SUMARRY OF THE BOOK WHY NATIONS FAIL

1. A REVIEW OF
WHY NATIONS FAIL
The Origins of Power,
Prosperity, and Poverty
Book by: Acemoglu, Daron, and James A. Robinson.
Submitted by: Jabagat, Shiela Rose D.

2. A REVIEW OF WHY NATIONS FAIL
By: Jabagat, Shiela Rose D.
Why in the world do wealthy nations like the USA and the UK exist while impoverished nations
like Haiti, Afghanistan, and Sierra Leone suffer from political unrest and poverty? These
questions are addressed in the book Why Nations Fail: The Origins of Power, Prosperity, and
Poverty by authors Daron Acemoglu and James Robinson. They introduce and develop a useful
theory that draws on economics and history to offer insights into why some nations fail and
what it takes for a country to achieve economic prosperity.
The authors contend that a country's capacity to become prosperous depends less on its political
and economic institutions than on its culture, geography, natural resources, or economic
practices. The authors effectively demonstrate why only nations with inclusive political and
economic structures have been able to achieve sustained economic growth, improved standards
of living, and more political liberties for their populations by analyzing various nations from a
historical perspective.
They talk about the economic and political conditions in the city of Nogales, which is divided
in two by the US-Mexico border, and why, despite sharing the same culture and geography,
the people on each side had very different living conditions, access to employment, and
political freedom. The authors shed light on how, despite the fact that both countries were once
European colonies, only the USA was able to create inclusive institutions while Mexico lagged
behind as a result of its extractive institutions by examining the histories of both the USA and
Mexico.
The authors propose in the chapter that follows that theories based on culture and geography
cannot adequately account for the income difference among nations by using historical
examples and logic. The authors also address how countries cannot simply implement the right
economic policies to escape poverty because the success of economic institutions like banks,
firms, and markets is strongly dependent on the inclusion of political institutions that uphold

3. property rights and the rule of law. The elite will intentionally sabotage the factors that promote
prosperity, such as innovation, industrialization, or technology, if political institutions are not
inclusive and power is concentrated in the hands of the elite. This is because the elite are afraid
that the forces of creative destruction will erode their position of power.
People have demonstrated against their various regimes on the streets all throughout the world.
Inequality is a major topic that these protesters have in common. Even if commerce,
technology, and innovation have advanced significantly over the years, poverty still exists in
society. Why can't we eliminate poverty from society in this day and age of information and
technology? The solution lies in figuring out why countries fail. Robinson, a professor of
political science at Harvard University, and Amergclu, a professor of economics at the
Massachusetts Institute of Technology, are both renowned academics with the necessary
expertise to present a clear theory explaining a nation's slide towards wealth or poverty.
Projects involving the comprehension and analysis of the institutional development of nations
will arise throughout their degree because they are business- and politically-focused students.
Because it will be helpful to have knowledge on numerous themes they will confront during
their careers, "Why Nations Fail" is a good book for IE students. Understanding the many
consequences of political and economic institutions and their historical roots, for instance, was
crucial in the lesson on the global economic environment. It aided in providing a theoretical
foundation on which to build when conducting a risk assessment between two countries
(Argentina and Russia). In the later phases of their degrees, when they start to handle more
challenging subjects, students might use the novel as a structural and theoretical base.
Consequently, it can be easy to believe that a nation's prosperity is due to its location and
subsequent access to resources. Another widely held belief asserts that a nation's economy is
closely linked to its culture. The authors reject these established views and propose that a
nation's success or failure is determined by the historical evolution of its political and economic
institutions and the incentives they produce. Governments that permit a small minority to
exploit the majority population for their own interests, like those in Latin America, are
burdened by extractive institutions. Mexico would make a good example. With Mexico's

4. declaration of independence from Spain, the oligarchical elite strengthened the extractive
Spanish policies for their own political and economic benefit. Decades later, the area as a whole
still experiences severe wealth disparities with little prospect of improvement.
The book goes on to describe institutional theory's workings and offer historical background
for its claims. The authors emphasize how these institutions impact citizens' motivations by
highlighting the traits of extractive and inclusive economic and political institutions using the
example of North and South Korea. For instance, although it has a similar culture and location
to North Korea, South Korea is substantially wealthier and more developed than the latter as a
result of inclusive institutions that uphold property rights and promote economic activity.
On the other hand, nations with inclusive institutions support their inhabitants by providing
incentives for them to be more inventive, which enables them to successfully drive the
economy. The enormous scope of the political, economic, and social evolution of numerous
nations appears like a difficult assignment best left to seasoned scholars. The writing of both
authors, however, is consistently lyrical, open, and uncomplicated, capturing the reader's
attention like a captivating movie storyline. Their research covers the growth and collapse of
the Roman Empire as well as the variations in development between North and South Korea.
They continually highlight instances in history where inclusive or extractive institutions led to
the emergence or fall of civilizations.
Although it touches on multiple historical eras, it only focuses on particular phases of each
nation's institutional growth. For instance, they emphasize the disparities between Mexican and
American development while discussing extractive institutions. Each nation's future
development is built on the institutions established by the incoming colonists. Since the
Spanish came into the heavily populated Aztec empire, they have chosen to usurp the existing
nobility with their own system of government. As a result, they created organizations that
increased the extraction of society's wealth, supporting their control and enabling them to
reinforce the vicious cycle of wealth extraction. The authors offer this as an illustration of how
the expansion of an economy can be stifled over time by the destructive cycle of extractive
institutions.

5. The English colonists crossed the border and arrived on what is now the northeastern coast of
the United States. In contrast to the Spaniards, they had to contend with a small native
population, a harsher environment, and fewer resources. The British immigrants were unable
to acquire and take use of a huge labor force as the Spanish had after making vain attempts to
copy the Spanish model. Instead, they had to establish inclusive institutions to encourage their
population to enter the labor force, including a more inclusive political system. Thus, centuries
later, the United States has grown to become the world's largest economy, while Mexico is
saddled with pervasive corruption and extreme inequality. It's interesting that while these
distinctions are acknowledged, many people are still unaware of the underlying causes, such
as the historical divergence between the institutions involved.
The framework used throughout the book is an intriguing case study approach that is examined
through the lens of institutional formation. The emphasis is on how inclusive political
institutions can lead to inclusive economic institutions, which will lay the groundwork for
wealth creation and sustainable growth. The conditions for a society to succeed are shaped by
the interaction of inclusive political and economic institutions. People won't have the incentives
to build or maintain wealth if their wealth is expropriated. They won't be able to innovate or
make progress. To eliminate uncertainty and uphold stability, people require a foundational set
of institutions.
Among the initial generation of inclusive economic institutions are safe property rights, the
rule of law, access to public services, and contract freedom. All of these are expected to be
provided by the state. Law and order enforcement, contract enforcement, and the prevention of
theft and fraud are all responsibilities of the state. When the state is unable to establish such a
system of institutions, it turns extractive, with its main goal being to appease a small but
powerful elite. (whether the ruler of the country, a set of rulers, or prevalent interest groups).
Acemoglu and Robinson base their main argument on the idea that increased political freedom
is necessary to build a solid system of economic institutions that will direct incentives toward
wealth creation. The primary factors that will define a society's level of political inclusion and
the distribution of political power are those that will determine whether a country succeeds or
fails.

6. Acemoglu and Robinson apply their solid framework to a range of historical tales of success
and failure in order to comprehend and demonstrate this incisive argument drawn from Adam
Smith's writings. They assert that random historical events are frequently helpful in
understanding contemporary results. These are referred to as the pivotal historical turning
points that took advantage of the initial marginal institutional disparities and produced
divergent national development trajectories. The bubonic plague, sometimes known as the
Black Death, which occurred in the 14th century, is an intriguing illustration of a turning point
that undoubtedly led to the separation of Western and Eastern Europe. Another illustration is
the previously noted distinct colonization trend in various nations, with North and South
America being the most noteworthy example.
The authors touch on various popular ideas that have attempted to explain slow growth and
underdevelopment in their quest to understand the role of politics in development. They
emphasize three theories: (1) the geographical position of the nation (countries in the sub-
tropical region), which blames exposure to a harsh climate, sparse vegetation, and tropical
diseases; (2) the cultural attribute, which holds that the populace is to blame for not working
hard (or being less productive) due to their ethical, religious, or cultural boundaries (a famous
example of this is Max Weber's Protestant ethic argument); and (3) the ignorance of the nation's
ruling elite. Additionally, they discuss the dual economy theory, which attributes Africa's
underdevelopment to the coexistence of two economic sectors between which social mobility
was almost impossible.
The issue isn't that poor countries continue to be poor due to internal or external exploitation,
population ignorance of economics, or laziness. It all depends on politics and how the nation's
political and economic institutions are set up by the ruling class. Economic institutions will
only be used to help the ruling elites extract the most wealth possible for themselves if political
institutions are structured as extractive and concentrated in the hands of a small elite. When
institutions are structured to be inclusive, where power is distributed among the many rather
than concentrated among the few, incentives for inclusive economic institutions are created,
where innovation and creative destruction ensure the development of sustainable economic
growth and development. The removal of the ruling class and the equitable distribution of

7. power and political rights throughout a society are necessary for a country to become wealthy.
In order for the populace to take advantage of the economic opportunities that are open to them,
the government must become responsive to and accountable to its citizens.
However, the writers do acknowledge that development is possible within a collection of
exceptional political institutions. The elites need to just reallocate resources to short-term,
highly productive projects they are in control of. (e.g., from agriculture to industry). However,
the issue is that this increase cannot be sustained over the long term. When rapid growth will
stall as the economy loses momentum, exposing the nation to first an economic and then a
political catastrophe, This idea is best illustrated by the example of Soviet Russia's explosive
growth. Nothing came to replace it when the grounds for expansion were depleted because it
wasn't driven by innovation but rather by governmental control. The authors forecast that China
would experience the same thing. Even though China has some inclusive economic structures
in place, unlike Soviet Russia, the political elites nonetheless restrict creative destruction.
They cite the case of a Chinese businessman who sought to go up against large, inefficient
state-owned steel enterprises and wound up in jail as a result. The lack of entrepreneurship in
China, media censorship, and technology advancements dependent on adoption rather than
creation are all signs of an exploitative governmental system with unsustainable growth. If
China can successfully implement a political reform that will increase personal and political
freedom, it will be able to overcome this and achieve sustainable progress. They will continue
to experience the Soviet scenario until that point.
The book unfolds as an engaging narrative with numerous vivid historical instances that bolster
the writers' main argument. The first four chapters establish the primary framework of the
analysis before taking the reader on a tour through history that includes a number of well-
known earlier and more modern success and failure tales. This gives the reader the chance to
understand how politics can in fact have a big impact on how a society develops.
The same historical pattern can be seen repeating itself in places like Venice and Ancient Rome,
Ethiopia and Mayan city-states, Soviet Russia and the Congo, 18th-century Spain, absolutist
Austria-Hungary, or tsarist Russia. Their political institutions' extractive nature was a recurring

8. trait that contributed to their collapse. Even if they did indeed grow quickly (like the absolute
kingdoms or Soviet Russia), this expansion was fleeting and unsustainable unless a road
towards inclusiveness was followed. They were able to experience it when Ancient Rome,
Venice, and the Mayan city-states possessed even marginally inclusive institutions that
provided the necessary incentives for growth. Conflicts arose, and their societies started to fall
apart as they shifted toward authoritarianism and the takeover of power by the elites.
Development was halted as extractivism took the place of inclusiveness.
Something different occurred in England. While repression was the prevalent social order in
other nations, England's drive for increased political sway and property rights created the
conditions for long-term prosperity. People became wealthier as a result of creative destruction
and technical innovation, which also changed the distribution of wealth and, more significantly,
the distribution of power in society. Elites resisted this process because they were worried about
losing their privileges. They created hurdles to innovation because they felt threatened.
However, in England, a new historical age was brought about by the expanding riches of
merchants and manufacturers, which were able to overcome political conflict and restrain the
power of the sovereign.
For precisely this reason, the Industrial Revolution was initiated in England and not anywhere
else in the world. The Glorious Revolution paved the way for the Industrial Revolution. The
key to success was the necessity of a large coalition that represented the people. Without such
a sizable coalition, one elite would have easily supplanted the other and kept up its extractive
institutions, as it did under Oliver Cromwell's rule. A massive increase in wealth and prosperity
was brought about by irreversible political change and the shift toward inclusion.
Yet not all nations followed this quick progress, and some even took their time in embracing
the benefits of the Industrial Revolution. The writers explain why all the nations that arose
from the ruins of the Ottoman Empire tend to be relatively underdeveloped by citing these
crucial junctures in history. (provided that they are not oil exporters). Instead of embracing
progress, the Ottoman Empire saw it as a danger and condemned its millions to another 200
years of subsistence living. Inclusionary institutions did not emerge in the Ottoman Empire

9. because there was never the same level of elite hostility as there was in England. Many nations
of the time, such as Spain, Austria-Hungary, Russia, or China, had the same characteristics.
Wherever people in positions of political authority perceived a threat from technology and
innovation, they blocked it, thereby effectively blocking the growth of wealth and prosperity.
Their analysis is summarized by describing the corrupt and healthy cycles of wealth. The
virtuous cycle will produce constructive feedback loops whenever inclusive institutions exist,
preventing the elites from overthrowing them. Similar to how extractive institutions' vicious
cycles create negative feedback loops that impede growth, inclusive institutions will be ensured
to grow and become persistent. The virtuous cycle explains how political system reforms in
England or the US were unassailable because people in authority realized that any potential
reversal would jeopardize their own status. This point is illustrated by the examples of British
consolidation and its gradual, contingent path to democracy, in which the populace gradually
demanded and gradually received more rights; the trust- busting in the US at the start of the
20th century; or President Roosevelt's unsuccessful attempts to curtail the authority of the US
Supreme Court.
The positive feedback loop was made feasible in the US and Britain thanks to the rule of law
and pluralism, which were essential prerequisites leading to the limitations of political power.
And this is precisely why the governments of Peron's Argentina, Chavez's Venezuela, and
Fujimori's Peru failed. Institutions to restrain political power were not established. These
systems gave rise to extractive institutions and a vicious cycle where the governing class had
no checks on their authority and strong incentives to take property and extract money. The
"iron law of oligarchy" meant that a new elite would simply replace the old one and continue
in its extraction, often much worse than under the former elite, even if this elite were to be
destroyed by a revolution. Because of this, the authors have some doubts that the Arab Spring
will bring about the essential transition in favor of inclusivity.
Once more, the authors provide a wide range of examples from Sierra Leone, Guatemala,
Ethiopia, Zimbabwe, Uzbekistan, Columbia, Argentina, Egypt, and even slavery in the US
South to persuade the reader of the negative feedback loop's mechanism and the iron law of

10. oligarchy. Nevertheless, the establishment of inclusive federal institutions made it simpler to
stop the vicious cycle in the South. In the South, the Civil Rights Movement led to equality and
paved the way for economic development.
Since there is no such thing as a development recipe, the writers decide not to attempt to create
one. Since it is difficult to predict which countries will break the mold in the near future, their
hypothesis, which is based on crucial turning points and unique historical trajectories, loses
predictive power. The theory can predict which nations are likely to remain impoverished for
a very long period, but it is less capable of predicting what will happen following significant
events like the Arab Spring. Various variables will determine whether the Arab nations follow
a slow path toward inclusivity or if the iron rule of oligarchy rules.
Finally, prosperity must result from empowering the people and involving them in the political
process rather than being orchestrated by international institutions with a reform plan or foreign
aid. Once a large coalition has been established, it will be possible to maintain inclusive
institutions and make political reforms that cannot be undone. Based on this perspective, one
might draw the conclusion that inclusive economic and political institutions emerge naturally,
while extractive ones are imposed by external force. Thus, achieving prosperity always requires
a greater degree of political, personal, and economic freedom.
The writers conclude by delving further into institutional theory and interspersing the text with
pertinent historical anecdotes. They go on to say that nations are not bound by their economic
or political fate and can "break the mold" by making slow but steady progress toward inclusive
economic and political reforms. The authors' opinions on China in particular seem fascinating
because they believe that despite having reasonably inclusive economic growth would not be
sustainable over the long term due to its extractive political institutions, China's rapid economic
growth would not be sustainable over the long term due to its extractive political.