January 5, 2012

Why Do Nations Fail?

As Arab dissidents know all too well, it has to do with how societies are politically organized.

Editor’s note: The Region, a journal of the Federal Reserve Bank of Minneapolis, recently discussed job markets, property rights, global warming, and the Arab Spring with MIT economist Daron Acemoglu, who is a member of the Hoover Institution’s John and Jean De Nault task force on property rights. Below is an excerpt from that interview. The entire interview can be found here.

Region: [Let’s discuss] your work with James Robinson on transitions in political economy. I wonder if you could share any thoughts you’ve had about how that research applies to the Arab Spring.

Acemoglu: Yes, for the last 15 years, most of my research is exactly what you could call, broadly, political economy. Why don’t I talk about that a bit, and then we can kind of transition into transitions.

Region: Perfect.

Acemoglu: My professional research didn’t start with political economy, although when I originally began to study economics in high school and college, I was interested in what today you would call political economy—the interaction of politics and economics.

 Daron Acemoglu  
Photo credit: The Region

But later in college and graduate school, I started working on issues related to human capital, economic growth and so on. But then after a while, I sort of realized, well, you know, the real problems of economic growth aren’t just that some countries are technologically innovative and some aren’t, and some countries have high savings rates and some don’t. They are really related to the fact that societies have chosen radically different ways of organizing themselves.

So there is much meaningful heterogeneity related to economic outcomes in the political structures of societies. And these tend to have different institutions regulating economic life and creating different incentives. And I started believing—and that’s reflected in my work—that you wouldn’t make enough progress on the problems of economic growth unless you started tackling these institutional foundations of growth at the same time.

That got me onto a path of research that has been trying to understand, theoretically and empirically, how institutions shape economic incentives and why institutions vary across nations. How they evolve over time. And the politics of institutions, meaning, not just economically which institutions are better than others, but why is it that certain different types of institutions stick?

What I mean by that is, it wouldn’t make sense, in terms of economic growth, to have a set of institutions that ban private property or create private property that is highly insecure, where I can encroach on your rights. But politically, it might make a lot of sense.

If I have the political power, and I’m afraid of you becoming rich and challenging me politically, then it makes a lot of sense for me to create a set of institutions that don’t give you secure property rights. If I’m afraid of you starting new businesses and attracting my workers away from me, it makes a lot of sense for me to regulate you in such a way that it totally kills your ability to grow or undertake innovations.

So, if I am really afraid of losing political power to you, that really brings me to the politics of institutions, where the logic is not so much the economic consequences, but the political consequences. This means that, say, when considering some reform, what most politicians and powerful elites in society really care about is not whether this reform will make the population at large better off, but whether it will make it easier or harder for them to cling to power.

Politicians are more interested in clinging to power than in making society a better place.

Those are the sort of issues that become first-order if you want to understand how these things work. And this area is where the majority of my time was devoted over the last 10 years, though I’ve been working on it for 16 years or more, a lot of it with Jim Robinson. Jim and I have co-authored a couple of papers on the effect of institutions on economic growth. We’ve written a lot on political processes and transitions, dictatorship, democracy and a series of papers on issues of political power and elites and so on. Some of that underpinned our book Economic Origins of Dictatorship and Democracy, which I’ll come back to in the context of your question about the Arab Spring. And some of it led to this new book that we finished—in fact, it’s here [lifting a roughly bound manuscript from beneath several papers on his desk] which will come out next year, next calendar year.

Region: Why Nations Fail?

Acemoglu: Yes, Why Nations Fail. It’s sort of a broader take on what are the deep causes, according to us, of this great variety of economic outcomes and economic organizations that you observe around the world, and we try to sort of have a coherent theory of this that is very different from those that are very popular in the media and policy circles. It is also, to some degree, even different from the ones that economists articulate. We put much more emphasis on the politics of it, rather than geography and culture, which is what a lot of policy and media people emphasize, or things related to optimal policy and how we can improve policy at the margin, and how we can design policies better, which is what economists put a lot of emphasis on.

Our take is that the political constraints here are central. And development is all about breaking those political constraints, rather than just thinking within existing political constraints and looking at the optimal tax design or the optimal unemployment insurance design and so on, within those constraints.

Obviously, the two are complementary, but I think this perspective is quite different from what’s out there. So that’s the major thing that’s kept me busy over the last few years.

In this very long, roundabout way, let me come to the question that you asked, which was about the Arab Spring.

Region: Ah, yes. I see that your preface in Why Nations Fail is just that: You write, “Why Egyptians filled Tahrir Square [to bring down Hosni Mubarak, and what it means for our understanding of the causes of prosperity and poverty].”

Development occurs when political constraints are removed.

Acemoglu: Exactly. If you want to think about the Arab Spring, I think a couple of issues are central, and some of them are the focus of this book, and some of them are the focus of both the previous book, Economic Origins of Dictatorship and Democracy, and this new book.

The first issue, which we focus on much more in this book, is that these societies weren’t dictatorships only in the sense that they banned elections. They were dictatorships of a very particular kind, but a kind that has been quite common around the world, where a narrow segment of the society controls both political power and economic resources.

So if you look at all of these societies from Tunisia to Egypt to Syria to Bahrain or to Libya, a narrow elite controlled political power, limited the ability of almost anybody else in society to have any political voice and used their political power to distribute economic resources of the nation to themselves at the exclusion of anybody else.

In Libya, that’s sort of obvious. In Syria, it’s also sort of obvious now; the newspapers have explained in great detail how the Alawite minority, for example, commands not only all the economically lucrative positions, but also all the top positions of the bureaucracy and the army. In Bahrain, that’s quite clear with the Sunni minority. In Tunisia and Egypt, it was a little in the softer form, in that many business interests that were favored had very strong representation within the group of cronies that Mubarak or Ben Ali had around them. And in those countries, the army and the security forces were effectively keeping any kind of real democracy at bay.

The consequence, perhaps not surprisingly again, is that when you have a system like this where a very narrow group controls political power for its economic ends, it also is quite disappointing for economic growth. It doesn’t encourage new technologies to come in; it doesn’t allow people to use their talents; it doesn’t allow markets to function; it doesn’t give incentives to the vast majority of the population; moreover, it encourages the people who control political power to suppress many forms of innovation and economic change because they fear it will be a threat to their stability.

So the result was large fractions of the population were excluded from political voice, they were excluded from economic power and they also saw their living standards not increase because there wasn’t strong enough economic growth.

There are exceptions in the sense that Tunisia and Egypt did have some economic growth. They did have improved education of the population over the last 20 years. But by and large, the majority of the society felt that they weren’t getting enough out of this deal, and they also had very little faith that politics as usual was going to serve their interests.

So, what to do? Well, most of the time, nothing, because such a system is structured and survives precisely because it is successful in denying voice and power to the majority. If the majority had real power all the time, such a system wouldn’t survive—in the same way that a plantation society wouldn’t be able to survive if 90 percent of the slaves really had a political voice.

But the 90 percent have vast numerical advantage if they can get organized—for example, as in Syria, where the Alawites rule society but are a small minority. So it’s very difficult to keep the majority at bay all the time. Especially when there is some instability and some spark, as the one that came from Tunisia. In the rest of the Middle East, people began to organize and solve their collective action problem. They made real demands from those who were holding power.

Will the Arab Spring mirror England's Glorious Revolution or Russia's Bolshevik Revolution?

And what are those demands going to be? The people who went to Tahrir Square actually wanted deep, fundamental change. They wanted deep, fundamental change, partly for economic reasons. But also, I think, if you read the blogs and other things they write, it’s also clear that they thought fundamental change could only come from political change. In fact, from the get-go, a lot of the discussion, the debate over “reform or no reform,” focused on political change.

So, the first move of the Mubarak regime was to say, “OK, fine, you want reforms? We’ll give you reforms. Just go home.” And the reaction of the people in Tahrir Square was, “No, you’ve got to be crazy, because if we go home, you’ll just continue the same system as before.”

This is the driving framework, the key element of the framework that Jim and I developed in Economic Origins of Dictatorship and Democracy. This also features to some degree here [in Why Nations Fail]. If you are able to solve the collective action problem and make some demands, then promises of change or economic goodies or political reform in the future are not good enough. Because if I go away and stop the collective action that is taking place in Tahrir Square or any other place, tomorrow what are your incentives to actually carry out the economic reform or the political reform?

And that’s exactly what the people in Tahrir Square said: “No, we don’t believe you. The moment we go home, you’re going to re-create the same system.” The only way of making those reforms credible is to change the distribution of political power and make the reforms right away. That’s exactly what the people in Tahrir Square wanted.

So at some level, therefore, we understand through the lens of this framework, I think, how the dynamics played out, why the demands were made in the way they were made and why people in power tried to make concessions, but they weren’t successful when there were demands for deep political reform.

The big question is: Is this going to be a political revolution like the Glorious Revolution in England, which unleashed a fundamental process of transformation in the political system with associated economic changes? Ultimately, such political revolutions are fundamental to the growth of nations. That’s one of the arguments we make.

Or is it going to be the sort of revolution like the Bolshevik Revolution or the independence movements in much of sub-Saharan Africa in the 1960s, where there was a change in political power, but it went from one group to another, which then re-created the same system and started the same sort of exploitative process as the previous one?

The Bolsheviks were obviously very different from the Romanovs, but they created an even more exploitative system than the Czarist regime in Russia. Many of the independence leaders in sub-Saharan Africa, from Nkrumah to Mugabe to Kenyatta, were obviously very committed to throwing out the whites. And they had very legitimate demands, just like the Egyptians do today, but the system that they created either degenerated into something as bad or they personally created something even worse, like Mugabe did when he destroyed Ian Smith’s terrible racist regime, and he created something as terrible.

Earlier, in the 1960s, Nkrumah came to power in Ghana, and in Sierra Leone, Margai came to power. Margai re-created a very exploitative system. It was perhaps marginally better than the British system, but then Margai was replaced by his half-brother and then by Siaka Stevens in 1967. Stevens made things so much worse, but all of its roots were in what Margai had done. [He had] just taken over the British system and used it for his own political and economic purposes. Under Stevens, the whole system sort of collapsed.

So, there is no guarantee that such movements will translate into a broad-based political revolution, as opposed to a palace coup where one group takes control for another. And again, part of the point of Why Nations Fail is trying to understand the conditions under which one takes place and interpret the long swath of history and the institutional variations that we see around us in light of this.


Daron Acemoglu is the Charles P. Kindleberger Professor of Applied Economics in the Department of Economics at the Massachusetts Institute of Technology. He is an elected fellow of the American Academy of Arts and Sciences, the Econometric Society, the European Economic Association, and the Society of Labor Economists. He has received numerous awards and fellowships, including the inaugural T. W. Shultz Prize from the University of Chicago, the Sherwin Rosen Award for outstanding contributions to labor economics in 2004, and the John Bates Clark Medal in 2005. His research interests include political economy, economic development and growth, human capital theory, growth theory, innovation, search theory, network economics, and learning.


Letters to the editor

It's the System, Stupid

Excellent interview. My take on it was that to be successful, a revolution must replace both those in power and the system they use to maintain power. If only those in power are replaced, the system continues and nothing changes for the better. I wonder how our country could use that excellent insight today, for example, in regards to the Arab Spring?

---Willis Cook


Letters to the editor may be sent to definingideas@stanford.edu. Editors reserve the right to reject or publish (and edit) letters.