Why Nations Fail: The Origins of Power, Prosperity, and Poverty

by Daron Acemoğlu

In all cases it proved to be impossible to force settlers into a rigid hierarchical society, because there were simply too many options open to them in the New World. Instead, they had to be provided with incentives for them to want to work.

Just as the United States in the nineteenth century was more democratic politically than almost any other nation in the world at the time, it was also more democratic than others when it came to innovation. This was critical to its path to becoming the most economically innovative nation in the world.

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.

The differences between the United States and Mexico are in turn small compared with those across the entire globe. The average citizen of the United States is seven times as prosperous as the average Mexican and more than ten times as the resident of Peru or Central America. She is about twenty times as prosperous as the average inhabitant of sub-Saharan Africa, and almost forty times as those living in the poorest African countries such as Mali, Ethiopia, and Sierra Leone. And it’s not just the United States. There is a small but growing group of rich countries—mostly in Europe and North America, joined by Australia, Japan, New Zealand, Singapore, South Korea, and Taiwan—whose citizens enjoy very different lives from those of the inhabitants of the rest of the globe.

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.

institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.

Different patterns of institutions today are deeply rooted in the past because once society gets organized in a particular way, this tends to persist.

The great inequality of the modern world that emerged in the nineteenth century was caused by the uneven dissemination of industrial technologies and manufacturing production.

Inequality in the modern world largely results from the uneven dissemination and adoption of technologies,

The culture hypothesis, just like the geography hypothesis, has a distinguished lineage, going back at least to the great German sociologist Max Weber, who argued that the Protestant Reformation and the Protestant ethic it spurred played a key role in facilitating the rise of modern industrial society in Western Europe.

Is the culture hypothesis useful for understanding world inequality? Yes and no. Yes, in the sense that social norms, which are related to culture, matter and can be hard to change, and they also sometimes support institutional differences, this book’s explanation for world inequality. But mostly no, because those aspects of culture often emphasized—religion, national ethics, African or Latin values—are just not important for understanding how we got here and why the inequalities in the world persist. Other aspects, such as the extent to which people trust each other or are able to cooperate, are important but they are mostly an outcome of institutions, not an independent cause.

there is not much support for a special relationship between Protestantism and economic success

The relationship between the Islamic religion and poverty in the Middle East is largely spurious.

Yes, Canada and the United States were English colonies, but so were Sierra Leone and Nigeria. The variation in prosperity within former English colonies is as great as that in the entire world. The English legacy is not the reason for the success of North America.

the ignorance hypothesis, which asserts that world inequality exists because we or our rulers do not know how to make poor countries rich.

The ignorance hypothesis maintains that poor countries are poor because they have a lot of market failures and because economists and policymakers do not know how to get rid of them and have heeded the wrong advice in the past. Rich countries are rich because they have figured out better policies and have successfully eliminated these failures.

As we will show, 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.

As the economist Abba Lerner noted in the 1970s, “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”

Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.

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.

A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations.

We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.

We might also call them re-distributive.

Politics is the process by which a society chooses the rules that will govern it.

We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions.

Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions are then often structured by this elite to extract resources from the rest of the society. Extractive economic institutions thus naturally accompany extractive political institutions.

combinations of extractive and inclusive institutions are generally unstable.

Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth.

Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.

political power—the ability to affect political outcomes against the wishes of other groups—of

powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction.

There are two distinct but complementary ways in which growth under extractive political institutions can emerge. First, even if economic institutions are extractive, growth is possible when elites can directly allocate resources to high-productivity activities that they themselves control.

The second type of growth under extractive political institutions arises when the institutions permit the development of somewhat, even if not completely, inclusive economic institutions.

political centralization is key to both ways in which growth under extractive political institutions can occur.

extractive political and economic institutions create a general tendency for infighting, because they lead to the concentration of wealth and power in the hands of a narrow elite.

were able to take up the economic opportunities generated by their ideas, were confident that their property rights would be respected, and had access to markets where their innovations could be profitably sold and used.

The most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elites.

Domestication is a technological change that enables humans to produce a lot more food from the available plants and animals.

complex society characterized by hierarchy, order, and inequality—beginnings of what we would recognize as extractive institutions—a

The traditional, geography-based explanation for the Neolithic Revolution—the centerpiece of Jared Diamond’s argument, which we discussed in chapter 2—is that it was driven by the fortuitous availability of many plant and animal species that could easily be domesticated. This made farming and herding attractive and induced sedentary life. After societies became sedentary and started farming, they began to develop political hierarchy, religion, and significantly more complex institutions. Though widely accepted, the evidence from the Natufians suggests that this traditional explanation puts the cart before the horse. Institutional changes occurred in societies quite a while before they made the transition to farming and were probably the cause both of the move to sedentarism, which reinforced the institutional changes, and subsequently of the Neolithic Revolution. This pattern is suggested not only by the evidence from the Hilly Flanks, which is the area most intensively studied, but also by the preponderance of evidence from the Americas, sub-Saharan Africa, and East Asia.

But whether this happened in a particular place was not determined by the availability of plant and animal species. Instead, it was a consequence of the society’s having experienced the types of institutional, social, and political innovations that would have allowed sedentary life and then farming to emerge.

Rather, this was determined by the interaction of a critical juncture, the Long Summer, with small but important institutional differences that mattered.

economies based on the repression of labor and systems such as slavery and serfdom are notoriously noninnovative.

The stocking frame was an innovation that promised huge productivity increases, but it also promised creative destruction.

Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.

Thus society needs newcomers to introduce the most radical innovations, and these newcomers and the creative destruction they wreak must often overcome several sources of resistance, including that from powerful rulers and elites.

Despite consisting of elites, the English Parliament developed two distinguishing characteristics. First, it represented not only elites closely allied to the king but also a broad set of interests, including minor aristocrats involved in different walks of life, such as commerce and industry, and later the “gentry,” a new class of commercial and upwardly mobile farmers. Thus the Parliament empowered a quite broad section of society—especially by the standards of the time. Second, and largely as a result of the first characteristic, many members of Parliament were consistently opposed to the monarchy’s attempts to increase its power and would become the mainstay of those fighting against the monarchy in the English Civil War and then in the Glorious Revolution.

Now that Parliament itself controlled spending, it was happy to raise taxes and spend the money on activities that it deemed valuable. Chief among them was the strengthening of the navy, which would protect the overseas mercantile interests of many of the members of Parliament.

But there were other ways to influence Parliament and thus economic institutions. The most important was via petitioning, and this was much more significant than the limited extent of democracy for the emergence of pluralism after the Glorious Revolution. Anybody could petition Parliament, and petition they did. Significantly, when people petitioned, Parliament listened. It is this more than anything that reflects the defeat of absolutism, the empowerment of a fairly broad segment of society, and the rise of pluralism in England after 1688.

New people with new ideas were crucial to this transformation. Consider innovation in transportation. In England there were several waves of such innovations: first canals, then roads, and finally railways. In each of these waves the innovators were new men.

Creative destruction redistributes not simply income and wealth, but also political power,