Why Nations Fail by Daron Acemoglu and James A Robinson

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Written by Daron Acemoglu and James A Robinson, the central theme of the book “Why Nations Fail” is to explain the huge differences in incomes and standards of living that split the rich countries of the world from the poor, and put forward a perspective based on how institutions created from politics can evolve the way towards progress or fail depending on their nature of being inclusive and extractive. The book also sought to debunk known theories such as the geography hypothesis advocated by the ecologist and evolutionary biologist, Jared Diamond, the culture hypothesis and finally the ignorance hypothesis proposed by the economists. There are interesting insights extracted from this book that any interested reader of politics and economics will enjoy and how they can be applied in context on Singapore in the present day.

The combination of insights from Daron Acemoglu, an economist and Daron Acemoglu, a political scientist James A. Robinson sought to show the importance of economic and political instituions are critical for determining whether a country is poor and prosperous. Starting with a parable by showing the living standards and conditions between Arizona in the United States and Nogales in Mexico, the authors show how two states separated by a boundary can differ so much in their evolution. The assumption is that each society function with a set of political and economic rules enforced by both the state and their citizens collectively. We understand that the economic institutions by shaping the incentives to be educated, the ability to invest and save, the capability to innovate and adopt new technologies to drive creative destruction within the society. However, it is the political process that determines what economic institutions live under and how the processes shape. Ultimately, the ability of the citizens to keep the politicians in check influences how they behave depending on the nature of the government in the form of democracy or authoritarian regimes.

As institutions influence behaviour and incentives in real life, they decide the success and failure of nations. Individual talent can only thrive if the institutional framework allows them to do so. That is where we come to the central thesis of the book:

When political and institutions are more “inclusive” that encourage economic activity, grown and prosperity or secure property rights and pace the way for technology and education, nations thrive. If the same institutions are more “extractive” that allows the political elite to concentrate power & economic opportunity to only a few, nations fail.

The real challenge is that how both the inclusive and extractive parts of a state might play out due to tension and dispute that will decide the rise and fall of a nation. However, the authors also introduced the concept of critical junctures i.e. breakpoints in history that changed the outcome of how the society shifted from extractive to inclusive institutions and vice versa, for example, the Industrial Revolution. Over the course of the book, the authors have taken many historical case studies from the Romans, the Mayans, the African nations and China to explain how other theories are not sufficient to explain why certain states fail.

One of the highlights of the book is the resistance of political elites towards innovation and change. As a matter of fact, the same analogy can be extended to modern day management teams of companies that form their own “silos”in their industries. Technological innovation helps the society to be more efficient and prosperous, but it also has the ability to destroy certain economic privileges and political power of those who are in power, and threaten the livelihood of those who worked with the old technologies. When the elite sees their own political power threatened by these new technologies, they will seek to construct a formidable barrier to innovation. Hence, the up and coming platers who seek to introduce these new technology innovations has to grasp the nature of their environment and tear down the resistance from the political elite. We see that a lot happening today in many nations, where technologies such as social media have passed the tipping point and made the older institutions of power, be it traditional media and authoritarian regimes irrelevant. Understanding the social and political forces in the context of innovation made us realize how tough entrepreneurship within an environment can be.

Reading this book has helped me to think, understand and reflect about the current political and economic situation in Singapore, where the people and the government are currently negotiating the boundaries of a new political normal. With the failures of housing and transportation, people are beginning to hold the government accountable and resent the lack of opportunities made available to them. The manifestations of xenophobia are beginning to surface. To understand why it is happening, one can ascertain the same argument about the “inclusive” and “extractive” nature of the political and economic institutions in Singapore and probably get a sense that how the nation will eventually progress or fail.

References
[1] Buttonwood, The question of extractive elites: Bankers and the public sector may both be enemies of growth, The Economist, 14 April 2012.
[2] Thomas Friedman, “Why Nations Fail“, New York Times, 31 March 2012.
[3] Fundamental theorems in Welfare Economics, Wikipedia – Refer to the references stated. In the context of the book, the ignorance hypothesis raised by the authors in the book asserts that world inequality exists because we or our rulers do not know how to make poor countries rich. In the book, the authors argued that poor countries are poor because those who have power make choices that generate and foster poverty, and get it wrong not by ignorance but on purpose.

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Bernard Leong

A Pragmatic Idealist