Why Nations Fail

My top 20 points:

1. The authors firmly reject that the reasons nations fail are due to geography, culture, religion or ignorance.

2. Geography and culture can’t be the reason-look at adjacent regions with differing outcomes, such as Nogales (US vs Mexico), North and South Korea, West and East Germany.

3. Religion can’t be the reason- Asian successes occurred without benefit of the Protestant work ethic and Middle Eastern dysfunction is strongly related to colonization by the Ottoman Empire and European powers than to Islam.

4. Ignorance can’t be the reason- the leaders of underperforming countries know the problems of their policies but choose them on purpose since they benefit at the expense of everyone else. Also, many economists favor the ignorance hypothesis because it implies more value for the advice they provide.

5. All failed states have one thing in common and that the rule is by an elite whose focus is on maintaining and/or expanding their own interests at the expense of the rest of the population eg the traditional Spanish elite in Argentina, the Sung family in North Korea, crony capitalists in Egypt, the cotton kings of Uzbekistan.

6. Failed states lack inclusive institutions. A good example is property rights. If you know you have solid and secure property rights, you are more likely to invest and build up your business. If you fear that a person or institution may step in at any moment and take your land or business from you, why bother?

7. Spain’s and Portugal’s conquests of Mexico, Central America, and South America meant replacement of the already exploitative institutions of the indigenous peoples with similar noninclusive, extractive institutions of their own.

8. Once established, this system persisted for centuries, including within many new countries formed after independence from Spain and Portugal. Infighting of elites over the spoils led to political instability with an endless succession of coups and dysfunctional governments.

9. Dispossession and political exclusion of the general population led to slow economic growth from lack of incentives for innovation and entrepreneurship and from inability to counter the excesses of elites.

10. World inequality increased with the Industrial Revolution because only some countries had the necessary inclusive institutions to adopt the spectacular changes of its innovations and new technology. These changes started in Britain and spread to Europe, north America, Australia, and Japan, then to South Korea & Taiwan after World War II.

11. Changes failed to to spread to Sub-Saharan Africa, much of Latin America, the Middle East, and much of Asia due to the absence of favorable institutions

12. Absolutist rulers who feared economic change leading to political change actually blocked or delayed spread of the Industrial Revolution in the Ottoman Empire, Spain, Austria-Hungary, Russia, and China.

13. Absolutism was not the only barrier. Africa lacked a centralized state that couldn’t even provide the minimal law and order necessary for those institutions.

14. The Industrial Revolution started and made its biggest strides in England because of her uniquely inclusive political and economic institutions. The emergence of constitutional rule and political pluralism made possible centralized government that strengthened property rights, improved markets, undermined state-sanctioned monopolies, removed trade barriers, extended taxation to elites, limited extraction by elites & increased incentives for innovators and entrepreneurs.

15. Highlights in the evolution of the above system included the Magna Carta of 1215, the Peasant’s Revolt of 1381, political centralization beginning after 1485 by the Tudors and continuing with the Glorious Revolution of 1688, the shift of authority from the monarch to Parliament after 1688 etc.

16. Why did changes vital to economic development occur first in England & Western Europe rather than elsewhere? The Black Death of 1346 led to labor shortages and land surpluses in Europe that ended feudalism in the West. The expansion of world trade after 1600 weakened the absolute rule of Elizabeth I of England who was unable to establish monopolies. The French Revolution led to inclusive institutions that converged with those of England in Western Europe but not in Eastern Europe.

17. Institutions that encourage prosperity create positive feedback loops that prevent the efforts by elites to undermine them eg British Reform acts, Trust busting in the US.

18. Institutions that create poverty generate negative feedback loops and endure eg Collapse of Sierra Leone, Land grab in Guatemala, Oligarchy in Ethiopia.

19. But extractive regimes can produce economic growth. However they are destined to collapse. Many examples- the Natufian society in the Levant around 9500 BC, the Mayan empire from 400-800 AD and the Soviet Union in the twentieth century.  This is also why the Chinese economic juggernaut will collapse in the years to come.

20. The solution to the economic and political failure of nations today is the difficult task of transforming extractive institutions toward inclusive ones eg The rise of Brazil since the 1970s was the consequence of diverse groups of people courageously building inclusive institutions.