Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Daron Acemoglu and James A. Robinson. 2012.
The authors begin by comparing life in Nogales, Arizona with life in Nogales, Sonora, which is only a few feet away across the Mexican border. Residents north of the border are healthier, live longer, have three times more household income, and enjoy much better government services, including law and order, with much less corruption than residents south of the border. Due to the proximity and shared background of the two cities, these striking differences cannot be explained by the usual references to geography, culture, ignorance, or the protestant work ethic. Instead, the cause is major differences of political and economic institutions between the US and Mexico. These differences have evolved because of the way the societies were formed in the early colonial period.
Spain’s and Portugal’s conquests of Mexico, Central America, and South America were complete. Hence, they were able to replace the already exploitative institutions of the indigenous peoples with similar noninclusive, extractive institutions of their own. The new European aristocracy established a system of absolutist rule with forced labor to extract the wealth and resources of indigenous peoples for themselves, Spain, and Portugal. Once established, this system persisted for centuries, including within many new countries formed after independence from Spain and Portugal. Infighting of elites over the spoils led to political instability with an endless succession of coups and dysfunctional governments. Dispossession and political exclusion of the general population led to slow economic growth from lack of incentives for innovation and entrepreneurship and from inability to counter the excesses of elites.
English colonization of the New World did not begin until after the defeat of the Spanish Armada in 1588 and hence was limited to the then less desirable portion that remained in North America. The English intended to establish exactly the same kind of noninclusive, extractive colonies as the Spanish and Portuguese. However, due to differing circumstances, their initial colony at Jamestown failed to subjugate the indigenous peoples, then failed to confiscate sufficient output from their own colonists. Consequently, the English were forced to introduce economic incentives and increased political participation to develop and retain more productive colonists. These changes persisted and evolved into the institutions of the US today that are much more inclusive and much less extractive than those of Latin America. It is the cumulative effects of these extractive institutions designed to take incomes and wealth from one subset of society to benefit a different subset that explain the differences in prosperity between Nogales, Arizona, and Nogales, Sonora. The authors then report that similar institutional factors in other countries and eras provide the best explanation for most differences in national prosperity for the rest of the world.
Alternative possible primary sources for differences in prosperity are discussed and dismissed. For geography and culture, this is done by comparing many adjacent regions with differing outcomes, such as Nogales, North and South Korea, West and East Germany, and adjacent sides of the Kasai River in the Congo. For religion, it is noted that recent Asian successes occurred without benefit of the Protestant work ethic and that Middle Eastern dysfunction is much more strongly related to successive extractive colonization by the Ottoman Empire and European powers than to the Islamic religion. For ignorance, it is noted that the leaders of underperforming countries are well aware of the problems of their extractive policies but choose them on purpose since they benefit at the expense of everyone else. Also, it is noted that many economists seem to favor the ignorance hypothesis because it implies more value for the advice they provide.
For much of world history, economic growth has been slow due to mostly noninclusive and extractive political and economic institutions, although with some variability. In ancient Rome, expansion and some economic growth occurred during the years of the Republic (510-28 B.C.) due to somewhat more inclusive (though still restrictive) political and economic institutions. Toward the end of the Republic and during the years of the Empire (28 B.C.-476 A.D), increasingly absolutist political rule, increased economic extraction by elites, markedly increased inequality, and eventually extreme political instability with endless civil wars resulted in complete collapse. In Medieval times, the Venetian Republic flourished from its onset in 810 A.D. due to relatively inclusive institutions and a favorable location for Mediterranean trade. However, the adoption of noninclusive institutions beginning in the 14th Century led to its decline to be the museum it is today. Many more historic examples are discussed.
Although noninclusive societies sometimes manage to achieve limited growth, it is usually unsustainable. The classic Maya civilization of 400-1200 A.D. (after the earlier 500 B.C.-100 A.D. cities) initially expanded due to centralized government and occupational specialization, but then declined due to political instability from elites fighting over the spoils of extraction. From 1928 to 1960, the Soviet Union achieved 6% annual growth of income by reallocating resources from agriculture to industry, but then declined and collapsed when this reallocation was complete. Thus, growth in extractive societies is unsustainable because technologic progress does not occur when most people in the economy lack the necessary incentives and security for innovation and the necessary political participation to limit extraction by elites. Indeed, political and economic elites who benefit
from the status quo often resist conditions that favor growth because they fear the creative destruction of a healthy economy.
World inequality dramatically increased with the British Industrial Revolution because only some parts of the world had the necessary inclusive institutions to adopt the spectacular changes of its innovations and new technology. These changes started in Briton and soon spread to Europe, the British “Settler Colonies” (US, Canada, Australia, and New Zealand), and Japan, then to South Korea, Taiwan, and China after World War II. They failed to spread to Sub-Saharan Africa, much of Latin America, the Middle East, and much of Asia due to the absence of favorable institutions. This failure was the legacy of centuries of institutions with absolutist political repression and economic extraction (including the slave trade), mostly from colonization by European countries, then from new countries’ own elites after independence in the 20th Century.
Absolutist rulers who feared economic change leading to political change actually blocked or delayed spread of the Industrial Revolution in the Ottoman Empire, Spain, Austria-Hungary, Russia, and China. Absolutism was not the only barrier to developing inclusive institutions. Some parts of the world, particularly in Africa, lacked a centralized state that could even provide the minimal law and order necessary for those institutions. European colonization even reversed some favorable institutional development, such as with the Portuguese and Dutch conquest of the Asian spice economy and with the expansion of the Atlantic slave trade for the sugar plantations and other colonies in the Americas.
The Industrial Revolution started and made its biggest strides in England because of her uniquely inclusive political and economic institutions. The emergence of constitutional rule and political pluralism made possible centralized government that could strengthen property rights, improve markets, undermine state-sanctioned monopolies, remove trade barriers, extend taxation to elites, and limit extraction by elites to increase incentives for innovators and entrepreneurs. Highlights in the evolution of this system included the Magna Carta of 1215, the Peasant’s Revolt of 1381, political centralization beginning after 1485 by the Tudors and continuing with the Glorious Revolution of 1688, the shift of authority from the monarch to Parliament after 1688, and subsequently numerous acts of Parliament that encouraged the countless innovations in textiles, other manufacturing, transportation, and trade occurring at the time.
Why did these inclusive changes vital to economic development occur first in England rather than somewhere else? According to the authors, the divergence of institutional characteristics between nations is largely the consequence of slow accumulation of small historical differences, the acts of individuals, or just random factors. This institutional drift is then amplified by critical junctures that lead to more rapid divergence, as in the following instances. The Black Death of 1346 led to labor shortages and land surpluses in Europe that ended feudalism in the West, where peasants had more bargaining power, but strengthened it in the East. The expansion of world trade after 1600 weakened the absolute rule of Elizabeth I of England who was unable to establish monopolies but strengthened it for the monarchs in France and Spain who were able to do so. The French Revolution led to inclusive institutions that converged with those of England in Western Europe but not in Eastern Europe.
Once established, these institutional differences are remarkably persistent due to virtuous and vicious cycles. They remain the core cause of inequality between and within nations today, although details vary from nation to nation. North Korea has one-party rule without elections, while Zimbabwe has one-party rule with the façade of elections. Argentina and Columbia have elections, but authority does not reach the periphery in Columbia. In Egypt and Uzbekistan elites took over extractive institutions of socialist governments and transformed them to crony capitalism. Centralized government is lacking in Somalia and Afghanistan because of failure to achieve it and in Haiti and Sierra Leone because of collapse of the state.
The solution to the economic and political failure of nations today is the difficult task of transforming extractive institutions toward inclusive ones. To do so, requires some degree of centralized order, some preexisting political inclusiveness, and transformative media, which are often attacked or captured by extractive regimes. Three examples of success are given. In Botswana, the chiefs seized the critical juncture of postcolonial independence to introduce inclusive institutions that achieved the highest per-capita income in sub-Saharan Africa at a level equal to that of Hungary. In the US South, replacement of the highly extractive institutions of slavery and Jim Crow in the 1960s contributed to the elimination of the 50% per-capita income gap between the South and the North. In China, the replacement by Deng Xiaoping of Mao’s extractive economic institutions in 1980 led to decades of rapid economic growth. However, questions remain about sustainability in China because this was said to be catch-up growth under noninclusive political institutions, rather than growth from innovation and creative destruction.
Multiple alternative solutions to reverse economic failures of nations are examined and rejected. The irresistible charm of authoritarian growth, such as in China, is rejected because China’s institutions are extractive, and its growth is said to be likely to end as soon as it reaches the level of a middle income country. The modernization theory that societies may pass through an authoritarian stage during rapid growth before becoming democratic as they mature is rejected because no authoritarian society has done so in the last one hundred years. The the prospect of engineering prosperity by providing the right advice is rejected because it fails to recognize the primary role of political institutions that undermine meaningful change. A primary role for foreign aid to extractive governments is rejected, since most of it is plundered and fails to reach its target.
32. Why Nations Fail (from extraction economics to benefit colonialists and oligarchs)
