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

Acemoglu and Robinson undertake a thorough and detailed enquiry of the existing puzzle of economic, social and political inequality in the current world scenario. The authors make an attempt to address the fundamental problem of glaring income gaps and variation in the standards of living in various parts of the world, "why [some] nations fail" while others succeed. The answer to the puzzle is embedded in the "institutions" which shape up the overall governance in terms economic, social and political policies of a specific country. The authors present a strong case by delving in-depth in a "historically path dependent" analysis of how some nations have followed an institutional path which resulted in effective institutions that are able to render policies beneficial for the citizens. This has been further elaborated by providing stories of "success and failure" and juxtaposing "dissimilar-similar" examples, dissimilar in terms of socio-economic indicators and similar regionally and geographically, for example, Nogales, Arizona (United States) and Nogales, Sonara (Mexico) in Chapter 1, North and South Korea in Chapter 3. Linking history and the contemporary conditions authors opine that historical revolutionary turning points of a nation matter only when they succeed in altering the social structures fundamentally as happened in the case of England in 1688 and French revolution in 1789. The authors cite the example of recent revolution in Egypt (overthrowing Hosni Mubarak) where earlier revolutions (the Ottoman Empire and the end of British rule in 1952) failed to establish a new order leading to much familiar to absolutism (Mubarak's rule). Following from the previous patterns, the authors cast a shadow of doubt whether the recent revolution would result in any fundamental change in the existing socio-economic and political structures in Egypt. A historical institutional exploration of success and failure stories according to the authors is instructive in providing answers and solutions to the existing dilemma of variation in prosperity and poverty.

The book initially presents a contrasting case of the two Nogales, one which is situated in the United States in the north and the other in Mexico in the south. Despite similar geography and climate, the two have glaring differences in income and standards of living. The authors argue that these differences are embedded in the types of institutions which took shape historically in the two countries. Institutions providing incentives to the citizens for overall growth is the key for the success and failure. However, economic institutions alone cannot provide the necessary structure for development; politics and political institutions also dictate the shaping of economic institutions as is the case of United States since 1619. It is pertinent to examine the interactions between political and economic institutions. The kind of institutions which take shape is path dependent on the past forces; "different patterns of institutions today are deeply rooted in the past because once society gets organized in a particular way, this tends to persist" (p. 44). Acemoglu and Robinson, while presenting a strong case for institutional analysis, negate some popular hypotheses which attempt to provide reasons for the world inequality in terms of geography, culture, and ignorance of the rulers, resulting in poor policy choices. Some prominent examples like Asian and African economies of Malaysia, Singapore, Botswana, and China are cited to support their argument.

Why some nations fail while others succeed is highly dependent on the types of institutions which take root historically. The authors further classify and distinguish them as "inclusive and extractive" institutions. Inclusive economic institutions provide incentives to the citizens resulting in technological innovations (Thomas Edison in the United States) and increase in education. Extractive institutions, on the other hand, only concentrate on maximizing benefits to the ruling elites, providing no incentive to the citizens to participate in any economic activity or encourage technological innovations. The authors cite differences in North and South Korea, the United States, and Latin America as examples of inclusive and extractive institutions. Economic institutions are inextricably linked to...