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

by Daron Acemoğlu

Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.

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

This persistence and the forces that create it also explain why it is so difficult to remove world inequality and to make poor countries prosperous.

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.

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

The fundamental problem is that there will necessarily be disputes and conflict over economic institutions. Different institutions have different consequences for the prosperity of a nation, how that prosperity is distributed, and who has power. The economic growth which can be induced by institutions creates both winners and losers. This was clear during the Industrial Revolution in England, which laid the foundations of the prosperity we see in the rich countries of the world today.

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.

innovation is about making sacrifices today in order to have more tomorrow.

technological innovation doesn’t necessarily lead to increased agricultural production. In fact, it is known that a major technological innovation, the introduction of the steel axe among the group of Australian Aboriginal peoples known as Yir Yoront, led not to more intense production but to more sleeping, because it allowed subsistence requirements to be met more easily, with little incentive to work for more.

The growth generated by extractive institutions is very different in nature from growth created under inclusive institutions, however. Most important, it is not sustainable. By their very nature, extractive institutions do not foster creative destruction and generate at best only a limited amount of technological progress. The growth they engender thus lasts for only so long.

innovation comes from new people with new ideas, developing new solutions to old problems.

The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions.

the elite, especially when their political power is threatened, form a more formidable barrier to innovation. The fact that they have much to lose from creative destruction means not only that they will not be the ones introducing new innovations but also that they will often resist and try to stop such innovations.

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. Only 9 percent of the southern population lived in urban areas, compared with 35 percent in the Northeast. The density of railroads (i.e., miles of track divided by land area) was three times higher in the North than in southern states. The ratio of canal mileage was similar.

The vicious circle turned out to be stronger than many, including Abraham Lincoln, had thought. The vicious circle is based on extractive political institutions creating extractive economic institutions, which in turn support the extractive political institutions, because economic wealth and power buy political power. When forty acres and a mule was off the table, the southern planter elite’s economic power remained untarnished. And, unsurprisingly and unfortunately, the implications for the black population of the South, and the South’s economic development, were the same.

an echo of Karl Marx’s remark that history repeats itself—the first time as tragedy, the second time as farce.

The most common reason why nations fail today is because they have extractive institutions.

The roots of many economic and political institutions in Zimbabwe, as is the case for much of sub-Saharan Africa, can be traced back to the colonial period.

NATIONS FAIL TODAY because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate.

Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction. Extractive economic and political institutions, though their details vary under different circumstances, are always at the root of this failure.

Recognizing the problem, Karimov came up with a solution, in fact, a cheaper option than combine harvesters: schoolchildren.

Probably 75 percent of the cotton harvest is now picked by children.

Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. This is true today in Africa, in places such as Zimbabwe and Sierra Leone; in South America, in countries such as Colombia and Argentina; in Asia, in countries such as North Korea and Uzbekistan; and in the Middle East, in nations such as Egypt. There are notable differences among these countries. Some are tropical, some are in temperate latitudes. Some were colonies of Britain; others, of Japan, Spain, and Russia. They have very different histories, languages, and cultures. What they all share is extractive institutions. In all these cases 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.

there has been a long history of extractive institutions since at least the nineteenth century. Each country is trapped in a vicious circle. In Colombia and Argentina, they are rooted in the institutions of Spanish colonial rule (this page–this page). Zimbabwe and Sierra Leone originated in British colonial regimes set up in the late nineteenth century.

In Sierra Leone, in the absence of white settlers, these regimes built extensively on precolonial extractive structures of political power and intensified them. These structures themselves were the outcome of a long vicious circle that featured lack of political centralization and the disastrous effects of the slave trade.

The rulings of the Supreme Court meant that southern educational facilities had to be desegregated, including the University of Mississippi in Oxford. In 1962, after a long legal battle, federal courts ruled that James Meredith, a young black air force veteran, had to be admitted to “Ole Miss.” Opposition to the implementation of this ruling was orchestrated by the so-called Citizens’ Councils, the first of which had been formed in Indianola, Mississippi, in 1954 to fight desegregation of the South. State governor Ross Barnett publicly rejected the court-ordered desegregation on television on September 13, announcing that state universities would close before they agreed to be desegregated. Finally, after much negotiation between Barnett and President John Kennedy and Attorney General Robert Kennedy in Washington, the federal government intervened forcibly to implement this ruling. A day was set when U.S. marshals would bring Meredith to Oxford. In anticipation, white supremacists began to organize. On September 30, the day before Meredith was due to appear, U.S. marshals entered the university campus and surrounded the main administration building. A crowd of about 2,500 came to protest, and soon a riot broke out. The marshals used tear gas to disperse the rioters, but soon came under fire. By 10:00 p.m. that night, federal troops were moved into the city to restore order. Soon there were 20,000 troops and 11,000 National Guardsmen in Oxford. In total, 300 people would be...

In 1985 the mandatory state purchasing of grain was abandoned and replaced by a system of more voluntary contracts. Administrative control of agricultural prices was greatly relaxed

It was the rural economy that took off first. The introduction of incentives led to a dramatic increase in agricultural productivity. By 1984 grain output was one-third higher than in 1978, though fewer people were involved in agriculture.