Why Nations Fail

Summary of Acemoglus book (2012)

-Martijn Huysmans-

I. Its institutions, stupid!

In this book, Acemoglu seeks to understand what drives Nations wealth, growth
and general success at giving their citizens the opportunity to lead decent lives

His conclusion is simple:

If Nations are poor or, even worse, completely failing, this is typically due to
extractive institutions
o Dictators or elites concentrate political and economic power
o Conversely, other institutions can create blooming nations

Incentives for hard work and innovation: rule of law, free markets

Political institutions determine economic institutions

o Democracy spreads political power over the population, which typically results in spreading
economic power

Acemoglu starts his book with an anecdote about Nogales, a city split by the USMexico border
o The two parts of the city are very similar in many respects: climate, genetics of the population,
history
o Yet Nogales, Arizona is many times richer than Nogales, Mexico
o The reason? Institutions!

The US has a well-regulated free market, rule of law...

Why Nations Fail summary MH

II. Conventional theories dont work

Its not due to geography/climate
o Some authors claim that tropical countries are poorer because of their climate

More diseases such as malaria, a tendency to be lazy due to excessive heat

o Acemoglu argues this is not generally true. We need only look at Singapore to realize this

In addition, it wouldnt explain the difference between Nogales, Arizona and Nogales, Mexico (cf. introduction)

Its not due to culture

o Since Max Weber, the idea of (protestant) work ethics as driving economic performance is popular
o Acemoglu agrees that some cultural aspects are important: e.g., Trust, Tendency to Cooperate
o However, the important cultural aspects are mostly driven by institutions

E.g. rule of law promotes trust

Its not due to ignorance

o Some people claim countries are poor because we dont understand how to make countries rich
o Acemoglu claims this is not true. We have nog perfect recipes, but rule of law and free market
tend to work very well in improving countries welfare

Bad leaders are not necessarily (nor typically) ignorant (dictators often trained at top US schools); usually
theyre rather smart and simply trying to enrich themselves and to buy support (i.e. maximizing welfare is not
their aim)

=> Countries remain poor because those who have power do not have the right
incentives. That is, those in power have do not have enough reasons to create
institutions that give their citizens incentives to create prosperity
Why Nations Fail summary MH

III. The making of prosperity & poverty

A case study: North & South Korea developed in a radically different way due to
institutions
o In 1948, Korea was split in North & South along the 38th parallel
o In North Korea, extractive institutions were put in place
o In South Korea, inclusive institutions were put in place

Secure private property for all, level playing field, free entry, unbiased rule of law, free contracting, public
services, some centralization

Dictators are afraid to create inclusive economic institutions, because this would
destabilize their extractive political institutions
o Growth is often destabilizing (cf. Creative Destruction in Austrian Economics), posing risks to the
existing elites
=> existing elites often block growth (e.g. land owners blocking merchant privileges in Middle
Ages)

When dictators are overthrown, the extractive institutions they created will often
remain in place
o Cf. Decolonization of the Congo: Mobutu just re-used the colonizers extractive institutions

=> After revolutions, new leaders are often tempted to re-use the extractive
institutions for their own good (the iron law of oligarchy)
o Cf. The Spanish & Portuguese colonizing Southern America and exploiting existing systems of tax
collection & forced labor after killing/taking control of the old king/elites
Why Nations Fail summary MH

IV. The Weight of History

Historical contingencies (can) matter greatly due to path dependence

Sometimes, events occur that open a window of opportunity

Acemoglu calls these moments Critical Junctures
An example of such a critical juncture is the Bubonic Plague (1346)
o The bubonic plague caused a dramatic decrease in the workforce
o Since supply of labor dropped, serfs* felt empowered to demand better conditions
o The outcomes differed significantly by country

England: better conditions were granted

Eastern Europe (Ottoman Empire): serfs were treated even worse

o Different outcomes were driven by small prior differences

Ottoman empire: lords were slightly better organized & had larger landholdings

o Later on, these small differences were compounded with new events

1688, Glorious Revolution: durable constraints on the English monarch

o => in the end, England became rich and the Ottoman Empire became poor & fell apart in 1924

=> Diverging development patterns hinge on the interplay of critical junctures &
institutional drift

*Serf: hereditary laborer in a feudal system

Why Nations Fail summary MH