What Bill Gates Got Wrong About Why Nations Fail

Our recent book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, received the harshest reviews from those who see geography and culture as the root causes of poverty, and enlightened leaders -- or even more enlightened outside donors and organizations -- as the keys to economic development. Perhaps unsurprisingly, given his dedication to international aid, billionaire foundation chief Bill Gates falls into this category: His Feb. 26 review of our book was particularly uncharitable. Unfortunately, however, it was also dead wrong on many counts. COMMENTS (0) SHARE: Share on twitter Twitter Share on reddit Reddit inShare15 Bookmark and Share More... Gates's review is disappointing, but not just because he disagrees with us. As academics, we expect that. Research is all about arguing and contradicting, finding new pieces of evidence, developing new concepts and perspectives, and getting closer to the truth. Alas, Gates fails in this endeavor. His inability to understand even the most rudimentary parts of our thesis means that his review fails to invite constructive argument. Nonetheless, we feel compelled to respond because of the undue attention the review has generated. To start with, Gates makes some pretty baffling statements about our book, such as his assertion that "important terms aren't really defined." Actually, all of the major concepts we use in the book are defined; one just needs to read the book. Other assertions demonstrate not only that Gates is unfamiliar with the academic literature, which is understandable, but that he actually did not bother to consult the bibliographic essay and the references at the end. He writes, "The authors ... attribute the decline of Venice to a reduction in the inclusiveness of its institutions. The fact is, Venice declined because competition came along ... Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for their loss of the spice trade." This is just bad history. Venice didn't decline because of the loss of the spice trade. If that were the case, the decline should have started at the very end of the 15th century. But the decline was already well underway by the middle of the 14th century. More generally, research by Diego Puga and Daniel Trefler shows that Venice's fortunes had nothing to do with competition or the spice trade. Likewise, Gates seems to think that the Maya declined because of the "weather." Though there is certainly scholarly dispute over why Maya civilization decayed, to our knowledge no reputable scholar argues that it was due to the weather. Instead, most scholars emphasize the role of inter-city warfare and the collapse of Mayan political institutions. Nor does the book, as Gates would have it, "overlook the incredible period of growth and innovation in China between 800 and 1400." We discuss that period, and explain why it didn't translate into sustained economic growth (see Chapter 8, in particular, pp. 231-234). Gates also says at one point that our book "refers to me in a positive light." Sorry, we do no such thing. We point out that Gates, just like Mexican telecom mogul Carlos Slim, would have loved to form a monopoly. He tried and failed. What our book shows in a positive light are the U.S. institutions, such the Department of Justice, that stopped Gates and Microsoft from cornering the market. We say, "sadly there are few heroes in this book." Bill Gates was not one of them. On a related note, Gates writes that that our book is "quite unfair to Slim." Mexico, he contends, is "much better off with Slim's contribution in running businesses well than it would be without him." But once again, this reveals a lack of understanding of our main thesis, which isn't that Carlos Slim is evil and the root cause of Mexico's problems. We argue that ambitious entrepreneurs like Gates or Slim will do good for society if inclusive institutions constrain them, and that they will mostly serve their own interests otherwise. So the right counterfactual to Slim isn't no Slim, but a Mexico in which people like Slim (and hundreds of other talented would-be entrepreneurs who never got the opportunity to flourish because of the country's poor education system or because of its terrible competition laws) operate within the context of inclusive economic institutions and therefore enrich their society to a much greater extent. For the record, however, before cheerleading Slim, Gates might want to read the OECD's 2012 report on telecommunications policy and regulation in Mexico, which estimates the social costs of Slim's monopoly at U.S. $129 billion and counting. (The latest Forbes list of the world's richest people puts Slim's net worth at U.S. $79 billion). So in what way is Mexico better off exactly? Gates also complains in his review that we "ridicule modernization theory." We don't. We try to articulate an alternative theory of extractive growth -- which takes place under extractive, authoritarian political institutions -- where countries grow because their leadership controlling these extractive institutions feels secure and able to control and benefit from the growth process. This occupies a large part of our book because it is a central feature of economic and political development over the last several thousand years. Our theory suggests why extractive growth doesn't automatically lead to more inclusive institutions: Growth is made possible, at least in most cases, by the leaders and dominant elites' belief in their relative security. Gates is right that there are examples like South Korea (which we discussed in the book) that have transitioned to more inclusive institutions following a period of extractive growth. But South Korea's transition to democracy in the 1980s was in no way automatic. It came about as a result of protests by students and workers against the military regime, and only after the repression by the military failed to quell the unrest. More importantly, as a cursory look at our bibliographic essay would have shown, our dismissal of modernization theory isn't based on a few case studies or a gut feeling, but on careful econometric evidence. See, for example, our papers titled "Income and Democracy" and "Re-evaluating the Modernization Hypothesis, both jointly authored with Simon Johnson and Pierre Yared. At another point in his review, Gates contends that economic growth is "strongly correlated with embracing capitalistic economics." Yet it is far from clear what he means by "capitalistic economics." Were Egypt's economic institutions during the presidency of Hosni Mubarak -- after he liberalized the economy and reduced the role of the state -- capitalistic? Most people refer to this as "crony capitalism," but perhaps this is all part of capitalist economics? Or consider the long dictatorship of Porfirio Diaz in Mexico in the 19th century, which eradicated many of the remaining restrictions of the Spanish colonial system, established an economy based on private enterprise (especially of his cronies), and "freed" markets (including the creation of the market for coerced labor). Was that capitalistic? What about South Africa under apartheid, based on private enterprise by whites, but disempowering and exploiting the majority blacks? Perhaps Gates himself should have more carefully defined his terms. The concept of capitalism doesn't feature in our book for good reason. It muddies the waters. Our point, by which we stand strongly, is that what distinguishes societies isn't whether they are centrally planned or capitalist, but whether they are extractive or inclusive. Though centrally planned economies are by their nature extractive, so are many "capitalist" economies. Finally, Gates takes issue with our supposedly "huge attack on foreign aid," citing in particular our "misleading" claims about Afghanistan. But again, he would have benefited from looking at the bibliography. The finding that about 10 percent of foreign aid goes to intended recipients isn't from Afghanistan, as he seems to think, but from Uganda, which was not a war zone but a peaceful country at the time of the 2004 study we cite. More importantly, there is now considerable evidence showing that foreign aid in the postwar era has had little positive impact on economic development, which Gates chooses to ignore (see, for example, William Easterly's White Man's Burden). Denying this is really putting your head in the sand. But even sadder is the fact that we don't even argue against foreign aid. What we argue in the book is that aid -- the little of it that reaches its target -- does a lot of good for poor people. But it is not the solution to the real problems of development. Instead of endlessly asserting empirically untenable positions, we all need to move on and find more constructive ways to engage with poor countries. Foreign aid should certainly be part -- but not all -- of this engagement. Gates does correctly point out that much is missing from the framework in our book. Even if underdevelopment isn't just a problem of bad leadership, and even if its solution won't come from enlightened leaders, a more complete framework should indeed integrate the behavior of leaders that play an important role in state building, organizing collective action, and articulating visions for social change. Examples of such leaders include Tunisia's Habib Bourguiba and Singapore's Lee Kuan Yew, both of whom undoubtedly influenced the course of their country's development. But we chose to emphasize institutions in our book because for leadership to have a lasting impact, it must become institutionalized via inclusive political institutions. After several decades of promoting education and developing a Tunisian national identity, for example, Bourguiba, who ran Tunisia as a dictator, was elbowed out of power by a very different sort of strongman, Zine El Abidine Ben Ali, who was far more interested in using his power to loot the country's resources. But Gates doesn't seem to be interested in such subtleties, preferring instead to criticize every aspect of Why Nations Fail. Some say that all publicity is good publicity, and we should be thrilled to have Bill Gates review our book. Publicity is nice. But we spent more than 15 years researching, writing, and thinking about these topics, and we would be thrilled if the reviewers actually read and understood the book in the first place. Then we could have a constructive debate about the root causes of poverty in the world.

Why Nations Fail: The Origins of Power, Prosperity, and Poverty (Book Review)

Normally, I’m fairly positive about the books I review, but here’s one I really took issue with. Why have some countries prospered and created great living conditions for their citizens, while others have not? This is a topic I care a lot about, so I was eager to pick up a book recently on exactly this topic. Why Nations Fail is easy to read, with lots of interesting historical stories about different countries. It makes an argument that is appealingly simple: countries with “inclusive” (rather than “extractive”) political and economic institutions are the ones that succeed and survive over the long term. Ultimately, though, the book is a major disappointment. I found the authors’ analysis vague and simplistic. Beyond their “inclusive vs. extractive” view of political and economic institutions, they largely dismiss all other factors—history and logic notwithstanding. Important terms aren’t really defined, and they never explain how a country can move to have more “inclusive” institutions. For example, the book goes back in history to talk about economic growth during Roman times. The problem with this is that before 800AD, the economy everywhere was based on sustenance farming. So the fact that various Roman government structures were more or less inclusive did not affect growth. The authors demonstrate an oddly simplistic world view when they attribute the decline of Venice to a reduction in the inclusiveness of its institutions. The fact is, Venice declined because competition came along. The change in the inclusiveness of its institutions was more a response to that than the source of the problem. Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for their loss of the spice trade. When a book tries to use one theory to explain everything, you get illogical examples like this. Another surprise was the authors’ view of the decline of the Mayan civilization. They suggest that infighting—which showed a lack of inclusiveness—explains the decline. But that overlooks the primary reason: the weather and water availability reduced the productivity of their agricultural system, which undermined Mayan leaders’ claims to be able to bring good weather. The authors believe that political “inclusiveness” must come first, before growth is achievable. Yet, most examples of economic growth in the last 50 years–the Asian miracles of Hong Kong, Korea, Taiwan, and Singapore–took place when their political tended more toward exclusiveness. When faced with so many examples where this is not the case, they suggest that growth is not sustainable where “inclusiveness” does not exist. However, even under the best conditions, growth doesn’t sustain itself. I don’t think even these authors would suggest that the Great Depression, Japan’s current malaise, or the global financial crisis of the last few years came about because of a decline in inclusiveness. The authors ridicule “modernization theory”–which observes that sometimes a strong leader can make the right choices to help a country grow, and then there is a good chance the country will evolve to have more “inclusive” politics. Korea and Taiwan are examples of where this has occurred. The book also overlooks the incredible period of growth and innovation in China between 800 and 1400. During this 600-year period, China had the most dynamic economy in the world and drove a huge amount of innovation, such as advanced iron smelting and ship building. As several well-regarded authors have pointed out, this had nothing to do with how “inclusive” China was, and everything to do with geography, timing, and competition among empires. The authors have a problem with Modern China because the transition from Mao Zedong to Deng Xiaoping didn’t involve a change to make political institutions more inclusive. Yet, China, by most measures, has been a miracle of sustained economic growth. I think almost everyone agrees that China needs to change its politics to be more inclusive. But there are hundreds of millions of Chinese whose lifestyle has been radically improved in recent years, who would probably disagree that their growth was “extractive.” I am far more optimistic than the authors that continued gradual change, without instability, will continue to move China in the right direction. The incredible economic transition in China over the last three-plus decades occurred because the leadership embraced capitalistic economics, including private property, markets, and investing in infrastructure and education. This points to the most obvious theory about growth, which is that it is strongly correlated with embracing capitalistic economics—independent of the political system. When a country focuses on getting infrastructure built and education improved, and it uses market pricing to determine how resources should be allocated, then it moves towards growth. This test has a lot more clarity than the one proposed by the authors, and seems to me fits the facts of what has happened over time far better. The authors end with a huge attack on foreign aid, saying that most of the time, less than 10% gets to the intended recipients. They cite Afghanistan as an example, which is misleading since Afghanistan is a war zone and aid was ramped up very quickly with war-related goals. There is little doubt this is the least effective foreign aid, but it is hardly a fair example. As an endnote, I should mention that the book refers to me in a positive light, comparing how I made money to how Carlos Slim made his fortune in Mexico. Although I appreciate the nice thoughts, I think the book is quite unfair to Slim. Almost certainly, the competition laws in Mexico need strengthening, but I am sure that Mexico is much better off with Slim’s contribution in running businesses well than it would be without him. http://www.thegatesnotes.com/Books/Personal/Why-Nations-Fail?WT.mc_id=03_1_2013_WhyNationsFail_fb&WT