Why nations fail

Why nations fail: The origins of power, prosperity, and poverty

This is probably the most prominent work by Acemoglu and Robinson. In this book, they elaborate on a popular theme: Inclusive institutions lead to prosperity; extractive institutions lead to poverty. There is a problem with the terminology. Do inclusive institutions engage in extractive activities?

All organisms need to extract external resources to survive and prosper. Humans, being organisms, need to extract external resources to survive and prosper. All institutions, including the so called inclusive institutions, are extractive institutions.

All people are fighting for resources. No institutions are truly all inclusive. From the definition provided by the book, inclusive institutions uphold property right. But property right is exclusive. We often notice No Trespassing sign on various properties.

The basic idea of the book is laid out in Chapter Three, The making of prosperity and poverty. The authors use the stark contrast between North and South Korea to illustrate their point. North Korea is indeed living hell. But the authors seemed not to notice that the fertility rate of South Korea was far below the replacement rate at the time of their writing. Today, its fertility rate, below 0.8 per woman, is the lowest in the world. The people of South Korea are not on the road to prosperity. They are on the road to extinction.

Inclusive institutions, being more internally cohesive, are more powerful in fighting for the control of resources. Hence an inclusive institution is more prosperous than an exclusive institution in general. An inclusive institution, whose resources are more widely shared, consumes more resources. Hence dominant inclusive institutions will suppress extractive institutions, as defined in their book, from emerging into inclusive institutions, which aspire to consume more resources and will have to compete with dominant inclusive institutions for resources.

In the book, Latin America is often used as an example of extractive institutions. That is why Latin America is mired in poverty. But according to the Monroe Doctrine, Latin America is the backyard of the US. The institutional structures of Latin America are largely shaped by US and US interests. Some countries in Latin America are called banana republics. These banana republics are institutions molded by the US to extract resources at low cost.

When resources are shared by less people, the powerful people who control the most resources are better off. This is why there is always a strong tendency for a system to become less inclusive over time during peace time. This tendency is mostly interrupted only during war time, when the need to include more people in fighting is the strongest.