Why Nations Fail: The Origins of Power, Prosperity, and Poverty Paperback – September 17, 2013

In his 2000 bestseller “Development as Freedom” Pulitzer Prize-winning economist Amartya Sen made the uplifting argument that the cornerstone of international development ought to be the promotion and growth of human freedom. What his thesis notably lacked was evidence. It seems to me that evidence supporting Sen’s important hypothesis is precisely what Daron Acemoglu and James Robinson present here in “Why Nations Fail: The Origins of Power, Prosperity, and Poverty.” This 2013 bestseller argues that only open and inclusive political institutions – those most likely to provide the freedoms Sen claims are critical – can achieve sustainable economic growth (e.g. “The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty”).To begin with, Acemoglu and Robinson shred three of the most commonly held theses on global economic inequality, while setting the stage to argue that politics and political institutions along with their associated incentives are what really matters for long term, sustainable economic growth. First, they dismiss the Geography theory, usually associated with Jared Diamond (but also Jeffrey Sachs), which suggests that north/south continents and tropical climates are poorly suited for economic growth. That’s simply not true, the authors say. North America was once far less economically desirable than South America; the Middle East was the cradle of civilization, yet non-oil Middle East countries today are as poor as Peru and Bolivia, which are far poorer than the UK or US. “History thus leaves little doubt that there is no simple connection between a tropical location and economic success.” Second, they reject Culture theory, which started with Max Weber and the Protestant work ethic, and is just as invalid as Geography according to the authors. How can one explain the differences between North and South Korea or the US versus Mexican sides of Nogales, Arizona? Or why is it that the US, Canada, Nigeria and Sierra Leone – all former English colonies and places that have shared cultures and/ or colonial heritage – have vastly different economies today? Finally, they critique Ignorance theory, which is favored by most modern development economists, especially Jeffrey Sachs, the doyen of the poverty-can-be-eradicated school, and essentially maintains that countries are poor because they make wrongheaded policy decisions. If only they had better advisors and made smarter choices to foster economic growth, Ignorance theory proponents argue, everything would work out just fine. Acemoglu and Robinson, on the other hand, claim that leaders rarely make stupid decisions. They make rational choices that may be economically disastrous for their country, but usually align well with economic incentives that are part of the institutions that they’ve created or, more often, inherited. There is no ignorance; it’s just that the system has been set up to encourage harmful policies. In other words, “They get it wrong not by mistake or ignorance but on purpose.”So what then is required for sustainable economic growth? The authors claim that “…to understand world inequality we have to understand why some societies are organized in very inefficient and socially undesirable ways.” They argue that “the ability of economic institutions to harness the potential of inclusive markets, encourage technological innovation, invest in people, and mobilize the talents and skills of a large number of individuals is critical for economic growth…” and that “…explaining why so many economic institutions fail to meet these simple objectives is the central theme of this book.”They lay out a simple and compelling hypothesis to support their position, although it does have some holes. The argument goes like this. First, a country needs to have a foundation of stable political centralization in order to provide basic law and order. This quickly excludes such international basket cases as Afghanistan and Somalia. Thus, from their perspective, without a firm political foundation there is no hope for meaningful growth. Next, the political institutions must be pluralistic, thereby ensuring that the required stability will come from the rule of law and the establishment of a level economic and political playing field for all, and not merely by the use of force flexed by some powerful entrenched elite. Nations that possess these political traits (centralized, pluralistic, rule of law) tend to have inclusive economic institutions, such as free labor markets, secure property rights and free market economies. The combination of these political and economic institutions fosters creative destructive, to use Joseph Schumpeter’s famous phrase, as long established elites cannot thwart the new technologies and processes that threaten the status quo and thus their privileged political and economic position. This focus on the centrality of creative destruction or what is now more commonly referred to as “disruption” from Clay Christensen’s seminal “The Innovator’s Dilemma,” is really the linchpin of the authors’ entire case. I found that it has special merit, although it is far from air tight.The authors view the Korean Peninsula as a powerful example of their theory at work. The two halves of the peninsula share the same geography and culture, so clearly those two explanations do not apply. But what about Ignorance? Although the South was until recently authoritarian like the North, the regime in Seoul allowed for secure private property, unbiased rule of law, proper public services, and an open labor market. Authoritarian regimes of every political stripe tend to have extractive economic institutions, the authors say. The state – and thus the economy, as the two are fundamentally intertwined – is set up for the exclusive benefit of some small elite. More inclusive economic institutions, with the potential for more rapid and broader based economic growth, are often eschewed because such growth would almost certainly come at the expense of the elites.That isn’t to say that extractive regimes cannot produce economic growth. They certainly can, so say the authors, but they are destined to sputter out and collapse eventually according to their theory. Acemoglu and Robinson muster a truly sweeping array of historical examples to make their case, from the Natufian society in the Levant around 9500 BC and the Mayan empire in Central America from 400-800 AD to the Bushong in the Congo in the 1600s and the Soviet Union in the twentieth century. They also boldly predict collapse for the current Communist China economic juggernaut in the years to come (“China…is likely to run out of steam”). Indeed, extractive institutions come in all different shapes and sizes today, according to the authors. Some are Communist, others Socialist, a few are ostensibly free market democracies. But the inevitable common denominator is that the wealth of the nation is expropriated by a narrow and closed elite, whether that be the anti-communist Mugabe in Zimbabwe, the anti-FARC paramilitary in Colombia, the traditional Spanish elite in Argentina, the Sung family in North Korea, crony capitalists in Egypt, or the cotton kings of Uzbekistan.These impressively diverse societies – as measured geographically, culturally, temporally – share many similar traits according to the authors: political centralization, often by force; forced re-allocation of productive resources and mainly for the enrichment of a narrow elite; general economic growth but technological and business process stagnation; and an inherently unstable political system as the incentives to displace the current elites and acquire the narrow stream of great wealth is overpowering. Thus, politically centralized (often absolutist) regimes with extractive economic institutions can deliver economic growth – often spectacular growth – but only for a limited period of time and almost never through technological innovation. The inherent conflicts in the system lead to a “vicious cycle” as “extractive political institutions [support] extractive economic institutions, which in turn [provide] the basis for extractive political institutions and the continuation of the power of the same elite.” The end result is always the same: economic and political collapse. However, the authors say nothing about how long such extractive regimes can continue to grow nor what sends them into collapse. In fact, many of the doomed extractive regimes survived and prospered for quite a long time: Rome (nearly a millennium), the Maya (half a millennium), and many European empires (centuries at least). Will China get its extractive institution comeuppance next year, next decade, next century or next millennium? The authors don’t hazard a guess.A major theme of “Why Nations Fail” is the incredible long range importance of innovation: “The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions,” the authors boldly claim. They go on to note how William Lee developed a knitting machine for making stockings in England in the 1580s. Queen Elizabeth quickly squelched the idea, fearing the potential disruptions to employment as a threat to political stability. The authors write that this is precisely what all extractive political regimes with non-inclusive political institutions are wont to do: block disruptive technology. It would be the Glorious Revolution of 1688 – an event the authors claim was nothing less than “…the most important political revolution of the past two millennia” – that would change everything. Indeed, they write that “World inequality today exists because during the nineteenth and twentieth centuries some nations were able to take advantage of the Industrial Revolution and the technologies and the methods of organization that it brought while others were unable to do so.”So what made the English Glorious Revolution so important? Well, to start, it promoted political centralization and pluralism, two key ingredients in their recipe for sustained economic growth. Indeed, politics is at the foundation of their case (“…while economics institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has”). As for the Glorious Revolution, it was a “…momentous event precisely because it was led by an emboldened broad coalition and further empowered this coalition, which managed to forge a constitutional regime with constraints on the power of both the executive and, equally crucially, any one of its members.” It gave England a Parliament that heard and responded to public petitions from a broad spectrum of society, which in turn laid the foundation for the Industrial Revolution. From this radical new system many popular initiatives were developed. Their combination had a profound impact, according to thesis of “Why Nations Fail”: new and improved property rights (i.e. no longer would Englishmen fear arbitrary confiscation by the Crown); improved infrastructure in the form of canals, turnpikes, and later railroads (because investors felt more secure in their investments); a fiscal regime that taxed land rather than hearths, thus shifting the tax burden to land owners rather than manufacturers (which further increased industrial investment); greater access to capital in the form of the Bank of England (a direct outcome of the Glorious Revolution allowing for ready capital to anyone with proper collateral); and aggressive protection of trade and manufacturing from outside competition, but accompanied by the dissolution of internal monopolies. In short, the authors claim that “The Glorious Revolution…was about a fundamental reorganization of economics institutions in favor of innovators and entrepreneurs, based on the emergence of more secure and efficient property rights.” Acemoglu and Robinson note just how dramatic were the waves of innovations that propelled the Industrial Revolution (e.g. the time to produce 100 lbs. of cotton fell from 50,000 hours by hand to 300 hours with a waterframe to 135 hours with a Spinning Jenny) and that these cumulative innovations were almost all developed by new men from humble backgrounds, the antithesis of the traditional ossified, hereditary elite.Moreover, inclusive institutions tend to promote a “virtuous cycle” of “… constraints against the exercise and usurpation of power…[and also] tend to create inclusive economic institutions, which in turn make the continuation of inclusive political institutions more likely.” The exact opposite of “…extractive economic institutions [that] create the platform for extractive political institutions to persist…” The authors use Australia, the French Revolution, and China versus Japan to further their core thesis that inclusive political institutions were fundamental for taking full advantage of the Industrial Revolution, which they claim explains the global economic inequality we have today. States with an entrenched, absolutist political system and extractive economic institutions (Eastern Europe, Ottoman Empire, Africa, China) were dominated by elites that were inherently opposed to change. “The aristocracies would be economic losers from industrialization. More important, they would also be political losers, as the process of industrialization would undoubtedly create instability and political challenges to their monopoly of political power.”“Rich nations [US, UK, Canada, Australia] are rich largely because they managed to develop inclusive institutions at some point during the past three hundred years. These institutions have persisted through a process of virtuous circles. Even if inclusive only in a limited sense to begin with, and sometimes fragile, they generated dynamics that would create a process of positive feedback, gradually increasing their inclusiveness.”Acemoglu and Robinson conclude “Why Nations Fail” with some promising words about an unlikely economic hero: Brazil. “The rise of Brazil since the 1970s was not engineered by economists of international institutions instructing Brazilian policymakers on how to design better policies or avoid market failures. It was not achieved with injections of foreign aid. It was not the natural outcome of modernization. Rather, it was the consequence of diverse groups of people courageously building inclusive institutions.”In closing, “Why Nations Fail” was much better and far more intellectually deep than I had anticipated. It has been one of the most thought-provoking reads I’ve had in a long time. It is an admirable blend of contemporary economic development theory to be read alongside Sachs, Easterly, Collier and Sen and an important contribution to strategic studies and cultural history, easily on par with Diamond’s “Guns, Germs, and Steel” and McNeil’s “Plagues and Peoples” or “The Pursuit of Power: Technology, Armed Force, and Society since A.D. 1000.” Overall, this is a book well worth reading.

I bought this book because it was the first one found on the particular subject of “Failed Nations” since I had read “The Collapse of complex Societies” by Joseph Tainter. The two books however are entirely different in the way they answer the fundamental question as this is why nations fail.Tainter’s theory is that powerful nations collapse because their institutions have become more and more complex and require more and more effort from their citizens with less and less to show for it, with the result that the fringes of the state start to crumble and the people either die off or move away. He cites many examples but the main ones he concentrates upon are Lowland Classic Maya of Central America, the Western Roman Empire, and the collapse of the Chacoan civilization of northern New Mexico . He argues that States ruling without competition compared with those ruling in polities of equal strength, leads him to the conclusion that collapse can only occur in a power vacuum.The authors of this book take an entirely different approach. Their arguments are primarily ones which are based on economical and political institutions . They firmly reject that there are arguments that the reasons nations fail are due to geographic, cultural or ignorance. But they do recognize that all have one thing in common and that the rule is by a narrow elite whose main focus is on maintaining and/or expanding their own interests at the expense of the rest of the population which they govern.The following is a summary of the contents of this book, which I will comment on later :Chapter 1 SO CLOSE AND YET SO DIFFERENTNogales, Arizona, and Nogales, Sonora, have the same people, culture, and geography. Why is one rich and one poor?Chapter 2 THEORIES THAT DON'T WORKPoor countries are poor not because of their geographies or cultures, or because their leaders do not know which policies will enrichtheir citizens. The interests of narrow elites and the long agony of the Congo.Chapter 3 THE MAKING OF PROSPERITY AND POVERTYHow prosperity and poverty are determined by the incentives created by institutions, and how politics determines what institutions a nation has. Extractive and inclusive economic and political institutionsChapter 4 SMALL DIFFERENCES AND CRITICAL JUNCTURES: THE WEIGHT OF HISTORYHow institutions change through political conflict and how the past shapes the present. The Black Death, the contingent path of history.Chapter 5 "I'VE SEEN THE FUTURE, AND IT WORKS": GROWTH UNDER EXTRACTIVE INSTITUTIONSWhat Stalin, King Shyaam, the Neolithic Revolution, and the Maya city-states all had in common and how this explains why China's current economic growth cannot lastChapter 6 DRIFTING APARTHow institutions evolve over time, often slowly drifting apart – Venice, Roman virtues and vices, Roman Britain, Diverging paths.Chapter 7 THE TURNING POINTHow a political revolution in 1688 changed institutions in England and led to the Industrial RevolutionChapter 8 NOT ON OUR TURF: BARRIERS TO DEVELOPMENTWhy the politically powerful in many nations opposed the Industrial Revolution and enduring backwardness: Ottoman Empire, Spain, Hapsburg and Russian Empires, Ming and Qing dynasties, Somalia,Chapter 9 REVERSING DEVELOPMENTHow European colonialism impoverished large parts of the world – Dutch East Indies, African slave trade, South African apartheid.Chapter 10 THE DIFFUSION OF PROSPERITYHow some parts of the world took different paths to prosperity from that of Britain – Australia, the French Revolution, Europe, Japan; The roots of world inequality.Chapter 11 THE VIRTUOUS CIRCLEHow institutions that encourage prosperity create positive feedback loops that prevent the efforts by elites to undermine them. British Reform acts, Trust busting in the US, Failed attempts to pack Supreme Courts.Chapter 12 THE VICIOUS CIRCLEHow institutions that create poverty generate negative feedback loops and endure. Collapse of infrastructure in Sierra Leone, Land grab in Guatemala, Slavery to Jim Crow, Oligarchy in Ethiopia.Chapter 13 WHY NATIONS FAIL TODAYInstitutions, institutions, institutions and why nations fail. ; Zimbabwe, Sierra Leone, Colombia, Argentina, North Korea, Uzbekistan, Egypt,Chapter 14 BREAKING THE MOLDHow a few countries changed their economic trajectory by changing their institutions. Botswana, US Civil Rights, China’s rebirthChapter 15 UNDERSTANDING PROSPERITY AND POVERTYHow the world could have been different and how understanding this can explain why most attempts to combat poverty have failed – Authoritarian growth (China), Failure of foreign aid (Afghanistan),Empowerment (Brazil)The main thesis that the authors put forward is fairly straightforward. First of all the state must be sufficiently centralized that its rulers and ruling elite can actually govern it. The second is that Economic and Political institutions established in the state are inclusive enough that a significant portion of the population have significant powers to prevent the control by a narrow elite, and that the state is governed by the rule of law in which the rights of all – justice, property, education, economic and political - are adequately protected and are difficult to be removed.The concept of contingent events – like the Black Death in which a major portion of the population died, provided an opportunity for a slow but sure change in the political development of western European countries as the rulers had to start to take into account the needs and demands of those which supported them – leading to the development of large cities, with merchants and guilds. Another was the discovery of the Americas which – particularly in Latin America – was primarily a looting operation that simply replaced the native ruling elites with European ones.The authors use the establishment of the North American colonies (which was a century later than that of Latin America) to describe how those colonists found it extremely difficult to exploit the local population and had to be self sufficient for their own survival. The slow development of a larger more wealthy portion of the English populations led to the English Civil War, and the eventual establishment of a more constitutional monarchy. This is described in some detail in Chapter 7 and showed how Britain and subsequently the US industrialized and slowly established more and more inclusive institutions which are so important for the development of their modern democracies.There are course, many descriptions of the ups and downs of this progress, but the book does an excellent job of explaining the successes and failures of various states in all continents of the world – and why this has resulted in the current world political reality.The difficulty I have with this book is that the authors are unable to offer solutions to dealing with the problems of failed states. I suppose that is probably too much to ask for, and the final chapter makes an effort to address this issue – which is more or less an appeal to influential persons to be informed of the failures of aid programs to alleviate poverty, and to understand why those policies may fail if the funds only end up in the hands of the oligarchic rulers. And they certainly do not address the many powerful international organizations such as FIFA, IOC, (and to some extent the UNO) which are observably corrupt and tend only to serve the “narrow elite ” who run those organizations.I am also dubious about some of the arguments used in favour of “Creative Destruction” which seem to be more effective in more successful democracies than those which are anything but democratic. What is the purpose of creative destruction when it can also destroy the foundations of a developing state?.I do agree that the development of a successful state is a slow one – although it appears that the French experience after the Revolution and the Napoleonic era effectively swept away the institutions of the old regime, such that a new structure had to be created in its place – and today (even if you do not agree with its political philosophies) it is one of the more powerful and successful democracies. And I agree with the proposition that you cannot legislate prosperity. I think, however, that the authors are being somewhat optimistic in arguing that current success stories will actually lead to long term success.What is interesting about the book is the there is little or no discussion on the impact of religion on the development of the state which is probably just as well, because once you can get on that topic then you enter the realm of beliefs and articles of faith, and any possibility of reasoned analysis tends to be glossed over as irrelevant.I found this book to be very readable and the arguments in support of their thesis very easy to follow. But as they say, economics is a dismal science and there are indeed few heroes and many villains in this account. I can understand why this book has been so well received, because it is provides strong justification as to why the western democracies have been so successful. I would certainly recommend it to other readers who have similar interests to my own. I give it 5 stars.