Politics Influence Economic Outcomes More than We'd Like to Admit

Why Nations Fail: The Origins of Power, Prosperity and Poverty
Daron Acemoglu and James Robinson
New York: Crown Publishers, 2012

Institutions, Institutional Change and Economic Performance
Douglass C. North
London: Cambridge University Press, 1990

Several theories of economic development have received attention in the popular press in recent years, even though many of these are based on non-economic foundations. For example, in Guns, Germs and Steel (1997) and Collapse (2005) Diamond presents a largely economic history of the world as determined by geographic and ecological factors. According to Diamond, Western Europe’s dominant role in global affairs, from the 17th century on, can largely be attributed to East-West trade routes, the domestication of certain species, resistances to certain diseases and balkanization. Diamond believes that the latter encouraged greater competition and, eventually, served as the catalyst of European Imperialism.

Another theory was advocated by Landes in The Wealth and Poverty of Nations (1998). Close followers of American politics are probably most familiar with (an incredibly simplified version of) this theory thanks to comments from Republican Presidential candidate Mitt Romney. He tried to explain the differences in wealth between Israel and the occupied Palestinian territories as the result of Israel’s “superior culture.” The ideas that largely cultural factors – like punctuality, industriousness and the willingness to embrace entrepreneurial risk – determine national success is quite old. Weber, for example, wrote about them in The Protestant Work Ethic and the Spirit of Capitalism (2009).

These two theories, along with several others, are decisively dispelled in Acemoglu and Robinson’s new book, Why Nations Fail (2012). By analyzing a series of natural experiments, the authors show the extreme limitations of theories about geography and culture. One of their most famous cases involves the city of Nogales, which lies on the US/Mexico border, between the states of Arizona (US) and Sonora (Mexico). The two sides of the border share similar heritage, culture, geography and climate. Many people living on one side frequently visit friends and relatives on the other. The only substantial difference between the two sides is national affiliation.