Why Nations Fail. Summary of Acemoglu s book (2012) -Martijn Huysmans-

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1 Why Nations Fail Summary of Acemoglu s book (2012) -Martijn Huysmans-

2 I. It s 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 US- Mexico 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 2

3 II. Conventional theories don t work It s 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 wouldn t explain the difference between Nogales, Arizona and Nogales, Mexico (cf. introduction) It s 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 It s not due to ignorance o Some people claim countries are poor because we don t 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 they re 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 3

4 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 38 th 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 colonizer s 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 4

5 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 5