Acemoglu and Robinson’s Why Nations Fail is an erudite piece of historical literature that is written in the style of other widely read books such as Diamond’s Guns, Germs and Steel, where historical examples are utilized to illustrate the intriguing ideas and arguments presented by the author(s). The authors seek to explain inequality in the world and the uneven development of nations with the concept of politics.
The overarching theme of Why Nations Fail is that institutions, both economic and political, are the fundamental factor in the determination of success or failure of a nation. The main thesis presented by the authors is that economic growth is much more probable under inclusive institutions as compared to extractive institutions. In other words, nations with inclusive institutions are likely to be rich and successful while nations with extractive institutions are likely to be poor and fail.
The authors theorized inclusive institutions are where most of the population are included in the process of governing, thereby diminishing or eliminating the exploitation process, with the aim of including the masses in economic activities and on equal footing. These inclusive economic institutions enforce law and order, have secure property rights, ensure state support for markets, the free entry of new businesses, access to education and opportunity for most of the population. Law-governed market economies are cited as a product of inclusive economic institutions. In inclusive political institutions, pluralism is present, with a broad participation in politics. The Rule of Law is upheld, and constraints and checks on the power of politicians are carried out to ensure there is no corruption.
Conversely, extractive institutions are where a small unit of individuals exploit the rest of the population, aiming for prosperity in the hands of a few at the expense of the masses. Slavery and feudalism are cited as examples of the outcomes of extractive institutions. Extractive economic institutions often lack law and order, have insecure property rights and regulations that inhibit market activities, entry barriers to markets as well as a non-levelled playing field. For extractive political institutions, absolutism dictates politics, where power is concentrated amongst the elite or a few people. The Rule of Law is absent and there exist no constraints and checks of power, leading to rampant corruption.
Acemoglu and Robinson’s theory argues that for any economic success, political institutions must be adequately centralized and coupled with pluralism, which is key to the sustained existence of inclusive economic institutions. Political institutions determine economic institutions and thus, an inclusive political institution will likely give rise to an inclusive economic institution. The state must be strong enough to keep private power in check yet be controlled by widely shared political authority. Basic public services such as justice, the regulation and enforcement of contracts, and education must be provided by the state. Given that these functions are carried out, inclusive institutions allow growth innovative energies to transpire and this in turn leads to continued growth. For example, the authors cited the Glorious Revolution (1689) begin in Great Britain can be attributed to the development of trade and the rise of business. This was enabled through the decisive shift of England towards inclusive political and economic institutions that provided the legal and institutional support to forge the Industrial Revolution that changed the world.
The authors also introduce the concept of Vicious and Virtuous cycles, where the former is a depressive cycle in which oligarchies trap nations with extractive institutions and the latter works the other way, allowing continued success of a nation due to the sustained existence of inclusive institutions. In the Vicious cycles, when a few people control political institutions, they will skew economic gains in their own favour, giving holders of power an incentive to fight to preserve power. These nations were often run by a dictator or colonial ruler that introduced and reinforced the extractive institutions. In Virtuous cycles, long term growth and prosperity is maintained and reinforced as the continued existence of inclusive institutions maintained democracy, pluralism and adequate centralisation. This allowed a more stable political and economic environment because people have the capacity to gain a higher standard of living and quality of life.
In addition, the authors postulate that failure is a norm. It is rarely the case where nations manage to break free from the Vicious cycle and adopt efficient inclusive institutions that embrace the Schumpeterian concept of Creative Destruction which allows for economic growth and prosperity. Creative Destruction may destroy the value of established companies that enjoyed some degree of monopoly power (Pfarrer & Smith, 2005), which in extractive nations, often belonged to the elites. Therefore, those in power are fearful of it and thus, inhibit the process of Creative Destruction to maintain their dominance. Investment and innovation by those outside the ruling elites is also almost unknown for the case of extractive political systems. The key aspect of continued growth under inclusive institutions are the investment in new technology and Creative Destruction. Innovative entry by entrepreneurs is the force that sustained long-term and continuous economic growth (Schumpeter, 1975). Since inclusive institutions allowed investment in new technology and creative destruction that allowed for innovations, continuous economic growth is possible in these nations. Therefore, in nations with extractive institutions, a degree of economic growth (and success) may be possible when the economy is far from the technological frontier, but will ultimately fail when innovations and Creative Destruction are needed to push the technology frontier for continued growth.
Why Nations Fail offers an alternative perspective with institutions being key to why some nations prosper and some nations remain poor. The book takes a departure from other notable theories like Diamond’s geographical determinism argument where geography, climate or the abundance of resources determine the success of a nation. Important anecdotes like historical accounts and natural experiments were effectively used to draw contrasts between countries that were geographically close yet suffer inordinate disparities, which is then attributed to the type of institutions. For example, the case studies of North Korea and South Korea as well as Mexico and United States at the border were efficient in countering the aforementioned theory by Diamond, that in turn lend credit to the authors’ arguments.
Acemoglu and Robinson utilised an abundance of concrete examples to substantiate their arguments. The compendium of examples covered Europe, Americas, Asia, that consisted of anecdotal time frames that spanned from the rise and fall of the Roman Empire, the disappearance of the Mayas to the rise of Japan. As these examples span from around the globe and across many societies and time periods, the authors’ theory seemed more persuasive and concrete as it showed that the theory is applicable across a myriad of contexts
The authors also emphasise the importance of historical contingency in their interpretation, highlighting that there is an aspect of random drifts in history and the future. The authors also acknowledged that it is not just the type of institutions but also luck and chance that enables a nation to succeed. Of course, then, institutional dynamics is important to respond to critical junctures and new opportunities that may in turn determine the success or failure of a nation.
In my opinion, Why Nations Fail fell short in certain aspects. Firstly, the authors did not discuss or consider the possibility that inclusive institutions might evolve into something different that could compromise successful nations. With money playing a more prominent role in today’s political system, the interconnection between large banks and the state are increasingly more protuberant. This could subliminally affect the dynamics and policies of inclusive institutions, especially with the financial sector being an increasingly dominant force (Cowen, 2010). Prominent bankers and monopolists of intellectual property could then manipulate the direction and goals of institutions, in a way that may compromise pluralism and centralization of the inclusive institutions.
Additionally, the definitions of inclusive and extractive could have been more extensively discussed. It is hard to determine whether a country has inclusive or extractive institutions with the authors’ broad definitions. The authors also failed to discuss the possibility of countries have a mix of both institutions. Many countries that are wealthy and successful have both extractive and inclusive institutions. Singapore has a political system leaning more towards an extractive one coupled with an inclusive economic institution, yet is highly successful and prosperous.
Despite, the abundance of examples, I felt like the authors cherry-picked their arguments to substantiate their arguments and to hide flaws in their theory. If the authors had included a discussion about the countries who failed despite of inclusive institutions or an extended discussion about countries with extractive institution who still prospered, the scope of the authors’ theory would be widened and the argument would seem more balanced.
Another thing I felt problematic about the book was the authors’ outright cursory dismissal of rival theories as it reflects that the authors are narrow-minded and naïve. They argued that geographical, cultural and other factors are not important as these do not explain the global disparity in the wealth. Although the authors’ theory rationalizes the situation for North Korea and South Korea, it does not hold for other countries like Italy. Northern and Southern Italy have the same type of inclusive institutions, nonetheless, they still suffer from socio-economic disparity. This suggests that other factors are at play and are not as unimportant as the authors proclaim. Cultural factors are pertinent in the explaining economic disparity in Italy. The noticeably lower productivity levels, worse education and lower capita per income in South Italy can be attributed to the Mafia culture (Doward, 2015) that is rampant that spread corruption, block innovation, dampen investment rates and hamper economic activities. In contrast, the football culture in North Italy, spurred on by major football clubs like A.C. Milan (Milan), Juventus F.C. (Turin) and A.S. Roma (Rome) that dominate the European football industry promote synergy and attract high volumes of foreign investment and stimulate economic activities, allowing Southern Italy to be significantly more prosperous. For example, the Chinese owners of A.C. Milan plan to invest in a stadium (The Star Online, 2017), and this in turn, helps stimulate economic activity.
With the heavy emphasis on inclusive and extractive institutions, I felt like there is too much focus on internal issues within nations. The book failed to discuss external issues that affect the development of countries, like competition or war and destruction between nations. In my opinion, war is a key reason why nations fail as victors from wars are likely to succeed and thrive, while losers from wars are likely to have detrimental effects that could linger on to the present day and hinder the nation’s success and growth. The destruction of empires by superior armies are also contributing factors. For example, the Carthaginian Republic and the Roman Republic both had inclusive institutions but the Carthaginian Republic failed due to the mass destruction cause by war by the Roman army.
Conclusion/Significance of the Book
I enjoyed reading Why Nations Fail, albeit critically, as one should with any book. The intellectual book provides intriguing arguments where the role of the state and institutions is central to the economic development of nations. The simplicity of the book along with the illustrious examples allows it to be easily comprehended and digested by a broader and general audience, unlike books like Mokyr’s Culture of Growth, where the reader must possess a certain level of knowledge in the subject to comprehend the ideas and arguments presented in the book. I would thus recommend it to anyone as it covers a broad range of history and political climates and is highly engaging.
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