“We live in an unequal world. The differences among nations are similar to those between the two parts of Nogales, just on a larger scale. In rich countries, individuals are healthier, live longer, and are much better educated. They also have access to a range of amenities and options in life., from vacations to career paths, that people in poor countries can only dream of. […] The United States is (also) far richer today than either Mexico or Peru because of the way its institutions, both economic and political, shape the incentives of businesses, individuals, and politicians. Each society functions with a set of economic and political rules created and enforced by the state and the citizens collectively. Economic institutions shape economic incentives; the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. It is the political process that determines what economic institutions people live under, and it is the political institutions that determine how this process works. […] Political institutions include but are not limited to written constitutions and to whether the society is a democracy. They include the power and capacity of the state to regulate and govern society. It is also necessary to consider more broadly the factors that determine how political power is distributed in society, particularly the ability of the different groups to act collectively to pursue their objectives or to stop other people from pursuing theirs.” – from Toward a Theory of World Inequality, Chapter 1. So Close and Yet So Different
“World inequality today exists because during the nineteenth and twentieth centuries some nations were able to take advantage of the Industrial Revolution and the technologies and methods of organization that it brought while others were unable to do so. Technological change is the only one of the engines of prosperity, but it is perhaps the most critical one.” – from Development Reversed, Chapter 9. Reversing Development
SO WHY DOES SOME NATIONS PROSPER WHILE SOME DON’T?
If you think you are living in a country where all above descriptions apply, you are lucky. That means you are enjoying the end result of virtuous circle that has been evolving through history with many influencing factors. But you may wonder what are those many influencing factors by the way. Also, you may become curious about the opposite factors that create and propel a vicious circle blocking a nation from achieving its prosperity. The authors-Professor Daron Acemoglu and James A. Robinson-try to answer a grand question of a nation’s prosperity and poverty in social, political, economic and historical contexts with very rich and extensive historical details and insights using a convincing and consistent framework-i.e. (IxC=! or ExC=!*). What’s most fascinating is their broad but never shallow coverage of small and big world affairs throughout history for countless nations on the globe with great insights which makes you want to finish the book at one go. So here I want to go through key insights in a few bullet points.
North and South America Case: Two Different World
The destiny of two close yet different world-North America and South America-was shaped by two different colonial forces started in the sixteenth century. Whereas the Spanish and Portuguese colonial expedition to South America firstly started solely for the exploitation of the natural resources including silver, gold and other minerals and even for extracting everything from indigenous peoples there in Mexico, Peru and other countries, leading to the continuous exploitative model for the benefit of the Crown and the conquistadors, the following British and the remaining European imperialists’ expedition to North America, started from North Carolina and Virginia, gave birth to a totally different colonial model due to the vast continent, scarce natural resources and harsh natural conditions along with the fierce indigenous people, opening for the new compromised model with the introduction of the “Laws Divine, Morall and Martiall” in 1618, which became the very start of the democracy in the United States.
These two different institutions developed themselves into even more divergent paths in which the New World in North America began to prosper with the allowed freedom of the patents grant, innovation, and rapid expansion of the banking industry enabling easy start up of a business through the nineteenth century, whereas the similar factors were only granted to the dictators and supporters in Latin America just as they were done for the Spanish conquistadors in old times, making the politically powerful more so at the expense of the people. These two different models persist into the present time showing the persistent or even enlarged wealth gap between different nations.
North and South Korea Case: Inclusive versus Extractive Institutions and The Making of Prosperity versus Poverty
As shown from the example of North Korea and South Korea, countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.
Inclusive economic institutions like in South Korea 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. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.
The extractive economic institutions as in North Korea don’t have these properties. These institutions are extractive because they are designed to extract incomes and wealth from one subset of society to benefit a different subset just like the colonial Latin American economies did.
The ability of inclusive economic institutions to harness the potential of inclusive markets, encourage technological innovation, invest in people and mobilize the talents and skills of a large number of individuals is critical for a nation’s economic growth, and this is only possible through the inclusive political institutions since these sufficiently centralized and pluralistic institutions only can vest power broadly and uproot such economic institutions that expropriate the resources of the many, erect entry barriers, and suppress the functioning of markets so that only a few benefit. Even if historically there were many examples of the elites or powerful groups stand against economic progress or creative destructions due to fear, the right choice of the political institutions was central in leading to a nation’s success or failure.
A few historical cases of some nations who chose extractive political institutions show they achieved limited economic growth and showed no sign of a transition to inclusive political institutions hence failing to sustain the growth. The major characteristic of extractive political and economic institutions is the general tendency for infighting, civil wars and widespread lawlessness resulting in frequent and persistent absence of state centralization of which example are some in sub-Saharan Africa and in Latin America.
Critical Juncture: The Contingent Path of History
Certain historical events play a critical role for a nation to shape the political and economical institutions. As one example, the Black Death in the fourteenth century led some feudal societies in Western Europe to reinvent the whole social and political systems in inclusive direction, whilst in Eastern Europe including Russia it worked the opposite ways which only further consolidated feudal systems involving landholdings and tightened serfdom of the peasants.
The initial seemingly small differences such as the ease of serfdoms as a result of the Black Death led the big institutional divergence along the way in the Western history. These are called the ‘Critical Junctures.’ The divergent paths of English, French, and Spanish societies in the seventeenth century show the importance of the interplay of small institutional differences with critical junctures. It can affect only a nation but also a whole set of societies in the way that colonization and then decolonization affected most of the globe.
The reason why such critical junctures are important is because once it happens, the relatively small institutional differences lead to fundamentally different development paths either in vicious loop or in virtuous loop expanding over time through history. One historical example is what happened in England starting from Glorious Revolution in 1688, paving the way for the Industrial Revolution that had a huge impact on prosperity in Europe leading again to the Imperialism that swept the globe. The inclusive economic and political system firmly established in England spread into that of North America and Common Wealth nations in Oceania as well. The weight of history clearly functions in building a nation’s destiny.
Reversing Development: European Colonialism on Africa and South Asia
On several instances in African and South Asian countries, the extractive institutions that underpinned the poverty of the nations were imposed by the same force that fueled the European growth, which is European commercial and colonial expansion. The profitability of European colonial empires were either built on the destruction of independent polities and indigenous economies around the world or on the creation of extractive institutions with the imported African slaves and plantation systems by the European colonists.
Why Nations Fail Today: Zimbabwe, Liberia and Sierra Leone, Columbia, Argentina, North Korea, Uzbekistan and Egypt
The extractive institutions still stand firm in certain countries as of today. Zimbabwe for example inherited a set of highly extractive economic and political institutions when it got independent in 1980 and the situations only got worse till recently. Sierra Leone, with its total lack of the order and central authority, suffered the severe civil war for a decade till 2001 and shows a typical case of a failed state. Columbia shows a state without sufficient centralization and with far-from-complete authority over all its territory. Failure to check on the government, the president, and political elites in Argentina shows that the state, which doesn’t have pluralism in political institutions, can override property rights and expropriate its own citizens with impunity. The abuse of the schoolchildren for the cotton plantation for the interests of the ruling family in Uzbekistan demonstrates that even in the twentieth century, such shameful extractive institutions stand firmly as if in old history. The crony capitalism in Egypt demonstrates a limited growth under extractive political institutions as of today.
Understanding Prosperity and Poverty: Both Small Differences and Contingency Play Key Roles
The huge differences in the wealth of nations around the world is relatively recent phenomena in the world history. Current prosperity map of the nations has been shaped only in recent past three or four hundred years. Certainly, the two otherwise similar societies would slowly drift apart institutionally along time. When a critical juncture arrives, small differences that have emerged as a result of institutional drift would result in the radical divergence thus creating a more major institutional differences along the history either strengthened via virtuous cycle or vicious cycle.
CONTEMPLATION: WHAT’S GOING TO BE THE NEXT CRITICAL JUNCTURE FOR US?
Everyone understands, by instinct or by any other simple measure such as authoritarian dictatorship versus democracy, that North Korea is a failed state and South Korea deserves relative prosperity. But this simple tool or explanation lacks logical frames. In the same context, we also easily understand the chronic malfunctions in many countries in Latin America. They simply inherited colonial systems from the past. Despite several efforts to improve the systems or institutions, they failed. Why their problems persist is neither a simple question nor has an easy answer.
This book, in that aspect, helped me to understand why the world is as it is today in a clear framework. Learning about lots of countries who are still under extractive economical and political institutions despite their independence from the colonialism only recently, I came to realize how difficult it is to get over the negative feedback loop- i.e. a vicious circle that only gets strengthened over time. A certain few countries in Africa and in Asia including South Korea and China(even if China is under authoritarian regime) seem lucky enough to be able to change the system into inclusive economical and political institutions. They definitely made a good choice when they faced critical junctures along the history. The leaders’ courage and insight on future may have worked or as in Europe in the seventeenth century after the plague, the people’s revolt against the stagnant and unjust system may have led the nation’s fate into the better one.
As the authors present in the early part of the book, there are many existing theories that try to explain what decides a nation’s prosperity. It can be the land, the geography, the culture or the simple ignorance of the leaders. Just like the authors’ argument, I also agree that certain theory can only explain certain countries or cases but not all. The authors framework-either inclusive or exclusive institutions shaped when faced critical junctures along the history can explain a nation’s prosperity-is convincingly delivered with rich historical examples of various countries across the globe along various time lines from history. I have never enjoyed such a fascinating feast that combined economics, politics, and history with such broad historical examples as this book. Also, I found myself constantly looking for my nation’s condition and comparing with other nations episode by episode. What if and what if? What if South Korea was progressive enough to learn about what was happening on the other side of the globe during the Industrial Revolution age? What if South Korea didn’t fall victim to the Japanese colonialism? What if South Korea lost the Korean War? What if South Korea fell under the communism after the war etc., etc..
This book certainly helps to look at the current world affairs in their coherent framework. The Brexit is certainly a critical juncture for U.K. that can change or shape their history for the better or worse. It was a unprecedented shock to the world but they had many such examples in their history actually. They had many revolutions led by people that built their destiny for the better throughout history. The revolutions were mostly not top-down but bottom-up and the Brexit is quite similar in a sense that people shocked the leaders like a quiet revolt. The post-presidential election of the United States can be a critical juncture-a turning point- for the U.S. for the better or for the worse. The still growing China despite the unsustainable authoritarian regime can face a surprise critical juncture at any time.
Lastly, I should emphasize that this is a must read for the political leaders in the state and want to recommend to economists, business leaders, and whoever has vested interest or responsibility for their nation’s prosperity. We all can grasp the picture about the coming future out of this uncertain present only after we know and thus learn from the past. In this sense, this book will certainly broaden your scope and give you much needed knowledge and insight on the world and what has been happening on the globe.
* is my own simplified formula for understanding the authors argument
IxC: Inclusive Institutions with Critical Junctures = Prosperity
ExC: Extractive Institutions with Critical Junctures = Failed State
WHO SHOULD READ THIS BOOK:
Policy Makers, Economists, Political and Business Leaders
MY RATING: 5 out of 5
Business, Economics, History, Political Science, Social Science
ABOUT THE BOOK:
Author(s): Daron Acemoglu and James A. Robinson
Published: 2012, USA
Publisher: Crown Business
Paperback, 464 pages