On "Why Nations Fail" by Daron Acemoglu and James A. Robinson *****

Countries are poor or rich because of their institutions. That is the basic argument. The authors use the example of the two Koreas and even more the two Nogaleses, one in Mexico and one in Arizona. Each has a better off partner. Why? They have the same geography, culture, people, and knowledge. It is because on one side the institutions exploit the people and on the other the people have more say in those institutions. I think the authors are pretty much correct, though I wouldn’t credit the institutions so much as the character of the leadership. That is, corrupt government leads to poverty.

The authors reference inclusive versus extractive economies and politics. Historical examples proliferate, which makes for great reading. In the examples, only rarely does a political system and economy not match and usually not for long. Extractive situations enrich and empower a small elite, while inclusive ones do so for the vast swath of society. With this also is the need for a strong central authority; without such, there will be no one to enforce laws, and thus society will fail to be extractive but also will not be able to be stable enough to provide the benefits of inclusivity. While inclusive societies are better off, extractive political systems don’t give way to inclusive ones because of creative destruction. That is, inclusivity also means less power and less ability to hold on to resources for the elite, meaning they would lose out even in a richer society.

Two other factors affect growth: critical junctures and institutional drift. Sometimes a plague, disaster, or invention will come along and change all the rules. Small adjustments at these junctures become big differences between nations as the institutions drift along based on that reaction.

Extractive economies can provide economic growth for a time. The problem they inevitably encounter, however, is the lack of creative destruction. When elites are focused only on gaining riches, they fail to spur innovation among others and thus the economy eventually stalls, or others attempt to take the elite position and centralized authority disappears, bringing an end to the structure and stability needed to extract wealth.

It is in the best interest of those in power to prevent creative destruction and thus to continue to extract wealth. A broad coalition of stakeholders, however, can interfere with the ability of the elite to continue to hold power, and once that broad coalition exerts its own power to force creative destruction, society revolutionizes. If that broad coalition holds, you have inclusion and the advantages that come with it. But often new elites emerge in whose interest it is to prevent continuing creative destruction.

The slave trade of course was part of that extractive economy. But so too was colonialism. Once slave trading was banned in the west, the authors bring out, slavery continued into the twentieth century via rules put into place in African countries that kept locals essentially enslaved to corporations and rich folks in the country itself. I hadn’t really thought about this before. The history of South Africa was particularly galling to read, where laws were put in place to create a racial underclass to be low wage workers, where previously there had been a greater degree of equality and advancement. One small Asian nation was completely obliterated, fourteen thousand killed, by the Dutch east Asia company because the people refused essentially to become subservient to the corporation. These were cases as such where nations were made to fail so that others could succeed by extracting land and labor and resources.

Countries that adopted inclusive political dynamics in the nineteenth century as the Industrial Revolution was taking place tend to be the rich ones today.

A virtuous cycle exists for nations with inclusive politics and economies. As elites sense that by not giving in on small issues could lead to revolution, they tend to expand power to less well off people in a gradual process. Likewise, such elites recognize the power monopolies wield over them and not wanting to compete, they break them up. Essentially so many parties have some degree of power that they recognize that not following equality in the law, even when it hurts their own cause, could lead to trouble down the road when they are no longer in charge. An example is given with regard to how fdr tried to pack the courts, which proved unpopular even though his policies were popular and the courts were interfering. Such preserved rule of law. In Argentina the opposite happened. Peron managed to get power to fire judges and install his own and ever since there has not been an independent judiciary and thus rarely a functioning democracy. (I fear that our virtuous cycle is drawing to a close in America, as parties, especially conservatives, play zero sum games. Republicans packed the Supreme Court in a dubious manner. Now the president is wielding powers he doesn’t actually have and congress is letting him and aiding him.)

The vicious cycle is just the opposite of the virtuous. Political power is extractive and limited to a few; this gives economic power, which in turn aids the political power. When the regime changes, it’s not a broad coalition of people but just another group setting themselves up as elites. This is what happened in Africa. Colonial empires extracted resources and set up government to do so; when they left, those who took over used the same techniques to continue extracting resources. Such is also why the us south persisted in poverty for so long. Plantation elites extracted from cheap slave labor; after the civil war, they set up a new system that more or less continued the same practices and kept the rich rich and the poor poor. Very little manufacturing or urbanization or modernization occurred because the system was set up to allow the well off to continue extracting. Eventually if such vicious circles aren’t broken, constant fighting to be top dog leads to a breakdown in the entire system and a lack of any central authority.

The few countries that have broken the mold have done so, the authors claim, with a broad coalition of interests. They give the example of Botswana, which I did not realize was as wealthy as it is. It was not heavily victimized by colonialism. When it became independent it was very poor and had few educated. But what it did have, I would say, were good leaders. I’m not sure they could not have personally benefited from forging an extractive economy. But their focus was on the nation. When diamonds were discovered—likely the source of much of the national wealth—they ensured that the money made was invested not in the tribe who owned the land (which seems would have been easy, especially as it was the tribe of the nation’s leader) but in the nation itself. The wealth is shared. In this sense I can see the virtuous circle taking hold. Everyone knows that if one person or tribe took the wealth for themselves, the nation would lose out. Better to share.

The authors close by noting that their theory is historical. There is no policy prescription that will bring about such changes. Giving money to poor countries usually just enriches the charities and the people in charge, rather than aiding the poor in the country. Increasing trade with an extractive regime, like china, will not make the regime change to an inclusive one. As such, growth in such a country will be temporal, the authors argue. Indeed, in a concrete example given, where a man started a company that was too successful compared with the government companies, he was arrested. The people aren’t actually free to innovate; riches belong to the elite. That is China. But in Brazil, a workers party, a broad coalition, has taken over the government and positive changes seems to be taking hold. Inclusivity. In both examples, however, I see more personal character and lack of corruption as the reason for a given success. You can’t have inclusivity unless the leaders are truly servants more interested in helping their coalition than manipulating it to enrich themselves. In this regard, the American experiment may have benefited by such leaders and may be drawing to a close with the loss of such.

For those wanting a spiritual explanation, Paul and Peter note that God puts the leaders of nations in charge; as such nations rise and fall, succeed and fail, by the leaders who ultimately take those positions. Call it inclusivity versus extraction if you want, but such hardly seems a result of pure happenstance.