Why Nations Fail offers an in-depth analysis of the roots of underdevelopment and economic inequality around the world.
Poverty is not an isolated phenomenon but rather the result of structural and historical factors | Cido Coelho/SBT News/AI-generated image
Vanessa Reis
October 31, 2024, at 1:45 PM
Integrity and Development is a column by the Center for Studies in Integrity and Development (CEID) of the Institute Against Corruption (INAC). This article solely reflects the author's views and does not represent the opinions of CEID and INAC. Articles are published weekly.
In recent years, the debate around including poverty in global economic policies has gained momentum, especially with the recent Nobel Prize in Economics awarded to the authors of Why Nations Fail, a work that offers an in-depth analysis of the roots of underdevelopment and economic inequalities around the world.
By examining the political and economic institutions that shape nations' destinies, they highlight that poverty is not an isolated phenomenon but the result of structural and historical factors that must be addressed in an integrated way.
In this text, I will discuss some of the theories of these renowned economists, as an invitation to rethink the path toward poverty inclusion in economic development strategies, challenging traditional approaches and proposing innovative solutions to break the cycle of exclusion that affects millions of people worldwide.
Among the main hypotheses are geographic, cultural, and ignorance-based explanations.
However, Acemoglu and Robinson, in Why Nations Fail, argue that it is economic and political institutions, rather than the factors mentioned, that explain why nations succeed or fail. Let’s analyze these main hypotheses.
Geographic Hypothesis
One of the first theories to explain inequality among nations is the geographic hypothesis, which argues that geographic location is a determining factor in a country’s development.
According to this view, tropical countries, like those in Africa and Central America, have natural disadvantages, such as the prevalence of tropical diseases and unsuitable soil for intensive agriculture, which limits economic growth.
While this explanation seems plausible, the authors refute the idea that geography is the primary factor in development.
They argue that many countries with adverse geographic conditions have prospered due to the implementation of sound economic and political institutions.
Cultural Hypothesis
Another widely discussed explanation is the cultural hypothesis, which attributes a nation’s success or failure to its traditions, values, and beliefs.
Philosopher Max Weber, for example, believed that Protestant ethics drove the Industrial Revolution in Europe.
However, the authors highlight that this theory fails to explain cases like France, a predominantly Catholic country that successfully adopted economic models similar to those of Protestant nations.
Moreover, they mention that wealthy Islamic countries, such as Saudi Arabia, lack economic diversification despite their oil wealth.
Ignorance Hypothesis
The third major theory is the ignorance hypothesis, which suggests that the leaders of poor countries simply do not know how to turn their economies into prosperous ones.
According to this view, the lack of knowledge about economics and adequate public policies is the main barrier to development.
However, Acemoglu and Robinson challenge this hypothesis, arguing that many leaders know what should be done but choose policies that preserve their own interests and privileges, even at the expense of the nation’s prosperity.
Economic Institutions: Inclusive and Extractive
The authors' central theory focuses on economic and political institutions.
They distinguish between inclusive and extractive institutions. Inclusive institutions encourage population participation in the economy, fostering innovation, entrepreneurship, and education.
They protect private property and provide equal opportunities for the majority.
Conversely, extractive institutions concentrate power and wealth in the hands of an elite, limiting opportunities for most people to progress.
Notable examples of this dichotomy can be seen in the division of North and South Korea after World War II.
Although they share the same culture and geography, South Korea’s economic success is attributed to its inclusive institutions, while North Korea’s poverty results from its extractive institutions.
Political Institutions: Inclusive and Extractive
Similarly, political institutions can be inclusive or extractive. Inclusive political institutions promote pluralistic participation and distribute power more equitably.
On the other hand, extractive institutions concentrate power in a small elite, which uses this power to enrich itself and maintain control over society.
The relationship between political and economic institutions is crucial because inclusive political institutions tend to foster inclusive economic institutions, and vice versa.
For example, economic growth is driven by "creative destruction" processes, where new technologies and companies replace older ones, but this process only occurs in societies with inclusive institutions.
Why Nations Fail Today
According to the authors, nations fail when they have extractive institutions that inhibit innovation and the creation of economic incentives.
Countries with such institutions often experience high levels of corruption, civil war, improper capital expropriation, and lack of investment in essential public services, such as education and health.
Conclusion
Why Nations Fail provides a profound analysis of the causes of nations’ prosperity and failure.
Instead of blaming geography, culture, or ignorance, Acemoglu and Robinson argue that inclusive economic and political institutions enable sustainable and equitable development.
Therefore, for nations to achieve prosperity, it is essential to adopt institutions that allow active participation of all citizens in the economy and politics, ensuring fair opportunities and appropriate incentives for growth.
*Integrity and Development is a column by the Center for Studies in Integrity and Development (CEID) of the Institute Against Corruption (INAC). This article solely reflects the author's views and does not represent the opinions of CEID and INAC. Articles are published weekly.
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