Why Nations Fail

WHY NATIONS FAIL
In Why Nations Fail, economists Daron Acemoglu and James A. Robinson argue

that institutional differences are responsible for the profound inequalities between
nations today. While most social scientists blame this inequality on geography,
culture, or incompetent leadership, Acemoglu and Robinson think the problem is
political. They argue that most of the world’s countries are poor because their political
and economic institutions are extractive, which means they’re designed to benefit the
small elite that holds power. In contrast, rich countries have achieved sustainable
economic growth by building inclusive political and economic institutions. Such
institutions secure political representation and economic freedom for a wide range of
the population. In turn, this drives innovation and investment, leading to sustainable
economic growth. Based on their analysis, Acemoglu and Robinson argue that
replacing extractive institutions with inclusive ones is the key to achieving economic
progress in the developing world—and overcoming global inequality.
In the first chapter, Acemoglu and Robinson focus on Nogales, a city that exemplifies
modern inequality because it’s split by the U.S.-Mexico border. While both halves of
Nogales share the same culture, history, and geography, people on the U.S. side have
a much higher standard of living and more economic opportunities than those on the
Mexican side.
Political history accounts for this disparity. Colonial Latin America ran on
the encomienda system, a system of indigenous slave labor that was massively
profitable for Spanish settlers but destructive to local communities. In contrast, the
earliest English settlers in Virginia had to farm their own land to survive. To build a
viable colony, then, the government had to give English settlers political power and
rights. Although it also came to depend on slavery and was by no means democratic,
Acemoglu and Robinson argue that the colonial U.S. was actually a remarkably
inclusive society for its time. This foundation allowed the U.S. to build stable and
democratic institutions, which eventually helped the country harness the Industrial
Revolution and grow rapidly from the 19th century onwards. In contrast, Mexico’s
economy is still highly extractive and centered around the elite, which has prevented
innovation and economic growth.
Acemoglu and Robinson go on to point out that geography and cultural customs can’t
explain global inequality. And while other social scientists blame poverty on leaders’
ignorant policy decisions, the authors note that leaders aren’t ignorant: politicians
know when they’ll benefit from policies that harm people. Institutions are the real
problem, along with the incentives they create.
The authors point out that political institutions create economic ones, so true
economic change starts with political change. This means that a country has to adopt
inclusive practices in order to achieve meaningful economic growth. Extractive
institutions can experience a certain amount of financial success, but this success is
severely limited and unsustainable, as made evident by the decline of the Soviet
Union.
Next, the authors ask where inclusive and extractive institutions come from. While
most societies throughout history have had extractive institutions, some have formed
inclusive institutions during periods of transition (or critical junctures). During these
critical junctures, societies that are similar to one another sometimes go down
radically different paths. For instance, in medieval Europe, feudal landlords had
slightly more power over their serfs in Eastern Europe than they did in Western
Europe. But after the Black Death, this difference was amplified: serfs won reforms in
the West and thus weakened the feudal system. In the East, though, landlords grew
stronger and serfs became even weaker, ultimately reinforcing the feudal system. The
same principle applies to inclusive institutions: for example, England’s monarchy was
weaker than France and Spain’s in the 1600s, so it put private merchants in charge of
overseas commerce instead of giving a monopoly to the Crown. The merchants were
therefore able to gain political power and eventually build inclusive institutions during
the Glorious Revolution.
Acemoglu and Robinson go on to examine economic growth under extractive

conditions. Extractive practices often redirect resources to activities that are
productive in the short term, but this stifles innovation and doesn’t lead to sustainable
long-term growth. In the following chapter, the authors look at how Venice and
ancient Rome rose and fell over the course of centuries. Both prospered after building
inclusive political and economic systems, then started to decline when once aristocrats
seized power and built extractive institutions for their own personal benefit.
In Chapter Seven, Acemoglu and Robinson examine the most important turning points
in modern economic history: the Glorious Revolution and the Industrial Revolution in
England. In 1688, the Glorious Revolution gave Parliament more power than the
Crown for the first time. Although not yet democratic, England did
become pluralistic—several different groups came together to make decisions in
Parliament. All of them cared about making the political system fair and protecting
their property and inventions. These reforms facilitated the Industrial Revolution,
which made England the first place in the world to experience high, sustained levels
of economic growth.
But many countries never saw the Industrial Revolution’s benefits because they had
extractive institutions, and the elites who ran them opposed innovation and stifled
economic growth. For instance, the Ottoman Empire banned the printing press, and
Russia and Austria-Hungary banned railroads and factories. Even technologically
advanced China refused to trade with the outside world for hundreds of years. In all
these cases, elites already controlled government and industry. Therefore, they saw
economic change—or creative destruction—as a threat, not an opportunity. But
these absolutist monarchies weren’t the only countries with extractive institutions.
Starting in the 1400s, European colonialism set up similar institutions across the
world. The Dutch destroyed prosperous city-states in present-day Indonesia, the slave
trade created widespread conflict and destruction in Africa, and white settlers
deliberately created unequal dual economies in places like South Africa.
Nevertheless, some countries built inclusive institutions and started industrializing in

the 1800s. Australia’s colonial economy couldn’t function unless settlers received
political and economic rights, so England rapidly built inclusive institutions there.
The French Revolution baked inclusive principles into the French constitution,
and Napoleon’s invasions spread these principles throughout Europe in the early
1800s. Meanwhile, Japan’s 1868 Meiji Restoration gave merchants and
entrepreneurs many new economic rights, which allowed the country to industrialize.
In the next two chapters, the authors explain how different kinds of institutions
reinforce themselves. First, inclusive institutions perpetuate themselves through
a virtuous circle. They check government power, which stops abuses of power, and
they gradually bring wider groups into political and economic life. This is why, after
the Glorious Revolution, Britain slowly but surely enfranchised the rest of its
population. It’s also why the U.S. managed to break up corporate monopolies and stop
presidential overreach in the 20th century. In contrast, however, extractive institutions
become more extractive over time, following a vicious circle. In some countries, like
Sierra Leone and Ethiopia, one group of revolutionaries overthrows the government
but then rules in exactly the same way. In others, like Guatemala, the same elite
manages to hold power for centuries despite profound social changes. In both cases,
elites use their political power to protect the economic system that works in their
favor.
Acemoglu and Robinson profile a series of countries that struggle under extractive
institutions, including Zimbabwe, Sierra Leone, Colombia, Argentina, North Korea,
Uzbekistan, and Egypt. All of them have been caught in the vicious circle for well
over a century. Very few societies have managed to “break the mold,” but the authors
mention three that have succeeded: Botswana, the Southern U.S., and China.
Botswana built on its democratic precolonial traditions to create a vibrant, inclusive
democracy after independence. The civil rights movement ended segregation and
created true democracy in the Southern U.S. And China kicked off an extraordinary
period of growth by reforming its economic policies in the 1980s.
In the book’s final chapter, though, Acemoglu and Robinson warn that China’s
growth is unsustainable because it’s based on the reallocation of resources and labor,
not genuine innovation. In conclusion, the authors emphasize that history is
impossible to predict with certainty. At the same time, they also reiterate their thesis
that the surest path to economic growth is radical institutional reform. And the best
way to do this, they argue, is by empowering broad coalitions that can steer their
countries to serve diverse interests—not just those of the elite.

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WHY NATIONS FAIL

In Why Nations Fail, economists Daron Acemoglu and James A. Robinson argue

Acemoglu and Robinson go on to examine economic growth under extractive

Nevertheless, some countries built inclusive institutions and started industrializing in

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