What makes a nation successful or a fail state? Not the culture, as proven in the differences between rich Nogales Arizona (US) and poor Nogales Sonora (Mexico) that have the same culture. Not the race, as we can see the miles differences between North Korea and South Korea. Not the religion, where the rich Middle East countries who have oil and the poor ones who don’t have oil they all have the same religion.
It’s not their history either, where China under the same Communist Party was disastrous under Mao Zedong but prosperous under Deng Xiaoping. It’s not the geography, where in the same area Argentina and Chile are relatively prosperous while Bolivia and Peru are relatively poor. And contrary to popular believe, what makes a nation successful or a failure is also not their former colonial power. True that successful US, Singapore, and Australia were former English colonies, but so were Sierra Leone and Nigeria.
No, according to this meticulously researched book, what makes a nation successful or a failure is the institution, and the methods they use to govern their respective nation.
And to that end, the authors have a simple yet powerful hypothesis: there are two types of political power, inclusive and extractive. And likewise there are two types of economic systems, inclusive and extractive. Today’s developed countries are the result of inclusive political institution implementing inclusive economic policies, while failed states are the result of extractive powers implementing extractive economic policies that only enriched its leaders and their cronies at the expense of the people.
And with this simple theory the book takes us to the historical journey around the world, to Brilliantly present their points, and to analyse seemingly every nation in the world from the rise and fall of Roman Empire and Ottoman Empire (extractive in nature), to the rags to riches journey of the US and England (managed to create inclusive institution), down to the smallest tribe political struggles that became the pre-text for what have happened since in present-day Ethiopia and Siera Leone, with one ultimate conclusion: when it comes to wealth of nations and its people nothing is absolute.
Indeed, the southern hemesphere in the American continent – in present-day Peru, Ecuador and Mexico – were once far richer than the present-day US. Baghdad Damascus were once the epicentre of cultures and knowledge while Europe lagged behind. Argentina managed to rise from poverty, to become one of the richest countries in the world, only to collapse back into chaos in the past few decades. So what have made the changing difference for these countries? Central to the authors’ theory are centralisation of political power, critical junctures and creative destruction.
For any nation to function, firstly it need a centralisation of political power. This partly explains why Somalia and Afghanistan are doomed as a failed state because they have no centralised power. It also shows why the centralised Mayan Civilisation were much wealthier than its de-centralised northern neighbours. Conversely, political centralisation could also spell for a disaster, where colonial powers could grab the already existing centralised power to be exploited, such as plantation owners controlling Haiti and Jamaica.
Secondly, any nation would eventually faced with critical junctions, or momentum, whether it was the Black Death in Europe, the Great Revolution in Britain, the French Revolution or the Meiji Restoration in Japan, which ripple effects gave power to a broad coalition of society to create sets of rulers and regulations (such as property rights, universal healthcare) that would benefit the greater masses instead of narrow group of individuals. Or inversely, critical junction could also translated to changing extractive powers from colonial rulers to local powers who would proceeded to exploit the nation in the same manner (or often worse) like in Zimbabwe, Uzbekistan and Democratic Republic of Congo.
Thirdly, for any nation to succeed it needs to undergo a process called creative destruction, i.e. the destruction of inefficient old ways to be replaced by new innovations, such as lightbulbs replacing candles and cars replacing horses, and any other pioneering innovations. For inclusive institutions these changes are welcomed, and became one of the main reasons for economic growth (such as what the steam engine did for the Industrial Revolution in England).
For extractive institutions, however, these creative destructions are supressed by those in power (or their cronies) because it could directly or indirectly destroy or diminish the extractive engine that generate them wealth and power. The building of railways in Astro-Hungarian Empire and Russia are two similar examples, where the availability of railway was feared can create socially dangerous mobility (to be used to organise a rebellion against those in power). And the opposition of abolishment of slaves in the US by Southern plantation owners (whom control the politics at that time) is another example, which lead to the Civil War.
Daren Acemoglu and James Robinson also argues, however, that extractive institution can also generate growth for the nation, in which the growth would then be extracted for their own consumption. This is what happened with the Soviet Union between 1940s to 1980s before the whole thing collapse spectacularly. The authors made a similar remark about the spectacular growth of China since 1980s, where due to the extractive nature of its political power the “Chinese miracle” would soon run out of steam and face reality. This is also why countries like Egypt, Indonesia and Brazil could still have growth in the past under their former dictators.
Specifically for Brazil, the authors gave a very positive outlook on how the Workers’ Party under Lula da Silva can create inclusive political power that gave power to broad sections of the population, which would translated to a brighter future. This, of course, was written in 2012. Since then, especially today in 2016, the “right-wing elites” have staged a political manouvre to topple Lula’s successor Dilma Rousseff and replaced her and her entire cabinet with unelected crooks (almost all of them have impending corruption charges), which will likely bring Brazil back to extractive regime. This echoes with what had happened in the fall of the great maritime power of Venice, which the book brilliantly analysed.
This is by far the best book to read to really understand politics, power play and the huge role economic institution play in the political arena. It is an out-of-the-box thinking outside the battle of economic ideologies, with findings perfectly summarised the situation for each one of the countries mentioned in the book, and with tools that can easily be implemented in analysing those countries that aren’t mentioned in the book.
If I somehow could get the chance to meet my president and I’m allowed to give 1 book to him, it would be this one.