Final Book Review - \"Why Nations Fail\" by Daron Acemoglu and James A. Robinson PDF

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Essay written for ECON 372 for Final Book Review . Written as a summary and commentary on the book "Why Nations Fail" by Daron Acemoglu and James A. Robinson. ...

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Ivan Figueroa

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ECON 372-001 11/24/20

Why Nations Fail To begin with, Why Nations Fail is an exploration into the driving forces that determine the economic and political fate of many countries around the world. The authors start by putting the city of Nogales under the scope for further investigation. In an attempt to uncover what causes the vast differences in life on the Mexico side of Nogales compared to the Arizona side of the city, the authors were faced with the fact that their economic and political differences are what make their experiences so distant. In terms of politics, it was important for the authors to take a deeper look into the history of both the United States and Mexico. Mexico was among the earliest countries colonized with the idea of slavery and extraction in mind. In the 15th century the Spanish arrived to Mexico, using a pre-existing system of slavery to extract a multitude of natural resources to send back to Europe. In the aftermath, the Spanish left behind a culture where the vast majority are governed by an elite-class of individuals. On the contrary, the U.S. is a country founded on certain political beliefs that discouraged this type of behavior. America’s history in being founded by English settlers had a vital role in the political and economic landscape that was created here. When first embarking on the journey to America, English settlers needed an incentive to leave behind the comfort of

their homes back in the U.K. This incentive came in the form of land gifted to those who promised to work and help establish the country. Centuries passed where the U.S. experienced political and economic stability. In general, political institutions in the U.S. have always been in control of economic institutions, thus ensuring that they work for the masses instead just a small ruling class. Similarly, the U.S. has other societal factors that contributed to its flourishing. Trust in public institutions, access to credit markets, protection of private property, and access to public education all come together to afford Americans the many opportunities we currently have. Unlike many Latin American countries, the U.S. did experience governance by a small elite class of individuals. Our historical background established a government and economy that works for the masses, making sure to always maintain and protect incentives individuals might have to strive for a higher quality of life. For example, Latin American countries do not ensure the economy works for all, and thus have given way for monopolistic economies to exist. Keeping this in mind, there are now less incentives for individuals to strive to get rich and improve their quality of life if they think the political or economic system is rigged against them. This idea of maintaining incentives for individuals to succeed is vital for a country to reach its full potential. Later the authors speak on the differences in life experienced in North Korea compared to South Korea. Like I previously mentioned, certain public institutions need to exist for a nation to prosper and reach its full potential. In South Korea, private property was protected by the federal government, credit markets developed, and thus investment and economic growth was

encouraged. Diving a little bit more into this idea of protection, the authors talk about the importance of property rights for a country to prosper. Logically speaking, people have very little incentive grow and succeed if they think the federal government will end up taking everything they have worked so hard for. This is the basis of inclusive institutions. To fully develop, a country must create inclusive economic institutions that foster prosperity for the masses. For the most part, these institutions in one way or another protect private property rights, establish fair business practices, provide public education to all, and create a physical infrastructure throughout the country. In addition to this, the authors shed light on the importance of publicly available education and its role in driving innovation in the technologically advanced world that we currently live in. All these institutions are vital not just for individuals, but for the private sector as well. Extractive institutions, on the other hand, inhibit economic prosperity by removing incentives for public and private sectors to flourish. Unlike inclusive institutions, extractive institutions work to take away the very fruits of others’ labor. Literally speaking, these institutions extract resources from the public and private sector, thus taking away incentive for these groups to work harder and be more prosperous. The question is, why would any governing body ever choose the path of extractive institutions? The answer is simple, albeit disheartening. Extractive institutions encourage the power balance that maintain the elite ruling class in control. Inclusive institutions work for all the people instead of a small group, thus transferring power away from the elite and handing it over to the masses. In other words, the only people that would benefit from extractive institutions would be those few elite people that currently have the power and

do not want to lose it. Despite growth happening in a few extractive countries, like Russia and China, it is unlikely to be maintained for much time. Furthermore, the authors go on to explain the idea of a vicious circle created by a faulty government. This vicious circle is said to be started when a colonial power arrives to a country, establishes extractive institutions, and then abandons that country, leaving behind its extractive institutions. After gaining independence, the post-colonial government often increases the extractive policies these institutions already have in order to increase their political and economic power. In turn, this tends to erupt into a civil war after factions within the country notice the disproportionate balance in power. Eventually this vicious circle plunges the country into economic and political chaos. The post-colonial government had the opportunity to disband the original extractive institutions, but instead chose to continue these corrupt practices for personal gain. In the end, this makes the people with no say in the government hungry for power and inclusion. Political power becomes an end in itself, instead of being used as a means to progress the country. Staying on that note, this brings the authors to his next chapter. Why do nations fail today? In short, nations fail today due to their own extractive policies often run by corrupt governments. In the case of Zimbabwe, Robert Mugabe ruled with an iron fist that even seemed comedic at times. It all culminated in the year 2009 when the UN reported Zimbabwe had a national unemployment rate of about 94%. In terms of Mugabe’s reign of terror, he was Prime Minister of Zimbabwe from 1980-1987 and then became President of Zimbabwe from 19872017. That information alone is enough to raise a few red flags regarding political power in the country. Similar to Russia where Vladimir Putin has been ruling for over a decade, Robert

Mugabe changed his official title from Prime Minister to President after 1987, but his political power over the people of Zimbabwe stayed the same. As I previously mentioned, Mugabe’s extractive tactics were even laughable at times. In the year 2000, Zimbabwe held a national lottery in an attempt to decrease the ever-growing problem of hyperinflation the country was facing. Every citizen that kept more than 5,000 Zimbabwean dollars in their bank account during December of 1999 was entered for a chance to win 100,000 Zimbabwean dollars. On that fateful day in the year 2000, the winner of the national lottery was announced to be nobody other than Robert Mugabe himself. In my own experience, I have noticed that coordinators of events with some sort of cash prize are almost never eligible to win the prize because their position of power results in a conflict of interest. However, my own experience has been with raffle tickets and other small contests, not a national lottery where the cash prize was five times the average per capita income of the country. To top it all off, Mugabe in no shape or form needed that money. The authors mentioned Mugabe had just given himself and his cabinet members a salary increase of up to 200%. The failure of a nation in today’s modern world is blamed on the force that impedes economic growth, which once again, are extractive institutions in a country. In many cases, a government known to have extractive institutions will purposely hinder economic growth because the growth experienced means they would risk losing their pre-existing power structure. In other cases, the consequences are much worse for the country as a whole. These types of extractive governments can lead a nation down the path of economic stagnation, civil war, famine, mass displacement, and even total state failure. In fact, many of the countries that

adopted post-colonial extractive institutions resulted in them being a poorer nation today than they were in the 1960s. In chapter 14, the authors go over the case of countries that were able to avoid or stray from their extractive institutions. Most importantly, the case of Botswana being able to avoid colonial rule in the first place to foster inclusivity is most admirable. Oddly enough, their success story began before colonial rule was even an option. The region of Africa where Botswana resides was already known to have an inclusive culture where the leadership roles, or chiefs, were elected based on merit and not some form of hereditary legacy. Keeping this in mind, this inclusive society had already established a culture where political leaders rule on behalf of the people that established these inclusive institutions generations ago. Staying on that note, in the 1890s, three chiefs from Botswana even went as far as to visit England to speak with their government about the possibility of becoming a British Protectorate. The idea was that England would protect Botswana from Rhode’s South African expansionary policies that threatened to change the course of their democracy. In return Botswana would give England enough land to build a railway that could travel through their lands so that England could easily access the interior parts of Africa. This crucial decision allowed Botswana to safeguard their culture of inclusivity and avoid many extractive institutions that could have otherwise been instilled by a colonial power. Likewise, Botswana maintained their position on retaining an inclusive society in postcolonial times by passing a law that ensured all newfound wealth resulting from the discovery of diamonds was said to be national wealth, and not that of the individual that discovered the

diamonds themselves. As a result of this policy, Botswana developed a large stockpile of public funds that were later used to pay for public services and to fund public programs. This in turn translated to economic development for Botswana that now sees them as one of the most, if not the most, inclusive country in all of Africa. It all stemmed from the decision made by the chiefs of Botswana to avoid Rhode’s South African expansionary policies so that they could maintain their culture of inclusivity. The authors emphasize the decisions made by political leaders in times of turmoil or conflict are often was set the precedent or foreshadow the future of that nation. There needs to be a compelling moment in the nation’s history where the governing body decides to split or completely avoid the extractive policies held by so many other poor and developing nations. In the final chapter of the book, the authors analyze the implication revolving around prosperity and poverty. Here they predict America and Europe are likely to get even richer and prosperous as time progresses because they offer the most inclusive institutions. In addition to that, the authors go on to talk about the shortcomings associated with foreign aid to a country harboring extractive institutions. Many times, such as the case of the U.S. in Iraq or Afghanistan, a foreign power trying to bring about social, political, or economic change through foreign aid often fall short of their desired goals. Foreign aid going towards a country that has extractive institutions is said to be a waste of resources because that aid is most likely to be extorted by the pre-existing extractive institutions. However, the authors do mention that this is not a reason to cease all foreign aid to developing and war-torn nations. They argue that if even a fraction of the foreign aid meant for the country reaches the masses it is meant to help, then the efforts of by the foreign government did not go to waste.

What strategy for bringing about change actually works? Economic and political change is most widely accepted when the desire for that change comes from the masses and is correctly implemented by the governing body. Real change comes from within the majority of the population, and through proper implementation of government programs that foster inclusivity. Without sticking to these principles, nations either fail to encourage change or fail to carry it out by the way they implement it. After all, what good is it to have a government where the official stance is pro-democracy and inclusivity, but behind closed doors they practice authoritarian ruling. In the end, I admit these authors made their case and explained it, so I have no disagreements. If anything, I have personal experience that proves the theories mentioned in the book. Despite only visiting Mexico for weeks at a time, I have seen the stark differences that public institutions can bring to a culture. Lack of trust in public institutions is extremely noticeable in Mexico and implies extra difficulties in life that I would not otherwise experience here in America. As previously stated, Mexico’s history differs from the United States, which ultimately planted the seed for a different culture to be born. Current day Mexico is still seen to have extractive institutions that were created by the ruling class to establish a power structure that would not be threatened by the masses. Ultimately, my experience in Mexico proves every single idea brought up in the book to be correct and allows me to appreciate the life we have here in America just a little more. Throughout the book, the authors try to find the solution as to why nations fail, and the answers are evident. Nations fail because of their extractive institutions. Without fostering an economic and political culture of inclusivity, the general

population will feel the effects of the power structure and will lose incentive to strive for further development. Without these incentives to improve, the nation’s driving forces for economic development come to a halt....