones break the mold?

Yes, I think there are but I think the more important thing is to realize that whatever they can do is going to be very incremental. It’s unrealistic to expect that somebody from the outside can come and give you the magic potion to develop your institutions or oust your dictator and put another inclusive regime in his place. Inclusive institutions need to be grounded on grassroots movements—on people who actually want to support those institutions. That’s difficult to engineer from the outside.

SP: So how can nations free themselves from such institutions?

It’s not an easy thing because you can’t count on the leaders to do it—they’re the ones who have introduced, kept in place and solidified these extractive institutions.

One way it can happen is that a challenge, either internally or externally, will demand changes in the extractive institutions. In the end, if the elites who are sitting atop these institutions decide that they cannot defend them or that defending them is too costly, they start loosening their grip. Democratization emerged in England during the 19th century after repeated, sometimes quite raucous, demands from the disenfranchised were met by the elite with gradual extensions of the franchise.

Unfortunately this sort of gradual path is not always open. As an example: the Arab Spring. Qaddafi or Assad, were so entrenched in their extractive regimes that they took their chances to fight those making demands, to repress them to the extent possible. Change will only come in that case when a conflict results in the victory of those who are trying to oust the regime.

SP: You write that China’s growth isn’t likely to last, despite the country’s inclusive economic institutions. Why is that?

Inclusive economic institutions can’t survive for a long time if they are situated in the context of extractive political institutions that concentrate power in the hands of a small segment of society.

China has managed to achieve significant economic growth because its sort of picked up the low hanging fruit from the world technology frontier, but that sort of growth is not going to last until China goes to the next step, which is harnessing innovation. And that’s not going to be possible unless economic institutions become even more open and the extractive political institutions in China will be a barrier to that.

SP: Do you foresee major problems for the United States as society becomes more and more polarized?

I think that’s the biggest problem for the United States. People are talking rightly about all sorts of problems that economic inequality causes. While those are not to be belittled, the biggest problem it poses is that associated with economic inequality, there has been an increase in political inequality. The political system is not as open to the voices of ordinary Americans as it used to be. It’s much more dominated by the wealthy who are able to talk and have the ear of politicians.

I think there is room for being optimistic about the US but there’s no god-given right of the United States to have inclusive institutions. It has to earn them and if it lets political power shift in a very unequal way, those institutions will start getting weaker.

Image: Why Nations Fail

This post was originally published on Smartplanet.com