Thoughts on Why Nations Fail

Got this as a book rec.

I thought that there were some really interesting, powerful and important ideas tied up in the book, but felt a bit too heavy with examples for me. The authors dove into many different countries’ political systems and histories to show the point they wanted to make, even though I felt like I got the point pretty quick.

For someone reading it, if you’re interested in the specific countries at hand, then the reading would be interesting. If you’re interested in ideas, then when things feel repetitive you could probably skip around.

Gist

Why Nations Fail talks about why certain nations around the world have succeeded from an economic and equality perspective while others have done worse.

The authors do not dive too deeply into what success for a nation means, but, rather, look at countries where people have more rights and the economy is clicking better compared to countries with political instability, inequality and economic issues.

They look at how this has happened for certain nations, primarily from a political and historical perspective.

As someone that is developing an interest in these economic/political differences in certain nations, especially as a function of where things are going to be headed in the future, I found the information and knowledge in this book to be very useful. Much of it is logical and intuitive, but still things I hadn’t thought about before under such a succinct framework.

Main ideas

Extractive vs. inclusive institutions

The authors divide countries into ‘extractive institutions’ and ‘inclusive institutions.’

They define extractive institutions as countries where the economic and political systems are set up to extract resources from the inhabitants.

Inclusive institutions, on the contrary, open the door for anybody to gain wealth and take advantage of their own hard work and creativity.

Extractive institutions

Extractive institutions are so problematic because they often mean that there is an elite group extracting resources from the countries’ inhabitants. For example, an elite that forces citizens to work on fields to make coffee beans, then takes 95% of the profits for themselves to live extremely privileged lives.

There are people at the top extracting the resources for themselves and not sharing.

In these types of institutions, there is often little incentive to work extra hard or innovate. Let’s say the government expects its inhabitants to produce 100 coffee beans each day and pays them the same low salary no matter what, as long as they hit 100.

Then, whether I produce 100 coffee beans or 200, I’m going to be earning about the same. They will just take all my extras. Or, maybe the government will pay for the extras, but a very marginal amount that makes the additional labor not worth it.

The reason that exclusive governments are nervous about the economic well-being of its citizens is that economic power eventually turns in political power. When people have more money, they can better rally citizens, plus more money in my hands means less money in the hands of the ruler.

Because of this, many exclusive governments fear innovation. If I come up with a new idea to boost coffee bean production, I am not going to reap the rewards of that benefit because the government will be nervous about what its use would mean for the economy and their own power.

Inclusive Institutions

You could guess what an inclusive institution looks like on the other hand. People can gain wealth and economic power. There are incentives to innovate, people can fairly work for their wages, there are many political rights and decisions at the top are decentralized. There tends to be no singular person calling all of the shots, which helps support the political needs of the citizens as they have more representation.

Loops

One of the most challenging (or rewarding) parts of this process is that once you get into an exclusive or inclusive institution, there are positive feedback loops that make it very hard to get out.

In exclusive intitutions, even if the person at the top decides to help those in the country and incresae human rights, it is likely that others in power (rich private business owners or others in government) will prevent those steps from being taken to help themselves.

There were many examples of revolutions as well of exclusive institutions that ended up in the same turmoil as before the overthrowing.

At least, the same can be said for inclusive institutions. Once there is freedom of press and balances of power, it is challenging to take human rights away. There will be upcry, people fighting for those rights, and, often, enough power behind those efforts to prevent drastic changes.

Overall

There were other ideas explored in the book as well, including a few thoughts about how to try and get past these exclusive economic institutions, but my big takeaway from that part was how challenging it really is.

Book sparked more interest in political and economic institutions for me, and makes me think they are extremely important, especially as they are going to begin to interact more and more with the changes that technology is bringing to the world.

Thoughts on this review/the book in general? Comment or send me a note :)

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