Why Nations Fail: The Origins of Power, Prosperity, and Poverty
Why Nations Fail: The Origins of Power, Prosperity, and Poverty (ISBN: 9780307719225) was written by Daron Acemoglu and James A. Robinson in 2012.
The authors make the case for structural, institutional explanations for global disparities. They use case studies to demonstrate that variation exists where alternative theories would suggest constant outcomes.
They compare inclusive economies to exclusive economies. The former are characterized by property rights, rule of law, public services that enable open exchanging of goods and contracting of labor, and permission for entrepreneurship. Inclusive economies grant economic freedoms that improve welfare directly, and also encourage the adoption of competitive technologies and investment into education. The establishment of such institutions is a critical juncture in their path-dependent framework for analyzing history.
A weak state cannot guarantee these things.
There are also extractive economies that look very prosperous for only a subset of people. These generally have unequal property rights, biased rule of law, or discriminatory bans on tradescrafts, labor contracts, or entrepreneurship.
Barbados: Two thirds of population in 1680 was enslaved; moreover "mostly the property of the largest 175 sugar planters, who also owned most of the land." (p75). Of the 40 judges and justices, 29 were large planters. 8 most senior military officers were large planters. When framing economic success purely in terms of the planters, Barbados and other Caribbean states ("Cuba, Haiti, and Jamaica": p92) enjoyed great outcomes.
- Feudalism and serfdom in Europe
Gult in Ethiopia
- Slave trade and colonization
- Banda genocide
There is some discussion of an extractive economy that funnels production into statebuilding.
USSR funneled production into statebuilding and low-hanging technological improvements, which had a high immediate return on development. The economy suffered from diminishing returns over time though.
The authors compare absolutist distributions of power to pluralist ones. Extractive economies are required to fund such concentrations of power. The two form a stable system. Extractive economies are unlikely to survive a pluralist distribution of power. Absolutist concentrations of power are unlikely to survive an inclusive economy. But there is no inherent inertia towards a pluralist distribution of power or an inclusive economy.
"Economic growth and technological change are accompanied by what the great economist Joseph Schumpter called creative destruction. ... 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." (p84).
- The East vs. West analysis, see below
"The fact that inclusive institutions can go into reverse shows that there is no simple cumulative process of institutional improvement." (p157)
The authors love to make examples of differences in quality of life on either side of a river. They tie these to the dual economy framework (Arthur Lewis).
North and South Korea on opposite sides of the 38th parallel
- Lele and Bushong on opposite sides of the Kasai River
- Natal and Transkei on opposite sides of the Great Kei River
The authors address several other theories for development:
- Wealth disparities have been durable across the last century and beyond (pp45-48), so the cause must itself be quite stable.
- Geographic theories fail to explain reversals of fortunes.
- Mesoamerica was ruled by the most prosperous native states, e.g. the Aztecs, while North America was relatively destitute. European colonialism broadly induced a reversal of outcomes.
Sub-Saharan Africa was more sparsely populated than, and had far weaker states than Saharan Africa. South Africa is now far more prosperous.
- Cultural theories fail to explain divergences.
- Nogales
- North and South Korea
- Cultural theories also fail to address societies that demonstrate adoption of some foreign ideas, just not the ones that lead to economic development.
- Kingdom of Kongo
- Ignorance theories fail to address political constraints.
- Kofi Busia's economic policies, esp. price controls, were considered detrimental. When he attempted a reversal of policies to satisfy contingencies on an IMF loan, he was overthrown by Acheampong.
- There were years of detrimental policies, e.g. the Five Year Plan and the Cultural Revolution, under the CCP. There was a reversal of policies under Xiaoping, which followed his consolidation of power.
Case Studies
Most of the book is applying the above framework to specific case studies.
Comparison of Nogales on either side of the US-Mexico border. The region was settled by New Spain and split by the Gadsden Purchase. There are now substantial differences in income, life expectency, etc., between the portion in Arizona and the portion in Sonora.
This bleeds into a bigger picture comparison of the US and Mexico. There are many parallels in their post-colonization history:
- declarations of independence from colonial powers around the same time
- presidential political systems with expansive executive power
- also a recurring theme of military officers taking the presidency
- incidence of civil wars
- large scale exploitation of native populations
The first discrepancy lies in reasons for declaring independence.
- The 13 colonies rebelled over a number of grievances with English Parliamentary control.
- New Spain rebelled as monarchists.
The Cortes, which were established following the abdication of Ferdinand VII to Napoleon, promulgated the Cádiz Constitution which effectively constitutionalized the Spanish monarchy.
This was controversial in the colonies, where a landed aristocracy remained. Local politics were also characterized by the recent experience of the Hidalgo Revolt.
- When Ferdinand was restored in 1815, he attempted to revert the constitution, but a mutiny instead enforced it. This led to the declarations of independence across the colonies.
The second discrepancy lies in how the civil war proceeded.
- The US civil war came from the rupture of a tenuous balance struck by the US constitution (and three fifths compromise), the Missouri Compromise, etc. There was security before and after. Furthermore, the war was short and decisive.
- The Mexican civil war was a protracted era of political turnover.
The third discrepancy lies in the development of financial sectors.
- "[I]n 1818 there were 338 banks in operation in the United States" (p33). "[B]y 1914 there were 27,864 banks" (p33).
- "[I]n 1910, the year in which the Mexican Revolution started, there were only forty-two banks in Mexico, and two of these controlled 60 percent of total banking assets." (p34).
The fourth discrepancy lies in the exact relationship between the military and presidency.
Washington, Grant, and Eisenhower did not use militarism to gained the presidency. All still subject to re-election.
- Iterbide, Santa Ana, and Díaz used military force to hold power.
The fifth discrepancy lies in who profited from exploitation of native populations.
- In US, largely to the profit of people willing to live in the "frontier". (Land Ordinance of 1785, Homestead Act of 1862, etc.)
In Mexico, it was to the profit of Díaz and his selectorate. Specific mention of the deportation of Yaqui from Sonora.
Comparison of Calca and Acomayo. Only significant historic difference between the two is that the former was outside the Potosí catchment, while Acomayo was not.
The Spanish colonization strategy, "perfected by Cortés in Mexico" (p11), was to capture leaders, demand tribute, and assimilating the existing coercive institutions (i.e. taxes, tributaries, and forced labor).
Then establishment of encomienda, borrowed from the reconquista.
Quoting Bartolomelé de las Casas, A Short Account of the Destruction of the Indies: "Each of the settlers took up residence in the town allotted to him (or encommended to him, as the legal phrase has it), put the inhabitants to work for him, stole their already scarce foodstuffs for himself and took over the lands owned and worked by the natives and on which they traditionally grew their own produce." (pp13-14).
Francisco de Toledo established reducciones, effectively concentration camps, to bring labor to newly discovered silver mines, e.g. in Potosí. He also assimilated the Incan mita institution, a system of forced plantation labor for collectivized agriculture to sustain other state projects, and vastly expanded its catchment area. Lastly, he established the repartimiento de mercancias, a system of price controls, and trajin, a replacement of pack animals with human labor for transportation of goods.
Comparison of North and South Korea, and more generally a case study of South Korea.
Korea was remarkably homogeneous until liberation from occupation, and now there is a massive disparity on either side of the 38th parallel. The boundary was completely arbitrary and ultimately was the subject to military adjudication. Furthermore, there are durable societal similarities, i.e. mandatory military service.
South Korea was not an inclusive political system under Rhee and Park, but did enforce property rights. Furthermore, Park's regime was secure enough to afford economic freedoms that led to an inclusive economy.
Il-Sung meanwhile outlawed private property and led a command economy, the Juche system.
South Korea is counted among the most successful economies of the world. In North Korea, famine is common.
Case study of the European slave trade. Its emergence coincided with a transformation of institutions in coastal African societies.
- Francis Moore reported from the Senegambia coast: "Not only murder, theft and adultery, are punished by selling the criminal for slave, but every trifling case is punished in the same manner." (p253).
- The oracle of Arochukwu was revered among the Ijaw, Ibibio, and Igbo peoples as an arbiter of justice. Often the decision of the oracle was for a petitioner to be taken into the cave, where they were seized upon by European slavers.
Building on this, there is a case study of the kingdom of Kongo. The Kongolese were observed to be averse to adopting certain agricultural technologies (i.e. wheels and plows) from Portuguese traders.
However...
- Nzinga a Nkuwu converted to Catholicism and adopted a royal name in the European style, João I
- João established a standing army of 5,000
- Kongolese adopted Portuguese guns
- European "dress styles, and house designs" (p59) were assimilated
Instead of adopting policies to encourage literacy and investment into agriculture, João directed expansion into the slave trade. This created incentives to not engage in the labor market, to not trade over long distances, to settle in remote areas beyond the effective power of the state.
Belgian Congo under Leopold II saw similar extractive economies, but also expanded the political boundary of the state. Congo achieved independence in 1960 but the government in Léopoldville, now Kinshasa, had little effective control. The territory was much larger and much more diverse than the kingdom of Kongo ever was.
Comparative analysis of Natal and Transkei, on opposite sides of the Great Kei River.
The Xhosa were a united society that lived in urban developments and practiced agriculture. They avoided much of the slave trade conflict, being far inland. This changed with the English conquest of Cape Town. Afrikaaners migrated inland and came into direct conflict with the Xhosa.
Natal, now KwaZulu-Natal, has a history of property rights and commercial agriculture. A large portion of the Xhosa society embraced cheap access to technology and equipment, such as the plow.
The chiefs in Transkei opposed land surveying that would see the communal lands divided into private properties.
The Native Lands Act in 1913 established the first part of apartheid, by decreeing that 87% of land is set aside for white men only. 'Homelands' including Transkei were the remaining 13%. In time these would become known as Bantustans, alleging that the natives were in fact not native, but Bantu migrants.
Comparative analysis of the Lele and Bushong, on opposite sides of the Kasai River in Congo
The Bushong utilized nets for hunting and crop rotation for agriculture, whereas the Lele did not, and suffered worse quality of life for it. The Bushong also enjoyed stability in rule of law, whereas the Lele did not.
The Bushong inherited the political institutions and culture of the Kuba Kingdom. This was an absolutist and extractive state, but still contributed towards a baseline economic growth and more importantly established a state powerful enough to support freedoms.
Case study of Somalia. There is no central state of substance. Historically, political power has been distributed across six clans:
- Dir
- Darod
- Isaq
- Hawiye
- Digil
- Rahanweyn
Most contracts and laws revolved around diya, or compensations for murder or injury. These semi-legal codes are called heer. Subgroups of clans ("diya-paying groups") form around a particular heer, which not only was enforceable internally but set expectations for inter-group interactions. If an individual refused to pay diya, the victim's group had basis to retaliate against the accused's group.
Case study of Botswana. Khama instituted reforms that modernized the tribe politically and economically. There is a lasting impact that outlived British colonialism and administration under the high commissioner for South Africa (under which Botswana was known as Bechuanaland).
Case study of the Banda genocide.
The Dutch East India Company's first venture was the clove trade in Ambon. Tribute in that society was traditionally paid in cloves. The Dutch coerced the rulers of Ambon to sign treaties giving them a monopoly on cloves. They then coerced the rulers of neighboring Tidore, Ternate, and Bacan into treaties banning production and trade of cloves. Coerced labor soon followed.
The second venture was the mace and nutmeg trade in the Banda Islands. But these were a series of entirely decentralized villages, with no state that was capable of enforcing treaties or coercing labor. Jan Pieterszoon Coen established a capital on Java called Batavia, now Jakarta. From there he mobilized an invasion force and proceeded to genocide the Banda. Only a small number were captured alive to pass on the knowledge of mace and nutmeg production. The islands were then subdivided into 68 plantations and granted to Dutchmen. Slaves were imported to repopulate and work the land.
With this precedent, nearby societies experiences mass de-urbanization and decline in productivity. Burma moved the capital from coastal Pegu to Ava on the Irrawaddy River. The rulers of Maguindanao destroyed all pepper trees to dissuade the Dutch from approaching.
There is a very 'big picture' comparison of Eastern World vs. Western World. The West is generally typified by England.
Feudal institutions in Europe reduced the peasantry to serfdom. At the same time, slavery was abolished, seemingly because there was no utility to separate classes of serfs and slaves.
Some parts of Africa experienced this as well, such as the gult in Ethiopia, but for the most part slavery continued.
Following the plague, reduced labor force should have meant laborers had more bargaining power and thus received higher wages. Lords used political coercion to restrain this market force.
In Korczyn by 1533, all work was paid. By 1600 about half was unpaid.
In Hungary, a day per week of unpaid labor was established in 1514. Raised in 1550 to two. By 17th century was raised again to three.
This was attempted in England as well, i.e. Statute of Laborers in 1351, which held wages at 1327 rates and outlawed enticement of serfs from one domain to another. All enforcement effectively ended with the Peasants' Revolt in 1381, led by Wat Tyler. The complete abolition of serfdom in England followed.
Early industrialization was opposed on the basis that it would hinder full employment. Not dissimilar to the Luddite argument.
Dionysus Papin invented the piston engine and the steamboat; upon sailing the first steamboat on the Fulda, it was smashed by the boatmen's guild in Münden.
- Nicolas I of Russia and Francis I of Austria opposed establishment of factories and railroads for fear that they would encourage accumulation of a poor and unemployed class in the cities, who would then join the revolutions of 1848.
In 1485, 40 years after Johannes Gutenburg invented the printing press in Mainz, Bayezid II decreed that Muslims are forbidden from printing Arabic. This was finally reversed in 1727, when Ahmed III granted for Ibrahim Müteferrika to establish a press.
Both Elizabeth and James I refused to grant William Lee a patent for the stocking frame. But...
Richard Arkwright had no issues patenting the water frame in 1769 and then monetizing it with factories in Manchester, Matlock, Bath, and New Lanark.
England did not start differently from these other states, but traced a different path. Notably, these transformations coincided with:
- Statute of Monopolies in 1625, which disallowed creation of domestic royal monopolies
- Civil Wars and the Long Parliament in the 1640s, which enshrined the right of Parliament to convene
- Cromwell developed an institutional government completely outside a royal prerogative
- Glorious Revolution in 1688
Implication is that the creation of inclusive political institutions led to an inclusive and developed economy.
Comparison of Tudor England and Russia.
Henry VIII succeeded in limiting the power of the aristocracy, despite a political culture following from the Magna Carta. He also seized control of institutional religion by establishing the Anglican Church.
Peter the Great succeeded in undermining the Boyars, and in controlling the Orthodox Church. Importantly though, there were rebellions by the Streltsy and the Bashkirs and various others. The rebellions did not succeed but did limit the effective control of the Russian state.
The implication is that an absolutist concentration of power is a hard prerequisite of establishing an extractive economy with the intention of funneling it into statebuilding.
Case study of Venice. The overall implication is that Venice rose with political and economic freedoms in the 10th century, and fell with the consolidation of those institutions in the 13th century.
Commendas had a senior partner, who managed the local warehousing and storefront keeping, and a junior partner, who traveled abroad to trade. The senior partner generally contributed much more to startup finances. This system encouraged economic mobility.
Doge became elected position in 1032, chosen by a ducal council with 2 members. Great council supplanted doge as highest office in 1171. Ducal council eventually expanded to 6 members.
Council of forty became more powerful in time. In 1286, several proposals (some passing, some failing) were put forward to restrict membership in the great council. These led to La Serrata in 1297; anyone who had been a member within 40 years was automatically admitted to the great council, but new members needed nomination and approval from the council of forty. The next year, this was amended such that families of members were also automatically admitted.
Commenda contracts were banned. In 1314, trade was nationalized.
Case study of Roman Republic. This is characterized as a partially inclusive political institution with a partially inclusive economy. Slavery was substantial; but plebians held meaningful political leverage through successions, i.e. mass strikes, and through representation through elected plebian tribunes (a right itself gained via succession in the 5th century BCE).
Calls for land reforms, as championed by Tiberius Gracchus (who was murdered by senatorial tribunes), led to the plebian class' power being diminished. This can be traced into civil wars such as the Social War, and ultimately into Julius Caesar's seizure of Rome. Augustus Caesar/Octavian did not re-establish any inclusive institutions. Tiberius abolished the plebian tribunes entirely.
The implication is that partial inclusion is not stable and does not inherently tend towards full inclusion.
Bad Case Studies
In addition, there are several case studies that I think are poorly done.
Comparison of Buenos Aires and Asuncion.
- Buenos Aires was established by Pedro de Mendoza in 1534. The colony could neither coexist nor conquer the local Charrúas and Querandí.
- Neustra Señora de Santa Maria de la Asunción was established by Juan de Ayolas in 1537. The colony quickly assimilated the coercive institutions of the Guaraní and subjugated the people.
- Spaniards abandoned the former for the latter. Buenos Aires was not resettled until 1580.
The problem with this comparison is that the success/failure of a military campaign is not a measure of development.
Comparison of UK and US patent systems. The English economy was dominated by royal monopolies. Meanwhile in US: "Between 1820 and 1845, only 19 percent of patentees in the United States had parents who were professionals or were from recognizable major landowning families." (p33).
The problems with this comparison are two-fold:
- Patent systems are inherently an exclusive political institution, so why are they treated as an inclusive one by the authors here?
- Patent submissions reflect a decision, not an invention. There are famous case studies of the misuse of patent systems, as between Tesla and Edison. There are also modern case studies, i.e. patent trolling. The frequency of patent submissions is not a measure of innovation, but rather a measure of the utility/value of a patent.
Comparison of Bill Gates and Carlos Slim. The former innovated, won in a competitive marketplace, and still was subject to checks and regulations by Congress. The latter bought out privatized state enterprises and ran monopolies. Found to be monopoly but successfully employed legal defense of recurso de amparo.
The problem is simply that I am uncomfortable extrapolating caricatures of entire nations from two individuals' abbreviated life stories.
Case study of Jamestown, established by the Virginia Company.
- The company initially directed the colonists to subjugate the local Powhatan Confederacy, led by Wahunsunacock. This only accomplished the colony being embargoed.
The company then directed the settlers themselves to be worked exploitatively, per the Lawes Divine, Morall and Martiall. This ran against the reality that settlers could easily run away from the colony.
- In 1618 the labor contracts were cancelled and settlers were allotted land. In the next year, they were also granted self governance.
The problem with this case study is that the initial Jamestown colony consisted of just over 100 people. There is no way to make an institutional argument out of such a small society, especially since it was (as noted above) embargoed.
Case study of early colonization in Australia, especially the Squatters. The lack of established/landed interests enabled incentives for innovation, investment, and productivity.
The problem with this case study is that too much of the book is devoted to investigating how weak states depress development because they cannot guarantee security and property rights. Australia certainly didn't provide those... again, Squatters'. If there's an implication to salvage, it's that the difference between most weak states and the early Australian colony is that colonists had sufficient technological advantages to self-guarantee security and property rights against Aboriginals, and that the presence of Aboriginals whom could be cheaply threatened and stolen from discouraged colonists from doing so to each other. Setting aside ethics... these are plainly not durable nor repeatable conditions. This is not a meaningful case study. Also, there's an epistemological problem. The claim that Australia saw rapid development during early colonization is rooted in the assumption that there was a baseline of zero development beforehand. Of course moving from zero to nonzero is rapid development. And it's fundamentally flawed to characterize the area as having zero development beforehand; it just wasn't developed in the way that colonists aimed to.
Comparison of Japan and China. Both had extractive economies, bans on international trade, and absolutist monarchies. Both experienced destabilization from European colonial powers around the same time.
Tokugawa shogunate was absolutist but had much less effective control. There was a nascent organized opposition in Satsuma and Choushuu that led into the Meiji Restoration.
Implication is that the rapid dispersion of power in Meiji Japan disrupted the exclusive and extractive economy there.
The problem is that there are far more confounding factors at play here.