Acemoglu and Robinson on 'Why Aid Fails'

Daron Acemoglu and James A. Robinson, the authors of Why Nations Fail: The Origins of Power, Prosperity, and Poverty, had an article in The Spectator last month on why aids fails.

Their main argument is that poor nations tend to be poor because the have extractive economic institutions that "sap the incentives and opportunities of the vast mass of the population and thereby keep a society poor." This not only impoverishes the poor but denies the society as a whole the full productive benefit of a large part of the population.

As far as aid goes, Acemoglu and Robinson argue:

• Recognising that poor countries are poor because they have extractive institutions helps us understand how best to help them. It also casts a different light on the idea of foreign aid. We do not argue for its reduction. Even if a huge amount of aid is siphoned off by the powerful, the cash can still do a lot of good. It can put roofs on schools, lay roads or build wells. Giving money can feed the hungry, and help the sick — but it does not free people from the institutions that make them hungry and sick in the first place. It doesn’t free them from the system which saps their opportunities and incentives. When aid is given to governments that preside over extractive institutions, it can be at best irrelevant, at worst downright counter-productive. Aid to Angola, for example, is likely to help the president’s daughter rather than the average citizen.

Therefore, they recommend that policymakers need to not only give aid to poor nations but use their financial and diplomatic clout to encourage the growth of more inclusive economic institutions.

Of course, this is easier said than done. If we recall Selectorate Theory. The survival of Leaders in small Winning Coalition political systems depend on providing private benefits to their supporters. Therefore, the extractive institutions that Acemoglu and Robinson decry are probably instrumental in providing these benefits and keeping the Leader in power. Only a fundamental change in the political system that expands the WC will change the logic of political survival from one of providing private benefits to supporters to one of providing public benefits to the society as a whole.

Of course, the case of China suggests that certain reforms can increase national income enough that private benefits to the WC can be increased while allowing the income of the nations residents to increase. China has certainly reduced poverty by a large amount while keeping the CCP in power. However, I don't know that this is the kind of reform that western democracies will want to encourage.

This leads one to wonder if China itself will export its policy experience as it engages more in Africa and whether doing so will promote economic growth among authoritarian regimes. Most of the discussion I have seen about China's role in Africa has focused on the geo-strategic and anti-democratic implications, not on economic policy spillovers.