Government, geography and growth: The true drivers of economic development

EDITOR’S NOTE: In their book, “Why Nations Fail,” Daron Acemoglu and James Robinson claim economic development depends on whether a country has “inclusive” political institutions. Economist Jeffrey Sachs disagrees in this article on the Foreign Affairs magazine. An excerpt.

[Daron] Acemoglu and [James] Robinson’s simple narrative contains a number of conceptual shortcomings. For one, the authors [of “Why Nations Fail”] incorrectly assume that authoritarian elites are necessarily hostile to economic progress. In fact, dictators have sometimes acted as agents of deep economic reforms, often because international threats forced their hands. After Napoleon defeated Prussia in 1806 at the Battle of Jena, Prussia’s authoritarian rulers embarked on administrative and economic reforms in an effort to strengthen the state. The same impulse drove reforms by the leaders behind Japan’s Meiji Restoration in the late nineteenth century, South Korea’s industrialization in the 1960s, and China’s industrialization in the 1980s. In each case, foreign dangers and the quest for national opulence overshadowed the leaders’ concerns about economic liberalization. In their discussion of the incentives facing elites, Acemoglu and Robinson ignore the fact that those elites’ political survival often depends as much on external as internal circumstances, leading many struggling states to adopt the institutions and technologies of the leading states in a quest to close economic gaps that endanger the state and society.

The authors also conflate the incentives for technological innovation and those for technological diffusion. The distinction matters because the diffusion of inventions contributes more to the economic progress of laggard states than does the act of invention itself. And authoritarian rulers often successfully promote the inflow of superior foreign technologies. A society without civil, political, and property rights may indeed find it difficult to encourage innovation outside the military sector, but it often has a relatively easy time adopting technologies that have already been developed elsewhere. Think of cell phones. Invented in the United States, they have rapidly spread around the world, to democracies and nondemocracies alike. They have even penetrated Somalia, a country that has no national government or law to speak of but does have a highly competitivecell-phonesector.

In fact, most of the economic leaps that laggard countries have made can probably be credited not to domestic technological innovations but to flows of technology from abroad, which in turn have often been financed by export receipts from natural resources and low-wage industries. China did not become the fastest-growing large economy in history after 1980 thanks to domestic invention; it did so because it rapidly adopted technologies that were created elsewhere. And unlike the Soviet Union, China has not sought in vain to develop its own technological systems in competition with the West. It has instead aimed, with great skill, to integrate its local production into global technological systems, mastering the technologies in the process. China will likely become an important innovator in the future, but innovation has not been the key to the country’s 30 years of torrid growth.

What’s more, authoritarian political institutions, such as China’s, can sometimes speed, rather than impede, technological inflows. China has proved itself highly effective at building large and complex infrastructure (such as ports, railways, fiber-optic cables, and highways) that complements industrial capital, and this infrastructure has attracted foreign private-sector capital and technology. And just like inclusive governments, authoritarian regimes often innovate in the military sector, with benefits then spilling over into the civilian economy. In South Korea and Taiwan, for example, public investments in military technology have helped seed civilian technologies.

The book misinterprets the causes of growth in another way. Acemoglu and Robinson correctly identify state power—“political centralization,” in their words—as a necessary precursor to economic development. After all, only a strong government can keep the peace, build infrastructure, enforce contracts, and provide other public goods. But in Acemoglu and Robinson’s version of events, a state’s strength arises from the choices made by its ruling elites. The authors forget that a state’s power depends not just on the willpower of these elites but also on an adequate resource base to help finance that capacity.

In their discussion of Africa, for example, Acemoglu and Robinson recognize that the continent’s lack of centralized states and long history of colonial rule have set its development far back, but they never adequately explain why sub-Saharan African governments were localized and weak to begin with. Geography has a lot to do with it. Sub-Saharan Africa’s geographic conditions—its low population densities before the twentieth century, high prevalence of disease, lack of navigable rivers for transportation, meager productivity of rain-fed agriculture, and shortage of coal, among others—long impeded the formation of centralized states, urbanization, and economic growth. Adam Smith recognized Africa’s transportation obstacles back in 1776 in The Wealth of Nations. These transport problems, along with ecological and resource-related weaknesses, made Africa vulnerable to invasion and conquest by Europe in the late nineteenth century (after the Europeans learned to protect themselves against malaria with quinine), and they still hamper development in some parts of the continent today.

Not only can unfavorable geographycripplestates; it can also slow the development and diffusion of technology. Again, however, Acemoglu and Robinson leave this variable out of their equation for economic growth, failing to acknowledge that diffusion requires not only inclusive political institutions but also sufficiently low costs of adopting the new technologies. In places where production is expensive because of an inhospitable climate, unfavorable topography, low population densities, or a lack of proximity to global markets, many technologies from abroad will not arrive quickly through foreign investments or outsourcing. Compare Bolivia and Vietnam in the 1990s, both places I experienced firsthand as an economic adviser. Bolivians enjoyed greater political and civil rights than the Vietnamese did, as measured by Freedom House, yet Bolivia’s economy grew slowly whereas Vietnam’s attracted foreign investment like a magnet. It is easy to see why: Bolivia is a landlocked mountainous country with much of its territory lying higher than 10,000 feet above sea level, whereas Vietnam has a vast coastline with deep-water ports conveniently located near Asia’s booming industrial economies. Vietnam, not Bolivia, was the desirable place to assemble television sets and consumer appliances for Japanese and South Korean companies.

The overarching effect of these analytic shortcomings is that when Acemoglu and Robinson purport to explain why nations fail to grow, they act like doctors trying to confront many different illnesses with only one diagnosis. In any system with many interacting components, whether a sick body or an underperforming economy, failure can arise for any number of reasons. The key to troubleshooting complex systems is to perform what physicians call a “differential diagnosis”: a determination of what has led to the system failure in a particular place and time. Bad governance is indeed devastating, but so, too, are geopolitical threats, adverse geography, debt crises, and cultural barriers. Poverty itself can create self-reinforcing traps by making saving and investment impossible.

Republished with permission from the Foreign Affairs magazine. Read the full article.

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