Why Nations Fail

Why Nations Fail

by

Daron Acemoglu and James A. Robinson

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In Why Nations Fail, economists Daron Acemoglu and James A. Robinson try to explain the wide gulf between rich and poor countries in the modern world. While other social scientists blame this inequality on geography, culture, or poor leadership, Acemoglu and Robinson attribute it to institutional differences. Specifically, they argue that rich countries have inclusive political and economic institutions, while poor countries have extractive ones. Inclusive institutions represent, benefit, and offer economic opportunities to the majority of society. In contrast, extractive institutions enrich and empower a small elite at the expense of the masses. In both cases, the authors argue, a country’s political institutions create its economic ones, and those economic institutions determine whether the country achieves sustainable, long-term economic growth. Unfortunately, extractive institutions are more common than inclusive ones, and Acemoglu and Robinson argue that this is why most countries remain poor. By analyzing centuries of history across dozens of countries, they conclude that there’s only one adequate explanation for global inequality: inclusive institutions make nations succeed and extractive ones make them fail.

Acemoglu and Robinson wrote Why Nations Fail to address global inequality, which has become more glaring than ever before. This inequality is clearest in terms of wealth and income. For instance, US workers earn about seven times as much as Mexican workers and 40 times as much as their counterparts in Ethiopia and Sierra Leone. But inequality is also stark in areas like education, healthcare, infrastructure, and rule of law (the fairness of the legal system). The authors believe that understanding the differences between rich and poor countries is critical to harnessing poor countries’ untapped economic potential and building a more equal world. The first step is understanding why inequality came about so recently: until the 18th century, people across the world enjoyed a similar standard of living, but since the Industrial Revolution, different nations have sharply diverged. To truly understand contemporary inequality, then, the authors must explain what changed after the Industrial Revolution.

After the Industrial Revolution, a country’s innovation and growth depended on its economic institutions. A few countries—those that prospered after industrialization—built inclusive economic institutions, which strongly protect private property rights and allow all citizens to freely participate in the economy. Such institutions encourage education, reward innovation, and incentivize investment. All of this drives economic growth. In contrast, extractive economic institutions are designed to enrich elites, not lift up the majority. Extractive institutions reward elites for stealing from the public, so they don’t create innovation, growth, or prosperity for most people. For instance, in the 15th century Congo, the king collected arbitrary taxes and took everything farmers produced—so they had no incentive to farm more efficiently or try out new technologies. Similarly, under extractive institutions, elites repress innovations that threaten their power. For example, Ottoman leaders banned the printing press because they worried that a literate public would overthrow them. Thus, extractive institutions stifle innovation and productivity, leading nations to stagnate economically rather than growing. Acemoglu and Robinson admit that extractive institutions can produce growth, like government investment did in China and the Soviet Union. But these governments really just reallocated resources from unproductive sectors (like agriculture) to more productive ones (like industry). Such policies can’t generate sustained growth, the authors argue, because they just implement existing technology without creating anything new.

The distinction between inclusive and extractive institutions explains why certain countries grew and industrialized rapidly in the 18th century, while many did not. Acemoglu and Robinson argue that, after the Industrial Revolution, the US, Canada, Australia, Japan, and most of Western Europe had (or quickly developed) relatively inclusive institutions, at least by the standards of the time. As a result, entrepreneurs in these countries could easily patent and profit from new innovations, which drove overall economic growth. In contrast, in countries without inclusive institutions, elites opposed, sabotaged, or even outlawed new industrial technologies. This prevented economic growth. For instance, the Holy Roman Emperor banned railways and factories, which kept his territory largely feudalistic. Thus, countries with inclusive institutions grew rapidly and those without them stagnated. This is why the distinction between inclusive and extractive economic institutions explains modern inequality.

However, political institutions are also crucial because they determine if economic institutions succeed. Inclusive political institutions create inclusive economic institutions because they are pluralistic, which means that they allow many different groups to share power. They’re also centralized, which means that the central government can implement the law throughout the nation. In this situation, every group wants to protect its own wealth and property, and no single group is powerful enough to take away others’ wealth and property. Therefore, under inclusive political institutions, different groups generally agree to recognize each other’s property rights and treat each other as equals. In other words, inclusive political institutions create strong property rights and a level economic playing field, which are the key ingredients of inclusive economic institutions. But the opposite is true for extractive political institutions, in which a small elite monopolizes power. In these systems, the elite can use its power to oppress and extract wealth from the rest of the population. For instance, in Uzbekistan, the authoritarian president forced schoolchildren to farm cotton, bought it from them at a fraction of the market price, and pocketed the difference. This extractive economic system wouldn’t stand without the extractive political system of one-party rule supporting it. This shows how extractive political institutions create extractive economic institutions. It also explains why most nations don’t build inclusive economic institutions: the only people with the power to do so are the elite, but they profit too much from extractive institutions to want to change them.

Based on their wide array of historical evidence, which ranges from the US to Uzbekistan and 9600 BC to the present, Acemoglu and Robinson conclude that inclusive economic and political institutions are the key to sustainable economic prosperity, while extractive ones prevent it. They hope that this understanding can help governments, entrepreneurs, and political activists better evaluate institutions and pursue long-term growth.

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Global Inequality and Economic Growth Quotes in Why Nations Fail

Below you will find the important quotes in Why Nations Fail related to the theme of Global Inequality and Economic Growth.
Preface Quotes

In this book we’ll argue that the Egyptians in Tahrir Square, not most academics and commentators, have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it, such as the $70 billion fortune apparently accumulated by ex-president Mubarak. The losers have been the Egyptian people, as they only too well understand.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Page Number: 3
Explanation and Analysis:
Chapter 1 Quotes

Throughout the Spanish colonial world in the Americas, similar institutions and social structures emerged. After an initial phase of looting, and gold and silver lust, the Spanish created a web of institutions designed to exploit the indigenous peoples. The full gamut of encomienda, mita, repartimiento, and trajin was designed to force indigenous people’s living standards down to a subsistence level and thus extract all income in excess of this for Spaniards. This was achieved by expropriating their land, forcing them to work, offering low wages for labor services, imposing high taxes, and charging high prices for goods that were not even voluntarily bought. Though these institutions generated a lot of wealth for the Spanish Crown and made the conquistadors and their descendants very rich, they also turned Latin America into the most unequal continent in the world and sapped much of its economic potential.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Page Number: 18-19
Explanation and Analysis:

The differences among nations are similar to those between the two parts of Nogales, just on a larger scale. In rich countries, individuals are healthier, live longer, and are much better educated. They also have access to a range of amenities and options in life, from vacations to career paths, that people in poor countries can only dream of. People in rich countries also drive on roads without potholes, and enjoy toilets, electricity, and running water in their houses. They also typically have governments that do not arbitrarily arrest or harass them; on the contrary, the governments provide services, including education, health care, roads, and law and order. Notable, too, is the fact that the citizens vote in elections and have some voice in the political direction their countries take.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Related Symbols: Nogales
Page Number: 40-41
Explanation and Analysis:

The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is simple; it is because of the very different institutions on the two sides of the border, which create very different incentives for the inhabitants of Nogales, Arizona, versus Nogales, Sonora. The United States is also far richer today than either Mexico or Peru because of the way its institutions, both economic and political, shape the incentives of businesses, individuals, and politicians. Each society functions with a set of economic and political rules created and enforced by the state and the citizens collectively. Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Related Symbols: Nogales
Page Number: 42
Explanation and Analysis:
Chapter 2 Quotes

Poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose. To understand this, you have to go beyond economics and expert advice on the best thing to do and, instead, study how decisions actually get made, who gets to make them, and why those people decide to do what they do. This is the study of politics and political processes. Traditionally economics has ignored politics, but understanding politics is crucial for explaining world inequality.

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Page Number: 68
Explanation and Analysis:
Chapter 3 Quotes

By the late 1990s, in just about half a century, South Korean growth and North Korean stagnation led to a tenfold gap between the two halves of this once-united country—imagine what a difference a couple of centuries could make. The economic disaster of North Korea, which led to the starvation of millions, when placed against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Page Number: 73
Explanation and Analysis:

Inclusive economic institutions, such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.

The contrast of South and North Korea, and of the United States and Latin America, illustrates a general principle. Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity.

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Page Number: 74-75
Explanation and Analysis:

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.

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Page Number: 79
Explanation and Analysis:

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.

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Page Number: 84
Explanation and Analysis:
Chapter 4 Quotes

England was unique among nations when it made the breakthrough to sustained economic growth in the seventeenth century. Major economic changes were preceded by a political revolution that brought a distinct set of economic and political institutions, much more inclusive than those of any previous society. […] The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions.

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Explanation and Analysis:
Chapter 5 Quotes

Allowing people to make their own decisions via markets is the best way for a society to efficiently use its resources. When the state or a narrow elite controls all these resources instead, neither the right incentives will be created nor will there be an efficient allocation of the skills and talents of people. But in some instances the productivity of labor and capital may be so much higher in one sector or activity, such as heavy industry in the Soviet Union, that even a top-down process under extractive institutions that allocates resources toward that sector can generate growth.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Page Number: 126
Explanation and Analysis:

Extractive institutions are so common in history because they have a powerful logic: they can generate some limited prosperity while at the same time distributing it into the hands of a small elite. For this growth to happen, there must be political centralization. Once this is in place, the state—or the elite controlling the state—typically has incentives to invest and generate wealth, encourage others to invest so that the state can extract resources from them, and even mimic some of the processes that would normally be set in motion by inclusive economic institutions and markets.

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Page Number: 149
Explanation and Analysis:
Chapter 6 Quotes

The Romans inherited some basic technologies, iron tools and weapons, literacy, plow agriculture, and building techniques. Early on in the Republic, they created others: cement masonry, pumps, and the water wheel. But thereafter, technology was stagnant throughout the period of the Roman Empire. […] There could be some economic growth without innovation, relying on existing technology, but it was growth without creative destruction. And it did not last.

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Page Number: 170
Explanation and Analysis:
Chapter 7 Quotes

The life expectancy of a resident of the Natufian village of Abu Hureyra was probably not that much different from that of a citizen of Ancient Rome. The life expectancy of a typical Roman was fairly similar to that of an average inhabitant of England in the seventeenth century. In terms of incomes, in 301 AD the Roman emperor Diocletian issued the Edict on Maximum Prices, which set out a schedule of wages that various types of workers would be paid. We don’t know exactly how well Diocletian’s wages and prices were enforced, but when the economic historian Robert Allen used his edict to calculate the living standards of a typical unskilled worker, he found them to be almost exactly the same as those of an unskilled worker in seventeenth-century Italy.

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Page Number: 184
Explanation and Analysis:

The process of political centralization can actually lead to a form of absolutism, as the king and his associates can crush other powerful groups in society. This is indeed one of the reasons why there will be opposition against state centralization, as we saw in chapter 3. However, in opposition to this force, the centralization of state institutions can also mobilize demand for a nascent form of pluralism, as it did in Tudor England. When the barons and local elites recognize that political power will be increasingly more centralized and that this process is hard to stop, they will make demands to have a say in how this centralized power is used. […] The Tudor project not only initiated political centralization, one pillar of inclusive institutions, but also indirectly contributed to pluralism, the other pillar of inclusive institutions.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Page Number: 186-187
Explanation and Analysis:

By 1760 the combination of all these factors—improved and new property rights, improved infrastructure, a changed fiscal regime, greater access to finance, and aggressive protection of traders and manufacturers—was beginning to have an effect. After this date, there was a jump in the number of patented inventions, and the great flowering of technological change that was to be at the heart of the Industrial Revolution began to be evident. Innovations took place on many fronts, reflecting the improved institutional environment. One crucial area was power, most famously the transformations in the use of the steam engine that were a result of James Watt’s ideas in the 1760s.

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Page Number: 202
Explanation and Analysis:
Chapter 8 Quotes

The Industrial Revolution created a critical juncture that affected almost every country. Some nations, such as England, not only allowed, but actively encouraged, commerce, industrialization, and entrepreneurship, and grew rapidly. Many, such as the Ottoman Empire, China, and other absolutist regimes, lagged behind as they blocked or at the very least did nothing to encourage the spread of industry. Political and economic institutions shaped the response to technological innovation, creating once again the familiar pattern of interaction between existing institutions and critical junctures leading to divergence in institutions and economic outcomes.

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Page Number: 215
Explanation and Analysis:
Chapter 9 Quotes

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.

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Page Number: 269
Explanation and Analysis:

In several instances the extractive institutions that underpinned the poverty of these nations were imposed, or at the very least further strengthened, by the very same process that fueled European growth: European commercial and colonial expansion. In fact, the profitability of European colonial empires was often built on the destruction of independent polities and indigenous economies around the world, or on the creation of extractive institutions essentially from the ground up, as in the Caribbean islands, where, following the almost total collapse of the native populations, Europeans imported African slaves and set up plantation systems.

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Page Number: 271
Explanation and Analysis:
Chapter 10 Quotes

In England there was a long history of absolutist rule that was deeply entrenched and required a revolution to remove it. In the United States and Australia, there was no such thing. Though Lord Baltimore in Maryland and John Macarthur in New South Wales might have aspired to such a role, they could not establish a strong enough grip on society for their plans to bear fruit. The inclusive institutions established in the United States and Australia meant that the Industrial Revolution spread quickly to these lands and they began to get rich. The path these countries took was followed by colonies such as Canada and New Zealand.

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Page Number: 282
Explanation and Analysis:
Chapter 12 Quotes

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.

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Related Symbols: The Sierra Leone Railway
Page Number: 343
Explanation and Analysis:
Chapter 13 Quotes

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.

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Page Number: 398-399
Explanation and Analysis:
Chapter 14 Quotes

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.

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Page Number: 426
Explanation and Analysis:
Chapter 15 Quotes

Any complex social phenomenon, such as the origins of the different economic and political trajectories of hundreds of polities around the world, likely has a multitude of causes, making most social scientists shun monocausal, simple, and broadly applicable theories and instead seek different explanations for seemingly similar outcomes emerging in different times and areas. Instead we’ve offered a simple theory and used it to explain the main contours of economic and political development around the world since the Neolithic Revolution. Our choice was motivated not by a naïve belief that such a theory could explain everything, but by the belief that a theory should enable us to focus on the parallels, sometimes at the expense of abstracting from many interesting details. A successful theory, then, does not faithfully reproduce details, but provides a useful and empirically well-grounded explanation for a range of processes while also clarifying the main forces at work.

Related Characters: Daron Acemoglu and James A. Robinson (speaker)
Page Number: 429
Explanation and Analysis:

Growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.

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Page Number: 430
Explanation and Analysis:

The rise of Brazil since the 1970s was not engineered by economists of international institutions instructing Brazilian policymakers on how to design better policies or avoid market failures. It was not achieved with injections of foreign aid. It was not the natural outcome of modernization. Rather, it was the consequence of diverse groups of people courageously building inclusive institutions. Eventually these led to more inclusive economic institutions. But the Brazilian transformation, like that of England in the seventeenth century, began with the creation of inclusive political institutions.

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Page Number: 457
Explanation and Analysis: