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

by Daron Acemoğlu

The “dual economy” paradigm, originally proposed in 1955 by Sir Arthur Lewis, still shapes the way that most social scientists think about the economic problems of less-developed countries. According to Lewis, many less-developed or underdeveloped economies have a dual structure and are divided into a modern sector and a traditional sector.

For generations of development economists building on Lewis’s insights, the “problem of development” has come to mean moving people and resources out of the traditional sector, agriculture and the countryside, and into the modern sector, industry and cities.

The backwardness of the Transkei is not just a historic remnant of the natural backwardness of Africa. The dual economy between the Transkei and Natal is in fact quite recent, and is anything but natural. It was created by the South African white elites in order to produce a reservoir of cheap labor for their businesses and reduce competition from black Africans. The dual economy is another example of underdevelopment created, not of underdevelopment as it naturally emerged and persisted over centuries.

Both of the goals of removing competition with white farmers and developing a large low-wage labor force were simultaneously accomplished by the Natives Land Act of 1913. The act, anticipating Lewis’s notion of dual economy, divided South Africa into two parts, a modern prosperous part and a traditional poor part. Except that the prosperity and poverty were actually being created by the act itself.

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.

Instead, New South Wales was like Jamestown, Virginia, in many ways: the elite ultimately found it in their interest to create economic institutions that were significantly more inclusive than those in Austria-Hungary, Russia, Mexico, and Peru. Convicts were the only labor force, and the only way to incentivize them was to pay them wages for the work they were doing.

The initial circumstances in Sydney, New South Wales, were very similar to those in Jamestown, Virginia, 181 years earlier, though the settlers at Jamestown were mostly indentured laborers, rather than convicts. In both cases the initial circumstances did not allow for the creation of extractive colonial institutions. Neither colony had dense populations of indigenous peoples to exploit, ready access to precious metals such as gold or silver, or soil and crops that would make slave plantations economically viable. The slave trade was still vibrant in the 1780s, and New South Wales could have been filled up with slaves had it been profitable. It wasn’t. Both the Virginia Company and the soldiers and free settlers who ran New South Wales bowed to the pressures, gradually creating inclusive economic institutions that developed in tandem with inclusive political institutions.

As with France, an important consequence of the British Industrial Revolution for China and Japan was military vulnerability. China was humbled by British sea power during the First Opium War, between 1839 and 1842, and the same threat became all too real for the Japanese as U.S. warships, led by Commodore Matthew Perry, pulled into Edo Bay in 1853.

Elsewhere on the continent the very same force of international trade that helped to transform English institutions in the seventeenth century locked large parts of western and central Africa into highly extractive institutions via the slave trade. This destroyed societies in some places and led to the creation of extractive slaving states in others.

Throwing the game away would destabilize the system and open the way for absolutism by a subset of the broad coalition or even risk the return of the Stuarts. In Thompson’s words, what inhibited Parliament from creating a new absolutism was that take away law, and the royal prerogative … might flood back upon their properties and lives. Moreover, it was inherent in the very nature of the medium which they [those aristocrats, merchants etc. fighting the Crown] had selected for their own self-defense that it could not be reserved for the exclusive use only of their own class. The law, in its forms and traditions, entailed principles of equity and universality which … had to be extended to all sorts and degrees of men.

Once in place, the notion of the rule of law not only kept absolutism at bay but also created a type of virtuous circle: if the laws applied equally to everybody, then no individual or group, not even Cadogan or Walpole, could rise above the law, and common people accused of encroaching on private property still had the right to a fair trial.

The logic of virtuous circles stems partly from the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrined in the rule of law. The ability of a subset to impose its will on others without any constraints, even if those others are ordinary citizens, as Huntridge was, threatens this very balance. If it were temporarily suspended in the case of the peasants protesting against elites encroaching on their communal lands, what was there to guarantee that it would not be suspended again?

The virtuous circle arises not only from the inherent logic of pluralism and the rule of law, but also because inclusive political institutions tend to support inclusive economic institutions. This then leads to a more equal distribution of income, empowering a broad segment of society and making the political playing field even more level. This limits what one can achieve by usurping political power and reduces the incentives to re-create extractive political institutions.

Pluralism also creates a more open system and allows independent media to flourish, making it easier for groups that have an interest in the continuation of inclusive institutions to become aware and organize against threats to these institutions.

While the virtuous circle creates a tendency for inclusive institutions to persist, it is neither inevitable nor irreversible.

Inclusive institutions emerge during critical junctures, such as during the Glorious Revolution in England or the foundation of the Jamestown colony in North America, when a series of factors weaken the hold of the elites in power, make their opponents stronger, and create incentives for the formation of a pluralistic society. The outcome of political conflict is never certain, and even if in hindsight we see many historical events as inevitable, the path of history is contingent.

The virtuous circle works through several mechanisms. First, the logic of pluralistic political institutions makes usurpation of power by a dictator, a faction within the government, or even a well-meaning president much more difficult,

Pluralism also enshrines the notion of the rule of law, the principle that laws should be applied equally to everybody—something that is naturally impossible under an absolutist monarchy.

Second, as we have seen several times before, inclusive political institutions support and are supported by inclusive economic institutions. This creates another mechanism of the virtuous circle. Inclusive economic institutions remove the most egregious extractive economic relations, such as slavery and serfdom, reduce the importance of monopolies, and create a dynamic economy, all of which reduces the economic benefits that one can secure, at least in the short run, by usurping political power.

Finally, inclusive political institutions allow a free media to flourish, and a free media often provides information about and mobilizes opposition to threats against inclusive institutions, as it did during the last quarter of the nineteenth century and first quarter of the twentieth century, when the increasing economic domination of the Robber Barons was threatening the essence of inclusive economic institutions in the United States.

two pernicious effects of European expansion and colonial rule in Africa: the introduction of the transatlantic slave trade, which encouraged the development of African political and economic institutions in an extractive direction, and the use of colonial legislation and institutions to eliminate the development of African commercial agriculture that might have competed with Europeans.

in many other African nations, a strong army would have become a threat to Stevens’s rule. It was for this reason that he emasculated the army, cutting it down and privatizing violence through specially created paramilitary units loyal only to him, and in the process, he accelerated the decline of the little state authority that existed in Sierra Leone.

Because whoever controls the state becomes the beneficiary of this excessive power and the wealth that it generates, extractive institutions create incentives for infighting in order to control power and its benefits,

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. What Michels did not anticipate perhaps was an echo of Karl Marx’s remark that history repeats itself—the first time as tragedy, the second time as farce.

Three factors greatly facilitated the emergence of more inclusive political institutions following the Glorious Revolution and the French Revolution. The first was new merchants and businessmen wishing to unleash the power of creative destruction from which they themselves would benefit; these new men were among the key members of the revolutionary coalitions and did not wish to see the development of yet another set of extractive institutions that would again prey on them. The second was the nature of the broad coalition that had formed in both cases. For example, the Glorious Revolution wasn’t a coup by a narrow group or a specific narrow interest, but a movement backed by merchants, industrialists, the gentry, and diverse political groupings. The same was largely true for the French Revolution. The third factor relates to the history of English and French political institutions. They created a background against which new, more inclusive regimes could develop. In both countries there was a tradition of parliaments and power sharing going back to the Magna Carta in England and to the Assembly of Notables in France. Moreover, both revolutions happened in the midst of a process that had already weakened the grasp of the absolutist, or aspiring absolutist, regimes. In neither case would these political institutions make it easy for a new set of rulers or a narrow group to take control of the state and usurp existing economic wealth and build unchecked and durable political ...

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.

The vicious circle also implies that even when extractive institutions lead to the collapse of the state, as in Sierra Leone and Zimbabwe, this doesn’t put a conclusive end to the rule of these institutions. We have already seen that civil wars and revolutions, while they may occur during critical junctures, do not necessarily lead to institutional change.

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 early stages of the process of colonization are a critical juncture for most societies, a crucial period during which events that will have important long-term consequences for their economic and political development transpire. As we discussed in chapter 9, most societies in sub-Saharan Africa, just as those in South America and South Asia, witnessed the establishment or intensification of extractive institutions during colonization.

The Tswana were of course not unique in Africa for having institutions like this, but they were unique in the extent to which these institutions survived the colonial period unscathed. British rule had been all but absent. Bechuanaland was administered from Mafeking, in South Africa, and it was only during the transition to independence in the 1960s that the plans for the capital of Gaborone were laid out. The capital and the new structures there were not meant to expunge the indigenous institutions, but to build on them; as Gaborone was constructed, new kgotlas were planned along with it.

Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.

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.

when a critical juncture arrives, these small differences that have emerged as a result of institutional drift may be the small differences that matter in leading otherwise quite similar societies to diverge radically.

History is key, since it is historical processes that, via institutional drift, create the differences that may become consequential during critical junctures. Critical junctures themselves are historical turning points.

Western European powers could not have surged ahead and conquered the world without several historic turning points. These included the specific path that feudalism took, replacing slavery and weakening the power of monarchs on the way; the fact that the centuries following the turn of the first millennium in Europe witnessed the development of independent and commercially autonomous cities; the fact that European monarchs were not as threatened by, and consequently did not try to discourage, overseas trade as the Chinese emperors did during the Ming dynasty; and the arrival of the Black Death, which shook up the foundations of the feudal order. If these events had transpired differently, we could be living in a very different world today, one in which Peru might be richer than Western Europe or the United States.

First, vicious and virtuous circles generate a lot of persistence and sluggishness.

nations likely to grow over the next several decades—albeit probably under extractive institutions—are those that have attained some degree of political centralization.

Our theory also suggests that growth under extractive political institutions, as in China, will not bring sustained growth, and is likely to run out of steam.

Even greater caution is necessary in drawing policy recommendations from this broad account of the origins of prosperity and poverty.

Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions. Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing technologies and rapid investment, not creative destruction. An important aspect of this is that property rights are not entirely secure in China.

Self-censorship is supported by an Orwellian apparatus that can monitor conversations and communications, close Web sites and newspapers, and even selectively block access to individual news stories on the Internet.

The Chinese experience does raise several interesting questions about the future of Chinese growth and, more important, the desirability and viability of authoritarian growth. Such growth has become a popular alternative to the “Washington consensus,” which emphasizes the importance of market and trade liberalization and certain forms of institutional reform for kick-starting economic growth in many less developed parts of the world.

Many followers of modernization theory also claim that, like democracy, inclusive institutions will emerge as a by-product of the growth process. Moreover, even though democracy is not the same as inclusive political institutions, regular elections and relatively unencumbered political competition are likely to bring forth the development of inclusive political institutions. Different versions of modernization theory also claim that an educated workforce will naturally lead to democracy and better institutions.

Growth under extractive institutions is possible precisely because it doesn’t necessarily or automatically imply the demise of these very institutions. In fact, it is often generated because those in control of the extractive institutions view economic growth as not a threat but a support to their regime, as the Chinese Communist Party has done since the 1980s. It is also not surprising that growth generated by increases in the value of the natural resources of a nation, such as in Gabon, Russia, Saudi Arabia, and Venezuela, is unlikely to lead to a fundamental transformation of these authoritarian regimes toward inclusive institutions.

the main obstacle to the adoption of policies that would reduce market failures and encourage economic growth is not the ignorance of politicians, but the incentives and constraints they face from the political and economic institutions in their societies.

Pluralism, the cornerstone of inclusive political institutions, requires political power to be widely held in society, and starting from extractive institutions that vest power in a narrow elite, this requires a process of empowerment.

One other actor, or set of actors, can play a transformative role in the process of empowerment: the media. Empowerment of society at large is difficult to coordinate and maintain without widespread information about whether there are economic and political abuses by those in power.