– December 22, 2017
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Guatemala appears in Why Nations Fail as an example of extractive institutions. (amslerPIX)

Why are some countries rich while others are mired in poverty and instability?

Daron Acemoglu and James Robinson attempt to explain this global phenomenon in their renowned text, Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

Nothing short of comprehensive, Acemoglu and Robinson analyze the economic and political development of a diverse array of countries, ranging from England to Guatemala. They conclude that the disparity in wealth and overall political stability between developed and developing countries lies in the institutional differences that took place in these countries over time.

A key theme is the need for countries to have inclusive political and economic institutions:

[These] allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. [They] must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.

Both authors contrast inclusive institutions with the experience of North Korea and Latin America:

In North Korea, the state built an education system to inculcate propaganda, but was unable to prevent famine. In colonial Latin America, the state focused on coercing indigenous peoples. In neither type of society was there a level playing field or an unbiased legal system.… We call such institutions … extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.

In short, states that developed inclusive economic and political institutions prospered, while countries with extractive economic and political institutions stagnated. Countries with extractive institutions tend to be characterized by oligarchical elites that game the political and economic system in their favor. Vote suppression, restricted civil liberties, anti-market laws that prevent competition, and cronyism are the order of the day in these countries.

In addition to using institutional analysis, Acemoglu and Robinson were able to masterfully connect Joseph Schumpeter’s concept of “creative destruction,” not only as a mechanism of economic progress, but as a means of dispersing overall political power. In their view, countries that do not embrace creative destruction tend to be extractive in nature and are characterized by political elites striving to perpetuate themselves in power.

The focus on institutional ingredients makes Why Nations Fail a strong work. But it is lacking in philosophical analysis, and tends to downplay important political movements such as classical liberalism.

Stable institutions did not just emerge out of vacuums; they generally rose out of philosophical movements like the Enlightenment — which championed individual rights, limited government, and reason — or Anglo-Saxon cultures that placed heavy emphasis on political decentralization.

While institutional structures matter, philosophical principles and a culture that routinely puts those principles in practice are crucial for a country’s long-term development.

Despite not thoroughly addressing the cultural and philosophical factors that spurred the growth of the developed world, Why Nations Fail remains a crucial text for understanding the disparities in political stability and wealth among countries across the globe. Those interested in comparative economics and politics can gain a stronger grasp of the impact institutions have in shaping a country’s destiny.

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José Niño

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