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Preface
Themes
Key
LitCharts assigns a color and icon to each theme in Why Nations Fail, which you can use to track the themes throughout the work.
Global Inequality and Economic Growth
History and Institutional Change
Cycles of Wealth and Poverty
Diversity, Pluralism, and Empowerment
Summary
Analysis
In this chapter’s first section, “The Economics of the Rio Grande,” Acemoglu and Robinson describe the city of Nogales, which is divided by the US-Mexico border. In Nogales, Arizona, most residents have at least a high school education, reasonable access to health care, and government services like roads and electricity. They don’t have to worry about their safety and can vote out elected officials if those officials don’t protect the public. But none of this is true across the border in Nogales, Sonora.
The two halves of Nogales embody the deep inequalities that plague the globe, and the US-Mexico border represents the stark divide between rich and poor in the world today. This inequality isn’t just about income and wealth—rather, it encompasses all aspects of a society’s standard of living. Of course, this passage raises the pressing questions that are at the heart of this book: why does this divide exist, and how can people overcome it?
Themes
The two halves of Nogales share the same geography, climate, history, and culture—the only difference is their economic and political institutions. On the US side, residents benefit from higher wages because of national investments in education and technology. They also benefit from a robust democratic system, which makes the government generally responsive to their needs. But on the Mexico side, institutions don’t encourage investment or effective government. To understand why the US’s institutions have generated more prosperity than Mexico’s—and the rest of Latin America’s—Acemoglu and Robinson turn to the colonial history of each region.
If geography, climate, history, or culture determined prosperity, then the two halves of Nogales would be equally rich. They aren’t, which is good evidence against all four of these explanations. Instead, the authors return to their primary thesis: institutions determine economic growth, and global inequality is the result of different countries’ differing institutions. Acemoglu and Robinson point out that both political and economic institutions shape prosperity. For instance, the US’s relatively strong democracy is an important political institution, and its strong technology sector is the result of its strong economic institutions, which encourage investment.
Themes
The next heading is “The Founding of Buenos Aires.” In 1514, the Spanish claimed the Río de la Plata estuary in South America, and in 1534, they founded the city of Buenos Aires on its banks. They tried and failed to enslave the local Charrúa and Querandí hunter-gatherers, so they sent an expedition up the Paraná River instead. There, the explorers encountered the Guaraní and enslaved them. The Spanish then brought their fellow colonists upriver from Buenos Aires and established their new city, Asunción. In other words, the Spanish colonists abandoned Buenos Aires because they wanted to plunder the Americas, not farm the land themselves.
The Spanish settlers’ move from Buenos Aires to Asunción makes their motives clear: they were looking for indigenous people to enslave. They planned to become rich through exploitation, which would become the foundation of their society. It’s important to remember that Acemoglu and Robinson are using this history to help explain why Mexico’s institutions are less successful than the United States’ today. In other words, these institutions were originally built to exploit the masses and enrich the few, so it's unsurprising that they’re still more exploitative and unequal today.
Themes
In the next section, “From Cajamarca …,” Acemoglu and Robinson explain how the Spanish conquered most of the Americas in the 1500s. Their ruthlessly effective strategy was to capture indigenous leaders, set themselves up as a new aristocracy, and start taxing and enslaving the indigenous population. For instance, at the Aztec capital of Tenochtitlán, Hernán Cortés captured the emperor Moctezuma, seized and melted down all of his gold, and granted encomiendas—parcels of land and groups of indigenous slaves—to Spanish settlers. The priest Bartolomé de las Casas famously spoke out against the encomienda system, writing about how Spanish settlers stole their slaves’ meager resources and brutally tortured indigenous leaders.
Tenochtitlán is located in present-day Mexico City, which shows the clear connection between Mexico’s colonial history and its current institutions. Much like the Egyptian elites criticized by Arab Spring protestors in the introduction, Spanish elites governed for themselves, not the people they ruled. Their institutions—like the extremely violent and exploitative encomienda system—were clearly intended to enrich this elite. In fact, they focused on extracting as much labor, land, and gold as they could from the common people. Unsurprisingly, this is the kind of political and economic system that Acemoglu and Robinson later associate with extractive institutions.
Themes
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The Spanish conquest of Peru followed a similar pattern. Francisco Pizarro captured the Inca emperor Atahualpa, demanded he fill several rooms with gold, and then killed him after he succeeded. The Spanish went on to murder the Inca aristocracy in Cusco, then enslave the indigenous population and organize them into encomiendas. They also forced a seventh of the region’s men to work in a large silver mine at Potosí. This labor system, which is called the mita, continued until 1825. Its legacy is still visible today—for instance, the province of Acomayo, which was forced into the mita system, is much poorer today than the neighboring province of Calca, which wasn’t.
Acemoglu and Robinson are less interested in the details of Spanish plunder than the kind of society that emerges from such plundering. The encomienda and mita systems didn’t disappear over time: rather, they transformed into other systems that still exist in the present. The disparities between Acomayo and Calca show that the mita system impoverished the places that were forced to participate in it. This makes sense: a large portion of the region’s workers were periodically forced into slavery-like conditions far from home. Not only did this reduce the workforce at home, but it also made it more difficult for people to plan their long-term economic future, since they could be drafted into the mita at any time. Furthermore, it decreased their motivation to innovate and build wealth, considering that, no matter how wealthy they became, they would still have to join the mita and would never have true economic rights on par with the Spanish.
Themes
In Peru, the Spanish government also imposed other laws to extract as much wealth as possible from the local population: indigenous people had to pay a yearly tax in silver, sell everything at low prices fixed by the Spanish, and transport goods on their backs like pack animals. All over the Spanish Empire, between the encomienda system and these extractive laws, the Spanish enriched themselves but impoverished their territories—which now make up the most economically unequal region in the world.
These laws show that government creates a society’s economic institutions, which then shapes that society’s economy. Taxation in colonial Peru looked nothing like taxation in modern democracies. Today, most governments tax their populations in order to fund public services that benefit them. But in colonial Peru, taxation was merely a way for the government to capture a portion of all the wealth in society and redistribute it to elites. In fact, Acemoglu and Robinson will go on to argue that taxation still works like this in many parts of the world.
Themes
Acemoglu and Robinson start the next section, “… To Jamestown,” by explaining that England was much less powerful than Spain in the 1500s. But after defeating the Spanish Armada in 1588, England sent an expedition to North America. (South America was more desirable, but it was already taken.) The English settlers who founded Jamestown in 1607 planned to capture a local leader and rule over indigenous people, just like the Spanish had done. But the surrounding indigenous groups were organized into the powerful Powhatan Confederacy, and the colonists ended up trading with them to survive the freezing winter.
Acemoglu and Robinson turn from Spanish colonialism in Latin America to English colonialism in North America. They want to show that the differences between the US and Mexico today actually trace all the way back to the early colonial period. Ironically, however, the relationship between Jamestown and the Spanish colonies was the opposite of that between the US and Mexico today: at the time, the Spanish colonies were much wealthier, but only because their methods were highly extractive.
Themes
The former mercenary and criminal John Smith, who led the Jamestown colony and coordinated its commerce with the natives, quickly realized that Spanish tactics wouldn’t work in North America. Most importantly, there was no gold to mine. Smith and the English expedition’s captain, Christopher Newport, next tried to make the native king Wahunsunacock pledge loyalty to the British Crown. They failed, and Wahunsunacock decided to stop trading with them. Smith forced the colonists to farm for themselves, because it was the only way to survive the winter.
The Jamestown colonists wanted to build a highly exploitative, extractive society like the Spanish. But they couldn't, because of a combination of geographic, demographic, and political factors, so they struggled to survive. Whereas the Spanish enslaved indigenous people and ruled over them as an aristocracy, Smith negotiated and traded with them as equals. This illustrates how Acemoglu and Robinson explain historical change: societies act differently depending on the underlying challenges and conditions that they face. Then, these actions shape those societies’ institutions, which reshape those societies in the long term.
Themes
But the Virginia Company, the British corporation in charge of the Jamestown settlement, was dissatisfied with its profits. It reorganized the colony’s government, which angered John Smith. He left, and most of the Jamestown colonists starved to death the following winter. The Virginia Company forced all new settlers to work in brutal conditions, much like the Spanish did to indigenous workers in their territories. But since North America’s population density was very low, there was plenty of open land, and many settlers decided to just abandon the Virginia Company and go live on their own.
The Virginia Company ruled Jamestown as a government, so its decisions were effectively policies in the colony. While they were similar to Spanish labor policies in colonial Latin America, these policies had a completely different effect because of North America’s geography and population. This shows how policies can only be understood in the specific context of the societies where they are implemented. The Virginia Company’s policies, which Acemoglu and Robinson would call extractive, failed to increase production or yield profit.
Themes
England started to realize that, if it wanted to maintain control of its colony, it had to give the settlers land, political rights, and economic incentives to work. Other models simply weren’t viable. For instance, the powerful noblemen Lord Baltimore and Sir Anthony Ashley-Cooper each tried to build their own private colonies with elitist, hierarchical systems of power and landownership. But this failed because their settlers just packed up and left.
In North America, extractive policies couldn’t generate profit for shareholders because the settlers had better ways of making money than working for the Virginia Company. Meanwhile, the Virginia Company didn’t have enough power to truly impose its policies on settlers. Extractive policies, then, can only create economic growth when a government can successfully force its population into cooperating with its oppressive practices.
Themes
Eventually, the Crown took control of Baltimore and Ashley-Cooper’s colonies (Maryland and Carolina), allowing settlers in these colonies to more or less rule and represent themselves. By the early 1700s, then, male settlers in the 13 US colonies had far broader political rights than other nations around the world. This created the foundation for the US Declaration of Independence.
After extractive institutions failed to create economic growth in the colonies, England built a different kind of system. Instead of concentrating all power in the hands of the Virginia Company and trying to impose rules on settlers, it gave settlers the power to choose their own political and economic rules. Thus, it built what Acemoglu and Robinson would call inclusive institutions.
Themes
Under the heading “A Tale of Two Constitutions,” Acemoglu and Robinson argue that the history they’ve presented so far explains why the US went on to create a relatively egalitarian constitution. Next, they explain why Mexico’s constitution was not nearly as democratic.
As early as the 1600s, the British and Spanish governed their American colonies in opposite ways. The Spanish colonies were hierarchical and extractive, while the British colonies were more egalitarian and inclusive—not because they wanted to be, but rather because this was necessary for staying afloat. Acemoglu and Robinson will now use their analysis of extractive and inclusive practices to explain the different paths that the US and Mexico ended up taking.
Themes
Mexico’s fight for independence began after Napoleon invaded Spain and dethroned its king in 1808. Next, Spanish military leaders passed a new constitution based on principles of equality and popular sovereignty. This frightened elites in Mexico, who were still profiting off of forced labor in the encomienda system. Although the Spanish monarchy was eventually restored, the military ended up forcing the king to accept an even more egalitarian constitution, and Mexican elites revolted. The military leader Augustín de Iturbide led the Mexican army to independence in 1821, then began to rule with an iron fist as its emperor.
Unlike many revolutions, the Mexican War of Independence was actually a conservative coup against egalitarianism. In other words, the Mexican elite seized power in order to hold onto its wealth and status. Whereas the elite had to give up some of its power very early on in the US, in Mexico, it never did. This shows how, according to the authors, elites will almost always try to hold onto their disproportionate power and wealth. Whether a country develops inclusive institutions over time depends on whether other factors stop the elite from hording power and wealth.
Themes
The authors next compare the effects of the US and Mexican constitutions. The US Constitution didn’t establish a modern democracy—it disenfranchised women and Black people, and it protected slavery. But the US managed to legislate away all the conflicts between the North and South through agreements like the Three-Fifths Compromise. This is why the US’s political institutions stayed intact until the Civil War. And even though the Civil War was bloody and tragic, it only lasted for five years.
The American Revolution was far more inclusive than the Mexican War of Independence because, instead of keeping a small elite in power, it gave political representation to a wider group. Of course, while Acemoglu and Robinson consider the American Revolution inclusive, they don’t mean that it brought everyone—or even anything close to a majority—into democracy. Rather, they consider the American Revolution inclusive because it extended power beyond a narrow elite and, crucially, brought multiple groups with competing interests into the government.
Themes
In contrast, Mexico saw constant conflict and political instability for the first 50 years of its independence. For instance, the presidency changed hands so often that Antonio López de Santa Ana was president 11 different times from 1835 to 1855, and Mexico had 52 presidents from 1824 to 1865. Because of this instability, property rights were weak, and the government didn’t actually control the whole national territory. This made it easier for the US to invade and annex Texas. Most of all, independent Mexico’s economic system was designed to preserve exploitative, unequal monopolies from the colonial era—and not give real economic opportunities to the majority of the population.
Whereas institutions generally enabled compromise and fragile peace in the early US, in post-independence Mexico, there was no institutional framework for compromise or peace. Instead, elites constantly fought over power, which led to political instability, which led to economic instability. This shows how extractive institutions weaken the state and foster conflict.
Themes
Under the heading “Having an Idea, Starting a Firm, and Getting a Loan,” Acemoglu and Robinson explain how, after the Industrial Revolution kicked off in England, Americans followed suit and started inventing new technologies. Because of the US’s relatively free patent laws, people without an elite upbringing could easily get patents. But to really profit from their patents, inventors needed to start companies—and get loans. Fortunately, in the US in the 19th century, the banking sector was vibrant and competitive, so inventors could get loans at low interest rates.
The US’s patent laws and banking sector illustrate the idea that inclusive economic institutions spur economic growth. Both patents and loans were available to a much wider slice of the population in the US than in other countries. As a result, entrepreneurs could bring more products and technologies to the market. Thus, the best products and most productive technologies could naturally win out and become widely adopted, which allowed the economy to grow rapidly.
Themes
But inventors didn’t have the same access to capital in Mexico. Two banks dominated the market, and they only loaned to wealthy people and charged exorbitant interest rates. The problem was political: after the authoritarian president Porfirio Díaz took power in 1876, he freely ignored property rights and gave his friends monopolies over key industries—including banking. When politicians in the US tried to do the same thing in the 1700s, they promptly got voted out of office. The US’s “broad distribution of political rights” was thus the real reason American inventors could get the money they needed to pursue their ideas.
Mexico’s institutions show how monopolies, insecure property rights, and elite control over the government prevent economic growth. Without inclusive economic institutions, the market always rewards elites—no matter what. Thus, it’s clear why elites fight against inclusive institutions, since protecting exploitative practices is a way of protecting their own wealth and power. The contrast between the US and Mexico shows that a “broad distribution of political rights” truly underpins these institutions and is the fundamental driver of economic growth. In simpler terms, politics determines economics, which in turn leads to poverty or prosperity.
Themes
In the section “Path-Dependent Change,” Acemoglu and Robinson contrast how US and Latin American institutions responded to industrialization and globalization in the late 1800s. In each region, institutions kept doing what they were already doing, and this caused their fortunes to diverge even further: it created more growth in the US and more conflict and inequality in Latin America.
US institutions were already more inclusive and Latin American ones more extractive before the Industrial Revolution. But Acemoglu and Robinson argue that industrialization significantly widened these existing differences: inclusive institutions became more inclusive and extractive ones more extractive. Essentially, each kind of institution responded to historical change in a way that magnified its existing characteristics. This explains why inequality tends to grow over time.
Themes
For instance, US laws gave virtually all white settlers the right to seize and settle indigenous land on the frontier, while in Latin America, leaders like Porfirio Díaz gifted frontier land to their powerful friends. While political reforms benefited many people in the US, then, in Mexico they primarily benefitted a tiny elite. This led to further political unrest, like the Mexican Revolution that overthrew Díaz in 1910. The pattern was similar all over Latin America: military and authoritarian governments seized resources for themselves, which caused further backlash, instability, and conflict. To stay in power, these governments also silenced their opponents and committed human rights atrocities—including mass murder in countries like Chile, Guatemala, and Argentina.
The US’s inclusiveness helped it maintain political stability and become even more inclusive over time. Because a wider segment of the population already had some political power, it was able to demand that new wealth and power also be distributed more widely. In contrast, in Mexico, extractive institutions gave leaders the incentive to govern even more unequally. Leaders like Díaz had to appease powerful elites in order to stay in office. And power was so financially rewarding that elites happily fought wars in order to seize it. This illustrates how inclusive and extractive institutions both respond to crises in ways that reinforce their inclusive or extractive character. In turn, both kinds of institutions tend to reinforce themselves in positive feedback cycles over time, unless something interrupts the cycle.
Themes
Under the heading “Making a Billion or Two,” Acemoglu and Robinson contrast the two richest men in the world: the American Bill Gates and the Mexican Carlos Slim. Gates founded Microsoft, an innovative technology company. Despite Microsoft’s influential position in American society, though, the US government still successfully sued the company when it abused its monopoly power. In contrast, Slim became rich by buying the national telecom monopoly when the government privatized it. In general, Mexican entrepreneurs have to deal with far more barriers to entry than American ones—including licensing, negotiations with politicians, and financing. All these barriers stifle competition and protect existing monopolies, like Slim’s, which he has consistently protected in the courts through legal loopholes and political connections.
The contrast between Gates and Slim shows how institutions create different incentives in the US and Mexico. Because of its inclusive institutions, the US keeps barriers to entry low. Therefore, it rewards innovation, and the wealthiest Americans, like Gates, tend to be people who have founded large companies that transformed the economy. In contrast, Mexico keeps barriers to entry high because of its extractive institutions. This allows the government to reward whomever it chooses. Therefore, the wealthiest Mexicans, like Slim, tend to build fortunes through their close ties to the government.
Themes
In the section “Toward a Theory of World Inequality,” Acemoglu and Robinson return to their book’s thesis. The world is deeply unequal, like the two halves of Nogales. People in rich countries have far better educational, health, and economic opportunities than people in poor countries. They can count on their governments to invest in basic infrastructure, respect their rights, and respond to elections. But people in poor countries generally can’t. This inequality has deep political and economic consequences for people all over the globe. This book is an attempt to understand this inequality so that it can be addressed.
Acemoglu and Robinson’s long detour through colonial, revolutionary, and modern history has shown why the US has inclusive institutions and Mexico has extractive ones. It has also shown why the US became more inclusive over time, while Mexico has repeatedly reinforced and strengthened the same extractive institutions. These differences explain why the US economy is so much larger and so dynamic, as well as why the US government chooses to spend much of its resources on investments that benefit the majority of the population. All of this suggests that building inclusive political and economic institutions, like the US’s, is the key to creating a prosperous economy. One of Acemoglu and Robinson’s main goals is to explain what it takes to build these institutions.
Themes
The inequality between the two halves of Nogales is “just the tip of the iceberg.” For one, Nogales is among the wealthiest places in Mexico. Moreover, its wealth comes almost entirely from Mexican factories run by US businesses. And the disparity between the US and Mexico is far smaller than the disparities between the richest countries and the poorest, where people make as little as one-fortieth of the income that people make in the US.
The inequality between the two halves of Nogales is extreme. But Acemoglu and Robinson zoom out to look at global inequality—which is about ten times as severe as the inequalities between the two halves of Nogales. The problem this book addresses, then, is clearly quite serious.
Themes
The difference between rich countries and poor countries—or places like Nogales, Arizona and Nogales, Sonora—comes down to institutions and the incentives they create. Different kinds of political and economic institutions incentivize individuals, politicians, and businesses to act in different ways. And while individual talent is important, innovators like Bill Gates can’t succeed unless strong institutions support them—like universities, banks, labor markets, and a legal system that respects property rights. Economic institutions thus lead to prosperity, but political institutions are what create those economic institutions in the first place.
Acemoglu and Robinson succinctly present their book’s central thesis: institutions make countries rich or poor, so institutional differences are responsible for global inequality. Specifically, institutions are important because they create the incentives for different people in society. In turn, these incentives determine people’s economic behavior. Therefore, institutions like the US’s—which give economic opportunities to a wide range of people—incentivize innovation and growth by rewarding it. In contrast, institutions like Mexico’s don’t reward innovation, and this limits overall growth.
Themes
Acemoglu and Robinson also argue that history profoundly shapes both political and economic institutions. They point out that, over time, societies tend to get stuck in certain patterns of political and economic organization. These patterns make overcoming global inequality very difficult. Powerful elites often resist changes that would threaten their status—and since they have power, they can sometimes block those changes, like Carlos Slim does in Mexico. Therefore, while it focuses on poverty and prosperity, this book is really as much about politics as it is about economics.
The first part of Acemoglu and Robinson’s argument in this book is their theory of how institutions cause or prevent economic growth. The second part is their explanation for how institutions become inclusive or extractive in the first place. Their discussion of US and Mexican history in this chapter has already shown that countries tend to get stuck in cycles of wealth or poverty. Specifically, most countries are stuck in cycles of poverty, and some countries manage to break this cycle by forming inclusive political institutions, which then transform the economy and society as a whole. Therefore, the key to economic growth is breaking the cycles of poverty created by extractive institutions. And this requires people to take power from the elite. In this way, Acemoglu and Robinson combine a traditionally Marxist interest in class struggle and conflict with the traditionally liberal capitalist belief that entrepreneurs, markets, and innovation are the key to prosperity.
Themes
