Posts Tagged ‘economic institutions’

My Take on “why nations fail”

Just finished reading “Why Nations Fail”, a book written by two academics Acemoglu, a professor of economics at MIT, and Robinson a professor of political science at Harvard.

Loved the book and enjoyed reading it because it dealt with issues like inequality and its consequences. As the world is coming ever closer, no single country could be immune from another nation falling apart. The book also deals with the impressive economic success of China which has enabled China to raise the living standards of hundreds of millions of its citizens, but the authors believe it will not lead China to become a modern prosperous country until its political system becomes inclusive.

The importance of the role of government in the proper running of the economy is not controversial, anymore. Investors go where there is a strong government that protects and guarantees their returns from their investments. This has to be balanced according to the authors, by making the strong centralized governmental power inclusive.

Otherwise, the authors believe it will lead the elites to serve only their interests by using the power of the institutions, thus making the institutions “extractive institutions”. Economic stagnations and inequalities are shared by all societies regardless of their ideological persuasions. The interest of the elite is to be dominant. Therefore, the politics of dominating others by creating “extractive political institutions” is what shapes the economy. The authors argue that the only time the elites see the benefit of sharing power and inclusive institutions is when they are faced with the prospect of “revolution”.

 Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions are supported by inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order.

By referring to the writings of Alvarez, John Bruce, etc. the authors see how “absolutism” was more intense in Ethiopia, even though, similarities existed between European absolutism and the Ethiopian version. It is the conclusion of the authors, that “with absolutism came extractive economic institutions and poverty for the mass of Ethiopians”. What makes the moves toward inclusive institutions more difficult is the absence of “traditional or historical institutions that could check the power of those who would take control of the state”. There conclusion is harsh in not believing that the cycle could be broken.

While the authors have documented a detailed account of how elites have controlled their populations through clear historical examples, they seem to have skipped the role of deregulation in the economy and its resultant global economic chaos. The authors also did not mention the total control Wall Street has on the U.S. political system and its disastrous consequences on the economy and democracy. If there was a glaring example of “extractive economic institution” Wall Street would fill the bill.

The book is clear in stating that those societies that quickly adjust to new modes of technology and make the necessary changes would be able to compete globally and benefit their citizens in a wide spread manner. It seems to fail its readers by not pointing out what the economic reality in the U.S. and Europe is at the present moment and why the economic benefits only belong to a selected few. The enormous gap that exists between those that have too much, and those that have so little in the U.S. and Europe is in its historical high and can’t be sustained. This worrying fact would have been of value to have been covered by the authors.

It is a fascinating book that my colleagues need to read.

Professor Mekonen Haddis





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