What Makes Countries Rich or Poor?

Two excellent reviews of Why Nations Fail


The essential message is simple: that there are two kinds of states: extractive and inclusive. Extractive states are locked into a vicious circle of kleptocracy, suppression of technological innovation and economic and personal freedom. Consequently, they are extremely poor. Inclusive states have no single centre of power but are innovative and prosperous thanks to the jostling of competing interests under the rule of law and secure property rights.

The reason that inclusive states are far more successful than extractive ones is the concept popularised by Joseph Schumpeter and recently misappropriated by Mitt Romney: creative destruction. Of course totalitarian societies are good at destruction – the kulaks can be liquidated. But creative destruction means challenging vested interests to develop a better way of doing things. It means replacing canals with railways, steam engines with electric, typewriters with word processors. It means that once-proud companies and sometimes whole industries go to the wall when the mode of the technology changes but the overall result is more widespread wealth.Poignantly for this reviewer, the hero of the book is England: the pioneer inclusive state.

Inclusive states virtually all stem from just two models: Britain and France. Together, they ensured that Western Europe would eventually become inclusive and British colonialism spawned inclusive states in North America and Australia. These are still pretty well the only such large states, with the exception of Japan, which began the process in the late 19th century and joined the club after the Second World War. The dirty secret of the inclusive states is that they are only inclusive at home: the authors mercilessly expose the viciously extractive economies they instituted in their colonies. One of the starkest lessons is that even when independence or revolution comes to extractive states, the new regime merely appropriates the corrupt power structure for its own ends. …

The frontrunners of the inclusive society, Britain and America, are showing worrying signs of lapsing into extractivism. Whereas a Henry Ford knew that there was no point in making cars by the thousand if people like his own workers couldn't afford them, the gap today between the very rich and the rest has widened to the point that the elite don't need incomes to be widely spread to enhance their own riches.

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And Second, from Jared Diamond (author of Guns, Germs, and Steel: The Fates of Human Societies):

My overall assessment of the authors’ argument is that inclusive institutions, while not the overwhelming determinant of prosperity that they claim, are an important factor. Perhaps they provide 50 percent of the explanation for national differences in prosperity. That’s enough to establish such institutions as one of the major forces in the modern world. Why Nations Fail offers an excellent way for any interested reader to learn about them and their consequences. Whereas most writing by academic economists is incomprehensible to the lay public, Acemoglu and Robinson have written this book so that it can be understood and enjoyed by all of us who aren’t economists.

Still curious? Buy the book. Also check out this 20 minute TED talk (below) by Nial Fergerson.