Why Nations Fail in the House of Lords

In our last post, we talked about the British prime minister David Cameron’s ideas about economic development which almost seem to paraphrase some of the themes from Why Nations Fail. We doubt that David Cameron read our book. But some members of the House of Lords seem to have done so.

On October 22nd the House of Lords debated the findings of the report made by the Economic Affairs Committee, The Economic Impact and Effectiveness of Development Aid. The report can be found here and the debate is here.

It might seem paradoxical, given the views we espouse in Why Nations Fail, to be even commenting on a debate in the House of Lords. Historically, the Lords played a highly reactionary role in British politics. It represented an un-elected aristocratic elite, an anachronism in a modern democratic society. In 1832 when the Whig government tried to pass the First Reform Act, the Lords refused to sign it into law, the prime minister persuaded the King, William IV, to threaten to create a sufficient number of Whig lords for the law to pass. The behavior of the Lords was little changed in 1909 when they tried to dole out the same treatment to the progressive reforms of Herbert Asquith’s Liberal government which introduced a “People’s Budget” into Britain. This budget involved important aspects of income redistribution and increased taxes on land. Asquith’s response was the same, to threaten to ask the King to create a sufficient number of Liberal Lords to pass the measures. So who cares about the House of Lords?

Yet though the role of the House of Lords was historically conservative and reactionary, and thus an easy target for criticism, the argument in our previous book, Economic Origins of Dictatorship and Democracy, suggests that it may have also played a useful role: in the sense that the House of Lords had the veto power against very radical redistributive programs may have made British elites more secure that the new democracy would not threaten their interests too much, and thus more accommodating to democratization at first and the rise of the Labour Party later.

So perhaps in spite of itself, the House of Lords played a useful role in the development of British democracy, inclusive institutions and economic growth. Moreover, since 1999 there has been some attempt to make the Lords more democratic. Hereditary peers were excluded from the house —- well except for a log roll which allowed 92 of them to stay to take part in a legislature where everyone is appointed by the politicians in power. Hmm, doesn’t seem very democratic. Further reform has stalled because, in effect, a politically legitimate second house would dilute the power of the House of Commons, and what leader of the Commons wants that?

So an anachronistic institution persists, yet an institution which nevertheless manages to have serious debates about institutions and policies in Britain, mostly because serious people get made Lords. One such serious person is Lord Lawson of Blaby, formerly Nigel Lawson, the Chancellor of the Exchequer under Mrs Thatcher’s government between 1983 and 1989, and probably one of the most powerful and important chancellors of the last several decades.

Lord Lawson was a member of the Economic Affairs Committee. During the debate on October 22nd the most controversial issue was the committee’s recommendation that the British government should drop its commitment to spend 0.7% of GDP on international aid. Their argument for this was pragmatic; 0.7% was arbitrary, when all areas of government expenditure were being cut why not this too, and what matters is outcomes and achievements, not how much money was spent.

So perhaps more surprising than the discussing the House of Lords, the House of Lords ended up discussing Why Nations Fail. In the debate, Lord Lawson attempted to bolster his position by referring to Why Nations Fail. He said:

A useful analysis, which I commend to the House, is to be found in a penetrating new study, Why Nations Fail, by a couple of economists, Acemoglu and Robinson, which unfortunately was not published until after we had completed our inquiry. They say that what the nations that fail,

“all share is extractive institutions. In all these cases the basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society”.

In parenthesis, my noble friend Lady Falkner reminded us earlier of my old friend, the distinguished development economist the late Professor Peter Bauer, who many noble Lords will recall was a stimulating Member of this House. He used to say that the principal effect of official development aid was to transfer money from the poor in the rich countries to the rich in the poor countries. That is far too true for comfort.

Be that as it may, Acemoglu and Robinson continue:

“The idea that rich Western countries should provide large amounts of ‘developmental aid’ in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions-which result in a lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of national and, more often, local elites over political and economic life. If sustained economic growth depends on inclusive institutions, giving aid to regimes presiding over extractive institutions cannot be the solution”.

That must be right. But I would myself put it more simply. The crucial requirement for economic development is a variant of the separation of powers: in this case, a separation between the political and the economic spheres.

Without that separation, if the route to individual wealth is via political office, government becomes a means of extracting wealth for the benefit of those in government, at the expense of the governed; and the notion of facilitating economic development or growth by providing conditions in which the governed can escape from poverty by their own efforts, outside the political process, is conspicuous by its absence-hence the futility of development aid.”

We find ourselves agreeing with Lord Lawson that development aid is not the solution to the problem of underdevelopment; dismantling the extractive institutions which dominate poor countries would be a far better start (how could we disagree when he cites such authority!).

But we do not actually argue in our book that international aid should be scaled back. In fact our own personal experience and understanding of the wider social science evidence is that aid does help poor people and improve their quality of life, unless it is directed specifically to dictators trying to suppress their people (which has unfortunately happened, for example, when the US was pouring aid to Mobutu in Zaire, though not when aid was directed to deal with issues of economic development, but when it was used for “geopolitical reasons”).

Of course some aid — often far too much of it — gets stolen. But this is the nature of the beast. Almost by definition any poor country is dominated by extractive institutions so it is inevitable that extractive elites should siphon off some of it. Yet this is not an argument for abandoning poor people to their fate or instead giving aid only to “deserving” countries with functional governments like Norway, which of course don’t need it! Rather, it is a plea to re-think aid and try to find ways in which it can be used to build institutions and move away from extractive institutions.

In this light, it is worth observing that there are several positive initiatives currently being implemented by the Department For International Development (DFID), the British governments aid agency. This, for example, includes their project to move away from simple budget support to poor countries which, by virtue of its lack of transparency as aid money simply goes into the government budget, is the type of aid most likely to be siphoned off by extractive political elites.

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