Why Nations Fail: A Summary Why Nations Fail: The Origins of Power, Prosperity and Poverty (2013) by D. Acemoglu and J.A. Robinson Overall Summary
Why Nations Fail: A Summary Why Nations Fail: The Origins of Power, Prosperity and Poverty (2013) by D. Acemoglu and J.A. Robinson Overall Summary
Why Nations Fail: A Summary Why Nations Fail: The Origins of Power, Prosperity and Poverty (2013) by D. Acemoglu and J.A. Robinson Overall Summary
Why Nations Fail: The Origins of Power, Prosperity and Poverty (2013) by D. Acemoglu and
J.A. Robinson
Overall Summary
Developed countries are wealthy because of inclusive economic institutions Basically a
combination of state and free market in which
1 The state creates incentives for people to invest and innovate (through
guaranteeing private property rights and enforcing contract law)
2 The state enables investment and growth through providing education and
infrastructure, which private business uses, and
3 The state is controlled by its citizens, rather than monopolised by a small elite.
Crucially, there needs to be a democratic principle at work in which people in politics establish
institutions and laws which work for the majority of people, rather than just working to make them
rich.
4 The state also needs to maintain a monopoly on violence.
The authors come to this conclusion through a number of comparative studies of countries which
are in close geographical proximity to each other such as
Mexico/ America
South/ North Korea
Botswana/ Zimbabwe
They argue that the only factor which can explain why one of these countries is poor and the
other rich is because of the institutional infrastructure which has been established through the last
few decades/ centuries.
In contrast to the above inclusive economic institutions which encourage development, the
authors suggest the opposite extractive economic institutions (think corrupt dicator and his clique
sucking money into a Swiss bank account) can generate growth in the short-term, but in the long
term result in poverty.
They also suggest that there has been a vicious circle at work in many underdeveloped
countries over the last three to four centuries With their globalised history starting off with
extractive institutions established by a colonial power (typically built on already existing internal
extractive institutions), which, on independence, became even more extractive under postolonial
rulers, which in turn lead to civil war as competing factions fought for control over the extractive
institutions which then led to a decent into chaos and failed states. The authors see little hope for
such countries.
In contrast, developing countries such as the US and the UK have benefitted from three to
four centuries of a virtuous circle in which institutions have become gradually more inclusive,
which has created increasing incentives for entrepeneurialism and economic growth.
The gist of the book is, handily enough, covered in the intro and chapter one.
Introduction
Countries such as Egypt are poor becuase they have been ruled by a narrow elite that have
organised society for their own benefit at the expense of the vast mass of people. (This also applies
to North Korea, Sierra Leonne, Zimbabwe)
Countries such as Great Britain and The United States are wealthy because their citizens overthrew
the elites who controlled power and created a society where political rights were much more
broadly distributed, where the government was accountable and responsive to its citzens and where
the great mass of people could take advantage of economic opportunties. (This also applies to Japan
and Botswana).
Chapter one so close and yet so different
Starts with a comparison of the two sides of Nogales, half of which lies in Arizona, in the
US, the other half in Mexico.
In the Arizonan half the average income is $30 000 U.S dollars, the majority of adults are
high school graduates, the roads are paved, there is law and order, most live until over 65. In the
Southern half, the average income isthree times less and everything else is similarly worse.
The authors point out that the difference cannot be because of environment or culture, it
must be because of politics and economic opportuntities.
They also argue that in order to understand the difference, you need to go right back to early
Colonialism in the 16th and 17th centuries.
Mexico was the first to be colonised, under a system of slavery and extraction. In the 15th
century, the Spanish basically used already existing systems of slavery to their own benefit and
extracted mountains of gold and silver, leaving a legacy of elite-governance and a dearth of politcal
rights for the majority.
In North America, settled by mainly the English 100 years later, the absence of slavery
amongst indiginous populations and much lower population densities meant that slave systems
simply would not work, although this didnt stop them trying for the first twenty years or so.
Eventually, however, the orginal settler company (The Virginia company) back in England realised
the only way colonialism was going to work was to provide incentives for the settlers So they
offered them land in return for work. It was this that set the basis for the democratic constitution
and congress of the US, which then went on to create problems for the English government.
The rest of chapter goes on to argue that the next 300 years of history are crucial to
understanding why the US is now so wealthy, and why most of Latin America is so poor.
America has had 300 years of political stability, where poltical institutions control economic
institutions, at least to an extent (the authors cite the breaking up of the Microsoft Monopoly as an
example) broadly making them work for everyone. Other factors such as the patent system, credit
systems, and education provide opportunities for anyone to make it rich and enjoy the benefits of
the wealth.
By contrast in Latin America (Mexico), up until the 1990s most countries saw political
turmoil and a series of dicatorships where a series of small elites ruled for their own benefit. This
instability has lead to the rise of monopoly power, and it acts as a disincentive for anyone to try and
do well and become rich (the next dictator might just take all your money away), also lack of
finance and education prevents competition anyway.
Crucially, historical good fortune appears to be central to explaining why a country is rich
now, so figuring out how a current poor country can develop is not that straight forward if a culture
of monopoly, corruption and lack of political rights are the norm..
Countries differ in their economic success becasue of their different institutions the rules
influencing how the economy works and the incentives that motivate people. Crucial is private
property rights which needs to be backed by the state. In South Korea, people know that they
will be rewarded for their efforts, in North Korea, there is no incentive to innovate and invest
because the state will expropriate the benefits of any such initiatives.
In order to develop a society needs to have inclusive economic institutions A state that
guarantees prosperity for the massess Such a state provides a degree of infrastructure that is
necessary for economic growth for example enforcing private property rights, contract rights for
all, not just a minority, and providing education and physical infrastructure such as roads. Private
enterprise uses and needs such institutions.
What doesnt work for development is extractive insitutions where the state is used to
extract wealth from one subset of the population to another. Such as slave and colonial systems
(and the Tories in the UK today?)
Engines of Prospertity
Education for the masses is crucial for innovation in an advanced technological world This
is what all developed nations have, and what many undeveloped nations lack. Education needs to be
well financed and parents need to have the incentive to send their kids to school.
Or in more detail The British Colonial Authorities built extractive instititions whichmany
post independence African politicians were only too happy to continue in order to enrich
themselves. This happened in countries such as Sierra Leone, Ghana, Kenya and Zambia. The
postcolonial rulers used their wealth to build personalised security forces which were answerable to
them and also to rig elections money thus became essential to maintain power, with only those
who have moneyable tomaintain power. This creates incentives among the opposition to depose
the existing leaders in order to gain power and wealth themselves, and to protect themselves from
being killed off by the said existing leaders. The point here is that power has become an end in itself
rather than as a means to developing a country.
This is best illustrated through the example of Sierra Leone
All of the West African nation of Sierra Leone became a British colony in 1896. The British
identified important rulers and and gave them a new title paramount chief. In Eastern Sierra
Leone, for example, they encountered Suluku, a powerful warrior king, who was made Paramount
Chief Suluku.
In 1898 the British tried levying a hut tax of five shillings, which resulted in a civil war
known as the hut tax rebellion. It started in the north, but was strongest and lasted longest in the
South.
In 1904, the British stopped construction of a railway line from Freetown to the North East
and instead diverted it south, to Bo, in Mendeland, to give them quick access to put down this
rebellion.
When Sierra Leone became independent in 1961 the British handed power to to the SLPP,
which attracted support from the South, and in 1967 this party lost the election to the opposition
party, the APC which drew support from the North.
Though the railway line was initially established to rule SL, by 1967, its role was economic
it allowed transportation of the countrys exports coffee, cocoa, and diamonds, which came
mostly from Mendeland in the south.
The then leader of the APC, Siaka Stevens, who drew his political support from the north,
ripped up the railway line and sold off the track and rolling stock in order to weaken the oppostion
in the south and consolidate his political power. This decimated the SL economy, but when it came
to a choice between consolidating power and economic growth, the consolidation of power won out.
Today, you cant take the train to Bo anymore.
There is continuity between Colonial rule and Stevens government both extracted wealth
from the people.
The Colonial rulers did this through agricultural marketing boards farmers had to sell their
goods to these boards, which typically paid much less than the market price (impovershing farmers
and enriching the elite). When Stevens took power, he kept these marketing boards in place, but it
got worse under colonial rule, the colonialists extracted about 50% of the value of agricultral
products, under Stevens, the rate of extracting rose to 90%.
Along with marketing boards, the old system of Paramount Chiefs remain in place today.
They control local politics at the village level, and local land rights and taxation Paramount chiefs
are elected, but only members of the ruling house can stand and in 2005 the victor was Sheku
Fasuluka, King Sulukus great, great grandson.
The combination of these two institutions means thereis very little incentive for farmers to
increase productivity because they have insecure land rights due to the paramount chief system
and are the victim of extractive insitutions in the form of the marketing boards.
Thirdly, there was the control of the diamond mines The British essentially set up a
monopoloy for the entire country and handed it to DeBeers in 1936, and shortly after independence,
Stevens simply nationalised this arrangement, through which he effectively personally controlled
51% of the diamonds in SL.
Stevens used his vast fortune to buy political influence and to set up his own private security
forces the ISU (known locally as the I Shoot You and the Special Security Division known as
Siaka Stevens Dogs).
All of this set the scene for the brutal civil war, outlined below.
The most common reasons nations fail today is because they have extractive institutions
and Zimbabwe illustrates the economic and social consequences of these. By 2008 its per capita
income was half that when it gained its independence, and 2009 the unemployment rate stood at
94%.
The roots of the political and economic instiututions lie in the colonial period. Orginally
apartheid institutions were establised for a white elite to extract wealth from the country, but when
Zimbabwe gained its indendence, these institutions were simply maintained by Mugabe. Eventually
(because of lack of inclusivity) his support waned until by the year 2000 he had to find further
resources to buy political support so he expropriated the farms owned by white people and when
that wasnt enough he printed money, which led to massive hyperinflation.
Nations fail today because their extractive institutions do not create the incentives to save,
invest and innovate. In many cases politicians stifle economic activity because this threatens their
power base (the economic elite) as in Argentina, Colombia and Egypt. In the cases of Zimbabwe
and Sierra Leone this led to total state failure and economic stagnation. The countries in which this
has happened include
Angola
Cameroon
Chad
DRC
Haiti
Liberia
Nepal
Sierra Leone
Sudan
Zimbabwe
And the civil war, mass displacement, famines and epidemics that accompany them in
terms of development many of these countries are poorer today than they were in the 1960s.
A childrens crusade
This section outlines the causes of the civil war in Sierra Leone. The authors put this down
to decades of extractive institutions by the tyrannical APC government (the economy was
collapsing by 1985, and they use the example of the TV transmitter being sold by the minister of
information in 1987 and in 1989 the countrys main radio antena collapsed, ceasing radio
transmissions.) By this point, the army had been dispanded because of the ruling elite feared it
might overthrow them, which meant by the time Charles Taylors RPF crossed the boarder in 1991
there was no one there to stop them. And then that brutal and chaotic civil war carried on for a
decade in which competing factions competed over resources in order to keep fighting each other
diamonds/ children (soldiers) and weapons.
So in summary, the historical precendent of the SL civil war is extractive institutions the
hollowing out the state to the point thatwas incapable of fending off rebels.
The authors now go on to outline three other countries which have suffered from different types of
extractive institutions Colombia, Argentina and Egypt, and then Uzbekistan. a country
languishing under the absolutism of a single family and the cronies surrounding them, with an
economy based on the forced labour of children.
Cotton accounts for 45% of the exports of Uzbekistan. When the country was created in
1991, its first and still only president Islam Karimov, divided up the land among farmers, but each
was required to devote at least 35% of their land to cotton, a valuable export crop. However,
because the farmers themselves receive only a fraction of the world market price of the crop, they
had no incentive to maintain, let alone invest in, cotton harvesting machinery.
No matter, however, because the country has turned to children to harvest the cotton, and every
September-November the schools are emptied of approx. 2.7 million schoolchildren. Teachers,
instead of being instructors, become labour recruiters.
Each child is required to pick between 20-60KG a day, depending on age, and the lucky
ones who live close to their allocated farms can walk or bus to work, but the unlucky ones have to
sleep over in sheds, with no toilets or wash facilities. And its BYO food.
While the market price for cotton was $1.40 in 2006, the children were paid somewhere in
the region of $0.01 per kilo.
All of this has come to pass because Karimov has established a regime where opposition is
repressed and there is no free media or NGOs allowed.
What works.?
The chapter and book round off by going back to the English and US revolutions which
resulted in institutions becoming more inclusive what is required for development is a plurality of
voices demanding to be heard by government and actually being heard. This cannot be imposed
from above, but seems to have to become from below.
In this sense, any attempt to engineer growth and provide aid seem pointless the only things that
make any sense are programmes oriented towards empowerment and making sure media is free
because the later fosters the former.
Limitations
This is quite a generalist analysis extractive and inclusive institutions are very general,
broad terms, and theres lots of variation possible within these voluminous concepts.
The book only draws on a relatively few case studies and lacks the statistical rigour of, for
example, Paul Colliers Bottom Billion Theory.
The book doesnt seem to deal with the globalised context of the nation state today within a
world system There is no mention (as far as I can see) of the role which TNCs, trade rules, the
World Bank might play in allowing a global elite (rather than nationalised elites) to extract regions
of the world.
As a final word, whats maybe most timely (or not timely?) about the book is its suggestion
that some kind of political infrastructure which allows a plurality of voices to be heard and wealth
to be distributed so it benefits all is crucial to development its time more of us started asking how
we might do this at a global, rather than a national level.