Understanding of Institutional Theory in Why Nations Fail

April 13, 2021 by Essay Writer

Institutional Theory of Economic Divergence

The Institutional theory of economic divergence, as defined by Darorsn Acemoglu and James Robinson in their book Why Nations Fail: The Origins of Power, Prosperity and Poverty, states that small changes lead to critical junctures which results in economic divergences. The authors believe that their theory helps explain why some nations experience economic growth, others have a stagnate economy and others experience rapid growth but after a while economic growth declines. As history shows, a small difference in a nation can lead to either positive or negative consequences in a critical juncture, which might boom and change the international drift of the nation. These differences can also determine whether a nation becomes an extractive or an inclusive institution. The major aspect that the authors believe factor into the institutional theory is good institutions. Under good institutions, the aspects of geography, extractive and inclusive institutions help demonstrate the institutional theory.

The strongest argument of the institutional theory is that under extractive institutions, nations are able to experience rapid economic growth. This is due to the fact the institutions use existing technology and allocation of resources to increase production. Since most of the poor nations have extractive institutions, it gives them hope that they might be able to turn around their economy. In my opinion, even though this is the strongest argument of the theory, it’s also the weakest. I don’t think that authors should have stated that even with extractive institutions, nations can still turn their economies around because instead of extractive leaders looking for ways to boost their power and wealth while also boosting the economy of the nation, they continue to extract more wealth from the nation thinking that they are helping the nation. It might have worked for the Soviet Union; it may work for China but I don’t think that at any point in the future, extractive institutions will provide rapid growth, similar to that of the Soviet Union or China, for the poor nations. In my opinion, instead of dedicating an entire chapter to why extractive institutions might work, they should have discussed why extractive institutions need to be addressed as soon as possible in poor nations if they have a chance of ever closing the gap between rich and poor nations.

The authors state that “while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.” In my opinion, this is a very weak argument because I think that economic institutions determine the political institutions. The curse of natural resources plays a major role in this argument because it shows that when nations have a lot of natural resources, they draw greedy people to the country. Greedy leaders of different groups of people develop, and start infighting because they all want to control the resources and benefit from them. The best examples are the wars between many groups of people in Sierra Leone, and South Africa who fought for control of diamond mines. Many people were killed in these wars while also attracting foreign attention from kings and queens in nations like Spain and England. When leaders take control of a nation when their main interest in the resources of wealth, it definitely determines how the leader uses economic policies to determine the political policies. In today’s world, where the economy has become the determinant of a nation’s superiority, more and more leaders seem to be focused on making the economy better. They believe that the economy will correct other aspects of the nation, mainly the political aspects. For example, looking at the past presidential election, the economy was one of the main topics that determined who Americans were voting for. Everyone knew that Mitt Romney’s main concern was the economy, considering he is a successful businessman. In my opinion, I thought Romney has no political or social policy and from time to time, he emphasized his status as a successful businessman and how he could turn the economy around. I believe that Romney thought that as long as he fixed the economy, every other aspect of the nation would fix itself too.

According to Jared Diamond, one of the weaknesses of the institutional theory lies in the historical origins of the inclusive economic and political institutions. The authors state history as one of the aspects of the institutional theory due to the small differences and critical junctures that cause international drift. I agree with Diamond in critical because even though the authors introduce the topic, they don’t go into depth or answer the question of where extractive and inclusive institutions came from. Instead they give examples of which go around in circles and still don’t address the question. For example, they state that the Industrial and Glorious revolutions started in England when they could have started other nations like France or Spain, and this was due to inclusive institutions. They all discuss how Venice and Rome both had inclusive institutions but due to the reversal of both extractive and inclusive institutions, the inclusive institutions turned into extractive institutions. When the nations tried to have partially extractive and partially inclusive institutions, they failed because the extractive policies overshadowed the inclusive policies and showed that they couldn’t co-exist. But still, that didn’t answer the question of where these institutions came or started from.

In addition to the question of the beginning of extractive and inclusive institutions, Diamond also states a big issue that was throughout the explanation of the institutional theory: the presence of unsupported facts. Most of the examples that the authors provided, especially those from the old periods, it seemed that authors were making assumptions in order to support their theory. In my opinion, I had difficulty following examples that weren’t supported by research. Referring back to the question of why the industrial and glorious revolutions started in England, the authors keep stating the fact that the revolutions started in England but they don’t provide supported facts. Instead, they keep providing theories and assumptions of why they think the revolutions started there. The theories they provided didn’t convince me as a reader why England was able to jump in front of other nations in the industrial race. All the theories they provided show why the revolutions could have started in France or Spain and could have spread to the rest of the world.

In Jared Diamond’s opinion, institutions are part of the explanation for the national differences in prosperity but they account for only fifty percent of the explanation. In his opinion, the other fifty percent of the explanation is given by the tropical location of the African countries and their geographical latitude. These two factors put African (Tropical) countries at a disadvantage because they have more diseases due to the climate that sustains bacterium out of the body and they are landlocked with no easy access to water trade. Successful countries like England, the United States, France, China and Japan have easy access to water trade because they are surrounded by water bodies and they also have climate that makes it hard for bacteria to survive outside of the body.

In conclusion, I think that the institutional theory fails to provide sufficient evidence to explain the gap between rich nations and poor nations. This is mostly due to the fact that the authors use assumptions and theories to explain theories, which provide no answers and more questions. When it comes to the assumption that political institutions create the economic institutions, I strongly disagree with the authors because I think that when it comes to extractive institutions, the economic institutions are the ones that determine the natural of the political institutions, especially in poor nations. If a nation starts out with an inclusive institution, due to the easy reversal of the institutions, depending on the next leader to the throne, his policies determine which institution leads to what institution. Like for Romney, if he had won the election, his economic institutions would have determined the political institutions because the economy was his main platform.

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