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Chapter 2
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 the section “The Economics of the 38th Parallel,” Acemoglu and Robinson explain how the division of Korea in 1945 led to the Korean War in 1950. During the war, a pharmacist named Hwang Pyŏng-Wŏn stayed in the South, while his brother, a doctor, moved North. Fifty years later, when they met again, Hwang Pyŏng-Wŏn was much wealthier than his brother. He offered his brother some money and a coat, but his brother refused both—the North Korean government would confiscate them.
Hwang Pyŏng-Wŏn and his brother personify two important points about inequality. First, they represent the way that different institutions create wildly different incentives and living conditions for people. Even though they started out with the same family, culture, and education, the brothers ended up living radically different lives because they lived under different institutions. Hwang Pyŏng-Wŏn became rich because South Korea’s institutions allowed him to, and his brother became poor because North Korea’s government systematically punished and seized wealth. Second, they show why inequality is tragic and overcoming it is crucial. Politics cruelly separated the two brothers for half a century, and North Korea’s oppressive regime prevented one of them from thriving or fulfilling his potential.
Themes
Today, South Korea’s living standards are similar to Spain’s, while North Korea’s are close to sub-Saharan Africa’s. But until World War Two, they were the same. After 1945, with support from the US, South Korea’s authoritarian leaders built market economies and protected private property rights. In the Soviet-backed North, Kim Il-Sung instituted a strict centrally-planned economy, banned markets and private property, and heavily restricted civil liberties. This created an economic disaster: productivity and investment plummeted. But Kim never changed the system. In contrast, the South invested heavily in education, which helped it industrialize rapidly. Fifty years after the Korean War, the South is ten times as prosperous as the North. Culture, geography, and ignorance don’t explain this gap: institutions do.
Much like the two halves of Nogales, North and South Korea are a kind of natural experiment that shows institutions’ effect on economic development. This is because they essentially share the same culture, geography, and history (until 1945). Their postwar governments are the only meaningful difference that could cause them to diverge economically. While both of these governments started out authoritarian, they created opposite kinds of economic institutions for their people: the South Korean government encouraged private industry, while the North Korean government seized control over the entire economy and erased all economic freedoms. The disparity between them today shows how these different economic models played out over time.
Themes
Acemoglu and Robinson start the section “Extractive and Inclusive Economic Institutions” by comparing the way teenagers grow up in North and South Korea. In the North, their education is mostly propaganda and doesn’t prepare them to work or start businesses. They are forced to join the army and have virtually no economic or civil rights. In the South, education is far better, and young people know that their standard of living will rise if they start successful businesses or work hard. Unlike in the North, they can borrow money and sell their goods or services on the market.
Acemoglu and Robinson finally introduce the concept of inclusive and extractive economic institutions, which is essential to their argument in the rest of the book. North Korea is a radical example of extractive institutions, while South Korea has relatively conventional inclusive institutions. As the authors point out here, each kind of institution creates radically different incentives for young people. Extractive institutions threaten young people into obedience, while inclusive institutions teach them to think critically and incentivize them to pursue their goals in the market.
Themes
South Korea’s system, like the US’s, is based on “inclusive economic institutions” that protect all citizens’ right to freely and fairly participate in whatever economic activities they wish. Such institutions generally lead to economic growth and prosperity. In particular, inclusive economic institutions guarantee private property rights, without which people have no incentive to invest or innovate. But they also need to extend these rights and economic opportunities to the whole population. (For instance, colonial slave societies weren’t truly inclusive, even though they had strong property rights.) The state is the only entity capable of guaranteeing economic rights and building the legal system, infrastructure, and public services necessary to support those rights.
Acemoglu and Robinson specify two key criteria that make economic institutions inclusive: they have to protect private property rights, and they have to treat all citizens equally. These criteria ensure that most people can pursue their ideas in the market, and in turn, that the best ideas will be rewarded and spread throughout society. In such a society, government policy ensures that entrepreneurship and innovation are the main forces driving the economy—rather than state planning or corporate monopolies. Of course, not all institutions are completely inclusive or extractive. For instance, for many centuries, the US and Great Britain were more inclusive than other countries around the world, even though they weren’t fully inclusive because they only gave political rights to white men.
Themes
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In contrast, societies like North Korea and colonial Latin America have extractive economic institutions. Instead of protecting the majority’s economic rights, they focus on extracting wealth from that majority and shifting it to the elite.
Economic institutions are extractive if they don’t meet one of the two criteria for inclusive institutions (strong property rights and equality). Under extractive economic institutions, government elites primarily use economic policy to capture and keep a portion of all economic activity in the country. In other words, the government collects taxes primarily in order to enrich elites and their allies.
Themes
In “Engines of Prosperity,” Acemoglu and Robinson expand on the benefits of inclusive economic institutions. In inclusive markets, people can choose their own occupations and pursue their own ideas on a level economic playing field. Inclusive markets incentivize innovation, which creates the new technologies that have made life far easier and dramatically increased productivity over the last few centuries. They also promote education (which makes the workforce more productive and creative) by giving parents the means and incentive to send their children to school. In short, to drive economic growth, institutions have to build inclusive markets, invest in education, and reward innovation.
Acemoglu and Robinson argue that people make economic decisions in response to the incentives that the market gives them. But the authors also think there’s essentially no market without the government. Therefore, they think government policies—or the economic institutions that a government sets up—determine whether a nation can grow sustainably or not. More specifically, they think individual economic freedom rewards—and thus incentivizes—innovation. In turn, entrepreneurship and innovation drive sustainable economic growth because they constantly increase productivity. According to Acemoglu and Robinson, this is why inclusive economic institutions create growth.
Themes
In the section “Extractive and Inclusive Political Institutions,” Acemoglu and Robinson argue that politics—society’s way of governing itself—determines whether a nation creates inclusive or extractive economic institutions. Absolutist political institutions, which concentrate unlimited power in the hands of a single ruler or a small elite, generally lead to extractive economic institutions. This is because absolutist systems give elites the power to set policies that benefit nobody but themselves.
The book now focuses not on economic institutions, but on political ones. Both can be either extractive or inclusive. But the relationship between economic and political institutions is important. There are three factors that play into this relationship. First, economic institutions determine whether a society prospers. Second, political institutions determine whether a society builds the kind of economic institutions it needs to prosper. Third, numerous historical factors shape what kind of political institutions a society builds. (Many of the following chapters will focus on these factors.)
Themes
In contrast, societies with pluralistic political institutions—which distribute power more broadly and put constraints on its exercise—tend to have inclusive economic institutions. However, the state also needs to be centralized and powerful enough to create these institutions. For example, in Somalia, power is distributed so widely that the state can’t enforce the law or establish functional economic institutions. Thus, the authors define “inclusive political institutions” as ones that are both centralized and pluralistic, whereas “extractive political institutions” don’t meet these conditions.
The authors believe that elites generally want to rule just for themselves, so will disenfranchise most people and set up extractive economic institutions whenever they’re able. The more power elites have, the more likely they are to succeed. This is why absolutism generally leads to extractive political institutions and pluralism leads to inclusive ones. Crucially, while centralization is like absolutism in that both involve the concentration of power, the two concepts are very different. Centralization refers to whether the state has enough power and reach to implement its policies. Somalia isn’t centralized because the central government can’t actually enforce the law. However, absolutism refers to how power is distributed within the state. If a few people have a lot of power, a state is absolutist, and if a lot of people each have a little power, a state is pluralistic. Therefore, a pluralistic and centralized state is one in which many different groups all share power, but together, they have enough power to enforce the laws—laws that they agree upon.
Themes
Extractive political and extractive economic institutions feed off each other. For instance, political institutions that are extractive thrive on economic institutions that are also extractive. Similarly, those economic conditions generally can’t survive without extractive political institutions upholding them. Because of this feedback loop, extractive political and economic institutions tend to support each other over time. Moreover, when newcomers disrupt the existing elite, they have incentives to recreate an extractive system (like Porfirio Díaz in Mexico).
The idea here is that political and economic institutions tend to track together: in most societies, both are either extractive or inclusive. Extractive economic institutions support extractive political institutions because they funnel wealth to elites, which gives the elites more power and lets them further dominate the political system. For example, in the first chapter, the authors explained how Mexico’s extractive economic institutions allowed Carlos Slim to buy the government telecommunications monopoly and become a billionaire. Slim then used his billions to buy political favors and defeat legal challenges that could limit his wealth and power. Thus, extractive economic institutions gave Slim lots of money, which he used to make the political system highly extractive. The same is true in reverse: extractive political institutions uphold extractive economic institutions. If the people in power aren’t benefiting from the economic system, they will change it. However, if the majority of the population controls an inclusive political system, it will make economic institutions more inclusive, too. Simply put, both political and economic institutions impact each other, creating either inclusive or extractive cycles.
Themes
A similar feedback loop applies to inclusive institutions. Inclusive political institutions put limits on elites’ power, and this prevents them from restructuring the economy for their own benefit. Furthermore, fair economic conditions enable citizens to leverage their financial power to secure political rights. This is what the English settlers did in 17th-century Virginia, as they used their economic position to gain a political advantage. In general, inclusive and extractive institutions don’t combine well: one tends to destabilize the other.
In inclusive economic institutions, many different groups have some political power, and all will use that power to protect their economic interests. Since no group can overwhelm all the others, everyone generally agrees to recognize and protect everyone else’s property. This is why inclusive political institutions create inclusive economic institutions. They also protect them. Acemoglu and Robinson argue that leaders in inclusive systems still generally want to rule for themselves, but inclusive political institutions simply make it impossible for them to do so because they’re forced to share power. However, while Acemoglu and Robinson argue that political and economic institutions support each other, this doesn’t mean establishing inclusiveness is quite so simple. In virtually all cases, a society has to establish strong inclusive political institutions before it can create inclusive economic ones.
Themes
In the next section, entitled “Why Not Always Choose Prosperity?,” Acemoglu and Robinson ask why some societies create inclusive institutions, while most create extractive ones. Wouldn’t everyone want inclusive institutions? Not necessarily, they argue. For instance, after the Congo’s independence in 1960, President Joseph Mobutu created extractive economic institutions to enrich himself because he knew he would surely lose power if he built inclusive ones.
Acemoglu and Robinson have shown that inclusive institutions are better for practically everyone in society, so it’s clear that practically everyone would prefer them. The problem is that the only people who don’t prefer inclusive institutions are elites. The authors argue that these elites generally cling to power and prioritize their own self-interest over the interests of the rest of society. Therefore, leaders like Mobutu keep extractive institutions running for as long as they possibly can, even if this traps millions of people in poverty. The fight for inclusive institutions is essentially a class struggle by the many against the few.
Themes
All economic growth creates winners and losers—and established elites often oppose it because they stand to lose from creative destruction (the process by which new firms and technologies replace old ones). For example, both landholding aristocrats and traditional artisans protested the Industrial Revolution. In Austria-Hungary and Russia, the aristocracy actually managed to stop it, but not in Britain, where industrialization took off and spurred massive economic growth. Thus, powerful elites tend to oppose economic progress and inclusive economic institutions—and sometimes they succeed in blocking them.
Creative destruction allows innovators of any background or social class to become wealthy and powerful. Therefore, it constantly threatens the elite personally, professionally, and financially. For instance, during the Industrial Revolution, factory owners could become rich, make existing businesses obsolete, and take status and power away from the old aristocracy. It's simply safer for the elite to stop economic change and keep things as they are, if they have the power to do so. This is why extractive institutions stifle innovation and tend to persist over time.
Themes
Elites also block inclusive political institutions. They generally oppose pluralism, which promises to decrease their power. Thus, they only create pluralistic institutions when the masses force them to. Elites also usually oppose centralization because it tends to cause conflict, which threatens their status—so nations can only centralize when one group is much more powerful than all the others.
Elites resist pluralism and centralization because both decrease their power. Acemoglu and Robinson believe that inclusive political institutions are usually a prerequisite for inclusive economic institutions. It follows, then, that in virtually all economically prosperous countries, the masses have forced the elite to give up some or all of its political power at some point in the past. This has allowed inclusive political institutions to form (and has led to inclusive economic ones further down the line).
Themes
In the section “The Long Agony of the Congo,” Acemoglu and Robinson explain how extractive institutions have kept the Congo poor for centuries. In the Kingdom of Kongo in the 15th and 16th centuries, the elite grew rich through slavery and arbitrary taxes. Farmers wouldn’t invest or innovate because, if they generated any surplus, they couldn’t sell it—the king would just take it away. There were no property rights or free markets for trade, and people had no choice over their jobs. But this situation made the king and aristocracy extremely wealthy. It was possible because of the Kongo’s absolutist political system, which the king defended with his personal army. He would have lost most of his wealth and power if he passed economic reforms to enrich the population.
The Congo’s history shows why extractive institutions tend to persist over time and how they prevent economic growth. Because the king of Kongo grew rich by collecting taxes and stealing harvests from his people, he had a strong incentive to maintain extractive institutions. Meanwhile, these extractive institutions gave ordinary farmers no incentive to innovate—if they did, they were more likely to end up in trouble than get rewarded. Therefore, there was no innovation, dynamism, or change in the economy. In fact, this was what the king wanted, because change could have threatened his power.
Themes
When Belgian King Leopold II took over the Congo in the 1800s, he created an even more absolutist system with more extractive economic institutions. And after the Congo became independent in 1960, Mobutu repeated this pattern. While Mobutu extracted as much wealth as he could from the country, his state barely had centralized power over it, which led to further conflict. Today, the Democratic Republic of the Congo is still poor because of its failed economic institutions (and not its geography, culture, or leaders’ ignorance). And its economic institutions continue to fail because its political elite prefers to keep extracting wealth from the people, rather than building inclusive institutions and a centralized state.
Belgian colonial rule and Mobutu’s independent government were just as extractive as—if not worse than—the Kingdom of Kongo. But Acemoglu and Robinson suggest that this should be no surprise: when new rulers take over an extractive state (or build a new one in its place), there’s nothing to constrain their power, so they can easily build another extractive state. Thus, the Congo has suffered from a cycle of poverty for at least seven centuries. It hasn’t achieved meaningful economic growth because it hasn’t managed to break this cycle.
Themes
Finally, in the chapter’s last section, Acemoglu and Robinson note that “Growth Under Extractive Political Institutions” is sometimes possible. First, elites sometimes funnel their resources into highly productive activities—like plantation agriculture in colonial Caribbean slave societies, or industry in the Soviet Union from 1928 to the 1970s. Second, elites in extractive political institutions sometimes decide to create partially inclusive economic institutions—like South Korea’s leaders did from the 1960s until democracy was established in 1992. China is growing fast under extractive institutions today, but the Communist Party seems hesitant to let inclusive institutions form.
Extractive institutions don’t incentivize ordinary people to grow the economy, but they do incentivize elites to do it. This is because, the more the people produce, the more elites can take. Therefore, elites will sometimes reorganize the economy in ways that cause significant growth—and then capture all the fruits of that growth. This is what happened on Caribbean slave plantations and in the Soviet Union. Meanwhile, South Korea’s path to growth is unusual: its authoritarian leaders chose to make economic institutions more inclusive, rather than reaping personal benefits from extractive institutions. This is unique among the authors’ numerous case studies—usually, governments only make institutions more inclusive when they face significant pressure to do so and are left with no other options.
Themes
In all these cases, extractive political institutions have needed strong centralization in order to achieve economic growth. In general, they can’t create long-term growth or creative destruction because they don’t incentivize innovation. Moreover, extractive political institutions are generally unstable, because elite groups tend to fight over power, so the growth and centralization they achieve doesn’t tend to last. Finally, whenever it benefits them, elites can simply make economic institutions more extractive. For all these reasons, sustainable economic prosperity requires inclusive political institutions.
The distinction between short-term and long-term growth is absolutely crucial to understanding Acemoglu and Robinson’s argument. Whereas inclusive institutions create growth by driving innovation, extractive ones simply eliminate market inefficiencies faster than the market would on its own. Eliminating these inefficiencies can lead to growth, but it’s not sustainable. For instance, extractive institutions usually don’t develop new technologies, so they can’t even fully eliminate inefficient methods of production. The reason extractive systems tend not to develop new technology is that they don’t give entrepreneurs the strong property rights or equal market necessary to innovate. Therefore, extractive political institutions can catch up, but they can never pull ahead. Their growth has an inherent limit.
Themes
