Research Question: What explains the major differences in poverty and prosperity and the patterns of growth throughout the globe?

Thesis: World inequality is caused by differences in political and economic institutions. Rich countries are rich largely because they developed inclusive institutions (centralized and pluralist) at some point in the past three hundred years, while poor countries are poor because they are dominated by extraction and exclusive political institutions.

Approach: Acemoglu and Robinson take a largely linear and historical approach to explaining world inequality, with a focus on politics and political processes

Key Definitions

Extractive economy: a resource-based economy dependent on harvesting or extracting natural resources for sale or trade. Extractive economies are defined by political and economic exclusion with elites controlling a largely disproportionate amount of the extraction process.

Creative destruction: Defined by Joseph Schumpeter as a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

Chapter 2: Pages 45-69

According to Acemoglu and Robinson, there are three main theories of the causes of world inequality, all of which have some level of credence in the academic community and general public, but all of which are wrong.

The Geography Hypothesis

  • Claims that the great divide between rich and poor countries is created by geographical differences
  • Modern version of the hypothesis emphasizes that climate has an effect on productivity in two ways:
    1. Health – tropical diseases have adverse consequences for health and labour productivity
    2. Agriculture – tropical soils do not allow for productive agriculture
  • Therefore, temperate climates have a relative advantage over tropical and semitropical areas
  • Acemoglu and Robinson: The geography hypothesis cannot account for economic divergences within regions and nations (north and south Nogales, North and South Korea). Moreover, it is simply not true that the tropics have always been poorer than temperate latitudes (50).

The Culture Hypothesis

  • Relates religion, national values, and other types of beliefs and ethics to prosperity.
  • For instance, “Africans are poor because they lack a good work ethnic, still believe in witchcraft and magic, [and] resist new Western technologies” (57).
  • Acemoglu and Robinson: The culture hypothesis, like the geography hypothesis does not adequately explain major economic divergences within regions and nations – those that have shared culture and history. Moreover, the culture hypothesis tends to reverse cause and effect, in that political and economic institutions can shape culture, and not necessarily the other way around.
    • Mexicans trust government less than Americans. This cultural factor does not result in economic underdevelopment, but is a result of economic underdevelopment and a government that cannot eliminate drug cartels or maintain rule of law.

The Ignorance Hypothesis

  • Asserts that world inequality exists because we or our rulers do not know how to make poor countries rich.
  • This idea is the one held by most economists – that poor countries experience market failures and economists and policymakers alike do not know how to eliminate them. In contrast, rich countries have succeeded in eliminating these market failures.
  • Common perception that leaders of developing countries, African leaders in particular, have mistaken views of how to run their countries, resulting in gross economic mismanagement
  • Acemoglu and Robinson: Ignorance is at best a small part of world inequality (64). Authors cite example of Ghana under Nkrumah. Nkrumah had the advice of Nobel laureate Sir Arthur Lewis, yet still executed many economically irrational projects, such as an infamous failed mango canning plant, because they were politically expedient (65).
  • According to Acemoglu and Robinson, “Poor countries are poor because those in power make choices that create poverty. They get it wrong not by mistake, but on purpose” (68). The motivation can be self-enrichment, maintenance of power, or both.

Chapters 5-8: Pages 134-244

  • Chapters 5-8 of Why Nations Fail see Acemoglu and Robinson give a historical overview of successive civilizations, their economic and political institutions, and the effect of those institutions on economic growth
  • Natufians (establishing extraction) –> Mayans (conflict) –> Venetians (reversal) –> Rome (reversal & conflict)
  • They assert that institutional drift creates institutional differences, albeit small, which get amplified when they interact with critical junctures (180)
  • British Industrial Revolution of the 18th century as next main point of economic growth after Neolithic Revolution. A result of institutional drift from the fall of the Roman Empire and several critical junctures
    • Societies responded differently to the Industrial Revolution based on their existing political institutions. These differentiated responses in turn affected their levels of economic prosperity.

Conclusions:

  • There is some limited degree of economic success that can be achieved through extractive institutions. Creating such growth requires a centralized state. To centralize the state, a political revolution is often necessary (King Shyaam)
  • Growth generated by extractive institutions is very different in nature from growth created under inclusive institutions (150). It is not sustainable for two reasons:
    • Lack of creative destruction and innovation – no incentive for either elites or non-elites (183-184)
    • Reversal of centralization – incentive for conflict, war, and infighting as others fight to replace the elite. Leads to breakdown of law and order and descent into chaos
      • Ultimately, a regime based on extractive institutions will break down

Chapter 9: Pages 250-273The All-Too-Usual Institution: Slavery

Acemoglu and Robinson provide figures to demonstrate how the Atlantic Slave Trade greatly ramped up the existing slave trade in Africa, with well over 10 000 000 Africans eventually being shipped out of the continent as slaves (251).

According to Acemoglu and Robinson, the Atlantic Slave Trade initiated two adverse political processes in Africa:

  • Many polities became absolutist with the single objective of capturing and selling slaves to Europeans (extraction).
  • Constant warring and slaving destroyed any sense of order or legitimate state authority that existed in sub-Saharan Africa (reversal of centralization).
  • When slavery was abolished in England and the United States, African civilizations went from one extractive industry (slavery) to another (forced labour in ‘legitimate commerce’). Slaves were simply redeployed into exporting goods such as palm oil, peanuts, ivory, and rubber.
  • The advent of formal colonization after the Scramble for Africa only resulted in more extraction.
  • Thus, “given the extractive economic and political institutions based on the slave trade, industrialization did not spread to sub-Saharan Africa, which stagnated or even experienced economic retardation as other parts of the world were transforming their economies” (258).

Source

Acemoglu, Daron, and James A. Robinson. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown Publishers, 2012. Print.

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