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Why Nations Fail: A Summary Why Nations Fail: The Origins of Power, Prosperity and Poverty (2013) by D. Acemoglu and J.A. Robinson Overall Summary… Developed countries are wealthy because of ‘inclusive economic institutions’ – Basically a combination of state and free market in which 1 The state creates incentives for people to invest and innovate – (through guaranteeing private property rights and enforcing contract law) 2 The state enables investment an
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  Why Nations Fail: A   SummaryWhy Nations Fail: The Origins of Power, Prosperity and Poverty (2013) by D. Acemoglu and J.A. RobinsonOverall Summary… Developed countries are wealthy because of ‘inclusive economic institutions’ – Basically a combination of state and free market in which1The state creates incentives for people to invest and innovate – (through guaranteeing private property rights and enforcing contract law)2The state enables investment and growth through providing education and infrastructure, which private business uses, and3The state is controlled by its citizens, rather than monopolised by a small elite. Crucially, there needs to be a democratic principle at work in which people in politics establish institutions and laws which work for the majority of people, rather than just working to make them rich.4The state also needs to maintain a monopoly on violence.The authors come to this conclusion through a number of comparative studies of countries which are in close geographical proximity to each other such as ! Mexico/ America ! South/ North Korea ! Botswana/ ZimbabweThey argue that the only factor which can explain why one of these countries is poor and the other rich is because of the institutional infrastructure which has been established through the last few decades/ centuries.In contrast to the above ‘inclusive economic institutions’ which encourage development, the authors suggest the opposite ‘extractive economic institutions’ (think corrupt dicator and his clique sucking money into a Swiss bank account) can generate growth in the short-term, but in the long term result in poverty.They also suggest that there has been ‘a vicious circle’ at work in many underdeveloped countries over the last three to four centuries – With their globalised history starting off with extractive institutions established by a colonial power (typically built on already existing internal extractive institutions), which, on independence, became even more extractive under postolonial rulers, which in turn lead to civil war as competing factions fought for control over the extractive institutions – which then led to a decent into chaos and failed states. The authors see little hope for such countries.In contrast, developing countries such as the US and the UK have benefitted from three to four centuries of a virtuous circle in which institutions have become gradually more inclusive, which has created increasing incentives for entrepeneurialism and economic growth.The gist of the book is, handily enough, covered in the intro and chapter one….IntroductionCountries such as Egypt are poor becuase they have been ruled by a narrow elite that have organised society for their own benefit at the expense of the vast mass of people. (This also applies to North Korea, Sierra Leonne, Zimbabwe)Countries such as Great Britain and The United States are wealthy because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to its citzens and where the great mass of people could take advantage of economic opportunties. (This also applies to Japan and Botswana).  Chapter one – so close and yet so different Starts with a comparison of the two sides of Nogales, half of which lies in Arizona, in the US, the other half in Mexico.In the Arizonan half the average income is $30 000 U.S dollars, the majority of adults are high school graduates, the roads are paved, there is law and order, most live until over 65. In the Southern half, the average income is   three times less and everything else is similarly worse.The authors point out that the difference cannot be because of environment or culture, it must be because of politics and economic opportuntities.They also argue that in order to understand the difference, you need to go right back to early Colonialism in the 16th and 17th centuries.Mexico was the first to be colonised, under a system of slavery and extraction. In the 15th century, the Spanish basically used already existing systems of slavery to their own benefit and extracted mountains of gold and silver, leaving a legacy of elite-governance and a dearth of politcal rights for the majority.In North America, settled by mainly the English 100 years later, the absence of slavery amongst indiginous populations and much lower population densities meant that slave systems simply would not work, although this didn’t stop them trying for the first twenty years or so. Eventually, however, the orginal settler company (The Virginia company) back in England realised the only way colonialism was going to work was to provide incentives for the settlers – So they offered them land in return for work. It was this that set the basis for the democratic constitution and congress of the US, which then went on to create problems for the English government.The rest of chapter goes on to argue that the next 300 years of history are crucial to understanding why the US is now so wealthy, and why most of Latin America is so poor.America has had 300 years of political stability, where poltical institutions control economic institutions, at least to an extent (the authors cite the breaking up of the Microsoft Monopoly as an example) broadly making them work for everyone. Other factors such as the patent system, credit systems, and education provide opportunities for anyone to make it rich and enjoy the benefits of the wealth.By contrast in Latin America (Mexico), up until the 1990s most countries saw political turmoil and a series of dicatorships where a series of small elites ruled for their own benefit. This instability has lead to the rise of monopoly power, and it acts as a disincentive for anyone to try and do well and become rich (the next dictator might just take all your money away), also lack of finance and education prevents competition anyway.Crucially, historical good fortune appears to be central to explaining why a country is rich now, so figuring out how a current poor country can develop is not that straight forward if a culture of monopoly, corruption and lack of political rights are the norm….. Chapter three – the making of prosperity and poverty This chapter contrasts North and South Korea, divided along the 38th parellel after world war two. In the late 1940s these had similar levels of development, today, however, their economies have diverged.South Korea has living standards 10 times higher than North Korea, the former being similar to Portugal, the later similar to sub-saharan African countries. People in North Korea also live ten years less than those in South Korea.The differences cannot be explained by anything other than institutions.In the South, private property and markets were encouraged (albeit by dictators initially) and thus investment and economic growth were encouraged. At the same time, the government invested in education and new industries took advantage of a better educated population.In North Korea, privated property and markets were banned, and a centrally planned economy instigated. This simply led to stagnation.  Extractive and Inclusive economic institutions Countries differ in their economic success becasue of their different institutions – the rules influencing how the economy works and the incentives that motivate people. Crucial is private property rights – which needs to be backed by the state…. In South Korea, people know that they will be rewarded for their efforts, in North Korea, there is no incentive to innovate and invest because the state will expropriate the benefits of any such initiatives.In order to develop a society needs to have ‘inclusive economic institutions’ – A state that guarantees prosperity for the massess – Such a state provides a degree of infrastructure that is necessary for economic growth – for example enforcing private property rights, contract rights for all, not just a minority, and providing education and physical infrastructure such as roads. Private enterprise uses and needs such institutions.What doesn’t work for development is extractive insitutions – where the state is used to extract wealth from one subset of the population to another…. Such as slave and colonial systems (and the Tories in the UK today?) Engines of Prospertity Education for the masses is crucial for innovation in an advanced technological world – This is what all developed nations have, and what many undeveloped nations lack. Education needs to be well financed and parents need to have the incentive to send their kids to school. Inclusive and extractive political institutions A state needs to be inclusive for economic growth to occur – that is, it needs to both be chosen by its citizens and have a centralized control over legitimate violence.Extractive political and economic insituttions tend to support eachother (which then means the masses don’t support them…. there is disincentive!) Why not always choose prosperity? The simple fact is that where technological change is the engine of economic growth, this means social change, and with change there are winners and losers… Thus existing elites may resist changes that make institutions more inclusive even if this means greater prosperity for all, because it will mean less prosperity for them. (Think industrial revolutions in Europe). The long agony of the Congo The Congo has not developed since independence because it has not been in the interests of the ruling elite to build a centralised state which includes all voices, or in their interests to use the state to provide public services which will benefit the masses – instead the institutions remain extractive.As an independent polity, Congo experienced almost unbroken economic decline and poverty under the rule of Jospeh Mobutu between 1965 and 1997. Mobutu created a set of highly extractive economic insitutions. The citizens were impoverished but Mobutu and the elite around him (known as the Grosses Legumes or The Big Vegetables) became fabulously wealthy. Mobutu built himself a palace at his birthplace, Gbadolite, with an ariport large enough to land a supersonic Concord jet, a plane he frequently rented from Air France for travel to Europe. In Europe he bought castles and owned large tracts of the Belgian capital Brussels.The simple truth is that if Mobutu had introduced more inclusive economic institutions he would not have been as rich. Growth under extractive institutions Growth can occur under extractive instiuttions – as in Russia and South Korea at first and China today but this is unlikely to be sustained unless both economic and political insitutions become inclusive.  Chapter twelve – the vicious circle The authors paint the vicious circle as starting off with extractive institutions established by a colonial power (which builds on previous extractive institutions), which, on leaving, becomes even more extractive under corrupt post-colonial rulers, which in turn leads to civil war as competing factions fight for control over the extractive instittions – which then leads to a decent into chaos!Or in more detail… The British Colonial Authorities built extractive instititions which   many post independence African politicians were only too happy to continue in order to enrich themselves. This happened in countries such as Sierra Leone, Ghana, Kenya and Zambia. The postcolonial rulers used their wealth to build personalised security forces which were answerable to them and also to rig elections – money thus became essential to maintain power, with only those who have money   able to   maintain power. This creates incentives among the opposition to depose the existing leaders in order to gain power and wealth themselves, and to protect themselves from being killed off by the said existing leaders. The point here is that power has become an end in itself rather than as a means to developing a country.This is best illustrated through the example of Sierra Leone –All of the West African nation of Sierra Leone became a British colony in 1896. The British identified important rulers and and gave them a new title – paramount chief. In Eastern Sierra Leone, for example, they encountered Suluku, a powerful warrior king, who was made Paramount Chief Suluku.In 1898 the British tried levying a hut tax of five shillings, which resulted in a civil war known as the hut tax rebellion. It started in the north, but was strongest and lasted longest in the South.In 1904, the British stopped construction of a railway line from Freetown to the North East and instead diverted it south, to Bo, in Mendeland, to give them quick access to put down this rebellion.When Sierra Leone became independent in 1961 the British handed power to to the SLPP, which attracted support from the South, and in 1967 this party lost the election to the opposition party, the APC which drew support from the North.Though the railway line was initially established to rule SL, by 1967, its role was economic  – it allowed transportation of the country’s exports – coffee, cocoa, and diamonds, which came mostly from Mendeland in the south.The then leader of the APC, Siaka Stevens, who drew his political support from the north, ripped up the railway line and sold off the track and rolling stock in order to weaken the oppostion in the south and consolidate his political power. This decimated the SL economy, but when it came to a choice between consolidating power and economic growth, the consolidation of power won out. Today, you can’t take the train to Bo anymore.There is continuity between Colonial rule and Steven’s government – both extracted wealth from the people.The Colonial rulers did this through agricultural marketing boards – farmers had to sell their goods to these boards, which typically paid much less than the market price (impovershing farmers and enriching the elite). When Stevens took power, he kept these marketing boards in place, but it got worse – under colonial rule, the colonialists extracted about 50% of the value of agricultral products, under Stevens, the rate of extracting rose to 90%.Along with marketing boards, the old system of Paramount Chiefs remain in place today…. They control local politics at the village level, and local land rights and taxation – Paramount chiefs are elected, but only members of the ruling house can stand – and in 2005 the victor was Sheku Fasuluka, King Suluku’s great, great grandson.
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