Acemoglu and Robinson argue that, although nations aren’t locked into specific destinies, changing the course of history is extremely difficult. Very few countries have gone from poor to rich—or rich to poor—over the last 150 years. This is because both inclusive and extractive institutions tend to get stronger over time. Inclusive institutions give more people economic opportunities and influence in politics, and those people usually use their newfound power and wealth to preserve and strengthen those institutions. The authors call this cycle the virtuous circle. In contrast, extractive institutions incentivize leaders to stay in power by any means necessary—even at the expense of the country’s overall prosperity. Therefore, extractive institutions generally become more and more extractive over time. Acemoglu and Robinson call this the vicious circle. The authors argue that these circles explain why, broadly speaking, rich countries often get richer while poor countries get poorer over time.
In the virtuous circle, inclusive institutions usually preserve and reinforce themselves, facilitating further economic growth. As the authors put it, inclusive political institutions tend to “resist attempts to undermine their own continuation.” First, inclusive institutions create rule of law, or ensure that the law applies equally to everyone. As a result, political leaders know that they will face consequences if they try to abuse their power, so they choose not to undermine the government. Second, under inclusive institutions, everyone involved in politics worries that they would probably lose their power if one faction seized total control of the government and created extractive institutions. Even if they disagree on everything else, then, lawmakers in inclusive societies band together to preserve inclusivity and pluralism. Most importantly, inclusive institutions convince elites to answer unrest with reform rather than repression. Acemoglu and Robinson argue that elites and the masses are constantly fighting for control in any society, and elites are always afraid of being overthrown in a revolution. Elites can fend off this revolution in two ways: either by violently repressing it or by giving in to some of the revolutionaries’ demands. Inclusive institutions make the second option more desirable. They empower workers, which makes repression riskier for elites (who risk being overpowered). Under inclusive institutions, it’s also more likely that elites are invested in competitive corporations instead of government monopolies, so they know that they’ll harm their own financial interests if they destabilize the system. Inclusive institutions can therefore lead to gradual reform—for instance, when English workers repeatedly demanded more of a voice in Parliament, the aristocracy expanded voting rights over the course of more than a century. This shows how even highly aristocratic institutions can become totally equal and inclusive over time if they start out with some pluralist element. Ultimately, since Acemoglu and Robinson view inclusive institutions as the main driver of economic opportunity, they conclude that the virtuous circle leads to sustained growth and innovation. For example, they point out how, in the early 1900s, the US government broke up several giant corporate monopolies to keep markets fair and competitive. Through these policies, the government kept the US economy growing and innovating throughout the 20th century, effectively demonstrating that inclusive political institutions constantly adapt to strengthen inclusive economic ones.
But extractive institutions also get stronger through a vicious circle that can be very difficult to break. This vicious circle takes two main forms. In the first, an elite group simply rigs political institutions to stay in power while structuring the nation’s entire economy for its own benefit. For instance, 400 years after colonization, the descendants of 22 Spanish settlers still control virtually all wealth and power in Guatemala. Similarly, in countries like Cuba, North Korea, and Uzbekistan, one-party governments use extreme repression to make sure that they will never lose power. In short, in this version of the vicious circle, extractive institutions give a single group the power and wealth it needs to make sure those institutions never become inclusive.
But in the other form of the vicious circle, which sociologists call the iron law of oligarchy, extractive institutions can persist even when regimes change. For instance, when European colonies in Africa became independent, their new governments often kept extractive colonial institutions in place. In Sierra Leone, the dictator Siaka Stevens kept the British colonial diamond monopoly and produce marketing board (which impoverished farmers through heavy taxes). Like Stevens, revolutionaries often become the new aristocracy because there is nothing to check their power. New leaders realize they can profit handsomely by redirecting existing extractive institutions to favor themselves. Therefore, even if they promise change to the public, they actually tend to preserve (or even worsen) these extractive institutions. Crucially, extractive institutions also drive conflict by making the rewards for holding power so high. In countries with extractive institutions, people in power can enrich themselves by stealing government resources—and this is also often the only available route to wealth. Therefore, extractive institutions give political rivals a strong incentive to overthrow the government and seize power. By incentivizing corrupt and repressive behavior, then, extractive institutions encourage leaders to become even more extractive. All of this slows innovation and economic growth.
And yet, Acemoglu and Robinson emphasize that it is possible to “break the mold” and escape the vicious circle. Botswana, China, and the US South all successfully did so in the 1960s without major revolutions. However, Botswana had a history of inclusive institutions, while China’s institutions remained relatively extractive, and the Southern US only changed because the rest of the country forced it to. Only in Botswana did the state’s institutions clearly embrace the virtuous circle. In a way, then, the authors are pessimistic about poor countries’ chances of overcoming extractive institutions: they argue that the vicious circle is even stronger than it appears, and the only way to break it is for citizens to oust the elite and create new, inclusive institutions all at once.
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Cycles of Wealth and Poverty Quotes in Why Nations Fail
Politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups, such as the elite of the Communist Party of North Korea or the sugar planters of colonial Barbados, will be much better off by setting up institutions that are extractive. When there is conflict over institutions, what happens depends on which people or group wins out in the game of politics—who can get more support, obtain additional resources, and form more effective alliances. In short, who wins depends on the distribution of political power in society.
Opposition to economic growth has its own, unfortunately coherent, logic. Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.
In South Africa the dual economy was not an inevitable outcome of the process of development. It was created by the state. In South Africa there was to be no seamless movement of poor people from the backward to the modern sector as the economy developed. On the contrary, the success of the modern sector relied on the existence of the backward sector, which enabled white employers to make huge profits by paying very low wages to black unskilled workers. […] Black Africans were indeed “trapped” in the traditional economy, in the Homelands. But this was not the problem of development that growth would make good. The Homelands were what enabled the development of the white economy.
The rule of law is not imaginable under absolutist political institutions. It is a creation of pluralist political institutions and of the broad coalitions that support such pluralism. It’s only when many individuals and groups have a say in decisions, and the political power to have a seat at the table, that the idea that they should all be treated fairly starts making sense. By the early eighteenth century, Britain was becoming sufficiently pluralistic, and the Whig elites would discover that, as enshrined in the notion of the rule of law, laws and institutions would constrain them, too.
The British example, an illustration of the virtuous circle of inclusive institutions, provides an example of a “gradual virtuous circle.” The political changes were unmistakably toward more inclusive political institutions and were the result of demands from empowered masses. But they were also gradual. Every decade another step, sometimes smaller, sometimes larger, was taken toward democracy. There was conflict over each step, and the outcome of each was contingent. But the virtuous circle created forces that reduced the stakes involved in clinging to power. […] There is great virtue in this sort of gradual change. It is less threatening to the elite than the wholesale overthrow of the system. Each step is small, and it makes sense to give in to a small demand rather than create a major showdown.
Sierra Leone’s development, or lack thereof, could be best understood as the outcome of the vicious circle. British colonial authorities built extractive institutions in the first place, and the postindependence African politicians were only too happy to take up the baton for themselves. The pattern was eerily similar all over sub-Saharan Africa. There were similar hopes for postindependence Ghana, Kenya, Zambia, and many other African countries. Yet in all these cases, extractive institutions were re-created in a pattern predicted by the vicious circle—only they became more vicious as time went by. In all these countries, for example, the British creation of marketing boards and indirect rule were sustained.
This form of the vicious circle, where extractive institutions persist because the elite controlling them and benefiting from them persists, is not its only form. […] In a form that the sociologist Robert Michels would recognize as the iron law of oligarchy, the overthrow of a regime presiding over extractive institutions heralds the arrival of a new set of masters to exploit the same set of pernicious extractive institutions.
The logic of this type of vicious circle is also simple to understand in hindsight: extractive political institutions create few constraints on the exercise of power, so there are essentially no institutions to restrain the use and abuse of power by those overthrowing previous dictators and assuming control of the state; and extractive economic institutions imply that there are great profits and wealth to be made merely by controlling power, expropriating the assets of others, and setting up monopolies.
Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. […] The basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractive institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar—even if their intensity differs.
The changes in economic institutions in China were radical. China broke the mold, even if it did not transform its political institutions. As in Botswana and the U.S. South, the crucial changes came during a critical juncture—in the case of China, following Mao’s death. They were also contingent, in fact highly contingent, as there was nothing inevitable about the Gang of Four losing the power struggle; and if they had not, China would not have experienced the sustained economic growth it has seen in the last thirty years. But the devastation and human suffering that the Great Leap Forward and the Cultural Revolution caused generated sufficient demand for change that Deng Xiaoping and his allies were able to win the political fight.
