Why Nations fail ,the origins of Prosperity and Power

I almost finished reading “Why Nations fail, the origins of Power , Prosperity and Power”. It is written by Daron Acemoglu and James Robinson after 15 years of research into why some countries have prospered and some didn’t. It’s a vast and detailed book which goes through various events and junctures which shaped the current world we live in.

 The book starts of by comparing two towns which are quite nearby, Nogales in Arizona and Sonora in Mexico which is separated by border. Even though they share geography and many other attributes like culture, the living standards and average income in two places are different because they have separate systems and different institutions.

Here are some important points from the book

·         Inclusive democratic institutions create inclusive economic institutions which creates sustained economic growth. Non inclusive systems create extractive institutions that serve the interests of the few while pushing others to the brink.

·         Even though culture has a limited impact, it’s the institutions that make the countries prosper or poor . For eg South Korea which is prosperous and North Korea is poor.

·         Inclusive democratic institutions create two important engines of prosperity ie education and technology.

·         The distribution of power does not lead to inclusive institutions always, centralization of state is vital for inclusive institutions. Somalia has distributed power among various clans , but has no centralized state.

·         Industrial revolution which started in Britain in the 18 century is responsible for prosperity which we see in western countries.

·         Creative destruction, in which old ideas and ways are replaced by the new, are fostered by inclusive institutions while extractive institutions don’t encourage it.

·         Sometimes power centralized states, even though it is extractive can trigger economic growth , but will not able to sustain it since it doesn’t allow creative destruction in many areas . Soviet Union is example which grew faster than the Western Europe and US at one point, but couldn’t sustain it.

·         Economic growth under extractive regimes can cause instability because it can cause infighting because concentration of power and wealth lies in the few elite.

·         Some critical junctures plays a major role in creating pluralistic institutions, Bubonic plague or known as “black death” which hit England during 14^th century wiped out half of the population and lead to massive scarcity for labor .When labor was scarce, and laborers demanded more rights. It almost upstaged feudalism.  Thus “Black death” disrupted the existing economic and political balance of the Western Europe.

·         Glorious revolution in 1688 which limited the power of the king , lead to more inclusive institutions in Britain 

·         Some parts of world like US, Canada developed institutions which are similar to those in England but by different ways.

·         In India , caste system became a serious impediment to growth of inclusive economic institutions .

·         Two ethnic groups in Congo, Lele and Bushong whom are separated by river congo , have different levels of economic prosperity . Bushong who practiced more sophisticated farming are richer than Lele , who did basic farming.  The reason can be attributed to different institution and culture they have.

·         In 15000 BC , Ice Age ended and temperature  rose up  to 15 o degrees which enabled rapid rise in human population. Human transitioned from “hunter gathers” to sedentary life, started farming , herding  etc. The ability to deal effectively with food stocks gave an incentive for sedentary life. Natufians originated at Syria ,were first to develop a complex society which contain various social hierarchies .

·         Venice which developed inclusive institutions initially reversed it when they saw creative destruction. Venice declined after that and it thrives on tourism now.

·         In 1589 “stocking frame” knitting machine made by William Lee was denied patent by Elizabeth 1 and James 1 fearing that it will create political instability by throwing people out of work

·         In England , the drift of institutions followed by Glorious revolution and massive expansion of Atlantic trade created new class of merchants and businessmen who aggressively opposed absolutism .And this lead to more inclusive institutions in England.

·         In 1368, Ming dynasty in China monopolized overseas trade and banned private individuals from trading fearing creative destruction.

·         Mass literacy and education was result of printing press invented by Gutenberg .  There was considerable opposition to printing press in extractive and absolutist regimes like Ottoman empire ,since books spread ideas and make population harder to control.

·         In 1800, 60 percent of adult males and 40 percent women in England were literate while it was 2 to 3 percent in Ottoman empire.

·         Industrial revolution created a transformative creative juncture for the world. Societies that allowed and incentivized the citizens to invest in new technologies could grow rapidly. But many failed to do so.

·         Societies that lacked centralization in the eighteenth and nineteenth centuries couldn’t take advantage of industrial growth.

·         When earlier European trade was growing, they directly or indirectly destroyed nascent commercial and industrial activity throughout the world or they built institutions that stopped industrialization in many places.

·         In 16^th century, probably 300000 slaves were traded in the Atlantic .

·         Leaders of French revolution and subsequently Napoleon exported “revolution “  to many parts , Belgium , Netherlands , Switzerland , and some parts of Germany and Italy destroying absolutism  ,ending feudal land relations and imposing equality. Alarmed by this development, many European countries organized to attack France in 1792 to crush French revolution.

·         Pluralism creates more open systems and allows independent media , making it easier for groups who wants continuation of institutions to understand and organize against  threats to that.

·         In Briton , education became free of charge in 1891

·         Inclusive economic and political institutions do not emerge by themselves. They are often the outcome of significant conflict between elites who ran extractive institutions and those who wishing to limit their influence.

·         Inclusive institutions emerge during critical junctures such as Glorious revolution in England ,where the hold of elites are weakened by growth of opponents which  created incentives for pluralistic institutions.

·         Inclusive institutions remove egregious economic institutions such as slavery, serfdom , reduces monopolies and create dynamic economy.

·         According to political scientist Robert Bates, agriculture was so unproductive in Africa not because of geography  , it is due to pricing policies of marketing boards which removed any incentives for farmers to invest , use fertilizers or preserve the soil.

·         Vicious circle of extractive institutions are still active in many parts of Africa like Sierra Leone  even after Independence from colonial regimes.

·          In 2008, Zimbabwe’s per capita income reduced by half of what it was when the country gained independence from Britain.

·         Nations fail today because extractive institutions do not create incentive for people to save, invest and innovate.

·         Nobel Prize–winning economist Simon Kuznets once famously remarked that there were four sorts of countries: developed, underdeveloped, Japan, and Argentina

·         Communism is twentieth century form of absolutism.

·         Communist system at first generated rapid growth, then flattered and led to stagnation.

·         Botswana, an African country which was formed in 1966 was one of the poorest countries at its formation. But now it has become one of the fastest growing countries in the world and it’s per capita is almost on the same level as some successful eastern European countries like Estonia and Hungry.

·         Botswana quickly developed inclusive political and economic institutions, never experienced civil war or military intervention. It seized the critical juncture, during post-colonial independence.

·         Den Xiaoping , a very successful general during Mao’s “great leap forward “ famously said in 1976 , “No matter whether the cat is black or white, if it catches mice, it’s a good cat.”

·         Den Xiaoping was jailed in 1967 but was rehabilitated in 1974 accused of being capitalist. He carried out reforms in China , which made China more economically inclusive.

·         Why does path of institutional change differ across societies? Institutional drift , the same way genes of two isolated populations of organisms differ gradually due to genetic mutations.

·         Chinese growth is based on adoption of existing technologies and rapid investment, not based on creative destruction.

·         Chinese growth share many similarities with Soviet Union which grew faster in 50s and 60s because it forcibly allocated resources towards industry under a centralized state. But Chinese economic institutions are more inclusive than that in Soviet Union .Also China’s growth is more diversified.

·         Modernization theory maintains that all societies, as they grow, are headed toward a more modern, developed, and civilized existence, and in particular toward democracy. This theory doesn’t hold good , since Japan and Germany two of the richest nations in the first half of twentieth century , turned itself into non inclusive political systems and institutions.

·         Growth under authoritarian regimes is not sustainable .It doesn’t pay way for inclusive institutions and it is not viable.

·         The main obstacle to the adoption of policies that would reduce market failures and encourage economic growth is not the ignorance of politicians, but the incentives and constraints they face from the political and economic institutions in their societies.

·         Attempts by international institutions to engineer economic growth by hectoring poor countries into adopting better policies and institutions are not successful because they do not take place in the context of an explanation of why bad policies and institutions are there in the first place, except that the leaders of poor countries are ignorant.

·         Many politicians around the world were spending more than they were raising in tax revenue and were then forcing their central banks to make up the difference by printing money. The resulting inflation was creating instability and uncertainty.

·         In places where independent central banks resisted printing money, the result was increased government spending financed by borrowed money.

·         Institutional structure that creates market failures will also prevent implementation of interventions to improve incentives at the micro level. Attempting to engineer prosperity without confronting the root cause of the problems—extractive institutions and the politics that keeps them in place—is unlikely to bear fruit.

·         Many studies estimate that only about 10 or at most 20 percent of aid ever reaches its target. But most of the waste resulting from foreign aid is not fraud, just incompetence or even worse, simply business as usual for aid organizations.

·         The formation of a broad coalition in Brazil from of diverse social movements and organized labor rejuvenated the Brazilian economy. Since 1990 economic growth has been rapid, with the proportion of the population in poverty falling from 45 percent to 30 percent in 2006.

·         What is common among the political revolutions that successfully paved the way for more inclusive institutions and the gradual institutional changes in North America, in England in the nineteenth century, and in Botswana after independence—which also led to significant strengthening of inclusive political institutions—is that they succeeded in empowering a fairly broad cross-section of society.

·         Democracy is no guarantee that there will be pluralism. Without empowerment at the grassroots level it will not create a pluralistic distribution of political power. Instead it creates corrupt politics, patronage networks, and conflict.

·         Empowerment of society at large is difficult to coordinate and maintain without widespread information about whether there are economic and political abuses by those in power.