Book Summary: Why Nations Fail by Acemoglu and Robinson

The city of Nogales sits on the US-Mexico border, divided by a fence.

In the US half, average household income is about $30,000 a year. Residents have good access to services such as electricity, sewage systems, public health, a decent road network and law and order.

In the Mexican half, average household income is closer to $10,000 a year. Roads are in bad condition and crime is high.

There is no difference in geography, climate, or the types of diseases prevalent in each half of Nogales. The key difference is the institutions. In the US half, Nogales residents have long enjoyed democratic rights. By contrast, until 2000, the Mexican half was under the corrupt control of a single party.

In theory, public healthcare in India is widely available and cheap. But in practice, even the poorest Indians use the much more expensive, unregulated, and sometimes deficient private providers. The reason is because the government healthcare facilities are unavailable most of the time — they are plagued by absenteeism, so are usually closed.

There was one proposal to fix this absenteeism by introducing time cards, and nurses were meant to clock in and out every day. This didn’t work. The health administrators sabotaged the program because they were in cahoots with the nurses and themselves contributed to the absenteeism problem.

Before the slave trade began, African societies were mostly small-scale with some legitimate (albeit limited) political authority.

The slave trade pushed many societies towards absolutism — people could get rich from capturing and selling people, instead of working with them, there was no need to build inclusive institutions. In some cases, the slave trade did aid the rise of powerful states, but the wars and slavery destroyed whatever legitimate political authority was left. Laws were distorted to further the slave trade; the penalty for every crime became slavery.

Even after the slave trade ended in 1807, the impact of extractive institutions remained. Many African states had already become organised around slaving so, slaves were simply redeployed within Africa instead of being sold off to the Americas. Slavery in Africa expanded throughout the 19th century and, in many parts, continued even into the 20th century.

Banks are naturally monopolistic and profit-driven. But the profit motive is channelled differently in a country like the US than in a country like Mexico, because of their different institutions and political incentives.

In Mexico, politicians could set up state banking monopolies and give them to their friends and partners in exchange for part of the monopoly profits. But this didn’t work in the US because of the political incentives. Politicians who tried to create such banking monopolies for their friends would lose future elections, so banking monopolies crumbled.

According to Pliny the Elder, the Emperor Tiberius executed a man who claimed to have invented unbreakable glass, because he was worried it would reduce the value of gold.

Similarly, the Emperor Vespasian refused to use an innovation for transporting columns more effectively (though he didn’t kill the man) because he wanted to keep the plebians busy and pliant. His fear was that the new device would be too destabilising.

Between 1928 and 1960, the USSR grew at around 6% annually, by reallocating resources from subsistence farming to industrial production. But this was catch-up growth, driven by resource allocation rather than innovation or creative destruction.

There were no incentives to innovate, because innovating requires experimentation, and experimentation is risky. If an experiment doesn’t work out, you may miss your production targets. Moreover, since output targets and bonuses were determined top-down based on previous production, managers were incentivised to undershoot targets, so that future targets would be lower. Although the government introduced explicit “innovation bonuses” to promote growth in 1946, these weren’t very successful.

In the 1970s, after the low-hanging fruit from reallocating underutilised resources had been plucked, growth stalled.

The Spanish conquered the Aztec and Incan civilisations, which had very dense local populations. This density made it easy for the Spanish to set up (or perpetuate) highly extractive institutions — they forced indigenous people’s living standards down to a subsistence level and extracted all the surpluses for themselves.

When the English arrived in Virginia, USA, they tried to do the same. But it didn’t work. There was no gold or precious metals, and the indigenous people were too spread out. The population density was about 1/500th that of central Mexico. The Virginia Company struggled even to make English settlers work — if conditions got too harsh, they’d just ran away to live with the locals. So, starting in 1618, the Virginia Company began to give settlers farmland and incentives to work. In 1619, settlers received voting rights. A similar story happened in the other US colonies.

The different institutions set up by the Spanish and the English have persisted until today. The US continued developing inclusive institutions that created incentives for productivity, while Latin America became highly unequal and politically unstable. Most Latin American countries didn’t become democracies until the 1990s, and even then they were very unstable.

[This example seems to suggest geography played quite a big role in why certain countries are richer than others though, of course, not a determinative role.]

England developed inclusive institutions gradually, helped along by the virtuous circle. Beginning with the Magna Carta in 1215, the king’s power was limited, as he was forced to consult barons before raising taxes. In 1265, Parliament was created. Though it consisted solely of elites, Parliament still empowered a broader section of society than before, and consistently resisted attempts by Tudor and Stuart kings to consolidate power. This came to a head in a civil war in 1642. Parliament wanted to end absolutist political institutions, while Charles I wanted to strengthen them. Parliament won, and Charles was executed in 1649.

A few decades after, during the Glorious Revolution of 1688, power genuinely shifted to Parliament. This led to a raft of reforms: the Bill of Rights 1688, parliamentary consent for taxation and standing armies, stronger property rights, and the creation of the Bank of England. State capacity increased, but with pluralistic oversight.

These changes set the stage for the Industrial Revolution, which was driven mostly by new entrants (only about 20% of the leading industrialists had previous manufacturing experience). New industrial centres like Manchester and Birmingham grew wealthy and began to demand political power through riots and protests. Parliament responded with a series of Reform Acts which extended voting rights to more and more people. Notably these reforms were not granted out of altruism, but to preserve elite rule and stave off revolution.

These expanded voting rights fed back into inclusive economic reforms: the Corn Laws protecting landowners were repealed; the civil service was made more meritocratic; workers gained legal protections; taxes were made progressive; and education became freely available.

In the Middle Ages, Venice may have been the richest place in the world, thanks to its inclusive economic institutions and somewhat inclusive political institutions. During this period, there was a great expansion of trade across Europe, and Venice was well-positioned (literally) to take advantage of it.

A particularly inclusive economic institution was the commenda, a type of partnership that involved a sedentary partner (who stayed in Venice) and a travelling partner (who sailed with the cargo). The sedentary partner would put in most of the capital, while the travelling partner would put in the work. The commenda was a key means of upward social mobility, as it allowed young people without wealth to build some up.

As young entrepreneurs grew richer, they began to demand political rights. Those political rights led in turn to institutional innovations in law (e.g. courts, contracts, bankruptcy and business structures) as well as finance. The origins of modern banking began around this time in Venice.

But all this economic growth came with the forces of creative destruction, which threatened existing elites. Political tensions steadily grew during the beginning of the 14th century, and the elites made a switch toward more extractive political and economic institutions. They banned the commenda contracts that had made Venice rich in the first place and, starting in 1314, the Venetian state began to limit long-distance trade to only the nobility.

Venice accordingly suffered both economic and population decline. Today, its only real economy is tourism, and a bit of fishing.

At the time of the Industrial Revolution, the Austro-Hungarian (Habsburg) Empire was the third-largest state in Europe. The economic system was a feudal one. The ruler, Francis I, was a strong absolutist who refused to recognise any limitations on his power. There were many monopolies and other trade restrictions, such as very high tariffs on imports and many explicit controls on cross-border and even internal trade.

Francis I was fiercely opposed to any sort of change, including the development of industry. He was concerned that factories would concentrate poor workers in cities, which would undermine the feudal order, and those workers might also organise to oppose absolutism. In 1802, he directly banned the creation of new factories in Vienna.

The first chairman of the Chinese Communist Party (CCP), Mao Zedong, presided over deeply extractive political and economic institutions from 1949 until his death in 1976.

Mao’s death formed a critical juncture. A power struggle emerged between Hua Guofeng, who wanted to continue Mao’s policies, and Deng Xiaoping, who wanted to move towards more inclusive economic institutions (but without inclusive political institutions).

Deng Xiaoping ultimately won the power struggle and implemented a bunch of liberalising economic reforms. The CCP increased the scope for private ownership, relaxed agricultural price controls, and bolstered the role of market forces and incentives. China also began opening up to foreign investment and trade. All of this led to a dramatic increase in economic growth and productivity.

There was nothing inevitable about any of this. Rather, the outcome was highly contingent, as Deng could well have lost the power struggle.

Pre-colonial Tswana states in the 1800s had unusually centralised government combined with some form of collective decision-making, where the people had the power to remove bad rulers.

In 1895, three Tswana chiefs travelled to London to petition Queen Victoria to take greater control of their land, to protect it from Cecil Rhodes. The Queen agreed — Britain took nominal control but largely left Botswana alone, which meant Botswana avoided the brutal extractive institutions elsewhere in Africa. After Botswana gained independence in 1966, the government created genuine democracy with competitive elections and enforced property rights, with an inclusive market economy.

Botswana also managed to avoid the resource curse thanks to its inclusive institutions. During the colonial period, the Tswana chiefs had blocked mineral prospecting because they knew that they’d lose their autonomy if the Europeans found precious metals or stones on their land. So diamonds weren’t discovered until the 1970s, after Botswana had already gained independence.

Moreover, before President Seretse Khama announced major diamond finds on his own tribe’s land, he passed a law vesting all subsoil mineral rights in the nation, instead of to individual tribes. This enabled diamond revenues to fund schools, roads, and government services. As a result, Botswana has never had a civil war, and today has sub-Saharan Africa’s highest income per person.

The development of long-distance trade was a critical juncture for many countries.

In England, the Crown at the time was relatively weak. Trading and colonial opportunities were pretty widely available, and long-distance trade empowered groups opposed to the monarchy, such as merchants. They then used their power to demand political rights. Existing pluralistic tendencies strengthened.

In France and Spain, overseas trade was already monopolised by the Crown. So the monarchy and its allies were the main beneficiaries when Atlantic trade and colonial expansion made much larger profits possible.

In Kongo (now the Democratic Republic of Congo), the kingdom was absolutist, with extractive institutions that captured all agricultural output from citizens. When the Portuguese arrived offering trade, this just intensified the extraction. The kingdom moved from seizing crops to enslaving people, selling them to European traders.

In the 1300s, Europe had a highly extractive feudal system. The king owned the land, and distributed some of it to lords in exchange for military service. Peasants who had to work the land were tied to it and couldn’t move without their lord’s permission.

The Black Death in 1347 killed off many people, creating a massive labour shortage. This increased the peasants’ power, and wages began to rise.

At the time of the Black Death, political and economic institutions in Western and Eastern Europe were pretty similar. The lords in the East were slightly better organised and their landholdings were bit more consolidated, while the peasants were slightly less organised. But these small differences were enough to cause great divergence over the coming centuries. By 1600, workers in the West didn’t have to pay feudal dues and were becoming a key part of a market economy, while a Second Serfdom emerged in the East.

The Glorious Revolution of 1688 in England limited the power of the king and opened up the political system to a broad cross-section of society. The coalition opposing absolutism was very broad, including landed gentry, manufacturers, and Atlantic traders.

But broad coalitions do not guarantee inclusive institutions. A similar broad coalition had emerged victorious in the English Civil War (1642-1651), but this just led to Oliver Cromwell’s dictatorship.

Historically, Somalia has been dominated by six clan families, which are very large with many subgroups. These clans and subgroups have been locked in almost continual conflict over scarce resources.

Political power is very widely dispersed, which made it impossible for Somalia to benefit from the Industrial Revolution. Though clans had leaders (sultans) and elders, they had no real power. There was no written law, police, or functioning legal system.

In 1964, the Brazilian military overthrew the democratic government. Later, in 1978, news broke that the military government had been distorting the national inflation figures. This riled up a bunch of workers at the Scânia truck factory in São Bernardo, Brazil. Even though strikes had been banned since 1964, the president of the metalworkers’ union, Luiz Inácio Lula da Silva (“Lula”), led a walkout that triggered a wave of other strikes across Brazil.

In 1980, Lula formed a new political party: the Workers’ Party. Despite its name, Lula insisted the party would not just be for trade unionists, but for all wage earners and the poor in general. The Workers’ Party also began to bring together former opposition politicians, intellectuals, and leaders of other social movements.

Throughout the 1980s, the Workers’ Party gradually won local mayoral elections. In 1989, the country held its first free presidential elections since the military coup. Lula did well, but didn’t win. Economic growth picked up in the 1990s. The poverty rate fell from 45% in 1990 to 30% in 2006. Inequality also fell sharply, particularly after the Workers’ Party took power in 2002.

Alberto Fujimori’s administration in Peru kept unusually good records of the bribes they paid in order to buy people’s loyalty! The amounts are illuminating. While a Supreme Court judge and other politicians were worth between $5,000 and $10,000 a month, newspapers and TV stations were worth millions.

The Fujimori administration paid $9 million on one occasion and more than $10 million on another to control TV stations. One mainstream newspaper received $1 million, while other newspapers got between $3,000 and $8,000 per headline. Controlling the media was therefore much more important to them than controlling politicians and judges.