Why Nations Fail: The Origins of Power, Prosperity, and Poverty

Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012) is a nonfiction book co-authored by Daron Acemoglu and James A. Robinson. Acemoglu, an MIT economist renowned for his work on political economy, and Robinson, a political scientist and economist, combine their expertise to examine the reasons behind the varying levels of success and failure among nations. This interdisciplinary work, situated at the intersection of institutional economics, developmental economics, and economic history, examines a range of historical case studies to understand the driving forces behind democracy, its impact on economic performance, and the role of institutions in national development. The authors explore themes such as The Role of Institutions in Economic Development, The Impact of Political Systems on National Prosperity, and The Historical Evolution of Economic and Political Structures.

The book received generally positive reviews, although multiple economists and political theorists disputed some of its findings and have suggested that the dichotomy of inclusive versus extractive institutions on which most of the book’s argument rests oversimplifies the issue. Despite some criticisms, the book received multiple honors following its release, including the Paddy Power and Total Politics Political Book Award (International Affairs). It was shortlisted for the Financial Times and Goldman Sachs Business Book of the Year Award, long-listed for the Lionel Gelber Prize, and received an honorable mention for the Arthur Ross Book Award.

This guide is based on the 2012 Currency e-book edition.

Summary

Why Nations Fail consists of 15 chapters that explore what factors are responsible for the political and economic successes or failures of nation-states. It argues that the existing explanations about the causes of prosperity and poverty—which include geography, climate, culture, religion, or the ignorance of political leaders—are either lacking or flawed. The book supports its thesis by comparing national case studies, selecting countries that are similar in many of the above-mentioned factors but experience varying degrees of prosperity due to differing political and institutional choices.

On such example is that of Korea, which was partitioned into North Korea and South Korea in 1953. The countries’ economies have diverged dramatically, with South Korea becoming one of the richest countries in Asia, and North Korea becoming one of the poorest countries in the world due to its repressive government and lack of economic opportunity.

The border cities of Nogales, Arizona, and Nogales, Sonora, also bear out this thesis. The two cities share the same geographic area and culture, but their differing institutional environments make for a massive difference in prosperity.

The book’s central thesis is that economic prosperity depends above all else on the inclusiveness of economic and political institutions. Institutions are considered inclusive when a large group of people have a say in political decision-making, as opposed to countries where only a small group of people control political institutions and are unwilling to change with the times. A functioning democracy and pluralistic state guarantee the rule of law, which is essential to economic prosperity.

Inclusive institutions promote economic prosperity because they provide incentives that allow talent and creative ideas to flourish. By contrast, “extractive” institutions are those that permit the government to rule over and exploit others, extracting wealth from anyone not in the elite.

Nations with a history of extractive institutions, such as absolute monarchies and communist dictatorships, have not prospered. This is because entrepreneurs and citizens have less incentive to innovate and invest. Ruling elites are afraid of creative destruction, a term coined by Austrian economist Joseph Schumpeter that refers to the ongoing process of tearing down bad institutions while generating new, productive ones. Creative destruction creates new groups that compete for power against ruling elites, something dictatorships aim to avoid at all costs.

The book looks at multiple examples of autocratic countries that struggled economically but found new success after opening up their governmental process. One example is Great Britain after the Glorious Revolution of 1688, which saw the absolute monarchy replaced with a constitutional one, a move the book argues was essential for the Industrial Revolution.

Using this framework, the book looks at the recent economic boom in China, which has occurred despite the country’s autocratic government. The book argues that China’s recent past doesn’t contradict its central argument. The country’s economy has in fact modernized quite a bit in recent years under the reformist economic policies of Deng Xiaoping, the Chinese leader responsible for opening China up to the world after decades of a repressive regime following the Cultural Revolution. Thus, China demonstrates the pattern of liberalization leading to economic progress.

Economic growth changes the economic resource distribution and affects the country’s politics. Thus, the book argues that despite China’s current rapid growth, the country’s economy will collapse unless China continues to improve its political inclusiveness and open itself to economic and cultural opportunity.

The book concludes that vast differences in living standards and economic prosperity across the world are not historically, geographically, culturally, or ethnically predetermined but are instead primarily caused by differences in political and economic institutions. It discusses the role of empowerment in creating inclusive institutions and highlights how broad coalitions of diverse social groups, civil society, and a free media can drive the transition from extractive to inclusive institutions.