Recently I read the book Why Nations Fail: The Origins of Power, Prosperity and Poverty by Daron Acemoglu and James A. Robinson. Why nations fail is of course is a very important question, but one economists often shy away from because it is so multifaceted. In this book, however, the authors argue that one sufficient condition for a nation to fail (in the long run) is to have extractive rather than inclusive institutions. Nations can fail for other reasons (e.g., disease, famine, war), but the presence of highly extractive institutions is a sure way for nations to fail. Inclusive institutions are political and economic systems that empower a broad population, protect rights, and incentivize growth. Extractive institutions are set up just to benefit those in power. The authors note that geography and culture do matter to the success of a nation, but nations will fail if a society is governed through extractive rather than inclusive institutions.
To make this point, the authors provide a number of examples. The most stark is the case of North vs. South Korea. Here, geography and culture are highly similar. However, South Korea has inclusive institutions which have enabled innovation and growth over recent decades; North Korea is governed by an extractive, authoritarian regime which has stifled opportunity for the general populace and created widespread poverty. The split cities of Nogales, Arizona (US) vs. Nogales, Sonora (Mexico) show how the U.S. side thrives due to effective American institutions, while weaker and extractive Mexican institutions lead to violence and stagnation on the southern side.
Another classic comparison: Western Europe vs. Eastern Europe. Western nations had political systems that eventually curbed aristocratic privilege and serfdom, paving the way for economic development, while Eastern Europe’s history of serfdom locked societies into stagnation.
Acemoglu and Robinson warn that politicians are often tempted to be extractive, gaining for themselves even as it harms the populace—making the battle to defend inclusivity perpetual and crucial for national stability. The book argues that inclusive institutions are the key to long-term growth. They do not guarantee growth–war, disease, and other factors can lead to bad outcomes–but the presence of inclusive institutions is a necessary condition for long-term growth. They authors summarize their key point as follows:
Countries become failed states not because of their geography or culture but because of their legacy of extractive institutions, which concentrate power and wealth in the hands of those controlling the state, opening the way for unrest, strife, and civil war.
– Why Nations Fail by Acemoglu and Robinson
You can read the full book here.
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