Why Nations Fail: The Origins of Power, Prosperity, and Poverty

by Daron Acemoğlu

George H. W. Bush summarized U.S. policy toward Chinese democracy as “Trade freely with China and time is on our side.” The idea was that as China traded freely with the West, it would grow, and that growth would bring democracy and better institutions in China, as modernization theory predicted.

YOU CAN’T ENGINEER PROSPERITY

In Argentina and Colombia, central banks were also made independent in the 1990s, and they actually did their job of reducing inflation. But since in neither country was politics changed, political elites could use other ways to buy votes, maintain their interests, and reward themselves and their followers. Since they couldn’t do this by printing money anymore, they had to use a different way. In both countries the introduction of central bank independence coincided with a big expansion in government expenditures, financed largely by borrowing.

The story of health care delivery in India is one of deep-rooted inefficiency and failure. Government-provided health care is, at least in theory, widely available and cheap, and the personnel are generally qualified. But even the poorest Indians do not use government health care facilities, opting instead for the much more expensive, unregulated, and sometimes even deficient private providers. This is not because of some type of irrationality: people are unable to get any care from government facilities, which are plagued by absenteeism.

Villagers in a remote district in the central valley of Afghanistan heard a radio announcement about a new multimillion-dollar program to restore shelter to their area. After a long while, a few wooden beams, carried by the trucking cartel of Ismail Khan, famous former warlord and member of the Afghan government, were delivered. But they were too big to be used for anything in the district, and the villagers put them to the only possible use: firewood. So what had happened to the millions of dollars promised to the villagers? Of the promised money, 20 percent of it was taken as UN head office costs in Geneva. The remainder was subcontracted to an NGO, which took another 20 percent for its own head office costs in Brussels, and so on, for another three layers, with each party taking approximately another 20 percent of what was remaining. The little money that reached Afghanistan was used to buy wood from western Iran, and much of it was paid to Ismail Khan’s trucking cartel to cover the inflated transport prices. It was a bit of a miracle that those oversize wooden beams even arrived in the village.

But most of the waste resulting from foreign aid is not fraud, just incompetence or even worse: simply business as usual for aid organizations.

Countries such as Afghanistan are poor because of their extractive institutions—which result in 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. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and is unlikely to be delivered where it is supposed to go.

Authoritarian regimes are often aware of the importance of a free media, and do their best to fight it.

The current extractive institutions in China are also crucially dependent on Chinese authorities’ control of the media, which, as we have seen, has become frighteningly sophisticated. As a Chinese commentator summarized, “To uphold the leadership of the Party in political reform, three principles must be followed: that the Party controls the armed forces; the Party controls cadres; and the Party controls the news.”