Why Nations Fail: The Origins of Power, Prosperity, and Poverty review

(I read this on vacation, and enjoyed it enough to write this review out longhand!)

Why Nations Fail: The Origins of Power, Prosperity, and PovertyWhy Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoğlu
My rating: 4 of 5 stars

This book attempts to explain why there is such a huge difference in income and standards of living between countries. Its thesis is there are two kinds of economic institutions in a country: extractive, which extract incomes and wealth from one subset of society to another, and inclusive, which encourage participation for everyone and lets people make choices. There are also extractive and inclusive political systems, which correspond roughly to how democratic the system is. Extractive political systems are highly correlated with extractive economic systems, and these are the poorer countries.

A lot of the book examines particular countries and how they got the way they are. For example, because there were existing native civilizations in Mexico and Latin America when the conquistadors arrived, they were easily able to make an extractive society by taking almost all of the existing wealth and income, and even today most of these countries are still fairly extractive. In the US, there were no societies for the English to enslave (although that was roughly their plan!) so instead the settlers had to start their own development, and they weren’t willing to be enslaved. (I’m grossly oversimplifying here – the book goes into more detail)

Some interesting notes:

– One of the big reasons extractive economies don’t do as well is that they don’t allow the creative destruction of new technologies, since the rulers are getting rich off of the existing technologies.

– But, economies can still grow under extractive political systems, such as the Soviet Union from 1930-1960 (or China now). A centralized government can still allocate resources more efficiently than they were before, but not as efficiently as a free-market system. However, this can’t last, and the author predicts China’s growth will slow down unless their political system changes.

– There is both a virtuous cycle where inclusive economies/political systems tend to stay that way, and a vicious cycle where extractive economies/political systems do too. Even when extractive governments are overthrown, the framework is still there for whoever runs the country to make a lot of money and have a lot of power – this is known as the “iron law of oligarchy”, and it’s a good reason to worry about the countries that underwent the Arab Spring. Of course it’s not guaranteed to happen – Japan is a good example that broke the cycle.

– There’s an interesting contrast between Bill Gates and Carlos Slim. (the Mexican billionaire, currently the richest person in the world) Even at the height of Gates’s power, Microsoft was sued by the Department of Justice and lost, even if the penalties weren’t extremely damaging. Slim made his money by buying Telmex when it was privatized, and using its monopoly. Telmex has been found in court to have a monopoly, but Mexican law has the idea of “recurso de amparo” (“appeal for protection”), which is a petition saying the law doesn’t apply to you(!). Slim has used this effectively. An anecdote – Slim bought CompUSA in 1999 and promptly violated a contract. The other company sued and won a big judgment against him in the US.

– Random: Convicts sent to Australia were sent to Botany Bay – the name of the starship Khan was exiled on! Why did I not know this?

– There’s a section about how the US South was somewhat extractive during segregation. Alabama’s constitution has a section requiring schools to be segregated (obviously not enforced anymore), but in 2004 it survived a vote in the state legislature! Sheesh.

– Control over the media is essential for an extractive system to survive. When Fujimori ruled over Peru in the 90’s, he would bribe Supreme Court judges and politicians on the order of $5-10K per month, but he paid TV stations and newspapers millions of dollars!

Anyway, the book is quite good and I would have given it 5 stars, but it’s a bit long. (which is great if you’re trying to prove your thesis to political scientists (there are lots of case studies!) but less good for casual observers like me) If you’re at all interested in the topic I’d recommend reading at least the first 3 or 4 chapters.

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