“Why Nations Fail:” Excellent in Every Way

WHY NATIONS FAIL by Daron Acemoglu and James Robinson combines history, economics, and political science to come to grips with one, central question: why do nations fail?  And if there is a root cause, what, if anything, can be done to keep more nations from failing?

In the process of examining that central question, Acemoglu and Robinson discuss known history and come up with some rather startling conclusions.  

To start with, nations generally have two different types of economic structures, “extractive” and “inclusive.”  The extractive type of economy (contemporary China, the Mayans, the Soviet Union, Great Britain prior to the 18th Century) is one where there is a cadre of elites that “extracts” all the wealth from the country, but doesn’t set up a good infrastructure so everyone can benefit from it.  Note that in extractive economies, a middle class may still arise, but the country’s ruling elites typically will not care about them; they are solely in it for themselves.

The inclusive economies (contemporary Botswana, the United Kingdom historically and today, and the United States among them) want everyone to succeed; further, an inclusive economy fosters innovation and what’s called “creative destruction” — that is, new ways of doing things cheaper or better are encouraged, even if it will temporarily cause distress in a formerly solid manufacturing sector.  A middle class is not only typical in inclusive economies, but is actively encouraged by progressive policies of taxation and legislation.

And the reason for the difference in extractive and inclusive economies, while it seems basic, comes down to one thing: politics.  This is illustrated very early on, when Acemoglu and Robinson discuss the differences between Nogales, Arizona and Nogales, Sonora, Mexico.  They’re just over the border from each other and really would be one city if circumstances were different, but because Mexico has historically had extractive economies and the United States historically has had an inclusive one, the difference between Nogales (U.S.) and Nogales (Mexico) is stark.

You see, in Mexico, no one really cares if businesses prosper; there isn’t a good way to collect taxation (which is one of the main “motivators” for a society to want to encourage a business-friendly environment); mostly, businessmen have to take chances they wouldn’t in the United States and, more importantly, pay bribes frequently in order to keep their businesses open.  Doing these things is not conducive to running a healthy business, to put it mildly.

And, of course, in the United States, business owners do not have to worry about most of that; the state of Arizona and the country of the U.S. wants businesses to have the chance to succeed, which is why business owners don’t have to pay bribes on a regular basis.  Business owners, for the most part, do not have to risk life and limb in order to run their businesses, as they often must in Mexico.  And because the United States has a system of taxation in place, a business owner knows exactly how much he’s going to have to pay the government, which is another plus compared to Mexico.

Another excellent example was the difference between South Korea and North Korea; the South Koreans have an inclusive economy, one other countries want to participate in.  They highly educate their people; they have a system of taxation that works for them; they are a lawful place where it’s free to associate, free to innovate, and of course it’s a place that allows — maybe even encourages — the “creative destruction” necessary in order to encourage new businesses and new ways of thinking, which is one reason why South Korea is at the forefront of the world’s (inclusive) economies.

But the North Koreans — ah, what a mess they are!  The people there are downtrodden; the country is run by elites for elites, and it is clearly an extractive economy.  Most people are at subsistence level.  Few people get decent, or even adequate, education unless they’re a member of the elite group that’s running the country.  And the country’s infrastructure is so bad that if Korea ever again becomes one country (as West and East Germany did), the South Koreans know they will have to massively upgrade the North in just about every possible respect in order to help the poor souls who live there.

There are many examples in WHY NATIONS FAIL that are drawn from history, economics, and political science that will more greatly illustrate this central premise: it’s not so much where you live that counts, but what sort of political system you live under as to whether or not your life is going to be bearable — or awful.  And while the United States is currently an inclusive economy, there is one example of a formerly inclusive economy — South Africa prior to 1935 or so, when the black farmers were encouraged rather than vilified and obstructed — going backward and becoming extractive (South African under their “apartheid” regime), so I’d definitely not want the U.S. to “rest on its laurels” after reading this book.  There is a constant need for vigilance on the part of any country’s populace in an inclusive economy in order to keep elections fair and free, or the potential exists for elites to arise in the United States in the same way they arose in North Korea, the Mayan Empire, or during the decline and fall of the Roman Empire.

WHY NATIONS FAIL is an excellent book that explains economics, politics, and history in a highly readable way without sacrificing intellectual vigor.  It is outstanding in every possible way, and I couldn’t recommend it more highly.  When it’s released on March 20, 2012, go grab a copy right away — you’ll be glad you did.

Grade: A-plus.

— reviewed by Barb

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  1. #1 by Jonathan Hughes on March 13, 2012 - 11:51 am

    I recommend a recent paper from the authors on the outlook in the US (since you asked the question!): http://economics.mit.edu/files/7623 “Is This Time Different? Capture and Anti-Capture of US Politics”

    • #2 by Barb Caffrey on March 13, 2012 - 8:12 pm

      This is an interesting paper about the current US situation; thanks for pointing it out, Jonathan.

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