Why Nations Fail summary

Forget grand theories that try to explain away variations in prosperity between countries. The truth is far simpler. What really matters are economic and political institutions.

A given country’s prosperity is determined by its economic institutional landscape – the systems and regulations that direct economic behavior within its borders. That landscape includes property laws, the strength of public services and access to finance.

One event more than any other shaped the medieval and early modern periods in Europe. In the mid-fourteenth century, the Black Death traveled along established trading routes from the Far East to the European continent. Almost half its population died in the plague’s devastation.

Alongside the human devastation, the ensuing economic fallout shaped Europe for centuries to come.

In the modern period, one country in particular was quick off the blocks to industrialize. England had begun the process of industrialization in the seventeenth century – and by the nineteenth, it was a global superpower.

This begs the question, why England? Well, it all came down to the country’s already existing political institutions, which gave rise to inclusive economic institutions.

Let’s continue with England as our case study. It’s no fluke that when fundamental inclusive institutions are put in place, the result is inclusive economic reform.

That’s because inclusive institutions not only stimulate economic growth; they also effectively reinforce themselves over time.

It would be quite natural to presume that intelligent leaders would always choose prosperity over poverty for their countries.

Unfortunately, political elites are actually a self-interested bunch, and this has adverse effects on development.

We’ve seen how inclusive institutions develop over time. Extractive institutions the world over are similar; historical forces not only fashion them, but effectively prolong and perpetuate them.

This can be most clearly seen in the institution of slavery and its persistent historical influence.

Generally speaking, extractive institutions emerge when leaders resist development and attempt to consolidate power instead.

But that’s just the start, since extractive political institutions are self-perpetuating.

Whichever way you square it, the Soviet Union can by no definition said to have been a country that fostered inclusive political or economic institutions.

That said, from its genesis right through to the 1970s, its success in certain spheres was unquestionable. Its society was innovative, and it sent the first cosmonaut into space. Its economy also boomed; the annual average growth rate was 6 percent between 1928 and 1960.

So far we’ve seen that sustainable growth in a society’s living standard is possible. It just needs economic and political institutions that are inclusive and pluralistic in nature.

But what does that mean for future prosperity? What can countries do if they have extractive political and economic institutions today but want to buck the trends of history?