The Singapore Economic Review, Vol. 58, No.

4 (2013) 1380009 (5 pages)

© World Scientific Publishing Company
DOI: 10.1142/S021759081380009X

BOOK REVIEW

Published 18 December 2013

by UNIVERSITY OF CALIFORNIA @ SAN DIEGO on 02/01/15. For personal use only.

Review of Why Nations Fail: The Origins of Power, Prosperity and Poverty
edited by Daron Acemoglu and James A. Robinson, New York: Crown Business, 2012.
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pp. 529.

This volume has all the ingredients to be a durable intellectual blockbuster. In a short time,
it has already set the intellectual agenda in its ambitious attempts to explain why some
nation states succeed and others fail. There can surely be no more important topic for
scholars to address. The authors are eminent academics in their fields, at the peak of
publishing careers. They come from the disciplines of economics and political science, and
weave together, seemingly effortlessly, the insights from their respective fields into a
coherent narrative. They are audacious in their academic parsimony, and their attempt to
distill a hugely complex array of development experiences and drivers of change into a
single, largely persuasive paradigm. The depth of scholarship, the absorption of centuries
of development experience, and the attention to country details are all quite extraordinary.
The volume is also highly accessible to a general readership, eschewing the sometimes
arcane methodologies and mathematics of academic social sciences in professional journals.
The volume’s pre-publication commentaries feature many leading luminaries in the
development profession, among them five Nobel laureates.
In the opening pages, the authors immediately highlight their principal objective, to
explain the huge differences in income and living standards between rich and poor
countries. They take the reader to the turmoil at Cairo’s Tahrir Square, where the protesting
Egyptians “… have the right idea. In fact, Egypt is poor precisely because it has been ruled
by a narrow elite that have organized society for their own benefit at the expense of the vast
mass of people” (p. 3). The United States, the United Kingdom and other developed
economies “… became rich because their citizens overthrew the elites who controlled
power and created a society where political rights were much more broadly distributed,
where the government was accountable and responsive to citizens, and where the great
mass of people could take advantage of economic opportunities” (pp. 3, 4).
There are 15 core chapters. Commencing with “So close yet so different,” they argue
that the basic constitutions developed in the US and Mexico were quite different, with the
former democratic and with power distributed widely. Frontier lands were broadly

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distributed (although of course indigenous peoples were dispossessed), whereas in Latin

America the land was allocated to political elites through restricted access. Thus, with
very different institutions and incentives, Mexico produced a Carlos Sim and the US a
Bill Gates.
Then Chapter 2 assesses “Theories that don’t work.” These include various explana-
tions, such as geography, soil fertility, disease (these factors lead them to discard the
theorizing of Jared Diamond), culture (the “lazy natives” and so on) and religion. The
problem with these theories is that they neglect to ask the central questions of how
decisions are made, who makes them and why.
In “The making of prosperity and poverty,” the authors introduce the central distinction
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between “extractive” and “inclusive” economic and political institutions. In the latter, states
encourage education and enterprise, while power is diffused. But importantly the state also
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has a monopoly over violence and coercion. Extractive institutions block broad-based
avenues of progress. Growth may sometimes be possible under these authoritarian regimes,
but it is risky and precarious. The political elites may switch priorities, and they may not
allow technological innovation and creative destruction.
Chapter 4, “Small differences and critical junctures — the weight of history” delves into
history. The revolution of 1688 in the UK set that country on the road toward inclusive
growth, introducing the freedom of ideas and respect for property rights. In other countries
serfdom persisted. Critical junctures seem to matter in the long sweep of history, including
the ability to take advantage of opportunities, such as those introduced by globalization.
For example, China, India and Japan all reacted differently to this opening up process.
Botswana was for decades the only sub-Saharan success story. Certainly, authoritarian
regimes can appear attractive. As outlined in “I’ve seen the future and it works,” for
example, the Soviet model long “fooled many people.” But eventually these extractive
regimes sow the seeds of their own destruction, with their lack of innovation, and their
infighting and instability.
The long-term consequences have been peoples “Drifting apart.” For example, on the
origins of European and African divergence (pp. 180, 181): “By the sixteenth century,
Europe was institutionally very distinct from sub-Saharan Africa and the Americas.
Though not much richer … [in Europe and England in particular] the feudal order had
made way most comprehensively for commercially minded farmers and independent urban
centers where merchants and industrialists could flourish.”
Next, in Chapter 7, the authors probe “The turning point.” Why did the industrial
revolution start in the UK? The explanation is because of her uniquely inclusive economic
institutions’ (p. 208), which in turn were brought about by its inclusive political institu-
tions. This was in contrast to attempts to resist the industrial revolution — “Not on our turf:
barriers to development” in empires as diverse as those in the Ottoman, Spain and China.
Part of the explanation also was in “Reversing development,” where incidentally Southeast
Asia enters the narrative for the first time. With the brutal and destructive entry of the
Dutch into the spice trade, “Dutch colonialism fundamentally changed [Southeast Asia’s]
economic and political development. The people … stopped trading, turned inward and
became more absolutist. In the next two centuries, they would be in no position to take

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advantage of the innovations that would spring up in the Industrial Revolution” (p. 250).
This European colonial expansion also explains the emergence of the dual economy model,
of Boeke, Lewis and others.
But there was also “The diffusion of prosperity” to some regions. The authors contend
that “Whether a country did embark on industrialization was largely a function of
institutions.…” (p. 299). Thus the European off-shoots of the US and Australia prospered
because of their inclusive institutions, but most other regions did not. Within Europe, the
English advance triggered change elsewhere, including the French Revolution of 1789 that
opened the way for inclusive institutions. This leads to the hypothesis in Chapter 11 of
“The virtuous circle,” including the representation of pluralist interests in parliaments, the
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slow march of democracy, the removal of slavery and pressure for a free media. But there
can equally be “The vicious circle,” including regimes established in the colonial era
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continuing into Independence. Here many country examples are dissected, mostly African,
pointing to the persistence of extractive institutions, with extortionist marketing schemes
and deeply entrenched oligarchies.
Toward the end of the volume, the authors distil their key findings. In “Why nations
fail today,” they remind us of Nobel Laureate Simon Kuznets’ quip that there are four sorts
of countries — developed, developing, Japan and Argentina. The latter puzzling country
has been a classic case of growth under extractive institutions, “ruled by a narrow elite
heavily invested in the agricultural export economy” (p. 385). Democracy has not nec-
essarily solved Latin America’s problems owing to the tendency to vote for politicians
offering extreme platforms, in part because of a sense of fatalism bred from high inequality.
But there is hope. In Chapter 14, “Breaking the mold,” they point to the special and
interesting case of Botswana and how, from very poor origins, it was able to establish
inclusive economic and political institutions, and build on its fortuitous discovery of
diamonds: “Botswana broke the mold because it was able to seize a critical juncture,
postcolonial independence, and set up inclusive institutions” (p. 413). Furthermore, China
growing rapidly after 1978, Japan after the Meiji restoration and the US South breaking out
of slavery all illustrate that “history is not destiny”.
Finally, they expound upon “Understanding prosperity and poverty.” There needs to be
a theory of why the industrial revolution commenced in the UK, then spread to Western
Europe and its off-shoots, the US and Australia. They propose a “simple theory,” operating
at two levels, to distinguish between extractive and inclusive economic and political
institutions, and then to explain why these inclusive institutions emerged in some parts of
the world and not in others. They recap that inclusive institutions enforce property rights,
create a level playing field and encourage innovation and risk taking, all underpinned by
inclusive political institutions that distribute political power widely. Extractive institutions
can of course achieve rapid growth, but it is not sustainable. They argue, for example, that
China’s rapid growth is therefore not sustainable without political and economic reform,
although authoritarian regimes may be good for the “catch-up” phase. To understand these
institutional differences across countries, “History is key, since it is historical processes
that, via institutional change, create the differences that may become consequential during

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critical junctures” (p. 432). These are tentative propositions, and they note also that “Even
greater caution is necessary in drawing policy recommendations …” (p. 436).
This process of change is unlikely to come from development agencies lecturing
countries, or from foreign aid that “is based on an incorrect understanding of what causes
poverty” (p. 453). Rather, the authors see hope in “empowerment.” They illustrate their
argument with reference to Brazil’s economic success since the 1970s. It was “not engi-
neered by economists of international organizations instructing Brazilian policy makers on
how to design better policies or avoid market failures. It was not achieved with injections
of foreign aid. … Rather, it was the consequence of diverse groups of people courageously
building inclusive economic institutions” (p. 457). How can institutions be established that
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underpin these successful transformations? Here the authors are rather cautious: “The
honest answer is that there is no recipe for building such institutions” (p. 460). But they do
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draw attention to what they see as some key ingredients: A degree of centralized order;
political institutions that translate popular views into policy; and the unfettered exchange of
information and opinions, including a free media.
There is an analytical conundrum for all researchers that this excellent volume brings
into sharp relief. Social scientists are always in search of the “grand theory,” a parsimo-
nious, uncluttered formula that guides our world view and explains a diverse array of
outcomes. The authors’ framework of extractive versus inclusive systems is intuitively
appealing. But how accurate a description of reality is it, for example in Singapore’s
neighborhood? Consider the Soeharto regime: There was egregious, family-centered cor-
ruption at the top, and yet the economy grew rapidly and it was largely “inclusive” growth,
as illustrated by the dramatic decline in poverty. In the case of Vietnam, too, the story does
not fit easily: it has been transformed from one of the poorest nations on earth to a middle
income economy in just one-quarter of a century, presided over by the communist party
determined not to share power. Similarly, Malaysia and Thailand are not easily categorized
according to this schema.
Viewed in this light, the two contrasting extremes appear more like end points of a
continuum rather than binary options. Most countries display characteristics of each, si-
multaneously exhibiting both “inclusive” and “extractive” features, with only a few outliers
that closely resemble the extremities. To illustrate their theoretical constructs, the authors
tend to select extreme examples — North Korea, Somalia, the Congo — but these are
surely special cases, of limited relevance to the great majority of “normal countries.” So the
real question in judging countries is, arguably, where they lie along the spectrum, and
the extent to which this location helps to explain their development outcomes. Moreover,
the reader — at least this one — would like more guidance on the factors that explain
turning points in countries’ development trajectories. Again with reference to Southeast
Asia, why were there such dramatic changes in Indonesia in 1966, Vietnam in 1986 and
Myanmar in 2012, with far-reaching implications for the welfare of their peoples, at least in
the first two?
To sum up, this is an awesome, inspirational and provocative volume, which will
certainly shape the development debate for years to come. The authors have also displayed
admirable entrepreneurship in establishing a website where reviews, commentaries and

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debates are collected. These include the fierce exchange between them and Jeff Sachs
following the latter’s review article in the September/October 2012 issue of Foreign
Affairs. See http://whynationsfail.com.

HAL HILL
Australian National University
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