Response to Fukuyama's Review

We are generally very happy with the reactions that Why Nations Fail is receiving from reviewers in newspapers, magazines and blogs. (A few of those can be found here). As it may be expected, some have been positive and some less so. But one review, by Francis Fukuyama in the American Interest blog, stands out in its critical tone and content. 

Our original reaction was to ignore it. But we have been asked about our reactions to this review a number of times, so we have decided that perhaps it is worth responding to some of its main claims.

Here, we would like to focus on some of the main criticisms that Fukuyama levels at Why Nations Fail.

First, Fukuyama writes “They are making almost the identical point to that one made in the 2009 book by Douglass North, John Wallis, and Barry Weingast”.

Our work in general, and Why Nations Fail in particular, built on North’s seminal ideas (for example, those in Structure and Change in Economic History and on North and Weingast’s seminal paper in 1989 Journal of Economic History as well as on North, Wallis and Weingast (NWW). But there are also major differences — which would have been really obvious to Fukuyama. The most important one is about the role of politics. In our book, we argue that a framework built on the primacy of politics — political institutions being forged and changing as a result of conflict and in turn shaping economic institutions and then innovation and investment — will go a long way. Our framework also clarifies that what we call extractive institutions are there by design. NWW put much more emphasis on economic and social factors. For example, their concept of “open access order,” far from being similar to “inclusive political institutions” as Fukuyama argues, is defined as a “social order” similar to Seymore Martin Lipset’s “development complex” (page 3). In particular, NWW emphasize the existence of business and other non-government organizations, impersonal exchange and beliefs supporting cooperation in society as the foundations of “open access orders”.

Though our work owes much to North and his co-authors, it is disingenious to imply that we have just re-created their argument under a different guise. In fact, NWW are themselves very explicit that when they talk of political change, they build on our past work, in particular our earlier book, Economic Origins of Dictatorship and Democracy as well as our earlier work (see, for example, their Chapter 5).

Overall, it should be clear that our work, though it builds on NWW, takes a different approach, and the two works not only build on each other but are quite complementary.

Second, Fukuyama argues that our distinction between inclusive and extractive is “sharply bifurcated”. This is clearly meant as a criticism, but the exact meaning is not quite clear. If by this Fukuyama means that inclusive and extractive political (and economic) institutions are defined as extreme cases, this is exactly right. As we state in the book, most countries are in shades of gray, but it is most useful to start with the black and the white to understand what’s going on. If, on the other hand, by this Fukuyama means that we think societies in reality are fully inclusive or fully extractive, this is obviously not true as most of the book is about degrees of extraction and small steps towards inclusive institutions.

Our discussion of China, for example, which Fukuyama further comments on, is all about this: we argue China did not start growing by becoming fully inclusive, but by taking some important — and yet limited — steps towards inclusive economic institutions.

Third, Fukuyama accuses us of not unpacking the constituent parts of inclusive and extractive institutions. He even writes: “There is for example a large literature comparing the separate impacts of a modern state, rule of law, and democracy on growth, which tends to show that the first two of these factors have a far greater influence on outcomes than democracy.” Now there are two problems with Fukuyama’s statement. First, the literature he seems to have in mind is the one on cross-country growth empirics, which sometimes runs kitchen-sink regressions including several indices at the same time. But few economists would take such regressions seriously given the endogeneity and reverse causality concerns. Second, a large part of our book is in fact devoted to explaining why many extractive (and inclusive) aspects will travel together — because of the feedbacks between these different aspects.

In fact, this is an important point which is perhaps somewhat easy to miss (or at the very least Fukuyama has missed it): there is a very good reason for broad concepts such as “extractive institutions,” because extraction is often undertaken using one of many specific institutions that are on the whole different ways of “skinning a cat”. So, for example, when after the Civil War, slavery was abolished and black Americans were enfranchised, this did not put a conclusive end to extractive institutions in the US South, but opened the way to the emergence of a different complex of specific institutions to achieve the same objective. Slavery went, but then came Jim Crow, “separate and equal” schooling, vagrancy laws, convict labor, and a whole gamut of restrictions against the movement and labor market freedoms of freed slaves. Former slaves were given the right to vote, but literacy tests for voting and the Ku Klux Klan made sure that they were effectively disenfranchised. Just focusing on a specific institution of extraction would miss the continuity in the nature of extractive institutions in the US South. It would also miss the similarities in the nature of extractive institutions across the world, which we tried to illustrate, for example, in Chapter 13 of Why Nations Fail.

Fourth, Fukuyama claims that China’s rapid growth invalidates our theory. Why this is not the case is discussed both in Chapter 5 and Chapter 15 of Why Nations Fail, so it’s a little surprising to see him make this claim. We also discuss the spectacular economic performance of the Soviet Union until the 1970s. We don’t think Fukuyama would argue that the rapid growth of Soviet Union for over four decades invalidates the theory that markets are better than central planning in generating innovation and economic growth. It doesn’t — for the same reason that Chinese growth so far doesn’t invalidate our theory. As a matter of fact, China is still much poorer relative to the United States than the Soviet Union was in 1970. If China is able to reach levels of income per capita comparable to those of Spain or Portugal based on its extractive political institutions, then this would invalidate our theory. But, as we explain in detail in the book (and we have also discussed elsewhere, for example here and here), growth under extractive institutions is part of our theory, so it is certainly not inconsistent with our framework. It is just that our theory suggests that such growth will not be sustained.

Our theory does not explain all sources of success and failure of nations. Nor do we claim to be the final word on this huge question. There are thus both many new and interesting approaches to be developed and many intelligent critiques of our work to be written. We look forward to such future approaches and critiques.

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