Why is it that some countries are so poor while others rich? “Why Nations Fail” is a book that will give you enough insight to answer this question on economic, historical, and political grounds. The book was co-authored by Daron Acemoglu and James Robinson. Though the book was written a decade ago in 2012, yet it still holds relevant arguments to understand the root cause of prevailing poverty and thriving prosperity in different parts of the world. The book is a synthesis of immense research, and case studies of different countries which had been a New York Times best seller.
The writers analyze three fundamental hypotheses considered to be the cause of world inequality: geography, culture, and ignorance. Firstly, the followers of the geography hypothesis argue that climate, diseases, and having a variety of plant and animal species make a country poor or rich. For example, the people in tropical climates were poor because the climate made them lazy, and non-innovative and they were easily ruled by despots. Secondly, the culture hypothesis maintains that religion, beliefs, values, or ethics play a key role in the development or under-development of a country. For example, the protestant Reformation was responsible for the rise of industrial society in Western Europe. Thirdly, the ignorance hypothesis stresses that “world inequality exists because we or our rulers do not know how to make poor countries rich”. The writers refute these arguments through some examples. Mexico and the US have the same geography but the former is underdeveloped while the latter is a developed country. In the same way, China’s contemporary growth is not due to its cultural value. Lastly, it wasn’t the difference between the knowledge of US presidents and that of Mexico that made the former developed and the latter underdeveloped.
However, the book asserts that this difference is because of political & economic institutions: inclusive institutions that allow prosperity and extractive institutions which cause poverty in a country. Inclusive economic institutions are those that allow and encourage participation by the great mass of people in economic activities that make the best use of their talents and skills and that enable individuals to make the choices they wish. Politicians invest in education; policies encourage investment and industrialization, exports, and the transfer of technology. In contrast, Extractive economic institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset. Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions are structured so by elites to extract resources from the rest of society.
For example, countries such as Egypt are poor because they have been ruled by a narrow elite that has organized society for their benefit at the expense of the vast majority of people living in the country. On the other hand, countries like Great Britain or the US are wealthy because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsible to its citizens and where the inhabitants could take advantage of the economic opportunities given by the government.
Moreover, the colonial powers including Great Britain, Spain, France, etc. not only dominated the colonies like India but also established extractive institutions there. This resulted in mountains of silver, gold, cotton, and other rich resources being extracted from colonies to their native lands. This was what is called the “dual economy” paradigm, proposed in 1955 by Arthur Lewis. “In fact, the profitability of European colonial empires was often built on the destruction of independent polities and indigenous economies around the world, or the creation of extractive institutions.” As a result, the colonial countries became prosperous, and the colonized ones became poor.
However, some can argue that there is China, not a democratic state in that sense. But still, it is growing rapidly. The writer holds that growth can also occur under extractive political institutions: firstly, if elites can directly allocate resources to high-productivity activities that they control. Secondly, if these institutions permit the development of somewhat inclusive economic institutions. But the growth under extractive institutions is unsustainable. That’s why the writers believe the progress of China is limited and would be collapsed soon.
Sustainable growth requires innovation, and innovation requires ‘creative destruction that is discarding the old technology and accepting the new technology. The countries with extractive institutions oppose creative destruction. For example, the Ottoman Empire banned printing; Russia and Austria Hungry stopped establishing factories and constructing railroads, and no shipping or trade was allowed under Sang dynasty in China. Likewise, the Dutch East India Company destroyed Indonesia; the Spanish slave trade evaporated the population from Africa, and White settlers created unequal dual economies in South Africa. Under such circumstances, the countries suffered a setback in their economic growth.
Why do Nations fail today? “Poor countries are poor because those who have the power to make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose”. The book elaborates that colonial powers established extractive institutions in the colonized nations, on independence these institutions were further made extractive by post-colonial rulers, usually elite representatives of the colonial powers. It led to a kind of civil war between competing factions, of the country, trying to control extractive institutions, resulting in chaos and stagnation of the economy. This is known as a “vicious circle”. However, the opposite of it is the “virtuous circle”. This circle gives incentives for entrepreneurship and investment in education or other public sector institutions.
But what is the way out from poverty to prosperity? Firstly, the writers say that there is no fixed rule as ‘we can’t engineer prosperity”. Every country has distinctive historical or social conditions. However what is common among these countries is an emphasis on education, innovation, and a movement from extractive towards inclusive institutions. Secondly, depending on foreign aid is “based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions_ which result in a lack of property rights, law and order, well-functioning legal systems, and the stifling dominance of national and, more often local elites over political and economic life. Thirdly, political revolutions which bring ‘pluralism’ and “pave the way for more inclusive institutions” can be a favorable path. For example, England in 1688, France in 1789, and Japan during the Meiji Restoration of 1868 were successful attempts in this regard. However, not all countries become successful at such ‘critical junctures’ as some countries fail to create inclusive institutions even after the revolution and the elite again dominate the political and economic landscape of the country.
To sum up, I would say the book offers a unique lens to look not at the superfluous problems, but a deep and usually ignored the root cause of the underdevelopment of a country. However, I disagree as well on some matters. For example, while talking about political revolutions, the writers argue that The Bolshevik Revolution and China’s Revolutions were not successful in the provision of incentives to citizens. However, what we see today is that China is the only country today that has not only boosted economic growth through global trade, but it has also eradicated poverty on a large scale. In the countries like Pakistan, reformative, personality cults or aid are thought to be the only solution for the ailing economy, however, The gist of the book enables us to think beyond ‘personality worship’, and allows us to shape our institutions in a way that benefit the public, not just a limited section.
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