Why Nations Fail

These are my notes and favorite highlights from the book Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012) by Daron Acemoglu and James Robinson. I’ll share three excerpts, three suggestions from the author, and three personal reflections.

Three Excerpts

On the relationship between Economic Institutions and Political Processes: “Economic institutions shape economic incentives: the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works.”

On individual talents in institutional frameworks: “As institutions influence behavior and incentives in real life, they forge the success or failure of nations. Individual talent matters at every level of society, but even that needs an institutional framework to transform it into a positive force.”

On why nations fail: “This synergistic relationship between extractive economic and political institutions introduces a strong feedback loop: political institutions enable the elites controlling political power to choose economic institutions with few constraints or opposing forces… Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth.”

Three Suggestions From The Author

• Attempting to engineer prosperity without confronting the root cause of the problems—extractive institutions and the politics that keeps them in place—is unlikely to bear fruit. Attempts by international institutions to engineer economic growth by hectoring poor countries into adopting better policies and institutions are not successful because they do not take place in the context of an explanation of why bad policies and institutions are there in the first place, except that the leaders of poor countries are ignorant. Instead of just releasing foreign aid to developing countries, we need to check why there are problems in the first place.
• Extractive political institutions can be abolished or prevented through pluralism: the cornerstone of inclusive political institutions. However, a democracy cannot guarantee pluralism. Diverse groups of people can reform extractive political institutions held by a few elites through lobbying for empowerment [of the masses]. 
• The media can play a transformative role in the process of empowerment. Empowerment of society at large is difficult to coordinate and maintain without widespread information about whether there are economic and political abuses by those in power

Three Personal Reflections

• I am tempted to conclude that the path towards prosperity is through a radical reform or a bloody revolution. While there are some bases in history, a civil war, for example, can be costly and cannot guarantee reform anyway. If “war against the extractive elites” is not an option, the most viable alternative is “war against misinformation.” The author emphasized the transformative role of the media. Social media was just an emerging political communications platform when the book was written. Recently, it became a behemoth of a platform for authentic news and otherwise.
• The book discussed the concept of a “critical juncture.” These are large, rapid, discontinuous changes (Collier & Collier, 1991) and the long-term causal effect or historical legacy of these changes (Flora, 1992). The CoViD-19 pandemic can be a critical juncture in our history, and countries (and businesses) need to choose the right decisions for them to succeed in the coming years. This is especially true for countries that will soon embark on a general election. I remember discussing a study in graduate school about firms that strive to become resilient during the pandemic. They will eventually come out stronger and more competitive post-pandemic.
• Reimagining Capitalism underscores the importance of lobbying. Similarly, the book highlights the importance of dissent and activism. In markets with populist governments, activists and dissenters have faced bullying from government leaders and supporters with a seemingly persuasive narrative. However, this can become a slippery slope toward extractive political institutions.