Vicious Circles

Helping the poor in the developing world has long been a central concern of Catholics. Catholic schools collect money for the missions; parishes sponsor sister communities in poor countries; organizations like Catholic Relief Services work on ground-level projects while advocating for increased foreign aid from governments. Supporting international charities and assisting efforts in developing countries are presented in homilies both as an ethical obligation and a source of spiritual growth.

Unfortunately, a large and growing body of research and experience shows that traditional ideas about how to help the poor in the developing world may be misguided or even harmful. Why Nations Fail assembles the best of this new research in a highly readable account. Co-authored by an MIT economist and a Harvard political scientist, it is a wide-ranging study of why some countries have developed and others have failed. Full of deeply researched historical and contemporary case studies, grounded in rigorous social science, it presents a fascinating and challenging account.

Recognizing that development cannot be measured only by GDP growth, the authors instead use a concept that assesses multiple dimensions of human well-being. In the process, they helpfully dismiss a number of shibboleths. Drawing on a plethora of comparative case studies, Why Nations Fail argues that development is not determined by geography or culture; countries are not doomed to poverty by being tropical or landlocked, or by not being Protestant. Development does not require Westerners who bring things and build things. Nor can failures of development be explained by lack of technical or engineering knowledge—the assumption behind much foreign aid.

Instead, the authors argue, the key to development lies in the existence of stable and inclusive institutions, both economic and political. Countries improve their material well-being when they are able to create an environment in which technological innovation can occur and benefit the population as a whole. That environment includes secure property rights, effective contract enforcement and dispute resolution, broad opportunities for education, incentives for innovation (or at least a lack of disincentives), constraints on the exercise of power, and basic levels of trust and cooperation. The authors contrast inclusive institutions with the failed state’s typical lack of any unifying political and economic institutions, and with the extractive institutions through which elites frequently control power and resources for their own benefit. They develop their argument by comparing such dramatically disparate neighbors as South and North Korea, Botswana and Zimbabwe, and Nogales, Arizona, and Nogales, Mexico.

Self-evident though it may seem, a focus on economic and political institutions has come only recently to development experts, who have tended to place their hopes on technical and engineering investments or on macroeconomic policies. Lately, however, driven by the failures of World Bank and IMF-inspired development efforts on the ground and econometric analyses in the university, mainstream development economists have come around to the view that institutions and politics matter and that foreign aid is no substitute for local capacity.

Alas, these new insights do not lead to straightforward or simple prescriptions for anyone—whether countries, development institutions, nonprofits, or donors and volunteers. Poverty, like prosperity, turns out to be much more complex than many had assumed. The second theme of Why Nations Fail is that of historically persistent vicious and virtuous circles. Why, the authors ask, is household income in Nogales, Arizona, three times that in Nogales, Sonora—two cities separated by a fence? Why do the two cities have different levels of life expectancy, infant mortality, education, and crime? Why do their roads and buildings look so different? The answer is that while the two cities are obviously similar in geography and culture, they arose in countries with very different political and economic institutions. During the time of European colonization, one might well have predicted that Mexico would eventually prove the much richer state. But the institutions that the Spanish set up in Mexico—institutions designed to enrich the conquerors and local elites—persisted through independence to the detriment of economic and political innovation, while the popular challenge to British rule in the north set up a virtuous circle of relatively broad-based politics and innovative and competitive markets.

The story of the United States and Mexico is more complicated, of course, and the authors tell it in engaging detail. They tell other comparative stories as well, developing case by case a compelling argument for the importance of inclusive and broad-based institutions in both economy and polity. Their view of the interrelationship of such institutions has interesting implications. They concede that development can indeed take place under authoritarian regimes, China being the most notable example. But they argue that economic growth will slow if the political system does not become more inclusive, citing the inevitable dampening of incentives and innovation necessary for continued growth that occurs when elites extract and control the bulk of the nation’s wealth. They also argue that, for similar reasons, rampant economic inequality slows development—a lesson that the United States should take to heart.

So what are the do-gooders of the world to learn from the research and analysis put forth in Why Nations Fail? One lesson is that—apart from humanitarian crises, when outside resources and personnel can indeed be life-saving—foreign aid has a very mixed record. When it supports corrupt and autocratic governments, or when it substitutes outside expertise and foreign labor for the development of local capacity, our “help” can actually be harmful. It can also fail by offering technical or engineering solutions to what are essentially political problems. These mistakes typify all forms of Western aid—large and small, governmental and NGO, religious and secular. At all levels, these organizations need to recognize that whatever assistance we offer must promote the development of local capacity and institutions.

Second, those efforts cannot ignore governments. Relief and development organizations often face a dilemma, since the places most in need tend to be those with the most awful governments. Organizations can bypass such governments to provide goods and services directly to the people, but this strategy, however necessary in some humanitarian crises, does not address the underlying structural and political barriers to development. Thus those who would help must ask themselves: Is the help reinforcing bad governments? Might other forms of assistance help bring about more inclusive and fair institutions?

Finally, aid organizations need to embrace efforts directed at empowerment and participation. At the micro level it is important for small aid projects and sister-parish efforts to recognize that full involvement of the local community in a project trumps getting the project done quickly or efficiently. At the national level, diplomatic and aid efforts must insist on broad participation and inclusion—even, again, at the potential cost of efficiency or stability. Donors should promote projects—and advocate policies—that incorporate these principles.

Like the authors of Why Nations Fail, I have no desire to undermine sincere efforts by rich countries and their citizens to alleviate the suffering of the poor. Aid in response to natural and other humanitarian disasters is a necessity. Avoiding harm and exploitation is an obligation. But the hard work of development needs to learn from research and experience. This book is an important contribution to that learning.

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