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Why Nations Fail:

The Origins of Power,

36 (3) 321-328 (2012)

practice
financial
Prosperity, and Poverty

theory and
DARON ACEMOGLU and JAMES A. ROBINSON
Profile Books, London, UK, 2012, pp. 529

why nations fail

daron acemoglu
Book review by VukVuković* 1

: the origins of power , prosperity

, james a . robinson :
, and
poverty

*
Received: May 28, 2012
Accepted: June 4, 2012
Vuk VUKOVIĆ, MSc
British Chambers of Commerce, 65 Petty France, London, UK
Adam Smith Institute, 23 Great Smith Street, London, UK
e-mail: [email protected]
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What makes countries end up in persistent and permanent poverty? Why is
Mexico much poorer than the United States? Why is Latin America so
fundamentally different to North America? How is it possible that an average
American is 40 times richer than an average Sierra Leonean? Is it climate,
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geography, culture, or could it be the ignorance of domestic leaders? Acemoglu

and Robinson suggest it’s none of these – rather, the real reason behind the
theory

poverty trap and significant betweennation differences lies in the role of political
and economic institutions. Politics and the formation of political institutions take
and

centre stage in their book, which formulates the thesis that only within an
inclusive political system it is possible for nations to achieve prosperity. The
opposite scenario will occur under extractive political institutions where wealth
will be accumulated within a narrow ruling elite which will aim to preserve its
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power thus sentencing a nation to persistent poverty.

In the very beginning of the book the authors hint to the reader how it will be
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, james a . robinson :

organized – through a series of historical case studies uponwhich they illustrate

their theory of institutional change and the consequential success or failure of
nations. It starts with the example of Nogales, a city on the US-Mexican border,
which is split in half by a fence. One city, in the same geographical position,
characterized by the same cultural upbringings, same population, same diseases,
but one part three times richer, much healthier, safer, and with higher living
standards. The crucial difference is the very border separating the two parts of
, and

the city depicting the different institutional settings within them.

poverty

The authors make a strong claim that this great divergence on a localized level
had its roots in the very start of colonization of North and South America. As
the Spaniards came to the Aztec, Mayan and Inca empires they had a single aim
of conquering the indigenous population and extracting their wealth. By
founding their settlements the colonizers designed a system that would coerce
the indigenous people to work for them and extractresources while enriching
only the small ruling Spanish elite. This made the Spanish Crown quite rich at
the time, as massive amounts of gold and other resources flooded into the
country.

The colonization strategy of the English was the same as of the Spaniards –
extract the resources and force the indigenous population to work for the
colonial elite, which would, along with the Crown, obtain maximum benefits
from it. This strategy worked well in India and Africa, but it failed in North
America. First of all, they were late. North America was less attractive and
much scarcer in gold than South America. In addition, the Native Americans put
up far greater resistance and more importantly didn’t allow themselves to
become enslaved and forced into manual labour for the newcomers. It was up to
the settlers to work themselves. At first they were coerced into working by the
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colony’s rulers but this strategy failed due to a range of possibilities for the
coerced to escape to the Indians. As a result, the colony needed to create
different institutions to create incentives for the settlers. With more personal
freedom came demands for more political freedom. In fact, the authors claim

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that the historical prelude to the monumental 1774 US Constitution and the
colonists’ fight for liberty was the formation of the General Assembly in

theory
colonial Jamestown in 1619.

and
It was these initial institutional differences manifested through the limitation of
political power, democratic principles, and economic incentives that paved the
different development paths of US and Mexico, generating the crucial difference
between the two parts of the city of Nogales.

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An intriguing case study approach analyzed through the lens of institutional
formation is the framework used throughout the book.The emphasis is on how

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, james a . robinson :
inclusive political institutions can lead to inclusive economic institutions which
will lay the foundations of wealth creation and sustainable growth. The
combination of inclusive political and economic institutions shapes the
incentives needed for a society to prosper. If people have their wealth
expropriated, they will lack the incentives to create or sustain it. They will fail to
innovate and fail to achieve progress. People need an initial set of institutions to
reduce uncertainty and maintain stability.

, and
This initial set of inclusive economic institutions includes secure property rights,

poverty
rule of law, public services and freedom to contract. The state is relied upon to
provide all of these. It is the role of the state to impose law and order, enforce
contracts and prevent theft and fraud. When the state fails to provide such a set
of institutions it becomes extractive, where its main objective is to satisfy a
small powerful elite (whether the ruler of the country, a set of rulers or prevalent
interest groups).

Acemoglu and Robinson formulate their central hypothesis around the fact that a
strong set of economic institutions which will guide incentives towards creating
wealth can only be achieved through more political freedom. Political
inclusiveness and the distribution of political power within a society are the key
elements that will determine the success or the failure of nations.

To understand and prove this insightful thesis originating from the works of
Adam Smith, Acemoglu and Robinson tackle a variety of historical stories of
success and failure by applying their robust framework. Very often, as they
claim, random historical events can be useful in understanding current
outcomes. They refer to these as the critical junctures of history that exploited
the initial small institutional differences and led to diverging development paths
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of nations. One interesting example of a critical juncture that probably
contributed to the divergence between Western and Eastern Europe was the
bubonic plague, better known as the Black
Death, in the 14th century. Another example is the aforementioned different
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colonization pattern in many countries, the most notable one being between
North and South America.
theory

In their pursuit of an explanation for the role of politics in development, the

and

authors touch upon other dominant theories that have tried to explain poor
growth and under-development. They stress three approaches: (1) the
geographical position of the country (countries in the sub-tropical area), which
blames exposure to rough climate, barren land and tropical diseases; (2) the
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daron acemoglu

cultural attribute, where the population is to be blamed for not being hard-
working (less productive) due to their ethical, religious or cultural boundaries (a
famous example here is Max Weber’s Protestant ethic argument); and (3) the
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, james a . robinson :

ignorance of the country’s ruling elites, implying that if they had better
economic advice, they would be able to emerge from poverty. They also touch
upon the dual economy paradigm that blamed African underdevelopment on the
co-existence of two sectors within an economy between which social mobility
was almost impossible.

Each of these arguments is found faulty by the authors. The rule of a narrow
, and

elite that organizes the society for its own rent-extracting interest is a common
trajectory every nation followed on its road to poverty.The differences between
poverty

the two parts of Nogales, two Koreas, or East and West Germany cannot be
explained by geography, culture, diseases or ignorance – it could only be
explained by a different set of political institutions that resulted in different
economic outcomes. As for the African dual economy paradigm, the dual
economy was artificially created by the ruling (white) elite that maintained
extractive political institutions.

The problem isn’t that poor nations remain poor because of outside (or inside)
exploitation, economic ignorance or laziness of the population. It lies in the role
of politics, and how the ruling elite will organize the country’s political and
economic institutions. If political institutions are organized as extractive and
concentrated in the hands of a narrow elite, then economic institutions will only
serve the purpose of the ruling elites extracting the maximum wealth for
themselves. If they are organized as inclusive, power being dispersed among the
many rather than concentrated among the few, then this institutional
environment will create incentives of inclusive economic institutions, where
innovation and creative destruction will ensure the creation of sustainable
economic growth and development. Becoming a rich nation necessitates the
overthrow of the ruling elites and the distribution of power and political rights
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evenly within a society. The government has to become accountable and
responsive to its people, who can then use this security and stability to advance
on the economic opportunities available to them.

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However, the authors do admit that growth can be achieved within a set of
extractive political institutions. The elites can simply reallocate resources into

theory and
temporary highly productive activities under their control (e.g. from agriculture
to industry). But the problem is that this growth is unsustainable in the long run.
When the economy runs out of steam, so will rapid growth and the country will
first be exposed to an economic and ultimately to a political crisis. The example
of the rapid growth of Soviet Russia illustrates this point. It wasn’t driven by
innovation, but state control and when the foundations for growth were

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exhausted, nothing came to replace it. The authors predict the same thing
happening to China. Even though China is different than Soviet Russia, as it
deploys some inclusive economic institutions, the political elites still constrain

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, james a . robinson :
creative destruction. They mention the example of a Chinese entrepreneur who
wanted to compete with big, inefficient state-owned steel companies and ended
up in prison as a result. The Chinese anti-entrepreneurship climate, censorship
of the media, and technological growth based on adoption of technologies rather
than innovation are all signals of an extractive political system in which growth
is not sustainable. China can overcome this and reach sustainable growth if it
manages to undergo a political reform that will introduce more individual and

, and
political freedom. Until then, they are destined to repeat the Soviet scenario.

poverty
***

The book develops as a fascinating storyline comprising of a multitude of vivid

historical examples that support the central thesis of the authors. After
identifying the main framework of the analysis in the first four chapters, it takes
the reader on a journey through history featuring a number of famous historical
and more recent stories of success and failure. This gives the reader an
opportunity to see how politics can indeed play an important part in the
development of a society.

We see the same historical pattern reoccurring in Venice and Ancient Rome, in
Ethiopia and Mayan city-states, in Soviet Russia and Congo, in 18 th century
Spain, absolutist Austro-Hungary or tsarist Russia. The common characteristic
that led them to failure was the extractiveness of their political institutions. Even
if they did briefly experience rapid growth (such as the absolutist monarchies or
Soviet Russia), this growth was temporary and unsustainable, unless a path
towards inclusiveness followed. When Ancient Rome, Venice and the Mayan
city-states had even partially inclusive institutions that offered the proper
incentives for growth, they managed to experience it. However, when they
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switched to authoritarianism and usurpation of power by the elites, conflicts
emerged and the downfall of their societies began. Inclusiveness was replaced
by extractiveness and consequently development was reversed.
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In England, something different happened. Whilst in other countries repression

was the dominant type of social order, in England the demand for more property
theory

rights and a greater political voice set the stage for sustained growth and
prosperity.
and

Creative destruction and technological innovation made people richer, led to a

new distribution of wealth, and more importantly new distribution of power in
the society. The elites, afraid of losing their privileges, opposed this process.
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They felt threatened and formed barriers to innovation. But in England, through
political conflict, the rising wealth of merchants and manufactures was able to
overcome this opposition and constrain the power of the sovereign, initiating the
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beginning of a new historical era.

This is precisely why the Industrial Revolution started in England, not anywhere
else in the World. The Industrial Revolution developed on the trails of the
Glorious Revolution. It was the importance of a broad coalition representing the
people that succeeded. If there had not been such a broad coalition, one elite
would have simply overtaken the other and continued with extractive
, and

institutions (as happened briefly during the dictatorship of Oliver Cromwell).

Irreversible political change and the switch to inclusiveness transformed the
poverty

economic incentives in the society and created enormous wealth and prosperity.

But not all countries followed this rapid development and not all countries
embraced the benefits of the Industrial Revolution, some even for a long time. It
is due to these defining moments of history (critical junctures) where the authors
explain why all those countries that developed on the ruins of the Ottoman
Empire tend to be relatively impoverished (provided that they are not oil
exporters). The Ottoman Empire, instead of embracing change, felt threatened
by it and sentenced its minions to another 200 years of extraction and poverty.
The opposition to the elites in the Ottoman Empire never grew as strong as it did
in England, which is why inclusive institutions never developed there. The same
is true for a multitude of countries at the time, including Spain, Austro-Hungary,
Russia or China.

Wherever those with political power felt threatened by technology and

innovation, they prevented it, and by doing so they effectively prevented wealth
creation and prosperity.
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The summing-up of their analysis is through explaining the vicious and the
virtuous cycles of prosperity. Whenever inclusive institutions are present, the
virtuous cycle will create positive feedback loops that will prevent the elites
overcoming them. It will make sure that inclusive institutions expand and

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become persistent. Similarly, in the case of extractive institutions vicious cycles
will generate negative feedback loops that will prevent progress.

theory and
In order for the virtuous cycle to work the first precondition is to have pluralism,
which will constitute the rule of law and lead to more inclusive economic
institutions. Inclusive economic institutions will remove the need for extraction
since those in power will gain little but lose a lot if engaged in a repression and
constraining democracy. Finally, they also recognize the importance of free

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media to provide information on threats against inclusive institutions.

The virtuous cycle explains how the reforms of the political system in England

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, james a . robinson :
or the US became irreversible, since those in power understood that any possible
deviation would endanger their own position. The examples of British
consolidation and its slow, contingent path to democracy in which the people
gradually demanded and gradually received more rights; or the trust-busting in
the US in the beginning of the 20th century; or the failed attempts of President
Roosevelt to limit the power of the US Supreme Court illustrate this point.

, and
Pluralism and the rule of law were critical conditions leading to the limits of
political power that made the virtuous cycle possible in the US and Britain. And

poverty
this was precisely why Fujimori’s Peru, Chavez’s Venezuela or Peron’s
Argentina failed. They failed to create institutions to limit political power. These
systems developed extractive institutions and generated a vicious cycle in which
the ruling elite had no constraints on power and had great incentives for
expropriation and wealth extraction. Even if this elite were to be overthrown by
a revolution, the “iron law of oligarchy” implied that a new elite would simply
replace the old one and continue in its extraction, sometimes even worse than
under the old elite. This is why the authors are somewhat sceptical of the ability
of the Arab Spring to produce the necessary shift towards inclusiveness.

Once again the authors convince the reader in the mechanism of the negative
feedback loop and the iron law of oligarchy through a multitude of cases ranging
from Sierra Leone, Guatemala, Ethiopia, Zimbabwe, Uzbekistan, Columbia,
Argentina, Egypt and even slavery in the US South. However, the vicious cycle
in the US South was easier to break due to the existence of inclusive institutions
on the federal level. The Civil Rights Movement generated equality in the South
and paved the way for economic growth.
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Another good example of “breaking the mould” is Botswana, where the natural
resource course didn’t lead to extraction from colonists or usurpation of power
over who gets to control resource extraction and enrich upon it. They have
managed to seize their critical juncture – postcolonial independence – and used
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it to develop inclusive institutions.

theory

The authors refrain from trying to write a recipe for development since there is
no such thing. Their theory based on critical junctures and specific historical
and

paths loses predictive power since it is hard to tell which countries could break
the mould anytime soon. The theory can say which countries are likely to stay
poor for a long time but it cannot really answer the question on what will follow
after events like the Arab Spring. A range of factors will decide whether the
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Arab countries undergo a gradual path towards inclusiveness or whether the iron
rule of oligarchy prevails.
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Finally, prosperity cannot be engineered by international institutions with a

recipe for reform or foreign aid; it has to come from empowerment to the people
and their inclusiveness in the political process. Once a broad coalition is formed
this will enable the inclusive institutions to persist and the political reforms to
become irreversible. One can conclude that based on this approach, inclusive
economic and political institutions develop spontaneously, while extractive
institutions are imposed by outside coercion. The road to prosperity is thus
, and

always achieved through more political, individual and economic freedom.

poverty

The only part the authors did not cover in more detail is what happens after
political and economic inclusiveness are attained, when certain elites or
organized interest groups try to obtain political support to serve their own self-
interest. An answer from the book would probably be that this scenario falls out
of the general definition of inclusive political institutions, where the media is
(partially) captured and where narrow self-interests can curtail the system in
order to extract certain benefit. It is here that their framework could be extended,
but the already large scope and size of the book prevent the authors from
engaging so deeply into the subject.

The framework used in the book is based on a rigorous fifteen-year research

process conducted by the authors and examined previously in some of their
earlier, more analytical work. Regular readers of their work will recognize many
of the ideas on the consolidation of democracies and political transitions coming
from their 2006 book, Origins of Dictatorships and Democracy, along with
many academic articles. Why Nations Fail builds on these findings thus
providing the crowning achievement in their political economy theory. It is a
recommended read to all professions and anyone interested in finding out why
some nations are rich while others are poor.
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Even though the book lacks academic rigour in supporting the theory and
proving the causality of certain events and their further manifestation, such
virtues were probably not the authors’ objectives.

For anyone interested in the academic proofs behind certain historical events, I
recommend their earlier work in which the analytical framework can be
thoroughly analyzed. This book had different goals. Its emphasis on historical
case studies to make it more interesting to the general reader succeeds in
transferring the idea to all those outside the economic and political science
profession. They have managed to summarize their theory and make the case for
institutional change, while presenting it in an understandable, yet brilliant way
for all those who are not economists. That alone marks the book as a success.