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Why Nations (and Regions) Fail

Bill Dodge / Apr 29 2012

For Release Sunday, April 29, 2012
Citiwire.net

Bill DodgeAsk why nations succeed or fail and a group of likely suspects are offered. Natural resources are too scarce, human capital isn’t developed, the geography is unfavorable (there’s a long list of possible explanations). But there’s another perhaps more critical factor, highlighted by Daron Acemoglu and James Robinson in their provocative new book: Why Nations Fail (Crown Business, 2012). Nations fail, they argue, because of extractive economic and political institutions that cement the power of narrow elites — as opposed to “inclusive” systems that centralize power to assure some degree of law, but share their power in a wise, pluralistic manner, offering opportunities for new entrepreneurs.

Could it be that regions within nations or states succeed or fail for the same reason?

The book cites numerous cases from the earliest city states to contemporary nation states to suggest regions thrive or falter for similar reasons. For example, they compare the sister cities of Nogales, Arizona and Nogales, Sonora, citing the extraordinary gaps in income, education, infrastructure, and quality of life across two sides of a common boundary — with the clear advantage on the United States of America side.

The difference lies in history and custom, it’s suggested. The United States is seen as a nation that expanded opportunities from its founding onwards, from the first landholders, then to slaves, then to women. The process wasn’t perfect: Native Americans were persecuted early on and a brutal war had to be fought to free the slaves. And to this day there are hard issues of disparities of wealth between rich and poor, corporate dominance of election financing, and push back against new immigrants… Still, for all its blemishes, the United continually seeks to open new opportunities, through quality free education, fairness in government decision-making and a rule of law that entrepreneurs can use to generate new economic activity.

The United States of Mexico story has differed. The nation has experienced centuries of brutal conflicts, most instigated to assure that economic wealth and political power would accrue to a small group, whether it was Spanish conquistadors, Catholic priests, mine/plantation/business owners, or key politicians and military leaders. Only through the people’s revolution of the last century has Mexico opened up opportunities for small businesses, workers, indigenous peoples, and other publics. But the process has often been a violent one, resulting in tensions among traditional and newly enfranchised groups — tensions that continually threaten governance stability. Most importantly, the tools required to pursue new opportunities are still largely controlled by extractive institutions trying to preserve economic benefits for the rich and powerful few.

No wonder then that the entrepreneurs of Nogales, Sonora and the world so often wanted to come to the United States of America, legally or illegally. Or are fighting for the economic and political institutions that offer the same opportunities in Cairo, Tripoli, Damascus, Harare, and Freetown.

But the differences between nations are reflected within them as well. Take the United States of America. All its regions already benefit from economic and political institutions that are open to budding entrepreneurs — regional economic development groups and councils of governments, for example — and are supported by all levels of government, as well as private, academic, civic and other sectors. However, at the local level, economic and political institutions, which behave inclusively within their boundaries, often stoop to beggar-thy-neighbor policies with their neighbors. They seem to forget that their economic success in the global marketplace is as an integrated region of many communities, not a standalone jurisdiction.

How, for example, can local economic and political bodies justify offering incentives to businesses to relocate from adjoining jurisdictions and argue seriously that this creates wealth? Not only do their actions poison local economic development waters, they squander opportunities to support the entrepreneurs who are pursuing opportunities that cut across jurisdictional boundaries. Such actions are often defended as protecting a jurisdiction’s tax base, with the result that our local tax systems become one of the most perverse extractive behaviors undermining regional cooperation.

How too can local economic and political institutions become bystanders when a critical economic asset is threatened, such as the loss of accreditation by a school system that is critical to preparing the next generation of regional entrepreneurs — a scene we too often see in central city school districts? Sadly, they usually get away with this behavior with scant media embarrassment or public accountability.

And how is such poor regional behavior fundamentally different from the historic attitudes that have too often kept Mexican economic and political institutions extractive? The current “haves” — individuals, groups, jurisdictions, institutions, etc. — want to preserve their privileged power and wealth against the potential “wannabes” and thwart actions for the good of the region, even if it means undermining the area’s collective capacity to build future wealth.

The only way many nations have opened up their societies to new entrepreneurs has been all too violent. But a regional revolution should hardly be necessary in the United States. What is needed is a willingness to seriously explore how local, and sometimes regional, state and national political and economic institutions, are acting in extractive ways, and then take steps to make them more inclusive.

Each region would benefit from preparing and pursing a vision for inclusive institutions, regularly reporting to the public on progress achieved. National organizations, such as the ones representing local, state, and national governments, as well as economic and regional groups, could offer a Good Housekeeping Seal of Approval to those declaring themselves inclusive institutions.

We owe thanks to Acemoglu and Robinson for making the convincing case that governance is the key to sharing power, achieving prosperity, and overcoming poverty. As usual, the theory is simple, but the execution is tough. But pursuing it probably offers the best guarantee that we will continue to reward the innovation and entrepreneurial spirit that has made these United States, and other prospering nations, succeed.


Bill Dodge (WilliamRDodge@aol.com), an expert in design of regional charters, is the former Executive Director of the National Association of Regional Councils, author of Regional Excellence, and currently writing a new book on regional charters.

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2 Comments

  1. Mayraj
    Posted April 29, 2012 at 3:37 pm | Permalink

    Indeed! Reducing extractive nature is a very important . But, given the start of minority-majority era in 2011, capacity building is even more vital as is treating those who are ignored and neglected today as the assets they rightfully are. The window of opportunity is short since by the time the new babies of 2011 start school is the time the dye will be cast.

  2. Darrell Marcy
    Posted May 7, 2012 at 10:48 pm | Permalink

    Hi Bill,
    I can’t believe it. A few weeks before your column I saw this book in our public library and picked it up. I looked interesting to me too and it is. One cautiousness I have developed for it though, is that it reminds me of the Strauss & Howe’s book Generations, which is also very interesting; or Jared Diamond’s work Guns, Germs, and Steel; or his lesser known Collapse, again very interesting. All these works are also compelling in describing a theory of why things happen like they do, for good or bad. (And they all pick out a salient theory, one that’s right under our nose that we’re just missing. But how can all these compelling theories be right? Are they just quack sociology, if that isn’t an oxymoron.
    I suppose they all address a question we all are interested in: that if we just know the right cause and effect; we, humanity, can choose what’s best for our society. Which in this work Why Nations Fail, the authors reject this “ignorance” theory. That that’s why we get into trouble, leaders just don’t know the best choices; but then the whole book is devoted to explaining the phenomena of national failure, and so how to avoid it.
    By the end of the book I wanted some quantitative data. For example is a society where the elite, the top 1% of the population, have 35% of the wealth of the society extractive? That’s the U.S. in 2012.