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.
