Institutions and Inequality: A Strategic Analysis of Why Nations Fail

By Arun Dahal Khatri

Why Nations Fail by Daron Acemoglu (MIT) and James Robinson (Harvard) has sparked widespread debate and discussion, a testament to the book's compelling narrative and provocative ideas. Its central theme is the explanation of global inequality, focusing on the last 200 years when extreme differences between rich and poor countries became more pronounced. Acemoglu and Robinson argue that political and economic institutions determine whether a nation prospers or fails, with inclusive institutions fostering growth and extractive ones leading to stagnation. The book highlights how inclusive institutions allow for broad political participation, accountability, and economic opportunities for the masses, contrasting sharply with extractive systems where elites monopolize power and wealth.

The authors contend that countries like Great Britain and the United States became wealthy not merely due to their monetary policies but because they underwent political revolutions. These revolutions led to the overthrow of elites who previously controlled power, thereby creating a more inclusive society. This inclusivity allowed citizens to hold the government accountable, and the resulting environment enabled the majority to take advantage of economic opportunities. The emphasis on political institutions as the foundation for economic success is a significant contribution of Why Nations Fail, distinguishing it from purely economic explanations of inequality. Another significant insight from the book is that failure is the norm rather than the exception. The authors argue that most nations fail to adopt efficient institutions because those in power fear "creative destruction," the process by which innovation and progress disrupt the status quo. This fear leads elites to stifle change, as they see it threatening their power. Acemoglu and Robinson describe this as an "iron law of oligarchy," where even revolutionary leaders who promise radical change often resemble the elites they overthrew. This idea echoes George Orwell's Animal Farm, where the revolutionaries become indistinguishable from the oppressors. Understanding why change does not happen is, for the authors, just as crucial as understanding why it does.

The book is rich in historical examples, using a variety of 'natural experiments' to illustrate the authors' points. One of the most compelling comparisons is between Mexico and the United States, showing how differing institutional frameworks on either side of the border led to vastly different outcomes. The contrasting fates of North and South Korea, with the North trapped in poverty under an extractive regime and the South thriving with inclusive institutions, further strengthen the argument. The pace of the book is energetic, jumping across countries and centuries—from the fall of the Roman Empire to the rise of Japan and from the collapse of the Mayan civilization to the French Revolution. This whirlwind tour through history is both engaging and informative, though at times it can feel overwhelming. However, the book's most striking point is its focus on the dynamics of change. The authors argue that minor initial institutional differences, often caused by random historical events, can have enormous consequences when countries hit critical junctures like the Black Death or the French Revolution. These moments can set nations on radically different paths of development. The idea of "path dependence" is compelling here, as it suggests that minor shifts in the past can lead to significant divergences in the future. Although it has challenges, this theory provides a fascinating lens through which to view world history. Many of the book's insights are retrospective, leaving readers to wonder whether these patterns could have been predicted in real-time.

Despite its many strengths, Why Nations Fail has its critics. One of the main criticisms is the authors' overly favorable view of American institutions. Acemoglu and Robinson frequently hold up the U.S. as an example of inclusive political and economic institutions, while downplaying the complexities and challenges within the American system. This romanticization of the 'American Dream' can feel somewhat one-dimensional, particularly when they argue that the U.S.success is due to its political institutions while dismissing other factors such as slavery, racial inequality, and economic exploitation that have historically shaped the country. Moreover, their treatment of China is another area where the book falters. The authors claim that China's growth, based on extractive political institutions, will eventually run out of steam. However, this argument feels rushed and lacks the depth needed to convincingly explain how or when China's economic rise might falter. Critics have pointed out that their dismissal of China's growth model is overly simplistic, especially in light of China's continued economic success.

Another criticism is the book's somewhat cursory treatment of the state's role in economic development. Acemoglu and Robinson downplay the importance of state intervention, particularly in the case of South Korea, which they describe as a market economy built on private property. However, scholars like Dani Rodrik and Ha-Joon Chang have shown that South Korea's economic success heavily depended on state-led industrial policies. By downplaying the role of government in economic takeoff, the authors miss an opportunity to engage with a more nuanced understanding of how states can foster development. The final chapters of Why Nations Fail are disappointing, especially after the grand sweep of history in earlier sections.The book ends with discussing how social media, particularly Facebook and Twitter, could potentially play a role in democratization efforts. While this is an exciting idea, it feels underdeveloped and fails to live up to the complexity of the rest of the book. The reliance on social media as a potential solution to inequality and extractive institutions seems out of place, given the book's focus on centuries of institutional development.

In conclusion, Why Nations Fail is an ambitious and thought-provoking book that offers valuable insights into the causes of global inequality. Its emphasis on the importance of political institutions and the dynamics of change is particularly compelling, and the historical examples make for an engaging read. However, the book's romanticization of the U.S. and its treatment of China leaves room for skepticism. Despite these shortcomings, Why Nations Fail remains an essential read for anyone interested in understanding the roots of global inequality and institutions' role in shaping nations' fate.