In Why Nations Fail, Acemoglu and Robinson argue that economic development and the prosperity or poverty of nations can be traced back solely to “institutions, institutions and institutions”. It is not geography, culture, or the ignorance of the policymakers that explains the vast income disparities across nations; but it is the fact that some countries were able to introduce and maintain inclusive economic and political institutions, while others still operated under the extractive systems, benefitting only narrow groups of elites.
Nations fail because of extractive institutions that concentrate power and wealth among narrow elites.
Why Nations Fail opens with the thought-provoking natural experiment between Nogales, Arizona, and Nogales, Mexico. Despite the two regions on either side of the US-Mexico border sharing almost identical cultures, climate, and natural resources, Nogales, Arizona, has three times the GDP per capita of its Mexican counterparts. But what causes such differences?
The geography hypothesis – proponents were of the view that nations fail because the geography of those nations doesn’t permit them to flourish, especially countries of tropical regions, their climate, soil fertility, and the lethargy of people. Two other classically cited theories don’t stand up either. The first is a cultural hypothesis- they believe that nations having a rigid culture, norms don’t permit them to flourish. because the culture is very conservative and orthodox, and discourages technological innovations. The ignorance hypothesis operates in a similar field when leadership fails in formulating policies and programmes. So, due to their ignorance, their nations fail. All these hypotheses were negated by writers. They believe that the failure of nations depends on the state/institution.
The country is ruled by narrow elites which extracts resources from the country. The nation will suffer and get poorer day by day. They are not getting their due rights. The narrow elite is flourishing at their expense. Nations fail because of extractive institutions. The Country where the layman is getting facilities, better health infrastructure, judiciary, law, and order. The authority spent resources on human development, and the authority is selected through a democratic process (through voting and working for the people). Nations succeed because of inclusive institutions.
On the border shared by Mexico and the US, there is a town called Nogales that’s divided in half between the two nations. The residents of Nogales, Arizona, have much higher standards of living than those living in Sonora. Arizona has better access to healthcare, education, and crime rates are lower, and average household income is three times higher. The geography hypothesis has been the most influential theory to explain such inequality, but the theory falls short here.
Inclusive institutions promote innovation, political participation, and long-term development.
Montesquieu (proponent of geographical theory) maintains that inhabitants of warmer, more tropical climates were lazier than hardworking, more resourceful types who lived in temperate climates. Cultural hypothesis by Max Weber claimed that Western Europe has a high rate of industrialization in contrast to the rest of the world. The ignorance hypothesis suggests that poverty results from a dearth of knowledge regarding policies that might encourage economic growth.
What really matters are economic and political institutions. The economic institutional landscape includes property laws, the strength of public services, and access to finance. Inclusive institution stimulates economic success, resulting in innovations (South Korea, USA), and Extractive institutions derive incomes from groups within society for the benefit of others (colonial Latin America, North Korea).
One event more than any other shaped medieval and early Eastern Europe. Due to the Black Death in the 14th century, almost half the population died in the plague’s devastation, and an economic crisis emerged. Before the Black Death, Europe’s social and economic system had a highly extractive form of governance and controllers called fiefs. In contrast, Eastern Europe became increasingly extractive as higher and higher taxes were extracted from peasants. Institutional drift is the phenomenon by which critical junctures lead to divergent paths. Another critical juncture was the expansion of global trade and the colonization of America.
In the modern period, one country in particular was quick off the blocks to industrialize. England began the process of industrialization, and in the 19th century, it was a global superpower. The initial foundation was led by the signing of Magna Carta in 1215, establishing the embryonic English Parliament. Consequently, legally enforceable property rights were enshrined in law, and stronger protection laws serve to incentivize investment and innovation. The tax system also underwent reforms. In the 19th century, country infrastructure improved radically, leading towards rapid industrialization.
England’s political institutions became pluralistic to ensure that every faction’s power was circumscribed by law. The right to vote was extended. Stability and governance in law and order were prevalent. The media monitored the actions of the powerful and kept voters informed of political events.
Geography, culture, and ignorance are insufficient to explain global inequality.
It is quite natural to presume that intelligent leaders always choose prosperity over poverty for their countries. Unfortunately, political elites are a self-interested bunch, having adverse effects on development. Another fear is the inhibition of economic growth is the fear of creative destruction among political elites. Seen in the institution of slavery is its persistent historical influence. Slavery existed in Africa before the arrival of European colonizers in the 17th century. Consequently, enslavement massively increased. Global trade ended in 1807, but slavery continued in Africa.
It emerges when leaders resist development and attempt to consolidate power instead. They’re self-perpetuating. To consolidate power, they introduced a poll tax and a literacy test for potential voters. Whenever you square it, the Soviet Union can by no definition be said to have been a country fostered political or economic institutions. Also, leaders discourage creative destruction. They are prone to elite infighting, causing instability and limited growth. So far, we have seen that sustainable growth in society’s living standards is possible. It needs economic and political institutions that are inclusive and pluralistic (Brazil).
This book highlights why, even today, some nations are trapped in a cycle of poverty. While others prosper and appear to be on their way to prosperity. It mainly focuses on political and economic institutions, as the authors believe in long-term prosperity. This book reflects world politics and foreign aid and provides ways to tackle inequality in the world. Prosperity and poverty among nations aren’t preordained fates, stemming from culture or geography. The reason why some countries do better is their institutional landscape. This is shaped over the course of history, often over centuries. It’ll take effort, but a vicious cycle of poverty can be reversed.
Critical junctures like the Black Death and industrialization led to institutional divergence and national outcomes.
In the conclusion, writers argue that the prosperity or failure of nations is fundamentally determined by the nature of their political and economic institutions. Inclusive institutions promote innovation, shared economic opportunities, political participation, and foster long-term growth and stability. In contrast, extractive institutions concentrate power and wealth in the hands of a few, stifling development and often leading to cycles of poverty and instability. Authors emphasize that change is possible but requires political will, leadership, and mobilization of society to challenge entrenched systems. Ultimately, the book underscores the importance of inclusive governance as a key to breaking the barriers of inequality and achieving sustainable prosperity.
Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.
