Why Nations Fail
An Analysis of the Different Economic Bodies and Their Impact in Different Countries in the Book, Why Nations Fail, Written By Doran Acemoglu and James Robinson
Why Nations Fail
Why some nations fail while others succeed have become a mysterious question to many. However, in their book named Why Nations Fail, authors Acemoglu and Robinson have finally revealed to their readers what truly causes nations to fail, which are extractive economic institutions that certain governments have. This paper will be exploring the current type of economic institutions in three different nations by using knowledge from the book Why Nations Fail, as well as historical facts to support the given statements. The countries’ economic institutions that will be explored are Venezuela, Mexico, and Haiti. These countries will also be put into comparison with the United States, a country that has inclusive economic institutions.
Venezuela has been experiencing an economic decline for a long time. According to the article, “Venezuela is in its third year of recession and according to the International Monetary Fund, its economy is expected to contract 10% this year” (Gillespie, 2016). The main cause of this recession can be tracked down to the leader of the government in Venezuela, Chavez, who focuses government spending excessively on extractive economic institutions. In the book Why Nations Fail by Acemoglu and Robinson, it’s stated that it’s the economic institutions that are the foundation of economic development which is evident through the fact that economic institutions allow people to trade and build their own businesses comfortably.
The topic of economic institutions being the heart of economic growth takes us to the topic of trade. Venezuela, as aforementioned, was a thriving country only a decade ago. This was mainly due to Venezuela being an oil-rich country. The point of trade is for the countries to specialize in whatever they’re doing best and export that while importing what they lack in. The problem with Venezuela was although they were successfully specializing in producing oil, they weren’t really producing anything else or importing any goods from other countries. Additionally, Venezuela wasn’t exporting any of the tremendous amount of oil it’s producing. Through the article, one can discover that Venezuela’s main oil company, which is run by the government, is the main reason why any of these exports or imports aren’t taking place. This again is evidence how extractive economic institutions can ruin a nation.
Because of the economic recession and the lack of trade in Venezuela, inflation has become a tangible problem. Prices are soaring high, and Venezuela has a staggering increase in inflation in 2016 with a 475% (Gillespie, 2016). Not only are prices high, but producers aren’t able to produce because of the lack of trade. This ultimately results in food shortages and suffering citizens. While the citizens of United States can freely go into any Publix or Winn Dixie and shop at their leisure, the citizens of Venezuela wait in long lines outside of super markets only to find out that the last bottle of milk had already been bought 2 hours ago. The food shortages are causing the mortality rates of Venezuela to go up, with more and more children and elderly being malnourished.
Mexico is the second country that is under the exploration of economic institutions. As explained in Why Nations Fail, the reason that Mexico currently has extractive economic institutions is because it’s a country founded up on extractive economic institutions. Historical facts and how a country began its government have a lot to do with its current economic institutions. For example, the reason Mexico is the way it is has to do with how Spanish conquistadors invaded that region and discovered large amounts of gold. Realizing the gold’s worth and seeing how it can be useful to them, they used the region’s natives, forcefully, to mine more gold and silver for them so they can be better off. There an extractive economic institution was created; the Spanish conquistadors were extracting the native’s wealth from them by using the native’ labor to make themselves better off.
Even right now Mexico has many extractive institutions. For example, in the 2013 article, Why Nations Fail & What Can be Done by David Sasaki, it speaks of how the infamous telecommunications monopolist of Mexico, Carlos Slim, have cost Mexico $129 billion (Sasaki, 2013). Although Mexico has one of the slowest and most costly internet speeds, they “lose $130 billion and Carlos Slim personally gains $80 billion” (Sasaki, 2013). Carlos Slim’s actions are the epitome of extractive economic institutions, and it because of people like Chavez and Slim and the Spanish conquistadors that are the ones who make sure that extractive economic institutions will continue on.
As can be seen, the root of why nations fail lies within their economic institutions. Nations that are successful have mainly inclusive economic institutions. China, a country with extractive economic institutions had a horrible economy only until recently ago. The only reason their economy improved is because they decided to accept technology and trade with foreign countries, instead of pushing them away and secluding themselves. However, China still does have extractive economic institutions, and if other countries don’t wish to trade with them anymore, their economy will return to where it started. As can be seen with Venezuela, Haiti, and Mexico, extractive economic institutions take away from the general public to help the elite. These type of institutions aren’t only bad for the nation, but are immoral and unethical as it leaves people in a chaotic turmoil.
Doran Acemoglu’s And James Robinson’s Interpretation of the Role of Economic Institutions in the Development of a Country as Depicted in Their Book, Why Nations Fail
The level of economic imbalance around the globe, in the past and today, is sincerely astonishing. Although Qatar has the highest GDP per capita in the world, with a staggering $129,700 per capita, Somalia, which is only a 3-hour flight from Qatar (“Distance from Qatar to Somalia”, 2017), has a GDP per capita of $400 (“The World Factbook – Central Intelligence Agency”, 2017). Wealthy nations provide their societies with a better life quality. The authors point out how those who have the privilege in living in these wealthy nations take everything around them for granted including the food they eat, the clothes on their body, and the roof over their heads. As can be seen with the differences in their GDP and distance, it’s easy to tell that distance isn’t the factor these differences are founded upon. But rather, the different types economic institutions the government is built upon. This paper will be exploring Daron Acemoglu and James A. Robinson’s book Why Nations Fail by analyzing their utilization of extractive and inclusive institutions throughout their work while also determining their consistency of it.
According to Acemoglu and Robinson, economic institutions are the foundation of economic development which is evident through the fact that economic institutions allow people to commerce and build their own business comfortably. Also, economic institutions generate inducements for the society so people can devote their time and money into longer lived investments, they ensure that society is upkept with the latest technology while also making sure people are being informed and educated in order to have a set of skills and knowledge, which in turn provides a better life quality. Furthermore, political institutions are the one that ascertains if economic institutions are successful in what they’re doing.
The authors of this book explain such institutions to be either extractive or inclusive. Acemoglu and Robinson states that “inclusive economic institutions are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish” (Acemoglu & Robinson, 2012). Countries with inclusive economic institutions are basically countries with a free market. Ultimately, when one wants to define economy, the most correct definition would be a nation and society making the most out of its scarce resources, which is what inclusive economic institutions seem to be doing. Countries with high GDP per capita, such as Qatar and United States, are countries that have inclusive economic institutions. When a nation has inclusive economic institutions, the political and economic say is up to the people and business’ hands rather than the economy being centrally planned and government controlled.
In contrast, extractive institutions could be stated as the opposite of inclusive institutions. According to Acemoglu and Robinson, “extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset” (Acemoglu & Robinson, 2012). A great current example of a nation with extractive institutions is Venezuela. Although previously a prominent and wealthy nation due to its oil, right now the people of Venezuela are in worries of being able to eat. Their stores are empty, the people are hungry, and the reason for all this blame is their economic and political institutions. Their economic institutions have made it so that Venezuela’s people can’t trade freely as do those who live in nations with inclusive economic institutions. Nations with extractive institutions face “scarcity, inflation, devaluation, and general rise in poverty” as Venezuela is facing right now (Nagel, 2014). While the middle class and the poor are desperately trying to find out how they will have their next meal, there are families in Venezuela who are bathing in luxury and money (Simons, 2016). Extractive institutions aren’t helpful to their general society because they don’t generate methods for their people to earn money. The elite within nations who have extractive institutions are the ones better off. Additionally, the wealthy most likely will center their life around protecting their own wealth and power even if it means the sacrifice of many, many people in the population, which is what’s happening in Venezuela thanks to their leader, Chavez. On the other hand, if Venezuela implemented inclusive institutions within their economy, they could have a form of creative destruction where the people of the society are more in touch with the rest of the world and the technologies and improvements that come along with being in touch with the rest of the world.
The book opens up with a great example showing the gravity of having inclusive economic institutions in a nation. Nogales, a city that’s both in the state of Arizona as well as in the country of Mexico, have differences between them that account solely to the fact that United States has more inclusive institutions than Mexico. The Arizona side of Nogales is a town with minimal criminal activity, a good level of education where the majority holds a high school diploma, and where the people are generally happy, whereas everything is much worse on the Mexican side of the city. An example even on a grander scale can be seen within North and South Korea. In some cases, in Korea let alone sharing the same geography and city, some people share the same family line. Although they’re from the same family, or although they spent their childhood together, those who are in South Korea are much happier than those who are in North Korea. Again, this is due to North Korea being made of extractive institutions whereas South Korea remains a country with inclusive institutions.
Throughout their work, Acemoglu and Robinson emphasizes how history plays a huge factor in whether nations have intrinsic or extractive institutions. Nations implement institutions based off on the type of institutions they have had so far, as well as the specific historical situation they happen to be in. Going back to the example given by the authors, the reason why the Arizona side of Nogales has more inclusive institutions than the Mexican side of Nogales is due to how they had different histories. In Mexico, it was the Spanish conquistadors who are responsible for building the economy. “The Spanish conquest also restricted the economy of Mexican cities and regions. Most of the economic activities initiated by the Spanish were of an extractive character. In colonial Mexico, it was these very extractive economic activities that developed cities, most of them in the Northern region” (Vazquez-Castillo, 2004). An example of the Spanish performing extractive economic activities would be how they used many natives to extract silver for them from Potosi with a mita of “low-wage and forced labor” (“From the Conquest Through Independence”, 2008).
In contrast to Mexico’s history with the Spanish conquistadors, United States, when colonized, didn’t have any gold or silver for the colonizers to become wealthy off of. In United States, there weren’t native populations as dense as those in Mexico, and ultimately, there wasn’t much of a hierarchy in regards to society. When colonizers did try to instill their own political and economic hierarchy to United States, it wouldn’t work out because those in the bottom of the hierarchy refused to be in the position they were. Thus, a new method had to be developed in order to split the land within the States which in all eventuality caused United States to have inclusive economic and political institutions which assists in economic development and economic comfort that’s focused on the majority of the people. However, due to the way Mexico was colonized, their nation focuses on satisfying those few who are more fortunate than others. It’s an economy that is more efficient than equal. They don’t care what size of the economic pie each individual gets.
After reading their work, one can understand that Acemoglu and Robinson’s reasoning on the significance of inclusive economic institutions and the important role they play in society, is powerful. However, the pros and cons of the authors’ exploration of the topic can be revealed through its relativeness to other ideologies on economic imbalance. The authors’ reasoning can be seen as a cure to the ignorance hypothesis. Additionally, the different set of examples the authors offer, with their in-depth analyses and historical facts, provide a great way in understanding inclusive and extractive economic and political institutions, and how these institutions are developed as well as their impact on the society.
As can be seen, the authors of the book Why Nations Fail, Acemoglu and Robinson, provide a coherent and consistent account of the different types of economic institutions. Inclusive and extractive institutions aren’t only spoken of in this book, but seem to be theme of it since the authors repetitively emphasize the importance of the type of institution within an economy. The reader of this book can walk away with knowing the differences between inclusive and extractive economic institutions as well as how these institutions have played certain roles in different economies since the authors also provide a look back into history. The historical realities the authors offer definitely do fit the authors’ framework. Last, but not least, by providing those historical realities and historical facts, Acemoglu and Robinson answers questions that have had their readers baffled for years. The authors successfully get across the message of why some nations are succeeding while others are failing by analyzing the institutions within those nations, and providing in-depth examples.
Doran Acemoglu’s And James Robinson’s View of Nation’s Prosperity as Illustrated in Their Book, Why Nations Fail
Why Nations Fail
The remarkable book Why Nations Fail, written by Doran Acemoglu and James Robinson, provides an insightful look into the revolving theories during the past centuries in how to make nations successful and why these theories fail. These theories, namely, the geographical hypothesis, the cultural hypothesis, and the ignorance hypothesis, are theories that lack any relativity with a nation’s economic institutions. The authors, by giving an in-depth analyzation of inclusive and extractive institutions, were able to show how other theories failed whereas their theory would succeed. Geographical, cultural, and ignorance hypothesis are all hypothesis that have been proven wrong within this book as well as many instances in history, and thus, should be abandoned. Nations worldwide need to adhere to the theory of economic development discussed in Acemoglu and Robinson’s book, and instill this into their societies in order to have a successful nation.
The authors state that there are three widely accepted theories that state why nations fail. However, each of these theories themselves fail to focus on what the problem is really about. The first example of this can be see within the geography hypothesis. According to Acemoglu and Robinson, “geography hypothesis claims that the great divide between rich and poor countries is created by geographical differences” (Acemoglu & Robinson, 2012). However, at this point the reader already knows this theory is at fault since the authors opened up the book with an example to oppose this theory. In the introduction of the book, the reader is described circumstances on both the United States side of the city Nogales, and the Mexican side of the city Nogales. The Arizona (United States) side of the wall has a high level of living quality with low crime rates, high average income, majority of society with at least high school diplomas, high life expectancy, as well as the help they get from the government such as medical insurance and senior benefits. On the other side of the wall lies Nogales still, however, within the borders of Mexico now. Although the authors state that this part of Mexico is a region that’s well-off, their average income is still one-third of that of their neighbors on the other side of the wall. Also, contrary to their neighbors, they risk theft and crime every day in their houses and businesses, their life expectancy is low, and education isn’t emphasized. The medical and seniority benefits are nonexistent. On top of all this, the citizens have to sometimes worry about their electricity, and source of water, something that all Americans take granted. Thus, Acemoglu and Robinson’s initial example goes on to prove how the geographical location has absolutely nothing to do with the success or failure of an economy.
In addition to that geographic factor, the geographical hypothesis also makes the climate of a nation an element in why that nation succeeds or fail. The climate hypothesis claims that nations that are tropical and with hotter climate have a lower living quality compared to nations with four seasons. This, apparently, is due to the heat and humidity which leads to laziness and ultimately unproductivity. However, whoever came up with the geographical hypothesis completely put out the factor of trade. Trade is what makes global economy happen in the first place. The reason why places like Australia and Qatar, who have hot climates, are thriving is because they’re in international trading. Trading allows nations to produce whatever they specialize in, and export that, while importing whatever they lack. By trading, usually everyone involved is better off, that is if they are trading in what they specialize. Thus, the climate hypothesis within the geographical hypothesis, also has no foundation or evidence to support it.
The second theory, which is the cultural hypothesis, relies on information from a German sociologist Max Weber, and states that “the Protestant Reformation and the Protestant ethic it spurred played a key role in facilitating the rise of modern industrial society in Western Europe. The culture hypothesis no longer relies solely on religion, but stresses other types of beliefs, values, and ethics as well” (Acemoglu & Robinson, 2012). What the sociologist Weber meant here is that the industrial society was successful largely due to the existence of the Protestant believers compared to those of a Catholic faith which basically translates into Weber stating that some nations are more successful than others due to their unique cultural characteristics. However, any citizen in the United States can disagree with that. United States, a thriving nation with one of the highest GDP per capita, has a nation mixed with so many different cultures and nationalities. The success, though, of the United States isn’t due to them having so many different cultures just as Somalia’s poorness isn’t due to them just being Somalian. On the contrary, United States is succeeding because they have so many inclusive institutions within their nations that are considerate of people and businesses making incomes easily. They’re succeeding because their government isn’t ripping their peoples’ right to trade and have a free market. Ultimately, there’s no cultural contribution to why United States is succeeding. Additionally, majority of the countries, except those that are communist or held by extremist Islamic law, have a mix of cultures within their country now anyway. Every culture has been mixing up together more than ever before. Thanks to improved technology and transportation, people can travel around the globe more, and choose where they want to live, which ultimately leads to the mix of cultures.
The fault within the cultural hypothesis can also be seen in North Korea and South Korea. Even though the two nations are separated now, they once weren’t, and thus, the cultural background between the two countries is virtually the same. The cultures being nearly the same doesn’t stop North Korea from being one of the poorest countries whereas South Korea sets the bar high by being on the higher side of the spectrum of high-income nations. The difference in the living standards between these two nations is that in North Korea the government is in the hands of the leader, the ones who are the richest are placed first instead of having equality for everybody, and most importantly, there aren’t any inclusive economic institutions to assist the people in their everyday life and their economic comfort. Instead, North Korea is made of extractive institutions that take away from any creative destruction, and/or technological improvement.
Last, but not least, is the ignorance hypothesis. The ignorance hypothesis asserts that “world inequality exists because we or our rulers do not know how to make poor countries rich” (Acemoglu & Robinson, 2012). This theory goes on to represent the idea that poor countries in fact have good leaders that do want make improvements to the country, but don’t know how to do so. This is by far the theory with absolutely no evidence to support it. At least, during the cultural or geographical hypotheses, someone arguing for it could give a few examples where culture or geography did have a small factor in the helping a nation succeed. However, with the ignorance hypotheses, that chance goes out the door. Acemoglu and Robinson strongly argue against this claim by stating that as long as there’s the existence of extractive institutions within a nation, there’s the high possibility of the nation creating exclusive gains for the wealthiest within that country.
How then, asks the reader of this essay, does a nation become successful? Acemoglu and Robinson with historical evidence to support their arguments as well as logical reasoning has successfully proven why the geographical, cultural, and ignorance hypothesis have no truth to them and don’t apply to the real world. However, Acemoglu and Robinson didn’t only criticize these hypotheses, but also provided their own hypothesis to challenge the ones they criticized. According to the authors, it’s the type of economic and political institutions within a nation that sets nations apart.
Successful nations tend to have inclusive economic institutions that assist in providing people and businesses to generate their income easily while being able to be a part of a free market. On the other hand, nations with extractive economic institutions, such as those in North Korea and many of the sub-African countries, have societies with much lower living qualities. This is because the extractive economic institutions are controlling everything in the society, and are taking from the general public in order to make the wealthy even more affluent. Acemoglu and Robinson goes onto argue that inclusive economic institutions allows a higher level of productivity within a nation. And even without the book, this makes logical sense, because the existence of inclusive economic institutions allows a free market where there’s trade. Trade allows for a nation to be introduced to improved technology and ideas. These new technology and ideas in turn generate more productivity for the nation which in turn can create more inventions and ideas by getting rid of the old ones. This theory proposed by them is called creative destruction, and it is thanks to this very theory that some nations have been doing well from the very beginning.
As it is evident from Doran Acemoglu and James Robinson’s influential book Why Nations Fail, the theories that have been believed for so long have clear faults with them and thus can’t be trusted. However, if from now nations focus on implementing inclusive economic institutions in their society as well as pave a path for creative destruction, those nations will have a high chance of succeeding in the very near future. The wake-up call Acemoglu and Robinson has shown the world shouldn’t be shut down, but instead embraces all around the globe.