Why Nations Fail
Throughout history, there have been herculean rises to power and prosperity, yet all too often these periods of economic and social dominance culminate in the road to ruin. Why Nations Fail attempts to explain why.
Turning away from traditional economic hypotheses that geography, culture, or ignorance (not knowing how to turn poor countries rich), are the components for the global power schema, Acemoglu and Robinson assert that economic and political institutions dictate success or failure by implementing inclusive or extractive incentives.
Inclusive economic institutions allow individuals to choose, encouraging “participation by the great mass of people in economic activities that make best use of their talents and skills.” As these economic institutions are recognized, the result will be increased economic productivity and comprehensive prosperity. However, when neglected, extractive institutions may fill the void by eliminating the willingness to increase productivity. Political institutions determine who commands power in a society and how the power will be executed. The authors establish a power continuum ranging from absolutist political institutions (extractive) to pluralistic political institutions (inclusive). If an institution is both pluralistic and centralized it is inclusive, but if either of those conditions is absent, it is extractive.
“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.” In contrast to the vicious circle, “The virtuous circle arises not only from inherent logic of pluralism and the rule of law, but also because inclusive political institutions tend to support inclusive economic institutions. This leads to a more equal distribution of income, empowering a broad segment of society and making the political playing field even more level.”
Why Nations Prosper Today
As Mao Zedong led the Communist Party to overthrow the Nationalists in 1949, the People’s Republic of China introduced a dictatorship with highly extractive institutions. Mao abolished the market economy and discouraged productivity by keeping a narrow set of unattainable goals. Further extractive politics emerged from the Gang of Four, made up of Mao’s wife and three of her closest colleagues. “In September [1976] there was a critical juncture: Mao died.” A vacuum of power developed, leaving the Gang of Four paired against acting premier and former vice- premier, Hua Guofeng and Deng Xiaoping. Deng thought, “significant economic growth could be achieved without endangering their political control.” Deng’s supporters were seeking economic reform, increasing the role of market forces and establishing legitimate incentives. Through a series of critical junctures, Deng was able to retain power of the PRC. In late 1978 the Central Party Committee, a rudimentary pluralistic political institution changed their focus from class struggle to economic modernization. Deng’s power initiated a rebirth of China, moving away from a highly extractive set of economic institutions and toward more inclusive ones. “A confluence of factors, in particular for reform or other propitious existing institutions, is often necessary for a nation to make strides toward more inclusive institutions. In addition luck is key, because history always unfolds in a contingent way.”
Contemporary models show that the conceptual framework for political and economic failure or prosperity remains overtly relevant. Inclusive institutions pave the way for economic success, partnered with critical junctures and a tinge of luck to break free from the vicious circle. Meanwhile, extractive institutions impede economic growth, using the resources of many for the benefit of the few.
Conclusion
Attempting to answer why nations can be so close, yet so different, the authors have proposed a theory based on the development of inclusive and extractive institutions. These institutions take form politically and economically, mutually feeding one another to create inclusive or extractive cycles. Although nations may be exposed to the same geographic, cultural, and climatic factors, they continue to experience institutional drift. This concept claims that history has transformed the institutional trajectories of nations. Events that unanimously affect entire regions, for example the devastation of the Bubonic Plague throughout Europe, led to critical junctures.
These junctures forged the way for Western Europe to develop pluralistic power, eliminate serfdom, and welcome the Industrial Revolution, while Eastern Europe plunged further into extractive destruction, diminishing incentives for growth and productivity. The authors contend that these institutional gaps cannot be solved by foreign aid or by teaching rich nations how to help the poor, instead there must be fundamental institutional change that allows a nation to break free from the vicious circle and begin to build the foundation of a virtuous circle. While a vicious circle includes extractive political institutions encouraging extractive economic institutions in an infinite fashion, there are opportunities to break the trend. The French Revolution and resulting expansion through Europe overturned the extractive institutions and created channels of pluralism and economic growth, rupturing the vicious circle. To find prosperity, nations should strive to create a virtuous circle. A virtuous circle consists of inclusive political institutions supporting inclusive economic institutions, reducing incentives for extractive institutions to resurface. This virtuous process was engaged as the United States looked to create pluralistic barriers for Robber Barons, federal regulation was introduced that reinstated a level playing field and inclusive markets. By citing the unique impacts and evolution of inclusive and extractive institutions, Acemoglu and Robinson have developed an empirical model explaining the differences in living standards around the world; concluding, “The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones.”
A link to the full book can be found here. The views expressed are, unless expressly stated, the views of the author or the brief writer, not Titans Of Investing as an organization.
Today’s Titans Brief was written by Cory Hall.
