27 August 2012

Sachs Doesn't Buy Why Nations Fail's Thesis

Foreign Affairs finally got around to publishing a review of Acemoglu and Robinson's Why Nations Fail having tapped Jeffrey Sachs to share his thoughts on the book. It is no surprise that Sachs disagrees with the argument set forth by the authors.
Acemoglu and Robinson's simple narrative contains a number of conceptual shortcomings. For one, the authors incorrectly assume that author-itarian 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 competitive cell-phone sector.

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.
The main point that Sachs makes is that the case for institutions set forth by Acemoglu and Robinson falls short on evidence. He makes some really strong points by using South Korea's development as an example of economic growth preceding political reform. Most interesting is the concluding paragraphs. Sachs writes:
Despite all these problems with Acemoglu and Robinson's theory, readers will have sympathy for their approach. The authors tell a story many want to hear: that Western democracy pays off not only politically but also economically. Yet real economic life is neither so straightforward nor so fair. Authoritarian regimes sometimes achieve rapid growth, and democracies sometimes languish. Acemoglu and Robinson's story is sometimes right: politics matters, and bad governments can indeed kill development. Yet the key to understanding development is to remain open to the true complexity of the global processes of innovation and diffusion and the myriad pathways through which politics, geography, economics, and culture can shape the flows of technologies around the world.

In fact, economic development will be even more complex in the coming decades. As human-led climate change progresses, many regions could well be hit by devastating environmental shocks, such as heat waves, droughts, and floods, that are far beyond their control. Populations will migrate in reaction to uneven patterns of demographic change. Advances in information and communications technology will make new kinds of global production networks possible. In such a complicated world, explanations of growth that center on a single variable will become even less useful.
What stands out is not so much that argument that Sachs makes against Why Nations Fail, but the way that that argument applies to his own theories. The point on needing more evidence should certainly apply to an intervention that is taking up money to operate. The mention of complexity is a way to tip his hat at not being able to gather every data point on what is working, but it then calls into question his earlier points that the evidence must be overwhelming for the authors.