Why Nations Fail

I’m just finished reading Why Nations Fail, a brilliant book that argues that power, prosperity, and poverty are determined by political and economic institutions.  Extractive institutions lead to failed states–while inclusive institutions allow for innovation, free markets, and ultimately, riches for a society. This theory is quite novel–others have argued that it is geography, culture, or ignorance that lead to failed states. But Acemoglu and Robinson disagree: all failed societies can be explained by extractive–and therefore, exploitative–institutions at work. To illustrate their point, they give dozens of examples, from North and South Korea to the town of Nogales that straddles the U.S.-Mexico border.

I actually began reading Why Nations Fail a few years ago, while working as a research assistant for the Economics Department at school–this copy arrived as a pleasant birthday surprise from Oyumaa. It is a long but worthy read as I was able to learn more about colonialism, dependency theory, and ultimately the political and economic history of nations around the world.

A few takeaways:

  1. Patents, firms, and loans are the keys to widespread economic success. The reason for the U.S. to take off in the 19th century can be attributed to the fact that intellectual property was protected by the state. People from all backgrounds could be granted a patent–and then go to build a business based off of that idea. Inventors were lucky in that there were no significant barriers to entry in starting a business. Most importantly, there was ready access to capital, often available at a fairly low interest rate. (Unfortunately, many other countries didn’t have these provisions in place–other could steal your idea and profit, thus disincentivizing innovation.)
  2. “Creative destruction” is the process of new sectors taking resources away from old sectors. (Consider how railroads might lead to unemployment for those who work in manual or horse-driven transport) Often times the aristocracy and political leaders oppose innovation because they are afraid of creative destruction–and how it might lead to less power for the landed elites. A great example is the Austro-Hungarian empire where serfdom was widespread and the crown actively opposed technological innovation. Francis I believed that industry leads to densely populated cities where ideas spread quickly–in this environment, workers could organize and demand better rights, leading to a revolution. Afraid of losing power over his empire, Francis I banned the creation of new factories in Vienna and also opposed the construction of railways. By prioritizing his power over the needs of his nation, he effectively held back his country by over 100 years.  Extractive politics are intertwined with extractive economic policy.
  3. Critical junctures are “a major event or confluence of factors disrupting the existing economic or political balance in society.” The outcome of a critical juncture is not historically predetermined. An example is the Black Death, that led to greater freedom in Western Europe but more inequality in Eastern Europe. In England, serfs were able to organize and demand higher wages and mobility–and a more inclusive labor market. Unfortunately, in the East, landlords strengthened their hold on the land and began to further control their workers. Unable to organize and too few in number, the workers lost what little rights they might have had and ended up in the Second Serfdom, a time of continued extractive practices. Of course, critical junctures don’t always turn out as expected. A particularly compelling example is the post-war American South. The authors ask, why didn’t equality prevail after the Civil War–and why was the South so much poorer than the North? Apparently,  slave-holders in the deep south enacted a law in the Confederacy that exempted one man from serving for every 20 slaves held. This means that rich families with hundreds of slaves never fought in the war–and therefore, never lost any power. Their wealth remained intact and their power undisturbed. When the war ended, these elites continued to pass laws to keep the status quo in their favor leading to decades of institutional segregation and racism. The South stayed economically stagnant for almost another century thanks to this institutional inequality and continuation of extractive institutions.

There are so many wonderful examples given in the book–and I would highly encourage it. As an Economics major with a strong interest in International Development, it definitely helped me look at the world order through a different pair of eyes.

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