Why Nations Fail: FROM THE WINNERS OF THE NOBEL PRIZE IN ECONOMICS: The Origins of Power, Prosperity and Poverty

by Daron Acemoğlu

Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful. Inclusive economic institutions require not just markets, but inclusive markets that create a level playing field and economic opportunities for the majority of the people.

A Supreme Court can have power if it receives significant support from broad segments of society willing to push back attempts to vitiate the Court’s independence.

For example, in eastern Nigeria the Igbo peoples had no chiefs when the British encountered them in the nineteenth century. The British then created chiefs, the warrant chiefs.

In a legislation unparalleled in its paranoid repressiveness, Ubico banned the use of words such as obreros (workers), sindicatos (labor unions), and huelgas (strikes).

The South’s extractive economic and political institutions made it considerably poorer than the North by the middle of the nineteenth century. The South lacked industry and made relatively little investment in infrastructure. In 1860 its total manufacturing output was less than that of Pennsylvania, New York, or Massachusetts.

the German sociologist Robert Michels called it the iron law of oligarchy. The internal logic of oligarchies, and in fact of all hierarchical organizations, is that, argued Michels, they will reproduce themselves not only when the same group is in power, but even when an entirely new group takes control.

Rich nations are rich largely because they managed to develop inclusive institutions at some point during the past three hundred years.

History is not destiny, and vicious circles are not unbreakable,

The most common reason why nations fail today is because they have extractive institutions. Zimbabwe under Mugabe’s regime vividly illustrates the economic and social consequences.

the Nobel Prize–winning economist Simon Kuznets once famously remarked that there were four sorts of countries: developed, underdeveloped, Japan, and Argentina.

inequities persisting for centuries under extractive regimes make voters in newly emerging democracies vote in favor of politicians with extreme policies.

it is again the underlying extractive institutions that make politics so attractive to, and so biased in favor of, strongmen such as Perón and Chávez, rather than an effective party system producing socially desirable alternatives.

In a famous example from the early 1960s, in Louisiana a white applicant was judged literate after giving the answer “FRDUM FOOF SPETGH” to a question about the state constitution.

Workers who ought to have been tending the fields were making steel by destroying their plows, and thus their future ability to feed themselves and the country.

Extractive institutions that have achieved at least a minimal degree of political centralization are often able to generate some amount of growth. What is crucial, however, is that 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.

the vicious circle implies that changing institutions is much harder than it first appears. In particular, extractive institutions can re-create themselves under different guises,

Jiang Zemin, shortly after becoming general secretary of the Communist Party in 1989, the most powerful position in China, went even further and summarized the party’s suspicion of entrepreneurs by characterizing them as “self-employed traders and peddlers [who] cheat, embezzle, bribe and evade taxation.”

Growth under extractive institutions is easier when creative destruction is not a necessity.

Just as in the Soviet Union, the Chinese experience of growth under extractive political institutions is greatly facilitated because there is a lot of catching up to do. Income per capita in China is still a fraction of that in the United States and Western Europe.

China has thus achieved economic growth not thanks to its extractive political institutions, but despite them:

Modernization theory maintains that all societies, as they grow, are headed toward a more modern, developed, and civilized existence, and in particular toward democracy.

Modernization theory is both incorrect and unhelpful for thinking about how to confront the major problems of extractive institutions in failing nations.

Growth under extractive institutions is possible precisely because it doesn’t necessarily or automatically imply the demise of these very institutions.

Attempts by international institutions to engineer economic growth by hectoring poor countries into adopting better policies and institutions are not successful because they do not take place in the context of an explanation of why bad policies and institutions are there in the first place, except that the leaders of poor countries are ignorant.

Countries such as Afghanistan are poor because of their extractive institutions—which result in lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of national and, more often, local elites over political and economic life.

since the development of inclusive economic and political institutions is key, using the existing flows of foreign aid at least in part to facilitate such development would be useful.

perhaps structuring foreign aid so that its use and administration bring groups and leaders otherwise excluded from power into the decision-making process and empowering a broad segment of population might be a better prospect.

democracy is no guarantee that there will be pluralism.

Authoritarian regimes are often aware of the importance of a free media, and do their best to fight it.