“Why Nations Fail: The Origins of Power, Prosperity, and Poverty” by Daron Acemoglu and James A. Robinson is a groundbreaking exploration of the factors that contribute to the success or failure of nations. Through historical analysis and case studies, Acemoglu and Robinson argue that the key determinant of a nation’s prosperity is the quality of its political and economic institutions.
The authors begin by distinguishing between “inclusive” and “extractive” institutions. Inclusive institutions are characterized by open political and economic systems that encourage participation, competition, and innovation, while extractive institutions concentrate power and wealth in the hands of a small elite, stifling economic growth and opportunity for the majority of the population.
Acemoglu and Robinson examine the historical origins of inclusive and extractive institutions, tracing their development through various stages of economic and political evolution. They argue that the presence of inclusive institutions is crucial for sustained economic growth and development, as they encourage investment, entrepreneurship, and technological innovation.
The authors explore the role of political power in shaping economic institutions, emphasizing the importance of checks and balances, rule of law, and property rights in fostering economic prosperity. They argue that extractive political institutions, such as autocracy and dictatorship, create barriers to economic development by limiting political participation and stifling competition.
Acemoglu and Robinson examine the impact of colonialism on economic development, arguing that extractive institutions established by colonial powers continue to shape the economic landscape of many countries today. They emphasize the importance of decolonization and the establishment of inclusive institutions as a prerequisite for sustainable economic growth.
The authors discuss the role of elites in perpetuating extractive institutions, arguing that they often use their political and economic power to maintain their privileged position at the expense of the broader population. They emphasize the need for inclusive institutions that promote social mobility and create opportunities for all citizens.
Acemoglu and Robinson examine the relationship between institutions and economic inequality, arguing that extractive institutions exacerbate inequality by concentrating wealth and power in the hands of a small elite. They emphasize the importance of inclusive institutions in promoting greater equality of opportunity and reducing poverty.
The authors explore the role of technology and innovation in driving economic growth, arguing that inclusive institutions create incentives for investment in research and development, leading to technological breakthroughs and productivity gains. They emphasize the importance of inclusive institutions in fostering an environment conducive to innovation and entrepreneurship.
Acemoglu and Robinson examine the impact of political and economic reforms on economic development, arguing that institutional change is crucial for promoting sustainable growth and reducing poverty. They emphasize the need for political leaders to prioritize inclusive institutions and enact policies that promote openness, competition, and innovation.
The authors discuss the challenges facing nations in transition from extractive to inclusive institutions, emphasizing the importance of political will and societal mobilization in driving reform. They argue that while the path to inclusive institutions may be difficult, it is essential for promoting long-term economic prosperity and reducing poverty.
In conclusion, “Why Nations Fail” offers a compelling analysis of the factors that contribute to the success or failure of nations. Acemoglu and Robinson’s treatise provides valuable insights into the importance of inclusive institutions in promoting economic growth, reducing poverty, and fostering a more equitable and prosperous society.
The Constitution of the US did not create a democracy by modern standards. Who could vote in elections was left up to the individual states to determine. While northern states quickly conceded the vote to all white men irrespective of how much income they earned or property they owned, southern states did so only gradually. No state enfranchised women or slaves, and as property and wealth restrictions were lifted on white men, racial franchises explicitly disenfranchising black men were introduced. Slavery, of course, was deemed constitutional when the the Constitution was written.
As institutions influence behavior and incentives in real life, they forge the success or failure of nations. Individual talent matters at every level of society, but even that needs an institutional framework to transform it into a positive force. Bill Gates, like other legendary figures in the IT industry had immense talent and ambition. But he ultimately responded to incentives. The schooling system in the US enabled Gates and others like him to acquire a unique set of skills to complement their talents. The economic institutions in the US enabled these men to start companies with ease, without facing insurmountable barriers. Those institutions also made the financing of their project feasible. The US labor markets enabled them to hire qualified personnel, and the relatively competitive market environment enabled them to expand their companies and market their products. These entrepreneurs were confident from the beginning that their dream projects could be implemented: they trusted the institutions and the rule of law that these generated and they did not worry about the security of their property rights. Finally, the political institutions ensured stability and continuity. For one thing, they made sure that there was no risk of a dictator taking power and changing the rules of the game, expropriating their wealth, imprisoning them, or threatening their lives and livelihoods. They also made sure that no particular interest in society could warp the government in an economically disastrous direction, because political power was both limited and distributed sufficiently broadly that a set of economic institutions that created the incentives for prosperity could emerge.
Though institutions are the key to the differences between Mexico and the US, that doesn’t mean there will be a consensus in Mexico to change institutions. Carlos Slim would not have been happy to see his political connections disappear and the entry barriers protecting his business fizzle - no matter what the entry of new businesses would enrich millions of Mexicans. Because there is no such consensus, what rules society ends up with is determined by politics: who has power and how this power can be exercised. Carlos Slim has the power to get what he wants. Bill Gates’s power is far more limited.
Getting it wrong is mostly not about ignorance or culture. Poor countries are poor because those who have the power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose. Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.
Fighting to control the all-powerful state is always latent, and it will periodically intensify and bring the undoing of these regimes, as it turns into civl war and sometimes into total breakdown and collapse of the state.
Finally, when growth comes under extractive political institutions but where economic institutions have inclusive aspects, as they did in South Korea, there is always the danger that economic institutions become more extractive and growth stops. Those controlling political power power will eventually find it more beneficial to use their power to limit competition, to increase their share of the pie, or even to steal and loot from others rather than support economic progress. The distribution and ability to exercise power will ultimately undermine the very foundations of economic prosperity, unless political institutions are transformed from extractive to inclusive.
Today the only economy Venice has, apart from a bit of fishing is tourism. Instead of pioneering trade routes and economic institutions, Venetians make pizza and ice cream and blow colored glass for hordes of foreigners. The tourists come to see the pre-Serrata wonders of Venice, such as the Doge’s Palace and the horses of St. Mark’s Cathedral, which were looted from Byzantium when Venice the Mediterranean. Venice went from economic powerhouse to museum.
A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development - and all-too-common occurrence due to the fear of creative destruction.
Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain power.
Naturally these men, once they had become successful, had the same urges as any other person. They wanted to block others from entering their businesses and competing against them and feared the process of creative destruction that might put them out of business, as they had previously bankrupted others.
We do not desire at all the great masses shall become well off and independent… How could we otherwise rule over them?
The trade and commerce between the different nations of a thousand leagues on every hand must come to Melaka… Whoever is lord of Melaka has his hands at the throat of Venice.
Apart from warfare, slaves were also kidnapped and captured by small-scale raiding. The law also became a tool of enslavement. No matter what crime you committed, the penalty was slavery.
Giorgis also vividly recordded how Mengistu changed once he became sole ruler:
The real Mengistu emerged: vengeful, cruel and authoritarian… Many of us who used to talk to him with hands in our pockets, as if he were one of us, found ourselves standing stiffly to attention, cautiously respectful in his presence. He moved into a bigger, more lavish office in the Palace of Menelik. He began using the Emperor’s cars. We were supposed to have a revolution of equality; now he had become the new Emperor.
These tendencies do not imply that extractive economic and political institutions are inconsistent with economic growth. On the contrary, every elite would, all else being equal, like to encourage as much growth as possible in order to have more to extract. Extractive institutions that have achieved at least a minimal degree of political centralization are often able to generate some amount of growth. What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons.
First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will ultimately short lived.
Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.
Of the promised money, 20% of it was taken as UN head office costs in Geneva. The remainder was subcontracted to an NGO, which took another 20% for its head office costs in Brussels, and so on, for another three layers, with each party taking approximately another 20% of what was remaining. The little money that reached Afghanistan was used to buy wood from western Iran, and much of it was paid to Ismail Khan’s trucking cartel to cover the inflated transport prices. It was a bit of a miracle that those oversize wooden beams even arrived in the village.
Many studies estimated that only about 10 or at most 20 percent of aid ever reaches its target. There are dozens of ongoing fraud investigations into charges of UN and local officials siphoning off aid money. But most of the waste resulting from foreign aids is not fraud, just incompetence or even worse: simply business as usual for aid organizations.