Friday, October 12, 2012

Why Nations Fail - the most important book in economics


Why Nations Fail may be most important economics book of the decade. I waited too long to read this ambitious piece of research. The issue of how nation states help to generate growth is one of the most fundamental questions in economics. Look at the problems in the US, EU, and any of the emerging markets and you realize that institutions matter. If you can determine the drivers of growth and the factors which lead to successful nations, you will be able to make the lives of billions much better. Everyone lives in a nation state, so the structure of nations will effect the wealth and consumption of everyone.

The premise of this work is that political and economic structures matter. You cannot talk about growth without discussing the institutions surrounding the growth. Capital and labor are not constraints, political institutions are the constraints. 

The example the authors provide are very compelling. Look at the difference between North and South Korea. Same culture and geography but very different impact on the livelihood of people in each country. Look at the difference between those living north or south of the Rio Grande between the US and Mexico. Same culture. Same geography but very different income levels. 

Countries are not predestined to failure. They have the ability to be successful if there are the right institutions. There needs to be property rights. More importantly or more fundamental, there needs to be democracy or political institutions which do not lead to a ruling class exploiting the people and resources that are available within the country. These are all themes that have been discussed by some of the leading political economists, but there has not been a work that has matched the political theory with data and history the way done with this single book.

The importance of this book transcends the history of emerging markets and can be useful for looking at the OECD countries. The United Sates may fail if it does not take the message of the authors to heart. The same applies to Europe.

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