Development Policy Review, 2013, 32 (1): 154-156

Book review

Why Nations Fail: The Origins of Power, Prosperity and Poverty. By Daron Acemoglu and
James A. Robinson. London: Profile Books, 2012. 529 pp. £10.99 pb.

Inclusive political institutions and inclusive economic institutions are central to growth and
prosperity. Inclusive economic institutions create inclusive markets which give rise to
equality of opportunity and provide a level playing field for talent to prosper. Inclusive
political institutions guard against predation and expropriation, preventing the risk of
powerful and unaccountable elites threatening lives and livelihoods, in the process
safeguarding investor confidence. In contrast, extractive economic institutions and
exclusive political institutions perpetuate poverty and foster inequality. Exclusive economic
institutions are cultivated by political elites which concentrate power to facilitate the
acquisition of economic resources through plunder, monopolies and expropriation. But
states with extractive economic institutions and which centralise political power can spur
growth and development in the absence of political pluralism. Politics and political
institutions determine the nature of economic institutions that countries acquire and in turn
are shaped by historical circumstances.
This is the core argument of Why Nations Fail, an influential new book by two leading
US-based social scientists, Daron Acemoglu and James Robinson. The evidence they
gather appears to offer powerful support for current political arguments around a golden
thread of development, namely, that institutions like the rule of law, property rights, an
active civil society and open media are essential pre-requisites for growth and prosperity. In
other words, all good things go together. But their argument is more nuanced than would
appear at first sight.
Focusing on the centrality of institutions to explain virtuous cycles of development is
not new. There have been many attempts in recent years to explain why institutions matter
for development. The main contribution of this book is to draw on historical examples of
growth and development over time and place to reinforce the overall case. Evidence is put
forward to show why Britain prospered after the ending of absolute monarchy in the
seventeenth century in contrast to imperial Spain and the Russian and Austro-Hungarian
empires. The demise of absolutism in Britain ended monopolies supported by the crown,
while political centralisation under parliamentary rule formalised the rule of law,
entrenched property rights and spurred innovation and investment. Over time this created
the conditions for the industrial revolution and the formation of a large urban working
class. Political pluralism slowly emerged as the constitutional privileges of the crown and
social elites were contained with the emergence of mass franchise. Imperial Russia and the
Austro-Hungarian empire followed a very different path, centralising political rule while
entrenching feudal privilege. They actively discouraged innovation and maintained
extractive economic institutions for the favoured few, leaving most of their populations
mired in poverty. Colonialism gave rise to a parallel pattern of under-development in
Africa where autocratic states colluded with colonial powers in the slave trade, which in
turn immiserated millions of Africans while discouraging investment and holding back
development, with adverse consequences for the development of economic and political
institutions. In the East Indies, the Dutch imposed a monopoly over the spice trade by force

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in the seventeenth century, creating extractive economic institutions and preventing any
semblance of political inclusion, again with adverse economic and political consequences.
However, as Acemoglu and Robinson readily acknowledge, not all nations follow a
virtuous path towards inclusive political and economic institutions. Some countries have
persisted with extractive economic institutions while centralising political power, achieving
considerable progress in growth and poverty reduction. Communist China is a good
example of this route to prosperity, but at the expense of political pluralism. China moved
away from reliance on exclusive economic institutions under party and state patronage,
enabling more private-sector entrants into the market, and fuelling high rates of growth and
poverty reduction over the past thirty years.
There are similar examples in parts of Africa, such as Rwanda and Ethiopia, where
autocratic regimes have used the state machinery and centralised institutions to pursue a
concerted route of economic extraction as the basis for growth and development. Acemoglu
and Robinson doubt whether such paths to development can be sustained. They argue that
extractive economic institutions cannot produce a sustainable growth path as they are
incompatible with the rule of law and political pluralism. They predict that the Chinese
model of economic growth founded on extractive institutions will run out of steam unless
extractive political institutions make way for inclusive institutions, driven by social
pressures building up within an increasingly prosperous society constrained by political
exclusion.
The authors also outline a less virtuous path where, unlike developmental states in
Africa and Asia, societies have been unable to centralise political power and create
effective extractive institutions. The cases of Somalia and Afghanistan come closest to this
state of existence, with limited prospects of either the centralisation of political power or
political pluralism as a basis for sustained growth and poverty reduction. In the view of
Acemoglu and Robinson a perpetual state of institutional decay and economic decline
appears to be inevitable in such circumstances.
What should we take from this analysis for development policy? In many respects the
idea that inclusive political institutions and inclusive economic institutions are mutually
reinforcing has a direct corollary in the concepts of open economies and open societies.
Historical experience, presented in broad outline from a range of contexts and time periods
in Why Nations Fail, appears to show that inclusive economic institutions provide the
foundations for growth and prosperity when supported by inclusive political institutions.
Open media, the rule of law and enforceable property rights, all of which are features of a
culture of political pluralism, are intrinsic to the success of inclusive economic institutions,
which in turn promote economic growth and prosperity.
The recent experience of Brazil appears to vindicate this approach, with political
pluralism having provided a foundation for inclusive economic institutions and economic
growth. It has also enabled public policy to redress deep inequalities through targeted social
programmes supported by an empowered citizenry. But there are important exceptions to
this path to prosperity as examples from China and parts of Africa testify, where extractive
economic institutions provide a path to economic growth under authoritarian regimes but
are not easily sustained.
Acemoglu and Robinson caution against simple solutions that ignore the centrality of
institutions and historical circumstances in determining prospects for prosperity. These can
take the form of macroeconomic policy prescriptions founded on economic stabilisation

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and liberalisation associated with the Washington consensus which they claim were only
partly successful in countries where they were introduced. Or they take the form of micro-
institutional interventions centred on improving incentives for improved public-sector
performance, which are embodied in the approach favoured by Banerjee and Duflo, the
authors of Poor Economics. Acemoglu and Robinson claim both approaches are destined to
fail when implanted in contexts where extractive economic institutions and an absence of
political pluralism prevail.
Acemoglu and Robinson are critical of the potential for foreign aid to make much
difference, claiming that a great deal of it is wasted and fails to take account of extractive
institutions that prevent policies and projects from either promoting growth or reducing
poverty. This sweeping conclusion is tempered by their call for aid donors to invest in
citizen empowerment and more open media as these will foster a climate of political
pluralism. They are circumspect about the limitations of formal democracy to deliver
political pluralism when such factors are absent, highlighting examples of countries where
democratic institutions have been created but without a shift towards more open economies
and societies. They also recognise the limitations of external efforts to support citizen
empowerment, arguing that durable political reform is path-contingent and ultimately
depends on the historical legacy of economic and political institutions.
This dismal conclusion might offer pause for thought for those who believe foreign
aid can promote more open societies and economies as a foundation for long-term growth
and prosperity. It is similar to William Easterly’s argument in The White Man’s Burden,
where he concludes that foreign aid is destined to fall short in living up to its grandiose
claims for development by failing to appreciate the limits placed on external reform efforts
by country context and politics.
But these authors may be underestimating the potential of foreign aid to foster a
virtuous circle of development. Many lessons have been learned about the problems of
imposing policy reforms through conditionality and the limits of institutional templates
transplanted from the West. There is greater appreciation for the importance of political
context and the centrality of institutions. Arguments put forward by Acemoglu and
Robinson are helpful in this regard. But their analysis also points to the conditions under
which foreign aid might reinforce virtuous paths to growth and prosperity: by promoting
and accelerating transitions from extractive economic institutions and by supporting efforts
led by domestic political constituencies to empower citizens and hold governments to
account. For foreign aid to succeed in promoting more open societies and economies it
must work with the grain of history and complement on-going societal transitions.
Adopting such a perspective will entail hard choices and require long-term commitments.

Mark Robinson
Department for International Development, UK

© The Author 2013. Development Policy Review © 2013 Overseas Development Institute.
Development Policy Review 32 (1)
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