Category: Why Nations Fail

Why have some countries prospered and created great living conditions for their citizens, while others have not? This is a topic I care a lot about, so I was eager to pick up a book recently on exactly this topic.

Why Nations Fail is easy to read, with lots of interesting historical stories about different countries. It makes an argument that is appealingly simple: countries with “inclusive” (rather than “extractive”) political and economic institutions are the ones that succeed and survive over the long term.

Ultimately, though, the book is a major disappointment. I found the authors’ analysis vague and simplistic. Beyond their “inclusive vs. extractive” view of political and economic institutions, they largely dismiss all other factors—history and logic notwithstanding. Important terms aren’t really defined, and they never explain how a country can move to have more “inclusive” institutions.

For example, the book goes back in history to talk about economic growth during Roman times. The problem with this is that before 800AD, the economy everywhere was based on sustenance farming. So the fact that various Roman government structures were more or less inclusive did not affect growth.

The authors demonstrate an oddly simplistic world view when they attribute the decline of Venice to a reduction in the inclusiveness of its institutions. The fact is, Venice declined because competition came along. The change in the inclusiveness of its institutions was more a response to that than the source of the problem. Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for their loss of the spice trade. When a book tries to use one theory to explain everything, you get illogical examples like this.

Another surprise was the authors’ view of the decline of the Mayan civilization. They suggest that infighting—which showed a lack of inclusiveness—explains the decline. But that overlooks the primary reason: the weather and water availability reduced the productivity of their agricultural system, which undermined Mayan leaders’ claims to be able to bring good weather.

The authors believe that political “inclusiveness” must come first, before growth is achievable. Yet, most examples of economic growth in the last 50 years—the Asian miracles of Hong Kong, Korea, Taiwan, and Singapore—took place when their political tended more toward exclusiveness.

When faced with so many examples where this is not the case, they suggest that growth is not sustainable where “inclusiveness” does not exist. However, even under the best conditions, growth doesn’t sustain itself. I don’t think even these authors would suggest that the Great Depression, Japan’s current malaise, or the global financial crisis of the last few years came about because of a decline in inclusiveness.

The authors ridicule “modernization theory,” which observes that sometimes a strong leader can make the right choices to help a country grow, and then there is a good chance the country will evolve to have more “inclusive” politics. Korea and Taiwan are examples of where this has occurred.

The book also overlooks the incredible period of growth and innovation in China between 800 and 1400. During this 600-year period, China had the most dynamic economy in the world and drove a huge amount of innovation, such as advanced iron smelting and ship building. As several well-regarded authors have pointed out, this had nothing to do with how “inclusive” China was, and everything to do with geography, timing, and competition among empires.

The authors have a problem with Modern China because the transition from Mao Zedong to Deng Xiaoping didn’t involve a change to make political institutions more inclusive. Yet, China, by most measures, has been a miracle of sustained economic growth. I think almost everyone agrees that China needs to change its politics to be more inclusive. But there are hundreds of millions of Chinese whose lifestyle has been radically improved in recent years, who would probably disagree that their growth was “extractive.” I am far more optimistic than the authors that continued gradual change, without instability, will continue to move China in the right direction.

The incredible economic transition in China over the last three-plus decades occurred because the leadership embraced capitalistic economics, including private property, markets, and investing in infrastructure and education.

This points to the most obvious theory about growth, which is that it is strongly correlated with embracing capitalistic economics—independent of the political system. When a country focuses on getting infrastructure built and education improved, and it uses market pricing to determine how resources should be allocated, then it moves towards growth. This test has a lot more clarity than the one proposed by the authors, and seems to me fits the facts of what has happened over time far better.

The authors end with a huge attack on foreign aid, saying that most of the time, less than 10% gets to the intended recipients. They cite Afghanistan as an example, which is misleading since Afghanistan is a war zone and aid was ramped up very quickly with war-related goals. There is little doubt this is the least effective foreign aid, but it is hardly a fair example.

As an endnote, I should mention that the book refers to me in a positive light, comparing how I made money to how Carlos Slim made his fortune in Mexico. Although I appreciate the nice thoughts, I think the book is quite unfair to Slim. Almost certainly, the competition laws in Mexico need strengthening, but I am sure that Mexico is much better off with Slim’s contribution in running businesses well than it would be without him.

“Why Nations Fail” is a sweeping attempt to explain the gut-wrenching poverty that leaves 1.29 billion people in the developing world struggling to live on less than $1.25 a day. You might expect it to be a bleak, numbing read. It’s not. It’s bracing, garrulous, wildly ambitious and ultimately hopeful. It may, in fact, be a bit of a masterpiece.

Daron Acemoglu and James A. Robinson, two energetic, widely respected development scholars, start with a bit of perspective: Even in today’s glum economic climate, the average American is seven times as prosperous as the average Mexican, 10 times as prosperous as the average Peruvian, about 20 times as prosperous as the average inhabitant of sub-Saharan Africa and about 40 times as prosperous as the average citizen of such particularly desperate African countries as Mali, Ethiopia and Sierra Leone. What explains such stupefying disparities?

The authors’ answer is simple: “institutions, institutions, institutions.” They are impatient with traditional social-science arguments for the persistence of poverty, which variously chalk it up to bad geographic luck, hobbling cultural patterns, or ignorant leaders and technocrats. Instead, “Why Nations Fail” focuses on the historical currents and critical junctures that mold modern polities: the processes of institutional drift that produce political and economic institutions that can be either inclusive — focused on power-sharing, productivity, education, technological advances and the well-being of the nation as a whole; or extractive — bent on grabbing wealth and resources away from one part of society to benefit another.

“Why Nations Fail” is a sweeping attempt to explain the gut-wrenching poverty that leaves 1.29 billion people in the developing world struggling to live on less than $1.25 a day. You might expect it to be a bleak, numbing read. It’s not. It’s bracing, garrulous, wildly ambitious and ultimately hopeful. It may, in fact, be a bit of a masterpiece.

Daron Acemoglu and James A. Robinson, two energetic, widely respected development scholars, start with a bit of perspective: Even in today’s glum economic climate, the average American is seven times as prosperous as the average Mexican, 10 times as prosperous as the average Peruvian, about 20 times as prosperous as the average inhabitant of sub-Saharan Africa and about 40 times as prosperous as the average citizen of such particularly desperate African countries as Mali, Ethiopia and Sierra Leone. What explains such stupefying disparities?

The authors’ answer is simple: “institutions, institutions, institutions.” They are impatient with traditional social-science arguments for the persistence of poverty, which variously chalk it up to bad geographic luck, hobbling cultural patterns, or ignorant leaders and technocrats. Instead, “Why Nations Fail” focuses on the historical currents and critical junctures that mold modern polities: the processes of institutional drift that produce political and economic institutions that can be either inclusive — focused on power-sharing, productivity, education, technological advances and the well-being of the nation as a whole; or extractive — bent on grabbing wealth and resources away from one part of society to benefit another.

To understand what extractive institutions look like, consider les Grosses Legumes (the Big Vegetables), the sardonic Congolese nickname for the obscenely pampered clique around Mobutu Sese Seko, the strongman who ruled what is now the Democratic Republic of the Congo from 1965 to 1997. When Mobutu decreed that he wanted a palace built for himself at his birthplace, the authors note, he made sure that the airport had a landing strip big enough to accommodate the Concordes he liked to rent from Air France. Mobutu and the Big Vegetables weren’t interested in developing Congo. They were interested in strip-mining it, sucking out its vast mineral wealth for themselves. They were, at best, vampire capitalists.

But the roots of Congo’s nightmarish poverty and strife go back centuries. Before the arrival of European imperialists, what was then known as the Kingdom of Kongo was ruled by the oligarchic forerunners of the Big Vegetables, who drew their staggering wealth from arbitrary taxation and a busy slave trade. And when the European colonists showed up, they made a dreadful situation even worse — especially under the rapacious rule of King Leopold II of Belgium.

When Congo finally won its independence in 1960, it was a feeble, decentralized state burdened with a predatory political class and exploitative economic institutions — too weak to deliver basic services but just strong enough to keep Mobutu and his cronies on top; too poor to provide for its citizenry but just wealthy enough to give elites something to fight over.

Acemoglu and Robinson argue that when you combine rotten regimes, exploitative elites and self-serving institutions with frail, decentralized states, you have something close to a prescription for poverty, conflict and even outright failure. “Nations fail,” the authors write, “when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth.”

But even as vicious cycles such as Congo’s can churn out poverty, virtuous cycles can help bend the long arc of history toward growth and prosperity. Contrast the conflict and misery in Congo with Botswana — which, when it won its independence in 1966, had just 22 university graduates, seven miles of paved roads and glowering white-supremacist regimes on most of its borders. But Botswana today has “the highest per capita income in sub-Saharan Africa” — around the level of such success stories as Hungary and Costa Rica.

How did Botswana pull it off? “By quickly developing inclusive economic and political institutions after independence,” the authors write. Botswana holds regular elections, has never had a civil war and enforces property rights. It benefited, the authors argue, from modest centralization of the state and a tradition of limiting the power of tribal chiefs that had survived colonial rule. When diamonds were discovered, a far-sighted law ensured that the newfound riches were shared for the national good, not elite gain. At the critical juncture of independence, wise Botswanan leaders such as its first president, Seretse Khama, and his Botswana Democratic Party chose democracy over dictatorship and the public interest over private greed.

In other words: It’s the politics, stupid. Khama’s Botswana succeeded at building institutions that could produce prosperity. Mobutu’s Congo and Robert Mugabe’s Zimbabwe didn’t even try. Acemoglu and Robinson argue that the protesters in Egypt’s Tahrir Square had it right: They were being held back by a feckless, corrupt state and a society that wouldn’t let them fully use their talents. Egypt was poor “precisely because it has been ruled by a narrow elite that has organized society for their own benefit at the expense of the vast mass of people.”

Such unhappy nations as North Korea, Sierra Leone, Haiti and Somalia have all left authority concentrated in a few grasping hands, which use whatever resources they can grab to tighten their hold on power. The formula is stark: Inclusive governments and institutions mean prosperity, growth and sustained development; extractive governments and institutions mean poverty, privation and stagnation — even over the centuries. The depressing cycle in which one oligarchy often replaces another has meant that “the lands where the Industrial Revolution originally did not spread remain relatively poor.” Nothing succeeds like success, Acemoglu and Robinson argue, and nothing fails like failure.

So what about China, which is increasingly cited as a new model of “authoritarian growth”? The authors are respectful but ultimately unimpressed. They readily admit that extractive regimes can produce temporary economic growth so long as they’re politically centralized — just consider the pre-Brezhnev Soviet Union, whose economic system once had its own Western admirers. But while “Chinese economic institutions are incomparably more inclusive today than three decades ago,”China is still fundamentally saddled with an extractive regime.

In fairly short order, such authoritarian economies start to wheeze: By throttling the incentives for technological progress, creativity and innovation, they choke off sustained, long-term growth and prosperity. (“You cannot force people to think and have good ideas by threatening to shoot them,” the authors note dryly.) Chinese growth, they argue, “is based on the adoption of existing technologies and rapid investment,” not the anxiety-inducing process of creative destruction that produces lasting innovation and growth. By importing foreign technologies and exporting low-end products, China is playing a spirited game of catch-up — but that’s not how races are won.

So how can the United States help the developing world? Certainly not by cutting foreign aid or conditioning it; as the authors note, you’d hardly expect someone like Mobutu to suddenly chuck out the exploitative institutions that underpin his power “just for a little more foreign aid,” and even a bit of relief for the truly desperate, even if inefficiently administered, is a lot better than nothing. But ultimately, instead of trying to cajole leaders opposed to their people’s interests, the authors suggest we’d be better off structuring foreign aid so that it seeks to bring in marginalized and excluded groups and leaders, and empowers broader sections of the population. For Acemoglu and Robinson, it is not enough to simply swap one set of oligarchs for another.

“Why Nations Fail” isn’t perfect. The basic taxonomy of inclusive vs. extractive starts to get repetitive. After chapters of brio, the authors seem almost sheepish about the vagueness of their concluding policy advice. And their scope and enthusiasm engender both chuckles of admiration — one fairly representative chapter whizzes from Soviet five-year plans to the Neolithic Revolution and the ancient Mayan city states — and the occasional cluck of caution.

It would take several battalions of regional specialists to double-check their history and analysis, and while the overall picture is detailed and convincing, the authors would have to have a truly superhuman batting average to get every nuance right. Their treatment of the Middle East, for instance, is largely persuasive, but they are a little harsh on the Ottoman Empire, which they basically write off as “highly absolutist” without noting its striking diversity and relatively inclusive sociopolitical arrangements, which often gave minority communities considerably more running room (and space for entrepreneurship) than their European co-religionists.

Acemoglu and Robinson have run the risks of ambition, and cheerfully so. For a book about the dismal science and some dismal plights, “Why Nations Fail” is a surprisingly captivating read. This is, in every sense, a big book. Readers will hope that it makes a big difference.

Why do some nations prosper while others struggle and are plagued with poverty and greed? Some people say it has everything to do with a nation’s location, culture, or lack of knowledge. But surely this can’t be the whole picture.

Just look at Botswana. It currently has one of the fastest increasing economies in the world. Meanwhile, close by Congo and Sierra Leone are stuck in a cycle of violence and poverty.

Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu and James A. Robinson centers around the question of why some nations remain poverty-stricken while others live in abundance. In this eye-opening book, the authors explain that the difference is actually the result of economic and political institutions put in place during critical junctures in history.

Forget age-old theories that some countries struggle economically because of their location. There are far too many countries next to each other that have different living standards to prove this as false.

The economic landscape determines the difference between these countries. These are the regulations directing the economy within a country’s borders. This includes things such as public services, property laws, and access to financing.

A country can have either inclusive or extractive economic institutions. Inclusive economic institutions pave the way for economic success because they encourage citizens to participate in economic activities. They are strong in economic freedom.

Examples of this include South Korea and the USA, where the economy benefits from private property laws, developed banking sectors, and strong public education. This system encourages people to work hard and be creative because they know their efforts will bring wealth.

An extractive economic institution receives income from one group in society for the benefit of another group. An example of this is colonial Latin America, which had a system built on the exploitation of indigenous people to benefit colonizers. Another example is North Korea, where the Kim family created a repressive regime that didn’t allow private property and secured all power for the select elite only.

Similarly, politics can also be either inclusive or extractive. An inclusive political institution has pluralism. This means every group in society is being represented politically. They also need centralized power to ensure that the rule of law is upheld and groups don’t overrun one another.

If a political institution doesn’t have pluralism or centralization, they are extractive. An inclusive political institution is best because all groups are represented, which doesn’t allow for extractive economic policies.

In the mid-fourteenth century, the Black Death took almost half of Europe’s population. This caused an economic fallout that was responsible for changing Europe’s economic future.

This is why the authors refer to the Black Death as an example of a critical juncture. This is an event that is influential enough to overturn the sociopolitical balance of a nation or continent.

Before the Black Death, most of the economic and political systems in Europe were extremely extractive. A country’s monarch owned land, and he gave his land to lords who promised to give military capabilities in return. Peasants would then take care of the land. They worked hard to make a living but paid most of what they earned in taxes. In addition, they had almost no freedoms.

But when the Black Death hit, there were suddenly huge shortages in labor. The peasants in Western Europe seized this opportunity to demand lower taxes and more rights.

Eastern European peasants were not so lucky, however. They were less organized, and landowners managed to take advantage of this and started hiking taxes higher and making the system even more extractive.

This is why the authors call the Black Death a critical juncture in history. For Western Europe, it spelled the end of extractive feudalism. But in the east, it grew worse. Institutional drift is the result of this difference that led to divergent paths. It’s where two similar regions grow in different directions.

We saw a similar institutional drift when global trade expanded, and the British colonized the Americas. Sometimes it takes centuries, but a small number of critical junctures can mean institutional drift that creates drastically different economic landscapes between once-similar areas.

We know that events in history can change the course of a country’s future. But what can countries do to fix the extractive institutions they have in place?

First, the authors explain that history doesn’t necessarily doom the future of these countries. We know that inclusive and extractive institutions can grow from critical junctures. The cycle can be broken.

The US South’s exclusive institutions against blacks are slowly becoming more economically and politically inclusive. There is still a lot to be done, but the civil rights movement meant that good changes were finally coming for blacks in America.

So what can we do? The first thing to do is make sure we encourage inclusive institutions so these countries can grow their own prosperity. Did you know foreign aid does very little to change extractive institutions in Africa and central Asia?

If we want to promote positive, long-lasting change, we need to direct foreign aid in a more meaningful way. The groups that are excluded from institutions need to have ways to defy the oppressing institutions.

For example, in Brazil, a grassroots movement of empowered people rather than politicians overthrew the country’s military dictatorship in 1985. Social movements led by these people paved the way for a coalition that resisted any future dictatorships.

Ever since Brazil broke that cycle, it has seen a huge rise in prosperity. In fact, between the years 2000 and 2012, it was one of the world’s fastest-growing economies. This serves as proof that shattering the chains of poverty is never too late.

Why Nations Fail will change the way you see the world. I never realized that such simple differences in institutions could mean such drastic differences in standards of living. I think this is an extremely important book that everyone can learn something from, and it helps that it is also an engaging read!

Have you ever asked yourself why some nations are poor and others are not? Have you ever asked yourself why do some nations enjoy prosperity and others rot in poverty and inequality for ages? Have you ever asked yourself why, in the first place, there is such thing as “poor nations” and “rich nations” when clearly we live on the same planet? Was it because other nations are geographically located in areas where natural resources are abundant? Was it because of socio-cultural factors that some nations have a high poverty rate and others are not? Was it because of the ignorance of the leaders of each nation that led to the wealth gap among nations?

For the past centuries, philosophers and other notable figures and experts have been sacrificing a lot of their brain cells to come up with reasonable and unifying answers to these questions. The proponents of the geography hypothesis believe that geography, climate, and ecology of a society’s location shape both its technology and the incentives of its inhabitants. American scientist Jared Diamond, in his theory, relies on the notion that some countries were able to develop, expand, and conquer much of the world because of geographical luck (Pbs.org, 2015).

On the other hand, the proponents of the culture hypothesis believe that culture affects economic activity through the choices that people make about how to allocate scarce resources – either through budget constraints or utility functions. Other theorists also argue how the “social capital” makes some countries poor, how religion affects the forms of governments, and how ethics contributes to the industrial revolution. All in all, cultural theorists posit that religion and culture matters for prosperity.

The proponents of the ignorance theory assert that world inequality is primarily due to the leaders of each nation because they don’t know how to make their county rich. This idea is highly influenced by the English economist Lionel Robbins who said that “economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses (Shizgal, 2012).

After carefully analyzing the rationales of these three hypotheses about world inequality, the authors Messrs. Acemoglu and Robinson counterattack them one by one with arguments from human history and the contemporary state of arts of different nations, and postulated “institutionalism” – not geography, culture, or ignorance – as the reason why nations fail.

According to Yourdictionary.com, institutionalism is “a belief where the emphasis is placed on the usefulness of established institutions, often at the expense of the individual.” In the book, the authors juxtapose on the historical developments of South and North Korea and suggested that the answers to questions about world inequality lie at the quality of institutions of each nation; either they have inclusive economic institutions or extractive economic institutions. The former “creates inclusive markets, with the help of inclusive political institutions, which not only give people freedom to pursue vocations in life that best suit their talents but also provide a level playing field that gives them the opportunity to do so,” whereas the latter creates markets under the hands of the elites with the goal of enriching themselves through profit extraction, at the expense of the society.

Institutionalism is not a new concept in political science or in economics. Douglass North, who laid down the theoretical framework of this hypothesis, states that “the primary source of economic growth is the institutional/organizational structure of a political economy.” He also added, “Third world countries are poor because the institutional constraints define a set of payoffs to political/economic activity that does not encourage productive activity.”

Like other books, “Why Nations Fail” has its own weaknesses. First, the determination of the authors to use “institutionalism” as the only reason for world inequality and failure to acknowledge the interplay of other factors that contributes to it. Second, the authors failed to poorly define the concept of institution which is the heart and soul of the book. Third, the book is full of repetitions which I think was done intentionally so readers would grasp the main idea of the book.

Despite the shortcomings, “Why Nations Fail” is an absolutely puzzling, brilliant, well-researched, and captivating book that contains the entire human history condensed into one big massive compilation to better understand poverty and prosperity in the world.

Peter Singer in his paper Famine, Affluence and Mortality believe that people of higher wealth should be morally obligated to donate more to humanitarian causes than what is considered normal in western cultures. It’s Singers premice that if it is in our power to prevent something bad from happening, without thereby sacrificing anything of comparable moral importance we ought to do it. Singer makes some good points throughout his paper such as the drowning child example, where if you’re not sacrificing anything of moral significance, why not help? In this paper, I argue that we have a moral responsibility to help those in need if it does not affect our everyday way of life. I will be evaluating this claim from Singer using Acemoglu and Robinson’s book Why Nations Fail and responding to an objection of Singers claim.

In Acemoglu and Robinson’s book Why Nations Fail, they do a good job of outlining why certain nations prosper and why others fail. They argue that there is an abundance of reasons why a nation fails such as geography, climate, religion, economy, and most importantly the political institutions. They talk about how inclusive nations tend to be more successful than those who are exclusive. Institutions are ‘inclusive’ when many people have a say in political decision-making, as opposed to cases where a small group of people control political institutions and are unwilling to change. This leads you back to Singer, and how he says we should be donating our wealth to countries such as Bengal. This leads us to the question, “Why should we be donating our money to exclusive countries?” This causes us to be skeptical of donating money to a country that is not politically stable and doesn’t have proper infrastructure. Singer does not talk much about where the money is going to be spent, and if it’s going to be used properly. Relief is considered a short-term solution to a much bigger problem. Yes, the relief will help in the short term, but over time it will simply delay the even bigger problems. You can mask the issues, but until you have an inclusive institution you will inevitably fail over time.

An objection to be made to this on Singers behalf could be even though it masks the problem, why let these people suffer? This goes back to Singers example of the drowning child and giving up something insignificant to save a life. Singer states, “Nearly 10 million children die every year from avoidable, poverty-related causes. And it wouldn’t take a lot to save the lives of these children. We can do it. For the cost of a pair of shoes, perhaps, you could save the life of a child. […] There’s some luxury that you could do without.”(1) Relating this to Acemoglu and Robinson, why would you not save a life if it didn’t impact you in a significant way? Yes, it may mask the issue, but that doesn’t mean we should let innocent people suffer for something they can’t control. If everyone who is relatively well-off donated money to these countries, we would be better off.

Going back to Acemoglu and Robinson’s thesis that economic prosperity depends on the inclusiveness of economic and political institutions. I feel as though this statement undermines Singers claim for the most part. Yes, we should not let people suffer because of these political institutions, but we are masking a bigger issue. In Why Nations Fail they do a great job outlining why certain nations are successful and why others fail. When you’re donating to causes that send money to a country with poor political institutions you’re just masking the bigger issue. This has less to do with money and more to do with political institutions of the country. In Chapter 1 of Why Nations Fail, they give an example of Nogales, in which half lies in Mexico and the other in Arizona. In the Arizonan half, the average income is $30,000 U.S dollars, the majority of adults are high school graduates, the roads are paved, there are law and order, and most live until over 65. In the Southern half, the average income is three times less and everything else is similarly worse. It all comes down to the economic and political institutions that help run the country as if you don’t have proper institutions, you will fail no matter how much money you throw at the problem.