Daron Acemoglu and James A.
Robinson, “Why Nations Fail: The Origins of Power,
Prosperity, and Poverty”, Random House Digital, 2012, (Kindle
Version)
Here
is a must-read book.
Poor countries today are poor mostly
because they are ruled by a relatively small group of elites who control their countries
and exploit them as extractive organizations for their own benefit at the
expense of the vast majority of the people.
The discipline of Economics has generally ignored
politics as an economic factor when explaining world inequality but, as this book makes clear, understanding
politics is crucial when explaining world inequality. Inclusive economic institutions, such as
those in South Korea or in the United States, are those that allow and
encourage participation by a broad cross-section of society in economic
activities; their institutions make the best use of their peoples talents and
skills and enable individuals to make the choices they wish. To be inclusive, economic institutions must
feature secure private property, an unbiased system of law, and provision for public services that provides a level
playing field in which people can exchange and contract; it also must permit
the entry of new businesses, allow creative destruction of old businesses and allow
people to choose their careers.
Many of the poor countries have had
revolutions, but those who mounted the revolutions generally just took over the
reins from those they’d deposed and re-created a similar extractive rather than
an inclusive system (think Iran). Yet, albeit
more infrequently, in some countries ordinary citizens did acquire real
political power with their revolutions and changed the way their society
works. This book explores how prosperity
prevailed in England, France, the United States, Japan, Botswana, Brazil, and
South Korea. Other countries have not
fared so well; North Korea is one of the book’s examples: South Korea, on the other hand, created
incentives, rewarded innovation and allowed everyone to participate in economic
opportunities. Their government became
accountable and responsive to citizens.
The people of North Korea, meanwhile, are essentially serfs of
the elite. (Also: to this day the US maintains a sizeable presence in South Korea).
My
Notes:
Pg. 1:
“Why Nations
Fail” is a sweeping attempt to explain the poverty that leaves 1.29 billion
people in the developing world struggling to live on less than $1.25 a day.
Even in today’s depressed economic climate, the average American is still seven
times as prosperous as the average Mexican, 10 times as prosperous as the
average Peruvian, about 20 times as prosperous as the average inhabitant of
sub-Saharan Africa and about 40 times as prosperous as the average citizen of
such particularly desperate African countries as Mali, Ethiopia, and Sierra
Leone. This book explores reasons for the huge differences in
incomes and standards of living that separate the rich countries of the world
from the poor.
Pg. 20: In 1607
colonists, under the auspices of the Virginia Company, founded the Jamestown
settlement. They had a model of
colonization heavily influenced by the Spanish template. Their first plan was to capture the local
chief and use him as a way to get provisions and to coerce the population into
producing food and wealth (gold) for them.
The notion that the settlers themselves would work and grow their own
food seems not to have crossed their minds.
Anyway, their plan to capture chief Wahunsunacock did not work out—he
was too suspicious and imposed an embargo on the colony to starve them
out. After two disastrous years, the
Virginia Company recognized that no gold was to be found and replaced the
ruling council with a single governor—Thomas Gates. Of the five hundred colonists entering the
winter of 1609/1610 only sixty were alive by March. Yet, the Virginia Company after concluding
that the Indians could not be exploited decided the colonists could. (After reading this, it occurred to me how
lucky I am to have not pursued teaching history—how long would a teacher last
if he truthfully covered this topic around Thanksgiving?)
Pg. 42: Economic
institutions shape economic incentives: the incentives to become educated, to
save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines
what economic institutions people live under, and it is the political
institutions that determine how this process works and whether politicians are
agents of the citizens or are able to use the power entrusted to them to amass
their own fortunes and to pursue their own agendas. While economic institutions are critical for
determining whether a country is poor or prosperous, it is politics and
political institutions that determine what economic institutions a country has.
Pg. 46: Most of
current world inequality emerged since the late eighteenth century, following
on the tails of the Industrial Revolution and caused by the uneven
dissemination of the industrial technologies and manufacturing production. This
inequality cannot be explained by climate or diseases, or any version of the
geography hypothesis; many adjacent communities with the same climate, etc.,
(such as North and South Korea) illustrate this.
Pg. 53: Diamond in
“Guns, Germs, and Steel” had argued that the inequality in the modern world
largely results from geographic orientation, that the east-west orientation of
Eurasia enabled crops, animals, and innovations to spread from the Fertile
Crescent into Western Europe as the climate is similar on this axis but is very
different north to south. The second
widely accepted theory, the culture hypothesis, relates prosperity to
culture. This hypothesis used to stress
religion via the Protestant ethic but now stresses other types of beliefs,
values, and ethics as well. Neither of
these explanations accounts for adjacent communities such as North and South
Korea having such great inequalities. (I think there is some contribution to inequality from both geographic location and cultural influences).
Pg. 84: Economic
growth and technological change are accompanied by what the great economist
Joseph Schumpeter called creative destruction.
They replace the old with the new.
New sectors attract resources away from established ones. New technologies make existing skills and
machines obsolete. The process of
economic growth and the inclusive institutions upon which it is based create
losers as well as winners in the political arena and in the economic
marketplace. Fear of creative
destruction is often at the root of the opposition to inclusive economic and
political institutions. Pg. 86: Growth
thus moves forward only if not blocked by the economic losers who anticipate
that their economic privileges will be lost and by the political losers who
fear that their political power will be eroded.
Pg. 90: It is not
geography, culture, or the ignorance of its citizens or politicians that keep
the Congo poor, but its extractive economic institutions. These extractive processes are still in place after all these
centuries because political power continues to be narrowly concentrated in the
hands of an elite who have little incentive to enforce secure property rights
for the people, to provide the basic public services that would improve the
quality of life, or to encourage economic progress.
Pg. 93: As in the
Soviet Union in its heyday, China is growing rapidly, but this is still growth
under extractive institutions, under the control of the state, with little sign
of a transition to inclusive political institutions. The fact that Chinese economic institutions
are still far from fully inclusive also suggests that a South Korean-style
transition is less likely to occur.
Pg. 97: The 1348 CE plague had a socially, economically, and politically transformative impact on
medieval European societies when one-half of their populations died. The massive scarcity of labor shook the
foundations of the feudal order. It
encouraged peasants to demand that things change. Pg. 101:
The plague is a vivid example of a critical juncture, a major event (a critical juncture) disrupting the existing economic or political balance in society. A critical juncture can open the way for
breaking the cycle of extractive institutions and enable more inclusive ones to
emerge, as in England. Or it can
intensify the emergence of extractive institutions, as was the case with the
Second Serfdom in Eastern Europe.
England was unique among nations when it made the breakthrough to
sustained economic growth in the seventeenth century.
Pg. 114: The
extractive political and economic institutions of the Spanish conquistadors in
Latin America have endured, condemning much of the region to poverty. Likewise, the economic institutions the
Ottomans imposed on the Middle East were also very extractive and have also
endured.
Pg. 128: The most important
lesson is that extractive institutions cannot generate sustained technological
change for two reasons: the lack of economic incentives and resistance by the
elites.
Pg. 136: About 15,000
BC, the Ice Age came to an end as the Earth’s climate warmed up. This warming process reversed about 14,000
BC, but after 9600 BC, global temperatures rose again and have since stayed
high. The warming was a huge critical
juncture that formed the background to the Neolithic Revolution, where human
societies made the transition to sedentary life, farming, and herding. Farming
spread into Europe from the Middle East starting around 6500 BC.
Pg. 143: Maya cities
first began to develop around 500 BC.
Between 250 AD and 900 AD, the Maya culture and civilization was at its
peak but by the time the Spanish conquistadors arrived in the early sixteenth
century, the great temples and palaces of such Maya sites as Tikal had receded
into the forest, not to be rediscovered until the nineteenth century.
Pg. 150: The growth
generated by extractive institutions is very different in nature from growth
created under inclusive institutions.
Most important, it is not sustainable.
By their very nature, extractive institutions do not foster creative
destruction and generate at best only a limited amount of technological
progress. The Soviet experience gives a
vivid illustration of this limit. Many in the Western world were awestruck by
Soviet growth in the 1920s, 30s, 40s, 50s, 60s, and even as late as the 70s, in
the same way they are mesmerized by the Chinese growth today.
Pg. 158: As in Venice, Rome’s initial economic success was
based on inclusive institutions—at least by the standards of their time. As in Venice, these institutions became
decidedly more extractive over time.
With Rome, this was a consequence of the change from the Republic (510
BC to 49 BC) to the Empire (49 BC to AD 476). Rome’s
increasingly extractive political and economic institutions generated its
demise because they caused infighting and civil war. Roman decline led to feudalism and brought
into existence cities that were outside the sphere of influence of monarchs and
aristocrats, and in the process created a set of institutions where the
political powers of rulers were weakened.
It was upon this feudal foundation that the Black Death would create
havoc and further strengthen independent cities and peasants at the expense of
monarchs, aristocrats, and large landowners.
And it was on this canvas that the opportunities created by the Atlantic
trade would play out.
Pg. 180: Out of the
ashes of the Black Death emerged stronger towns and cities, and a peasantry no
longer tied to the land and newly free of feudal obligations. It was precisely these critical junctures
unleashed by the fall of the Roman Empire that led to a strong institutional
drift affecting all of Europe in a way that has no parallel in sub-Saharan
Africa, Asia, or the Americas.
Pg. 183: A key idea of this book is that the fear of
creative destruction is the main reason why there was no sustained increase in
living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies
prosperous, but also involves the replacement of the old with the new and the
destruction of the economic privileges and political power of certain people.
Pg. 213: In 1445
Gutenberg unveiled a printing press based on movable type. Without this innovation, mass literacy and
education would have been impossible. Not everyone saw printing as a desirable
innovation. In 1485 the Ottoman sultan
issued an edict that Muslims were expressly forbidden from printing in
Arabic. It was not until 1727 that the
first printing press was allowed in the Ottoman lands but whatever was printed
had to be vetted by a panel of three religious and legal scholars. In 1800 probably only 2 to 3 percent of the
citizens of the Ottoman Empire were literate, compared with 60 percent of adult
males and 40 percent of adult females in England.
Pg. 218: The effort to
build and consolidate absolutism in Spain was massively aided by the discovery
of precious metals in the Americas. (Precious metals served much the same purpose as oil does today; both relieve the government of much of their dependence on the people).
Pg. 294: The French
revolution of 1789 and Napoleon’s subsequent march through Europe radically
changed the lay of the land. In much of
Europe, gone were feudal relations; the power of the guilds; the absolutist
control of monarchs and princes; the grip of the clergy on economic, social,
and political power; and the foundation of ancient regime, which treated
different people unequally based on their birth status. These changes created the type of inclusive
economic institutions that would then allow industrialization to take root in
these places. By the middle of the
nineteenth-century, industrialization was rapidly underway in almost all the places that the French controlled, whereas places such as Austria-Hungary and
Russia, which the French did not conquer, or Poland and Spain, where the French
hold was temporary and limited, was still largely stagnant.
Pg. 301: With a few
exceptions, the rich countries of today are those that embarked on the process
of industrialization and technological change starting in the nineteenth
century, and the poor ones are those that did not.
Pg. 306: The rule of
law is not imaginable under absolutist political institutions. The rule of law is a creation of pluralist
political institutions and of the broad coalitions that support such
pluralism. It’s only when many
individuals and groups have a say in decisions, and the political power to have
a seat at the table, that the idea that they should all be treated fairly
starts making sense.
Pg. 309: It is highly
significant that the English state stopped censoring the media after 1688. The media played a similarly important role
in empowering the population at large and in the continuation of the virtuous
circle of institutional development in the United States. A free (and responsible) media often provides information about
and mobilizes opposition to threats against inclusive institutions, as it did
during the last quarter of the nineteenth century and the first quarter of the twentieth century, when the increasing economic domination of the Robber Barons
was threatening the essence of inclusive
economic institutions in the United States.
Pg. 332: Inclusive
economic and political institutions do not emerge by themselves. They emerge during critical junctures, such
as during the Glorious Revolution in England or the foundation of the Jamestown
colony in North America, when a series of factors weaken the hold of the elites
in power, make their opponents stronger, and create incentives for the
formation of a pluralistic society. Once
in place, inclusive economic and political institutions tend to create a
virtuous circle, a process of positive feedback, making it more likely that
these institutions will persist and even expand.
Pg. 343: The
extractive institution that many African countries inherited from the colonial
powers sowed the seeds of power struggles and civil wars. These struggles would not be fought to change
political institutions, introduce constraints on the exercise of power, or create
pluralism, but to capture power and enrich one group at the expense of the
rest.
Pg. 353: In the United
States a continuation of extractive institutions persisted in the South after the Civil War,
this time of the Jim Crow kind rather than of slavery. The Jim Crow legislation after 1865
continued for almost another century until yet another major upheaval, the
civil rights movement.
Pg. 354: While more
than 600,000 were killed in the Civil War, the planter elites suffered few
casualties. The law, designed by the
planters and for the planters, exempted one slaveholder from military service
for every twenty slaves held.
Pg. 355: Following the
Civil War, the period called Reconstruction lasted from 1865 until 1877.
Pg. 368: The most
common reason why nations fail today is that they have extractive
institutions. Zimbabwe under Mugabe’s
regime vividly illustrates the economic and social consequences; Botswana, on
the other hand, represents the opposite. The
extractive economic institutions do not create the incentives needed for people
to save, invest, and innovate.
Extractive political institutions support these economic institutions by
cementing the power of those who benefit from the extraction.
Pg. 430: Growth under
extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires
innovation, and innovation cannot be decoupled from creative destruction, which
replaces the old with the new in the economic realm and also destabilizes
established power relations in politics.
Because elites dominating extractive institutions fear creative
destruction, they will resist it.
Second, the ability of those who dominate extractive institutions to
benefit greatly at the expense of the rest of society implies that political
power under extractive institutions is highly coveted, making many groups and
individuals fight to obtain it. As a
consequence, there will be powerful forces pushing societies under extractive
institutions toward political instability.
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