Why Nations Fail, The Making of Prosperity and Poverty

by Acemoglu & Robinson

- The Economics of the 38th Parallel

In 1945 Korea was divided at the 38th parallel, becoming North and South Korea. Families were
separated in this division and were not able to meet again until 2010 under a limited program of
family reunification. While South Korea developed and took the standards of the West
following the example of the U.S an anti-communist policy was shaped under an authoritarian
president, private property was allowed, and credit and subsidies were given to firms; the North
came to a level of living standards close to those in south Saharan Africa, it had a communist
dictator, the regime abolished property and many rights, the North failed to developed a strong
economy and often suffered famines. This situation remains the same today. Therefore, while
the South was able to develop it economy the North completely failed creating a huge gap
between the countries the once were one.

- Extractive and Inclusive Economic Institutions

The economic outcome of countries differs due to the different institutions, rules and incentives.
Following the example of the Koreas, the North is educated in pure propaganda and all citizens
must attend the military, on the contrary the South has been able to develop a good education
and offers several other things for the development of the people.

Inclusive economic institutions allow and encourage participation by great mass of people in the
economic activities. They feature: secure private property (motivation as part of human
motivation, must be secured for most of the society), unbiased system of law, provision of
public services, permit entry of new business and allow people to choose their careers. These
institutions foster economic activity, productivity growth and economic prosperity.

State is intertwined with economic institutions, as it enforces law and order, private property,
and contracts, and is a key provider for public services. Inclusive economic institutions need
and use the state.

Extractive economic institutions are designed to extract incomes and wealth from one subset of
society to benefit a different subset.

- Engines of Prosperity

Inclusive economic institutions create inclusive markets (are not just free markets). They also
allow 2 engines of prosperity: education and technology. Sustained economic growth is usually
connected to technological improvements which allow for economic factors to become more
productive.

Process of innovation is possible with economic institutions that encourage private property,
uphold contracts, create a level playing field, and encourage and allow entry of new business
and technology. We are way more productive than we were 100 years ago.

The poor countries’ low level of education is caused by economic institutions that fail to create
incentives for parents to educate and political institutions the fail to induce the government to
help with the development of education.

The ability of economic institution to help inclusive markets, technological innovation, invest in
people and skills is critical for economic growth.
 - Extractive and Inclusive Political Institutions

Politics is the process by which a society chooses the rules the will govern it. When there is a
conflict over institutions (rules that govern incentives in politics) the winner depends on the
distribution of political power in society (1) narrow and unconstrained=absolutist, enrich
themselves (2) broadly=broad coalition or plurality group.

Countries with inclusive institutions, are sufficiently centralized and powerful states (US, SK),
while those who fail to centralize (Somalia) fail to have authority.

Max Weber: State has the monopoly of legitimate violence.

Extractive political institutions concentrate power in a small elite, who often structure economic
institutions, these introduces a feedback loop (enrich same elites).

When elites are challenged by extractive political institutions, newcomers have incentives to
maintain the same. Inclusive economics institutions (more equitable distribution of resources)
are forged under inclusive political institutions.

Inclusive economic institutions are not compatible with extractive political ones, they will
transform to extractive or the dynamism created will destabilize extractive political institutions.

- Why not Always Choose Prosperity?

Political and economic institutions can be inclusive and encourage economic growth or
extractive and become impediments to economic growth. Nations fail when extractive
institutions block economic growth. That happened in the Congo, which had economic decline
and mounting poverty after decolonization.

Economic institution which create incentives for economic progress may redistribute income
and power where it can affect the ruling elite. Therefore, economic growth creates winners and
losers, the case of Industrial Revolution. Creative destruction: replace old with new, new
technologies make existing skills and machines obsolete. It is the root of the opposition to
inclusive economic and political institutions. With industrialization the political picture of
Europe changed, and elites and aristocrats lost power, so did manufactures which formed
Luddites (nothing effective). England allowed development, Austro-Hungarian and Russian
empires.

There are no reason why political institutions should automatically become pluralistic, at the
same time there is no natural tendency toward political centralization.

- The Long Agony of the Congo

Kingdom of Kongo: tax arbitrary, king rich because of slavery, farmers avoid new technology
and run away. Poverty result of extractive economic institutions. Political institutions were
absolutist. There was no chance of sustained economic growth.

Belgian Colony: it produced the same pattern the country previously had

Independence 1960: the system reproduced it self once again. The republic remains poor
because citizens still do not have economic institutions that create basic incentives to develop
society, and political power is still very concentrated.
 - Growth Under Extractive Political Institutions

First—even if economic institutions are extractive growth is still possible, when elites allocate
resources to high-productivity activities that they control. (Caribbean Islands XVI-XVIII
century/industrialization of Soviet Union)

Second—extractive political institutions allow for the development of somewhat inclusive

economic institutions. (South Korea/ Chinese economic growth today)

Political centralization is key to both ways in which growth under extractive political
institutions may happen.

Extractive political and economic institutions generate a general tendency for infighting, as they
lead to the concentration of wealth of power.

When growth is generated by extractive political institutions with inclusive economic ones there
is always the risk the economic institutions become more extractive and growth stops. The ones
controlling political power will benefit from it. Therefore the distribution and ability to exercise
power will undermine the foundations of economic prosperity, unless political institutions
become inclusive.