Why Nations Fail

The Origins of Power, Prosperity and Poverty

Saurav Anand M2021DS039

Why Nations Fail : The Origins Of Power, Prosperity And Poverty

By – Daron Acemoglu and James A. Robinson

Why Nations Fail is an excellent book for budding economists, public policy officials, social
activists and anyone who wants to understand the pattern and reasons of inequality across the
world. The book is engagingly written for amateur readers and has been widely appreciated,
the book was shortlisted for the Financial Times Business Book of the Year Award (2012),
and it was awarded Lionel Gelber and Arthur Ross Book Award in 2013. Daron Acemoglu
and James A. Robinson, are well known in the field of economics. Daron Acemoglu has been
teaching at MIT since 1993 and is a recipient of awards like the John Bates Clark Medal
(1993), John Von Neumann Award (2007), BBAV Foundation Frontiers of Knowledge Award
(2016). The other writer James A Robinson is a Professor of Global Conflict at the University
of Chicago and has authored several other books.

In this thesis, the authors have tried to explain and answer the complex question of
inequality, poverty, and prosperity across the world. According to Acemoglu and Robinson,
the most essential factor in the growth and development of a society is the way its political
and economic institutions are established and function. The authors have tried to explain this
through a comparative study of historical examples like the establishment of a form of
governance in USA, Mexico, England and Latin America, Russia, Africa, Japan and a few
more. They have tried to explain that societies that have democratic institutions and plural are
more progressive. It represents a large proportion of the population, in such societies, people
have an incentive to progress. At the same time, those forms of societies that are autocratic
have shown lesser growth. The autocratic government is not inclusive and only represents a
few elites and protects their interests; such societies are also politically less stable. For
example, there were 52 presidents in Mexico between 1824 and 1867.

Acemoglu and Robinson have divided political and economic institutions into two classes,
Inclusive Institutions and Extractive institutions. According to the Daron and James Inclusive
economic institutions are pluralistic in nature and represent every sections of the society,
everyone has an opportunity to be part of decision-making, and there is a restriction on abuse
of power. A centralized system is maintained through the rule of law and democratic
participation. Property rights, public services, market support and regulation, and ease to
enter the market are a few important characteristics of inclusive institutions. Inclusive
societies achieve a higher level of growth because it attracts investment in the form of labor
and capital, leading to innovation. Not only inclusive institutions more transparent, but also
they are more stable; thus, they provide a peaceful environment for the development of trade
and commerce. Inclusive institutions also provide support and an environment conducive to
the growth of education and technology, which multiply the country's efficiency. To explain
inclusive institutions, authors have given examples of the United States Of America, England,
Western Europe, Japan, and Singapore. Whereas extractive economic institutions only serve a
few elites in the country, as the names suggest, extractive institutions function in a way to
drive maximum benefits from the general population for the elites. In extractive institutions,
public participation in the government is minimal, and the power is concentrated in a few
hands, and therefore, such institutions are mostly autocratic and lack the rule of law.
Sometimes extractive institutions resort to violence and covert operations to maintain their
hegemony. In extractive institutions, property rights are insecure and it’s very difficult to
enter the market as the level playing field is not even and openly supports a few elites. In
such a form of government, people don't see any incentive in their outcome, and hence such
societies show lesser growth and development than inclusive plural societies. Apart from that,
extractive societies are less stable politically, whereas inclusive are mostly unstable. Authors
have used the example of Congo, North Korea, Mexico, Austro Hungry, and Latin America to
explain extractive institutes.

Acemoglu and Robinson argue that extractive economic and political institutions are
complementary in nature and either cannot survive alone. According to the authors, elites in
the extractive political system can control and influence the economic institutions for their
benefit by creating a barrier for others and ease for themselves. To explain, these authors have
given the example of Latin America in the colonial period, how the colonial powers
controlled the political institutions and used them to gain wealth and power. Thus, to
understand the widespread disparities it is important to understand the nature of political
institutions in a country and situations which led to the establishment of government. Authors
have also highlighted the importance of a Centralised democratic structure for the welfare of
people; according to them- The distribution of power leads to chaos (page 80). This has been
explained with the example of Somalia that how the lack of a centralizing power has led to
chaos in the country.

In chapter 1 (So Close and Yet So Different), Acemoglu and Robinson have done a
comparative study of Nogales, a small town situated on the border of the USA and Mexico.
However, the origin, geography, ethnicity of the city is the same, but later it divided into
Nogales (Arizona) and Nogales( Sonora). Through Nogales, authors have tried to explain the
importance of Inclusive institutions in the growth of a country and rejected theories of
geography, climate, ethnicity in development. In this chapter, the authors have explained the
historical factors that led to the form of government in the USA, Mexico, and Latin America.
Authors have briefly explained the steps colonial government took like Encomienda’s and
slavery and how they affected the societies in the long term. According to Daron and James,
countries that were inclusive and successful in incentivizing their people reaped the benefit of
the Industrial Revolution, for example, England. Chapter 1 is vital because authors have tried
to establish their theory of inclusive and extractive institutions in the chapter. In chapter 2
(Theories That Don’t Work), the authors have explained that theories of ethnicity, geography,
climate, and ignorance cannot explain the pattern of growth and development. They have
given comparative examples of Nogales Arizona and Nogales Sonora, South and North
Korea, Singapore, Protestant, and Catholic to explain the inefficiency of these theories. It is
essential to understand the political pattern in a country. Chapter 1 and Chapter 2 can be
considered as the most critical chapters in the sense that the authors give us an insight on the
importance of Inclusive institutions for development and have at the same time contradicted
the older theories.

In chapter 3 (The Making of Prosperity and Poverty), Acemoglu and Robinson have
explained the effects of ruling institutions on North and South. They have tried to explain that
how inclusive economic institutions are more stable and creative. Authors have explained
through the example of North Korea how concentrating power in one hand can lead to an
Autocratic government and termed it as Absolutist institutions, which are neither stable nor
prosperous. In chapter 4 (Small Differences and Critical Junctures: The Weight of History),
the authors have tried to explain through the example of the Black Death that how it affected
the political institutions in Europe. There was a vast difference in the societies of eastern and
western Europe how the western Europe became inclusive whereas eastern aristocracy
became more powerful and extractive.

According to authors, extractive institutions can show growth for some time because elites
who control the economy and power sometimes invest to gain back from it. However, such
growth is not sustainable as it is based on existing technologies and not innovation, and also
competition for power between elites can lead to instability. Acemoglu and Robinson have
explained this in Chapter 5 with examples of the Soviet Union (Stalin), China and King
Shaam, and the Neolithic revolution. Acemoglu and Robinson have explained why soviet
growth under Stalin could not survive, and the growth of China is unsustainable.
In Chapter 6, with the example of Venice and Rome, the authors illustrate how progressive
and inclusive changes in political and economic institutions are not permanent, and that they
can be reversed in a matter of a few years. Such reversals then unsurprisingly lead to a
decrease in virtues and increases in vices in society. Political and economic freedoms take a
backseat and instead, a strong centralization of power and decision-making eventually finds
its way into economic institutions, and these institutions take an extractive form.

In Venice, legal innovations such as commenda led to some upward mobility in Venetian
society. A new economic elite was formed, that challenged the then existing political elite,
and asked for a wider power-sharing arrangement. However, they were met with resistance,
and the decline of political institutions was later met with a similar decline of economic
institutions in Venice.

Rome, when it was a republic, with relatively inclusive political and economic institutions
also saw a phase of economic growth. However, they too soon turned extractive which led to
its eventual decline.

Later, in England, after the fall of the Roman empire, and rise of the new feudal society,
conditions were created for a new phase of history. By no means is history predetermined,
however, there are certain patterns that one can identify in hindsight. And after the fall of the
Roman empire, similar conditions prevailed across Europe, which led to the divergent
European Path of development.

In the next Chapter, Chapter 7, the authors pick up the theme of development of political and
economic institutions, situating in England – the site of the Industrial Revolution. In
examining the causes and conditions for the emergence of Industrial Revolution, they take us
to the England after the fall of the Roman empire. The political vacuum created by the end of
an empire was soon filled by feudal lords in England. At the helm remained the king.
However, as was the case with the Tudors and the Stuarts, the monarch tried to centralize all
political and economic power to himself. This was met with resistance, and after a failed
attempt at reform by Oliver Cromwell, the Glorious Revolution of 1688 laid the foundation
of an inclusive political structure - where the monarch ceded much power to the Parliament.

The authors emphasize that creative destruction – where the new technology replaces the old
– affects not just the distribution of income and wealth, but also the distributions of political
power. Hence, it is often those in positions of power – the elite – who are opposed to new
technologies.
The Parliament, with its new powers, expanded the capacity of the State and invested heavily
into the economy. At its peak, the state expenditure was as high as 10% of the economy.
Freeing of political institutions, stable property rights, removal of barriers to trade and
unnecessary taxes led to the emergence of a new economic class of entrepreneurs. With new
technologies that revolutionized textiles, transport, energy and numerous other sectors,
through creative destruction, a sustained economic growth was achieved in England. All of
this was possible only because of inclusive political and then economic institutions.

Why did the Industrial Revolution fail to take off in some countries? While exploring
answers to this question in Chapter 8, the authors argue, using two prominent examples of
Spain and Somalia, that having either centralized political institutions or inclusive political
institutions is not adequate to fire up economic growth.

The different group elite fear centralization of State power as it may lead to absolutism and
lead to the diminution of their own political power. While those with a centralised State will
fight new technologies and the process of creative destruction as it may again lead to
dissemination of political and economic power.

At the critical juncture of Industrial Revolution, Spain did have centralized institutions, but
they were extractive in nature. In the case of Somalia, the political institutions were inclusive
in nature, however, they were not centralized, which created constant conflicts. Therefore, for
sustained economic growth and prosperity, both of the conditions have to be fulfilled.

In Chapter 9, the authors explain how Europeans impoverished their colonies. They do this
principally with the examples of the Moluccan islands in Indonesia, slave trade in West
Africa, and the economy of South Africa.

The Portuguese first tried to capture the spice trade in the city of Melaka with the goal of
monopolization. But they failed because many other absolutist states in the region were
trading in spices. The Dutch later followed, and when they too could not secure a monopoly
on the trade of clove, they committed genocide of the natives and started a form of plantation
slavery. With the creation of such extractive institutions, the Europeans sowed the seeds of
underdevelopment in these colonies.

Although slavery had ended under feudalism in Europe, it still existed in Africa. The
Europeans took advantage of this and carried millions of these slaves from Africa to their
colonies in Americas. The African leaders were paid with guns and ammunition. In such
societies without any centralised authority, this led to an increase in violence among the
native Africans. After the end of slave trade, the enslaved people in Africa were used to
extract other commodities such as rubber, palm oil and ivory. Thus, extractive institutions
were created in these societies.

South Africa managed to avoid slave trade to a large extent. Europeans settled in the
temperate climate but did not engage with the native Xhosa tribe. But as the Europeans
ventured further inland, conflicts took place between the native Xhosas and the Dutch and
English settlers. But over time, colonialism in South Africa experienced an economic boom.
The conditions of the natives also began to increase as they embraced new technologies and
began to trade with the Europeans. They began to cultivate their own lands. However, soon
the Europeans reversed these improvements, as they faced competition from the native
farmers. Under the Native Lands Act of 1913, 87% of land was reserved for the Europeans.
The natives were “freed” from their lands and this created a cheap source of labour for the
European businesses in South Africa. A dual economy was imposed on the population, where
Europeans depended on cheap labour of the natives and this laid the foundation of apartheid.

Thus, extractive institutions were created in the colonies, which in turn caused
underdevelopment.

The authors try and explore the different paths to prosperity taken by different parts of the
world in the tenth Chapter.

Starting with Australia, where convicts from Britain were sent off as punishment, and in
conditions initially similar to that of the United States, political and economic institutions
took an early root. The guards and convicts developed an economic arrangement beneficial to
both, and although there were some obstacles, inclusive political institutions followed over a
period of time, allowing for industrialization and economic growth in the continent.

The French Revolution took a different path than that of Britain. The Third Estate – the
masses of people – revolted against the First and Second Estates – the clergy and the
aristocracy, who enjoyed all the privileges in the feudal system. They led the overthrow of
feudalism in France, and although a phase of turmoil followed, the French revolution laid the
foundation for inclusive political and economic institutions, which helped France participate
in Industrialisation and economic growth in the 19 th Century. As it spread across Europe, the
French Revolution also helped the Jewish people attain equal rights in European societies.
Similarly in Japan, the Meiji Restoration helped reform the extractive absolutist rule in Japan.
It ended feudalism and established inclusive institutions in the country. This helped transform
Japan from a feudal society and allowed it to industrialize in a rapid way. Countries which
were able to industrialize in the 19th Century are today prosperous and those who could not
are still poor. In chapter 11, authors introduce new concepts of the virtuous circle and the vicious
circle. The experiences of UK and USA have been again presented to explain the former. The
inclusivity politics practiced today in these countries turned them into successful global power with
thriving economy. This inclusivity is direct result of virtuous circle and rule of law. The authors have
asserted that glorious revolution of 1688 and American independence did not automatically
empower every citizen. The process was lengthy and arduous in England as attempts were made to
undo the gains of revolution. The hesitancy of the new power bloc to further increase the base of
democracy is prime example of pluralism always being a work in progress. In England, considered as
birthplace of modern democracy, Authors have found a perfect role model to put across their point.
The evolution of a backwater into an imperial behemoth is also a study in the power of inclusive
institutions and economic freedom. The Absolutism as a from of governance stifles innovation and
generates wealth only for few. The English progress is a domino effect of knocking down absolutism.

The virtuous circle and rule of law are interconnected. The former is responsible for persistence of
inclusive economic and political institutions and the later puts the lid on accumulation of power by
new power bloc. It is rule of law that supports the opposition and every other democracy watcher
who can raise their voice if any threat to inclusivity arises. The juxtaposition of successful nations
with the failed ones is the hallmark of this book. Authors have identified set of patterns found in
both. The failed nations are product of extractive institutions sustained on vicious circle. The authors
have identified countries from Africa and Latin America to prove their vicious circle theory which is
basically unconstrained power exercised by few to control resources and suppressing any opposition
to their regime. The rulers in these countries do favor growth and development but the beneficiaries
are limited number of people. Examples of Sierra Leone, Argentina, Venezuela, Uzbekistan,
Guatemala, Egypt and even Southern America have been used to demonstrate the power of vicious
circle. It is harder to break this circle as there is huge incentive to keep the regime of extractive
institution alive.

The decolonization of 20th century brought fresh hope to the people of global south. The colonial
powers in Latin America and Africa were basically a giant extractive machine. The book has assailed
the occupation of resource rich poor countries and described in detail the structure of loot put in
place by European power but they have not written on the linkages between inclusive political
institutions of western Europe and colonialism. To know about the reaction of civil society and
intelligentsia when their fellow country men were on rampage in other parts of the world would
have been interesting. The decolonization did not bring any respite either as the local ruler who took
the baton from their colonial overlords were equally rapacious.

One of most enlightening part of the book is USA’s evolution from being a British colony to an
incredible democracy. The tussle between Franklin Roosevelt (FDR) and judiciary holds enormous
relevance in today’s time. FDR’s took many initiatives to revive the economy after the devastation
caused by The Great depression but judicial activism got in the way. There was urge to use to
political clout to push the reforms, after all desperate times demands desperate measures, but this
mistake was fortunately avoided by him. The separation of power is tremendously important for
inclusive political institutions. Agreed this makes the job tougher and delays the decision-making
process but taking an alternative route have dangerous consequences as Soviet Union came to
realize in 1991. The yearning for a decisive leader is always present in our society and populist
leaders exploit this to cement their grip on power. Their intention might be noble, to uplift the
slowing economy or build infrastructure, but absence of diverse voices in corridors of power spells
doom in long term. As we all know the path to hell is pave is paved with noble intention.

The authors have described communism as 20 th century version of absolutism. The failure of Soviets
and North Korea lends support to their definition. At this juncture some disagreement might b in
order. Cuba too is not an open economy but has the best social indicator in the world. Its health
sector is matter of envy for many countries. Vietnam despite run by authoritarian regime has done a
commendable job in uplifting the citizens. Today it is an export powerhouse. Singapore is another
example that does not fit in the mold formulated by the authors. It has been labelled as ‘Guided
democracy’ and a nanny state for intervening too much into its citizen’s life. Lee Kuan Yew, its
former prime minister once remarked “The exuberance of democracy leads to indiscipline and
disorderly conduct which are inimical to development.”

South Korea, Taiwan and China are successful economies today with high quality of life. Their
success lies according to the book in quick course correction. The writer’s traces China’s rise from
being a tightly closed economy run by extractive political institution to becoming epicenter of
manufacturing. The beginning was disastrous under Mao tse tung yet it managed to realign its
priorities under Deng xioping and went on to pull greatest number of human beings out of poverty in
human history. But one may argue that even today after all its achievements, China is not governed
by inclusive political institutions. Suppression of dissent and absence of opposition is well known to
all of us. China’s world beating economy has started to slowdown and its largest real estate company
has delayed debt payment multiple times. Whether the authors judgement of all extractive
institutions meeting the same fate comes true for China or not remains to be seen.

The book has not given sufficient coverage to India. The world’s largest democracy ticks all the boxes
for being a successful country but falls behind on every social indicator. This country has
flabbergasted many scholars in the past too as this strange dichotomy continues to persist. An
investigation by authors would have addressed a major lacuna.

All in all, this book is a Tour de force and sets a new parameter in multi-disciplinary research. It has
covered politics, History and economics and intermingling of all three with great elan. The reader
would be able to understand the roots of poverty and prosperity by the end of this book. By
understanding these roots, one would certainly start to make sense of the shape of modern world.