Why are countries like the USA or the UK prosperous while countries like Haiti, Afghanistan and Sierra Leone languish in poverty and political instability? In the book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, the authors Daron Acemoglu and James Robinson have introduced and developed a useful theory utilising both economics and history to answer these questions and provided insights into why some nations fail and what it takes for a nation to achieve economic prosperity.
The authors argue that a nation's ability to become wealthy does not depend on its culture, geographical location, natural resources or the economic policies it enacts but rather on the strength of its political and economic institutions. By analysing different countries from a historical perspective, the authors aptly illustrate why only countries with both inclusive political and economic institutions have been able to achieve sustained economic growth, higher standards of living and greater political freedoms for its citizens.
In the first chapter, the authors discuss the economic and political situation of the city of Nogales that is split in two by the USA-Mexican border and why the people on either side experienced vastly different standards of living, economic opportunities, and political freedom despite sharing the same culture and geography. By exploring the history of both the USA and Mexico, the authors provide insight into how even though both countries were European colonies only the USA managed to develop inclusive institutions while Mexico lagged behind as a result of its extractive institutions.
In the following chapter, the authors utilise historical examples and logic to suggest why hypotheses based on culture and geography cannot accurately explain the wealth disparity among nations. Moreover, the authors discuss how countries cannot simply apply the correct economic policies to escape poverty as the success of economic institutions like banks, businesses and markets is highly dependent on inclusivity of political institutions ensuring property rights and the rule of law.
If the political institutions are not inclusive and power is concentrated in the hands of the elite, the drivers of prosperity like innovation, industrialisation or technology will be actively undermined by the elite in the fear of creative destruction eroding their power.
Later, the book explains the mechanisms of institutional theory and provides historical context to support its arguments. Using the example of North and South Korea, the authors highlight the characteristics of extractive and inclusive economic and political institutions and emphasise on how these institutions shape the incentives of citizens. For example, South Korea is significantly wealthier and better developed than North Korea despite sharing the same culture and geography as a result of its inclusive institutions ensuring property rights and encouraging economic activity.
This provides incentives for its citizens to innovate and invest in their economy, unlike their North Korean counterparts. Does this mean countries with extractive economic and political institutions never achieve economic growth? No, the authors highlight that countries with extractive institutions can achieve substantial economic growth if they can centralise power, but they will not be sustainable in the long run (i.e. former USSR made rapid growth and it collapsed at some point due to poor institutions).
Moreover, the readers are taken on a journey through time from the Neolithic Era, the Industrial Revolution to the present where many aspects of the theory are elaborated. For instance, the idea of institutional drift (how extractive institutions of a country may become inclusive) is vividly illustrated using England and the French Revolution as case studies.
However, even though the authors emphasise and elaborate on the ability of both extractive and inclusive institutions to sustain themselves (the virtuous and vicious circles respectively), they also warn that institutional drift can easily transform one into the other at critical junctures (an event that disrupts the economic and political balance of society). The authors also emphasise on the importance of contingency to determine the economic and political fate of a nation.
In conclusion, the authors delve deeper into institutional theory in great detail with relevant historical anecdotes throughout the book. They also explain that countries are not tied to their economic or political fate and can 'break the mould' by taking gradual steps towards economic and political reforms to become more inclusive. In particular, the authors' views on China appears fascinating as they predict that China's rapid growth will not be sustainable in the long run as it has extractive political institutions despite having relatively inclusive economic institutions.
The authors end on the note that there are no short-cut way to achieve prosperity, which is why no form of foreign aid will be able to effectively transform the economic situation of a country as it does not address the institutional limitations. Lastly, the authors recommend that if countries want to 'break the mould', the freedom of press and formation of a broad coalition is essential to represent diverse interests and empower citizens.
(Why Nations Fail: The Origins of Power, Prosperity, and Poverty; Edited by Daron Acemoglu and James A. Robinson, New York: Crown Business, 2012. pp.529)
The writer is an undergraduate student in the Department of Economics, University of Dhaka.