Nations Fail: The Origins of Power, Prosperity, and Poverty

The new Nobel laureates in economics Acemoğlu, Johnson and Robinson explain why some countries become rich and other countries poor. Integration into the global economy plays a decisive role in this.

Just over a decade ago, economists Daron Acemoğlu and James Robinson wrote an economic bestseller entitled “Why Nations Fail”. The word globalization only appears three times in the book. Nevertheless, globalization or international trade plays a crucial role in the stories with which the two economists attempt to explain why some countries are doing so much better than others.

This week, the Swedish Nobel Prize Committee awarded Acemoğlu and Robinson the Swedish Riksbank Prize for Economic Sciences in Memory of Alfred Nobel for their research. The third and equal prizewinner is economist Simon Johnson, who often works with Acemoğlu and Robinson.

The institutions are decisive

The scientific findings of the three prizewinners can be summarized simply. They have shown historically, theoretically and also empirically that the economic development of a country depends little or nothing on the climate or the supply of people, goods or capital. Rather, it is the institutions under which the people in the country operate that are decisive.

In economic parlance, the term institutions does not stand for political or social institutions such as a parliament, but for the rules of social interaction. In concrete terms, this means, for example: do people live in a liberal democracy or in a market economy? Do they live in a dictatorial regime like in North Korea or China? Can they rely on secure property rights? Are they part of a socialist planned economy?

The fact that these rules are crucial for the economic success of a country and its people is nothing new in itself. It is an important insight of the school of economics that laid the foundations for the social market economy in Germany under the heading of regulatory policy.

Today, the term institutional economics is used internationally. What is new about the work of Acemoğlu, Johnson and Robinson is that they seek to explore how such institutions are created and how they are destroyed. This is where globalization or international trade comes into play. In many of the historical examples that the researchers examine, the impetus for institutional change comes from outside, from economic exchange with foreign countries, from the global economy.

Venice as an example

One example is the rise and fall of Venice. The city became independent in 810 and by 1330, with 110,000 inhabitants, it was as big as Paris and around three times the size of London. Its economic rise was largely based on market-friendly rules and trade. A rudimentary form of joint-stock company enabled young and ambitious Venetians without much capital to take part in trade transactions with foreign countries. It was the key channel for social advancement, write Acemoğlu and Robinson.

The merchants, who became rich in foreign trade, forced political changes, the end of the quasi-ruling of the Doge and the establishment of a Grand Council, a parliament, in 1172. What had allowed the economy to flourish came to an end around 1300, when the established nouveau riche merchant class feared competition from new merchants. The established class made the seats in parliament hereditary. International trade was made more difficult for new competitors in important areas due to high barriers to entry. People preferred to keep to themselves in order to secure their benefices. As a result, Venice fell behind economically. The example teaches us that participation in world trade led to institutional changes that first led to the rise and then the economic decline of Venice.

Conditions in Europe in the 16th century

According to the analysis of the three economists, international trade, especially the Atlantic trade, is also a decisive reason for the economic rise of Europe beginning in the 16th century. In Britain and the Netherlands, the Atlantic trade strengthened the economic power and self-confidence of merchants, who demanded secure property rights and business-friendly reforms from the respective crown. This did not happen in Spain, Portugal and France because the royal houses there dominated foreign trade absolutistically and controlled it to their own advantage.

The lesson to be learned from this example is that opening up a country to the outside world can, but does not have to, favor business-friendly reforms. It depends on the interplay between free trade and the internal constitution of a country whether and what institutional changes foreign trade brings about. (Political) change through trade, as the West hoped for in Russia and China, takes a long time or may not happen at all. This is especially true when the political elites dominate foreign trade in order to secure their power, as is the case in North Korea.

According to the studies by Acemoğlu, Johnson and Robinson, it is also clear that isolation from the global economy is impoverishing countries. The best-known example of this is China. It slipped from a highly developed economy, which was far ahead of the West, into poverty after the Ming and Qing dynasties largely prohibited foreign trade from the 15th century onwards. The Chinese emperors feared that opening up to the outside world would jeopardize their own power.

Foreign trade as a decisive success factor

Japan, which was trapped in the feudal system, also stagnated in its economic development after the Tokugawa shogunate almost completely banned foreign trade from 1600 until the second half of the 19th century and cut the country off from foreign countries. The revolt that led to the fall of the shogunate, the abolition of the feudal system and the Meiji Restoration in 1868 originated in the Satsuma domain in the southwest of the country. This was no coincidence.

Why Nations Fail: Wikipedia

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