Q.What do you think of Francis Fukuyama’s review of your book? I checked your blog and didn’t find any response to his assessment of the short-comings of your approach. -Jack Sparrow

A. Francis Fukuyama’s review seems to miss the point.

There are several incorrect or misleading statements in it. It would be too much to go through each of them, but let’s focus on some of the more important ones.

First, he writes “They are making almost identical point to that one made in the thousand nine book by Douglass North, John Wallis, and Barry Weingast.” Our work in general, and Why Nations Fail, built on North’s seminal ideas and on North and Weingast and on North, Wallis and Weingast (NWW). But there are major differences. The most important one is about the role of politics. In our book, we argue that a framework built on the primacy of politics — political institutions being forged and changing as a result of conflict, and in turn shaping economic institutions and then innovation and investment — will go a long way. Our framework also clarifies that what we call extractive institutions are there by design. NWW put much more emphasis on economic and social factors. For example, their concept of “open access order,” far from being similar to “inclusive political institutions” as Fukuyama argues, is defined as a “social order” similar to Seymore Martin Lipset‘s “development complex” (page 3). In particular, NWW put the emphasis much more on the existence of business and other non-government organizations, impersonal exchange, and beliefs supporting cooperation in society. Though our work owes much to North and his co-authors, it is disingenious to imply that we have just re-created their argument under a different guise. In fact, NWW are very explicit that when they talk of political change, they build on our past work, in particular our earlier book, Economic Origins of Dictatorship and Democracy, as well as our earlier work.

Second, Fukuyama argues that our distinction between inclusive and extractive is “sharply bifurcated.” If by this he means that inclusive and extractive political (and economic) are defined as extreme cases, this is exactly right and it is clearly stated in the book. Most countries are in shades of gray, but it is most useful to start with the black and the white to understand what’s going on. If by this he means that we think societies and reality are fully inclusive or fully extractive, this is obviously not true as most of the book is about degrees of extraction and small steps towards inclusive institutions. Our discussion of China, which Fukuyama further comments on, is for example about this: we argue China did not start growing by becoming fully inclusive, but by taking some important — and yet limited steps — towards inclusive economic institutions.

Third, Fukuyama accuses us of not unpacking the constituent parts of inclusive and extractive institutions. He even writes: “There is for example a large literature comparing the separate impacts of a modern state, rule of law, and democracy on growth, which tends to show that the first two of these factors have a far greater influence on outcomes than democracy.” Now there are two problems with Fukuyama’s statement. First, the literature he seems to have in mind is the one on cross-country growth empirics, which sometimes runs kitchen-sink regressions including several indices at the same time. But few economists would take such regressions seriously given the endogeneity and reverse-causality concerns. Second, a large part of our book is in fact devoted to explaining why many extractive (and inclusive) aspects will travel together — because of the feedback between these different aspects.

Fourth, Fukuyama claims that China’s rapid growth invalidates our theory. Why this is not the case is discussed both in Chapter 5 and Chapter 15. We discuss the spectacular economic performance of the Soviet Union. Perhaps Fukuyama would also say that the fact that the Soviet Union grew so rapidly for over four decades invalidates the theory that markets are better than central planning in generating innovation and economic growth — let alone the fact that, subsequently, the Soviet Union crashed and burned.

Our theory certainly does not explain all sources of success and failure of nations. Nor do we claim to be the final word on this huge question. There are thus both many new and interesting approaches to be developed and many intelligent critiques of our work to be written. Fukuyama’s is not one of them.

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