Why Nations Fail

Kamer Daron Acemoğlu is a Turkish-born American economist who has taught at the Massachusetts
Institute of Technology (MIT) since 1993. He is currently a Professor of Economics at MIT. He was
named Institute Professor in 2019 which is the highest title that can be awarded to a faculty member at
MIT. Acemoglu has authored hundreds of academic papers, many of which are co-authored with his long-
time collaborators Simon Johnson and James A. Robinson. He noted that most of his research has been
"motivated by trying to understand the sources of poverty." His research includes a wide range of topics,
including political economy, human capital theory, growth theory, economic development, innovation,
labor economics, income and wage inequality, and network economics, among others. With Robinson, he
authored Economic Origins of Dictatorship and Democracy (2006) and Why Nations Fail (2012).

James Alan Robinson is a British economist and political scientist. He is currently the Professor of
Global Conflict Studies and University Professor at the Harris School of Public Policy, University of
Chicago. Robinson has previously taught at Harvard University between 2004 and 2015 and also at the
University of California, Berkeley, University of Southern California and the University of Melbourne.
He studies what makes countries different by focusing on the underlying economic and political
institutions that led some to prosperity and others to conflict

Two important terms to equip yourself with before you forge ahead:
1. Extractive Institutions: Institutions that permit the elite to rule over and exploit others,
extracting wealth from those who are not in the elite.
2. Inclusive Institutions: Bestow equal rights and entitlements, and enable equal opportunities,
voice and access to resources and services.

Chapter 1: This chapter begins with description of city of Nogales divided into two parts between US and
Mexico. Both have similar cultural practices; however it is marred by the fact that the region in US is
significantly richer with higher literacy rate and low crime rate than their counterpart in Mexico. These
two regions are separated by the national border of the countries therefore it gives us the idea that how
institutional settings of a country can govern the outlook of that region. Colonizers; be they Spaniards
controlling Aztec, Maya or Inca Civilizations or English colonizers conquering the world; they all planted
seeds of a forced system wherein the indigenous people were forced to labor for them and harvest
resources, benefitting mainly the colonizing nations. This colonization policy of England was successful
during their rule in India and Africa but it failed in North America since there were less mining
opportunities as well as the Native Americans resisting the colonial rule compared to South America.
These institutional variations were represented in the form of political power limitations, democratic
ideals and economic incentives which paved the way for different developmental policies of the two
halves of Nogales. The state institutions of a certain state play a crucial role, whether they are political or
economic, in shaping the incentives of businesses, individuals and politicians and if political hegemony is
vested in the hands of few rulers; it leads to unproductive economy of two regions and thus to a failed
nation.

Chapter 2: In this chapter, there are three types of theories mentioned that the authors tried to negate that
are popular in explaining the different prosperity of each country.

● Geography Hypothesis
In the 18th century, Montesquieu, a French philosopher, claimed that hot weather made people lethargic
and stupid. Today, American economist Jeffrey Sachs attributes poverty to tropical illnesses and degraded
soil quality. However, the geography theory is incorrect. There is a significant disparity between areas
with similar geographies, like the two half of Nogales or North and South Korea. Furthermore, during
most of human history, the richest and most evolved civilizations were located in tropical regions such as
Mexico, Peru, India, and China. These areas were significantly more developed than temperate zones
equivalent to modern-day Canada, Argentina, or Australia.

● Cultural Hypothesis

The Culture Hypothesis is the second theory. This idea describes how countries evolve throughout time as
a result of their religion and nationalism. Some countries are said to have a strict and conservative culture
that prevents them from flourishing and prospering correctly. This chapter is a detailed explanation of
why the Culture Hypothesis is incorrect. Take the case of South and North Korea, for example. The South
is one of the world's wealthiest regions, whereas the North suffers from hunger and extreme poverty on a
regular basis. While the South and the North have quite distinct cultures today, culture has little bearing
on the economic fortunes of these two half-nations. The Korean peninsula has shared history for a long
time. It had an exceptional homogeneity in terms of language, ethnicity, and culture prior to the Korean
War. What matters, just as it does in Nogales, is the border. To the north, a separate regime is in place,
with different institutions and incentives. Any cultural difference between the south and north of the
border passing through the two parts of Nogales or the two parts of Korea is thus a result, not a cause, of
the disparities in affluence.

● Ignorance Hypothesis

The Ignorance Hypothesis is the final prevalent explanation for inequality. This notion simply states that
the country's leader is the one who makes the country impoverished or causes it to fail. Economists
sometimes attribute Ghana's post-independence woes on President Kwame Nkrumah's misguided
economic measures, such as the construction of a mango canning plant in an area where mangos don't
grow. However, Nkrumah did not make such judgments out of ignorance; rather, he did so in order to
maintain power by gaining political support from crucial constituencies. Out of ignorance, political
leaders do not build extremely unequal economic systems that defend elite control. They do it for the
advantage of themselves and their allies. The authors conclude that economists are correct in blaming
faulty policies for poverty. Leaders, on the other hand, make disastrous policies because of politics, not
illiteracy or culture.

Chapter 3: This chapter contrasts North and South Korea, which were split after WWII along the 38th
parallel. These economies had comparable levels of growth in the late 1940s, but their economies have
varied since then. South Korea has ten times greater living standards than North Korea, with the former
resembling Portugal and the latter resembling Sub-Saharan African countries. Institutions are the only
thing that can explain the discrepancies. Private property and markets were favored in the South, which
stimulated investment and economic progress. Simultaneously, the government invested in education, and
new sectors benefited from a more educated workforce. Private property and markets were outlawed in
North Korea, and a centrally controlled economy was instituted. This just resulted in a state of stagnation.
South Korea's system, like that of the United States, is built on inclusive economic institutions that
safeguard all individuals' freedom to freely and equitably participate in whatever economic activity they
choose. Economic progress and prosperity are usually the result of such institutions. North Korea on the
other hand, has extractive economic structures. Rather than preserving the economic rights of the
majority, they concentrate on taking wealth from the majority and transferring it to the elite. Political
systems that concentrate infinite power in the hands of a single ruler or tiny elite usually result in
extractive economic institutions. Societies with pluralistic political institutions, on the other hand, tend to
have inclusive economic institutions since power is distributed more broadly and its use is constrained.

Chapter 4: This chapter talks about years before 17th century, extractive economic institutions were
working in England and a huge political event took place in Britain Where King James of England was
overthrown by his daughter and her husband; this revolution was termed as “Glorious Revolution” that
took place in 1688. Following the Glorious Revolution, the power of the crown was limited and
parliament gained power and people were given freedom and the right to innovate. After the events of the
revolution, inclusive economic institutions were established and people actually had power. This paved
the way for the famous “Industrial Revolution”.

Chapter 5: This chapter boldly states that it is not necessary that extractive institutions hamper growth.
We have seen many examples of such institutions that have imparted positive growth in economy such as
USSR and in this current age, China following the similar trajectory. The difference between inclusive
growth and extractive growth is that the latter is never long lived. The reason for this short term growth is
that

1. Reluctance to rely on technological advancements

Chapter 6: This chapter outlines homogenous characteristics that Venice and Ancient Rome, Ethiopia
and Mayan city-states shared in their evolution path and explains how extractive Political institutions
failed them. However, they did instill some inclusive institutions which can be visualized by growth of
Venice. Venice adopted a very successful system for their governance. The primary power was given to a
“Great Council” for which 100 new members were nominated each year. This great council then chose a
few other councils among which were “Ducal Council” and “Council of Forty” and the Doge of Venice.
In this system, inclusive institutions advanced in the 13th and 14th centuries. They also introduced the
system of banking, courts and bankruptcy laws. This system enabled growth. However, Venice and Rome
deviated from these rule of law and slowly adapted exclusive economic institutions which resulted in their
inevitable decline. So when authoritarianism shadowed the system and elites illicitly used their power,
conflicts emerged and the downfall of the respective societies began.

Chapter 7: This chapter is set in late 16th century England where regressive thought of ruling elites
prevailed and they feared creative destructions for e.g. the knitting machine by William Lee was denied
by both Queen and King. 200 years later, both Glorious and Industrial Revolutions led way for the
transformation of England’s extractive institutions to inclusive institutions. England couldn’t industrialize
in the 16th century because of its political institutions which strayed away from being inclusive. No room
of growth, refusal to change, poor health conditions and elite strengthening their vice grip on society
spurred the industrial revolution in England. However, Glorious revolution occurred 70 years earlier than
industrial revolution, in later half of 17th century. As a result of this Glorious revolution, the English Bill
Of Rights was passed into law in 1689; this law severely restricted the rights of the Royal Family. The
most important part of this bill was that it limited the right of raising money through the taxation of
parliament. This Bill of Rights is a prime example of an inclusive policy which was the result of a
revolution. Not all nations learned from the industrial revolution of England neither they followed the
path of rapid development till distant future.

Chapter 8: This chapter lists the two reasons which were barriers to industrial growth:

I) Absolutism
II) Lack of political Centralization

Absolutism refers to a ‘rule unconstrained by law or the wishes of others.’ Lack of political centralization
means ‘limited order and enforcement of rules and property rights which are necessary for inclusive
institutions to emerge.’ Western Europe quickly adopted the idea of ban on printing and actively
encouraged it as well, Ottoman Empire followed a similar route, however it negatively impacted the
nation by declining literacy rate due to lack of education which failed the economic situation of the
country. Somalia is a prime example as how negatively the lack of political centralization affected it:
there was no written law or police or legal system and political power was widely spread between 6 large
clans and the population thus relied on these informal rulers. Absolutism persisted in Ethiopia since that
nation was secluded geographically and was ruled by an emperor. China was a centralized state but it had
extractive institutions which dimmed the economic growth slightly. Spain also had its fair share of
absolutism where absence of property rights for entrepreneurs and expropriational rule led to no free trade
with other colonies which meant no broader class of merchants thus lack of trading opportunities.

Chapter 9: This chapter explores the exploitation and the resulting underdevelopment of South Asia in
late 17th century due to the Spice Island Wars and the East India Company’s expansion. ‘Dual economy
model’ by Sir Arthur Lewis is introduced which states that the growth of a developing economy is of
labor transition between two sectors; the capitalist sector and the subsistence sector. The author argues
that the dual economy is an artifact for colonization and is method to implement extractive institutions.
The authors state that the underdeveloped societies were unable to participate in raising income and
wealth as a result of extractive institutions imposed by European colonization. European colonialism
might have improvised large parts of the world but the colonies did not benefit from industrialization.

Chapter 10: The chapter begins with the description of British colonial expansion in Australia. Australia
was considered as a penal colony where convicts were sent to complete their sentences, however, the
convicts gradually gained power through gaining economic control such as of rum export. This economic
power eventually led to more rights for those convicts and thus eventually paved way for Australian
separation from British colonialism. The author then explains how French revolution led to the expansion
of French rule throughout most of Europe under napoleon rule that radically changed the lay of land such
as abolishing feudal relations; the power of Guilds, the absolutist control of monarchs and princes.
Conclusively, Institutional dynamics determined which countries took control of major opportunities
present in the 19th century onward and those that failed at it. The reason for stark differences between
economics of countries can be explained here simply by saying that the rich countries of today are those
that embarked on the process of industrialization and technological change starting in the 19 th century,
and the poor ones are those that did not.
Chapter 11: The chapter begins by explaining how in 16th century Britain, Whigs, a political faction,
expressed distaste towards “Blackening”, a trick employed by the bandits. This incident focused on the
fact that the future of a society depended on the conflicts between the elites and the masses. By 18 th
century, legal system gained more trust as it became fairer and less disposed. All of this was possible due
to rule of law and its implementation. Thus if Britain stayed monarchial, it wouldn’t have been possible.
Rule of law, therefore, prevents groups from using the law as a weapon against others and gradually
transitions the political systems to become more inclusive and fair in their regulation.

Chapter 12: This chapter opens up on the dismal situation Sierra Leone was suffering from. The British
Government allowed Oligarchs to run rampant and this allowed the insinuation of extractive institutions;
wherein the elites have power to exploit the countries natural resources. This spiraled Sierra Leone into a
vicious cycle through deteriorating food production, splitting up of land and skirmishes with other sub
Saharan nations. Guatemala also faced extractive institutions by the Spanish elites where the elites
imposed forced labor on the general population and restricted local competition by forcibly closing down
local booming industries. Therefore, extractive institutions only pave way for next regime because there
extractive rule engender infighting and civil wars. Civil wars hence lead to human suffering and
destruction of whatever little the society had achieved and thus propel the region into a state of
lawlessness, failed government systems and political turmoil’s which reflect into a slump in economic
activity.

Chapter 13: This chapter explains how Robert Mugabe clinches victory in Zimbabwe with the help of
Zimbabwe African Peoples Union (ZAPU) and Zimbabwe African National Union (ZANU) and thus
assumes presidency. Similarly in Sierra Leone Siakka Stevens ruled. Both the countries lacked Extractive
institutions, however, these leaders slowly inculcated the idea of extractive institutions thereby increasing
their amount. In Sierra Leone cotton collection labor earnings decreased sharply from $1.40 to $0.01.
Extractive Institutions like these are easily visible in Kim Jong’s North Korea. Conclusively, Extractive
Institutions are an ideal form of capitalism.

Chapter 14: This chapter uses Botswana as an example of ‘’Breaking the Mould’. Nature gifted
Botswana with heaps of natural resources especially Diamonds, however, this did not result in a tussle for
power resource extraction and rent appropriation in Botswana. Rent appropriation is an economic concept
that occurs when an entity seeks to gain added wealth without any reciprocal contribution of productivity.
The authors state that after Botswana gained independence from colonial rule, the elites and political
parties of that country did not perform an activity which would indicate extractive institutions but rather
they had a perfect interplay between the existing institutions of the country.

Chapter 15: This chapter lays focus on China and how their reforms will in the probable future compare
with those of the USSR under the continued restrictive regime. Author then shifts to how foreign aid and
international institutions are unbefitting choices to confirm prosperity and economic growth of any
country, whereas only inclusive institutions and empowering the population can propel towards growth.
The author provides proof as to how international aid directed to Africa for UN projects was diverted to
restructuring Afghanistan. Overall chapter highlights that nation’s success lies in liberating markets,
inculcating inclusive institutions and understanding the real problem and not in foreign aid and extractive
regimes.
Conclusion:

On page 88, the objective of this book is summed up beautifully as the writer’s state ‘Countries differ in
their economic success because of their different institutions’. Both the authors have laid their claims
after studying 100’s of years of economic evolution all over the globe. However, the repeated use of
inclusive and exclusive institutions impacting the economic and political institutions is hard to
comprehend as the only factors which could determine if a nation is failed or not. This is a well-
researched and well-written book on current era of economic and political interest. Since the book has
cornered itself within inclusive and exclusive institutions, while ignoring the role of geography,
population and technological factors in determining the success of a nation; some readers may not agree
with its observations. It is important to note that geography and other plethora of factors like culture,
technology and population have significant role to play in economic outcome of countries for e.g.
geography conducts commerce of a nation and thus affects its economic growth. It is well accepted that
politics matters, and bad governments can indeed restrict development and bring forward ‘Iron Law of
Oligarchy’. Credibly, this book is full of extensive evolutionary proof and highlights the significance and
importance of several institutions and how, negligence of any of them may implode a society. Although
there are different theories which are for and against the dominant role of institutions in economic
development, these claims are not yet fully justified. Thorough exploration of economic history and
industrial revolution in the book projects ambitious statement that good quality institutions in every
aspect are imperative for virtuous performance of nation.