Previous
Preface
Themes
and Colors
Key
LitCharts assigns a color and icon to each theme in Why Nations Fail, which you can use to track the themes throughout the work.
Global Inequality and Economic Growth
History and Institutional Change
Cycles of Wealth and Poverty
Diversity, Pluralism, and Empowerment
Summary
Analysis
In this chapter’s first section, “The Economics of the Rio Grande,” Acemoglu and Robinson describe the city of Nogales, which is divided by the US-Mexico border. In Nogales, Arizona, most residents have at least a high school education, reasonable access to health care, and government services like roads and electricity. They don’t have to worry about their safety and can vote out elected officials if those officials don’t protect the public. But none of this is true across the border in Nogales, Sonora.
The two halves of Nogales embody the deep inequalities that plague the globe, and the US-Mexico border represents the stark divide between rich and poor in the world today. This inequality isn’t just about income and wealth—rather, it encompasses all aspects of a society’s standard of living. Of course, this passage raises the pressing questions that are at the heart of this book: why does this divide exist, and how can people overcome it?
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The two halves of Nogales share the same geography, climate, history, and culture—the only difference is their economic and political institutions. On the US side, residents benefit from higher wages because of national investments in education and technology. They also benefit from a robust democratic system, which makes the government generally responsive to their needs. But on the Mexico side, institutions don’t encourage investment or effective government. To understand why the US’s institutions have generated more prosperity than Mexico’s—and the rest of Latin America’s—Acemoglu and Robinson turn to the colonial history of each region.
If geography, climate, history, or culture determined prosperity, then the two halves of Nogales would be equally rich. They aren’t, which is good evidence against all four of these explanations. Instead, the authors return to their primary thesis: institutions determine economic growth, and global inequality is the result of different countries’ differing institutions. Acemoglu and Robinson point out that both political and economic institutions shape prosperity. For instance, the US’s relatively strong democracy is an important political institution, and its strong technology sector is the result of its strong economic institutions, which encourage investment.
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The next heading is “The Founding of Buenos Aires.” In 1514, the Spanish claimed the Río de la Plata estuary in South America, and in 1534, they founded the city of Buenos Aires on its banks. They tried and failed to enslave the local Charrúa and Querandí hunter-gatherers, so they sent an expedition up the Paraná River instead. There, the explorers encountered the Guaraní and enslaved them. The Spanish then brought their fellow colonists upriver from Buenos Aires and established their new city, Asunción. In other words, the Spanish colonists abandoned Buenos Aires because they wanted to plunder the Americas, not farm the land themselves.
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In the next section, “From Cajamarca …,” Acemoglu and Robinson explain how the Spanish conquered most of the Americas in the 1500s. Their ruthlessly effective strategy was to capture indigenous leaders, set themselves up as a new aristocracy, and start taxing and enslaving the indigenous population. For instance, at the Aztec capital of Tenochtitlán, Hernán Cortés captured the emperor Moctezuma, seized and melted down all of his gold, and granted encomiendas—parcels of land and groups of indigenous slaves—to Spanish settlers. The priest Bartolomé de las Casas famously spoke out against the encomienda system, writing about how Spanish settlers stole their slaves’ meager resources and brutally tortured indigenous leaders.
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The Spanish conquest of Peru followed a similar pattern. Francisco Pizarro captured the Inca emperor Atahualpa, demanded he fill several rooms with gold, and then killed him after he succeeded. The Spanish went on to murder the Inca aristocracy in Cusco, then enslave the indigenous population and organize them into encomiendas. They also forced a seventh of the region’s men to work in a large silver mine at Potosí. This labor system, which is called the mita, continued until 1825. Its legacy is still visible today—for instance, the province of Acomayo, which was forced into the mita system, is much poorer today than the neighboring province of Calca, which wasn’t.
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In Peru, the Spanish government also imposed other laws to extract as much wealth as possible from the local population: indigenous people had to pay a yearly tax in silver, sell everything at low prices fixed by the Spanish, and transport goods on their backs like pack animals. All over the Spanish Empire, between the encomienda system and these extractive laws, the Spanish enriched themselves but impoverished their territories—which now make up the most economically unequal region in the world.
Acemoglu and Robinson start the next section, “… To Jamestown,” by explaining that England was much less powerful than Spain in the 1500s. But after defeating the Spanish Armada in 1588, England sent an expedition to North America. (South America was more desirable, but it was already taken.) The English settlers who founded Jamestown in 1607 planned to capture a local leader and rule over indigenous people, just like the Spanish had done. But the surrounding indigenous groups were organized into the powerful Powhatan Confederacy, and the colonists ended up trading with them to survive the freezing winter.
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The former mercenary and criminal John Smith, who led the Jamestown colony and coordinated its commerce with the natives, quickly realized that Spanish tactics wouldn’t work in North America. Most importantly, there was no gold to mine. Smith and the English expedition’s captain, Christopher Newport, next tried to make the native king Wahunsunacock pledge loyalty to the British Crown. They failed, and Wahunsunacock decided to stop trading with them. Smith forced the colonists to farm for themselves, because it was the only way to survive the winter.
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But the Virginia Company, the British corporation in charge of the Jamestown settlement, was dissatisfied with its profits. It reorganized the colony’s government, which angered John Smith. He left, and most of the Jamestown colonists starved to death the following winter. The Virginia Company forced all new settlers to work in brutal conditions, much like the Spanish did to indigenous workers in their territories. But since North America’s population density was very low, there was plenty of open land, and many settlers decided to just abandon the Virginia Company and go live on their own.
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England started to realize that, if it wanted to maintain control of its colony, it had to give the settlers land, political rights, and economic incentives to work. Other models simply weren’t viable. For instance, the powerful noblemen Lord Baltimore and Sir Anthony Ashley-Cooper each tried to build their own private colonies with elitist, hierarchical systems of power and landownership. But this failed because their settlers just packed up and left.
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Eventually, the Crown took control of Baltimore and Ashley-Cooper’s colonies (Maryland and Carolina), allowing settlers in these colonies to more or less rule and represent themselves. By the early 1700s, then, male settlers in the 13 US colonies had far broader political rights than other nations around the world. This created the foundation for the US Declaration of Independence.
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Under the heading “A Tale of Two Constitutions,” Acemoglu and Robinson argue that the history they’ve presented so far explains why the US went on to create a relatively egalitarian constitution. Next, they explain why Mexico’s constitution was not nearly as democratic.
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Mexico’s fight for independence began after Napoleon invaded Spain and dethroned its king in 1808. Next, Spanish military leaders passed a new constitution based on principles of equality and popular sovereignty. This frightened elites in Mexico, who were still profiting off of forced labor in the encomienda system. Although the Spanish monarchy was eventually restored, the military ended up forcing the king to accept an even more egalitarian constitution, and Mexican elites revolted. The military leader Augustín de Iturbide led the Mexican army to independence in 1821, then began to rule with an iron fist as its emperor.
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The authors next compare the effects of the US and Mexican constitutions. The US Constitution didn’t establish a modern democracy—it disenfranchised women and Black people, and it protected slavery. But the US managed to legislate away all the conflicts between the North and South through agreements like the Three-Fifths Compromise. This is why the US’s political institutions stayed intact until the Civil War. And even though the Civil War was bloody and tragic, it only lasted for five years.
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In contrast, Mexico saw constant conflict and political instability for the first 50 years of its independence. For instance, the presidency changed hands so often that Antonio López de Santa Ana was president 11 different times from 1835 to 1855, and Mexico had 52 presidents from 1824 to 1865. Because of this instability, property rights were weak, and the government didn’t actually control the whole national territory. This made it easier for the US to invade and annex Texas. Most of all, independent Mexico’s economic system was designed to preserve exploitative, unequal monopolies from the colonial era—and not give real economic opportunities to the majority of the population.
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Under the heading “Having an Idea, Starting a Firm, and Getting a Loan,” Acemoglu and Robinson explain how, after the Industrial Revolution kicked off in England, Americans followed suit and started inventing new technologies. Because of the US’s relatively free patent laws, people without an elite upbringing could easily get patents. But to really profit from their patents, inventors needed to start companies—and get loans. Fortunately, in the US in the 19th century, the banking sector was vibrant and competitive, so inventors could get loans at low interest rates.
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But inventors didn’t have the same access to capital in Mexico. Two banks dominated the market, and they only loaned to wealthy people and charged exorbitant interest rates. The problem was political: after the authoritarian president Porfirio Díaz took power in 1876, he freely ignored property rights and gave his friends monopolies over key industries—including banking. When politicians in the US tried to do the same thing in the 1700s, they promptly got voted out of office. The US’s “broad distribution of political rights” was thus the real reason American inventors could get the money they needed to pursue their ideas.
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In the section “Path-Dependent Change,” Acemoglu and Robinson contrast how US and Latin American institutions responded to industrialization and globalization in the late 1800s. In each region, institutions kept doing what they were already doing, and this caused their fortunes to diverge even further: it created more growth in the US and more conflict and inequality in Latin America.
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For instance, US laws gave virtually all white settlers the right to seize and settle indigenous land on the frontier, while in Latin America, leaders like Porfirio Díaz gifted frontier land to their powerful friends. While political reforms benefited many people in the US, then, in Mexico they primarily benefitted a tiny elite. This led to further political unrest, like the Mexican Revolution that overthrew Díaz in 1910. The pattern was similar all over Latin America: military and authoritarian governments seized resources for themselves, which caused further backlash, instability, and conflict. To stay in power, these governments also silenced their opponents and committed human rights atrocities—including mass murder in countries like Chile, Guatemala, and Argentina.
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Under the heading “Making a Billion or Two,” Acemoglu and Robinson contrast the two richest men in the world: the American Bill Gates and the Mexican Carlos Slim. Gates founded Microsoft, an innovative technology company. Despite Microsoft’s influential position in American society, though, the US government still successfully sued the company when it abused its monopoly power. In contrast, Slim became rich by buying the national telecom monopoly when the government privatized it. In general, Mexican entrepreneurs have to deal with far more barriers to entry than American ones—including licensing, negotiations with politicians, and financing. All these barriers stifle competition and protect existing monopolies, like Slim’s, which he has consistently protected in the courts through legal loopholes and political connections.
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In the section “Toward a Theory of World Inequality,” Acemoglu and Robinson return to their book’s thesis. The world is deeply unequal, like the two halves of Nogales. People in rich countries have far better educational, health, and economic opportunities than people in poor countries. They can count on their governments to invest in basic infrastructure, respect their rights, and respond to elections. But people in poor countries generally can’t. This inequality has deep political and economic consequences for people all over the globe. This book is an attempt to understand this inequality so that it can be addressed.
The inequality between the two halves of Nogales is “just the tip of the iceberg.” For one, Nogales is among the wealthiest places in Mexico. Moreover, its wealth comes almost entirely from Mexican factories run by US businesses. And the disparity between the US and Mexico is far smaller than the disparities between the richest countries and the poorest, where people make as little as one-fortieth of the income that people make in the US.
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The difference between rich countries and poor countries—or places like Nogales, Arizona and Nogales, Sonora—comes down to institutions and the incentives they create. Different kinds of political and economic institutions incentivize individuals, politicians, and businesses to act in different ways. And while individual talent is important, innovators like Bill Gates can’t succeed unless strong institutions support them—like universities, banks, labor markets, and a legal system that respects property rights. Economic institutions thus lead to prosperity, but political institutions are what create those economic institutions in the first place.
Acemoglu and Robinson also argue that history profoundly shapes both political and economic institutions. They point out that, over time, societies tend to get stuck in certain patterns of political and economic organization. These patterns make overcoming global inequality very difficult. Powerful elites often resist changes that would threaten their status—and since they have power, they can sometimes block those changes, like Carlos Slim does in Mexico. Therefore, while it focuses on poverty and prosperity, this book is really as much about politics as it is about economics.
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