Doran Acemoglu’s And James Robinson’s Interpretation of the Role of Economic Institutions in the Development of a Country as Depicted in Their Book, Why Nations Fail
The level of economic imbalance around the globe, in the past and today, is sincerely astonishing. Although Qatar has the highest GDP per capita in the world, with a staggering $129,700 per capita, Somalia, which is only a 3-hour flight from Qatar (“Distance from Qatar to Somalia”, 2017), has a GDP per capita of $400 (“The World Factbook – Central Intelligence Agency”, 2017). Wealthy nations provide their societies with a better life quality. The authors point out how those who have the privilege in living in these wealthy nations take everything around them for granted including the food they eat, the clothes on their body, and the roof over their heads. As can be seen with the differences in their GDP and distance, it’s easy to tell that distance isn’t the factor these differences are founded upon. But rather, the different types economic institutions the government is built upon. This paper will be exploring Daron Acemoglu and James A. Robinson’s book Why Nations Fail by analyzing their utilization of extractive and inclusive institutions throughout their work while also determining their consistency of it.
According to Acemoglu and Robinson, economic institutions are the foundation of economic development which is evident through the fact that economic institutions allow people to commerce and build their own business comfortably. Also, economic institutions generate inducements for the society so people can devote their time and money into longer lived investments, they ensure that society is upkept with the latest technology while also making sure people are being informed and educated in order to have a set of skills and knowledge, which in turn provides a better life quality. Furthermore, political institutions are the one that ascertains if economic institutions are successful in what they’re doing.
The authors of this book explain such institutions to be either extractive or inclusive. Acemoglu and Robinson states that “inclusive economic institutions are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish” (Acemoglu & Robinson, 2012). Countries with inclusive economic institutions are basically countries with a free market. Ultimately, when one wants to define economy, the most correct definition would be a nation and society making the most out of its scarce resources, which is what inclusive economic institutions seem to be doing. Countries with high GDP per capita, such as Qatar and United States, are countries that have inclusive economic institutions. When a nation has inclusive economic institutions, the political and economic say is up to the people and business’ hands rather than the economy being centrally planned and government controlled.
In contrast, extractive institutions could be stated as the opposite of inclusive institutions. According to Acemoglu and Robinson, “extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset” (Acemoglu & Robinson, 2012). A great current example of a nation with extractive institutions is Venezuela. Although previously a prominent and wealthy nation due to its oil, right now the people of Venezuela are in worries of being able to eat. Their stores are empty, the people are hungry, and the reason for all this blame is their economic and political institutions. Their economic institutions have made it so that Venezuela’s people can’t trade freely as do those who live in nations with inclusive economic institutions. Nations with extractive institutions face “scarcity, inflation, devaluation, and general rise in poverty” as Venezuela is facing right now (Nagel, 2014). While the middle class and the poor are desperately trying to find out how they will have their next meal, there are families in Venezuela who are bathing in luxury and money (Simons, 2016). Extractive institutions aren’t helpful to their general society because they don’t generate methods for their people to earn money. The elite within nations who have extractive institutions are the ones better off. Additionally, the wealthy most likely will center their life around protecting their own wealth and power even if it means the sacrifice of many, many people in the population, which is what’s happening in Venezuela thanks to their leader, Chavez. On the other hand, if Venezuela implemented inclusive institutions within their economy, they could have a form of creative destruction where the people of the society are more in touch with the rest of the world and the technologies and improvements that come along with being in touch with the rest of the world.
The book opens up with a great example showing the gravity of having inclusive economic institutions in a nation. Nogales, a city that’s both in the state of Arizona as well as in the country of Mexico, have differences between them that account solely to the fact that United States has more inclusive institutions than Mexico. The Arizona side of Nogales is a town with minimal criminal activity, a good level of education where the majority holds a high school diploma, and where the people are generally happy, whereas everything is much worse on the Mexican side of the city. An example even on a grander scale can be seen within North and South Korea. In some cases, in Korea let alone sharing the same geography and city, some people share the same family line. Although they’re from the same family, or although they spent their childhood together, those who are in South Korea are much happier than those who are in North Korea. Again, this is due to North Korea being made of extractive institutions whereas South Korea remains a country with inclusive institutions.
Throughout their work, Acemoglu and Robinson emphasizes how history plays a huge factor in whether nations have intrinsic or extractive institutions. Nations implement institutions based off on the type of institutions they have had so far, as well as the specific historical situation they happen to be in. Going back to the example given by the authors, the reason why the Arizona side of Nogales has more inclusive institutions than the Mexican side of Nogales is due to how they had different histories. In Mexico, it was the Spanish conquistadors who are responsible for building the economy. “The Spanish conquest also restricted the economy of Mexican cities and regions. Most of the economic activities initiated by the Spanish were of an extractive character. In colonial Mexico, it was these very extractive economic activities that developed cities, most of them in the Northern region” (Vazquez-Castillo, 2004). An example of the Spanish performing extractive economic activities would be how they used many natives to extract silver for them from Potosi with a mita of “low-wage and forced labor” (“From the Conquest Through Independence”, 2008).
In contrast to Mexico’s history with the Spanish conquistadors, United States, when colonized, didn’t have any gold or silver for the colonizers to become wealthy off of. In United States, there weren’t native populations as dense as those in Mexico, and ultimately, there wasn’t much of a hierarchy in regards to society. When colonizers did try to instill their own political and economic hierarchy to United States, it wouldn’t work out because those in the bottom of the hierarchy refused to be in the position they were. Thus, a new method had to be developed in order to split the land within the States which in all eventuality caused United States to have inclusive economic and political institutions which assists in economic development and economic comfort that’s focused on the majority of the people. However, due to the way Mexico was colonized, their nation focuses on satisfying those few who are more fortunate than others. It’s an economy that is more efficient than equal. They don’t care what size of the economic pie each individual gets.
After reading their work, one can understand that Acemoglu and Robinson’s reasoning on the significance of inclusive economic institutions and the important role they play in society, is powerful. However, the pros and cons of the authors’ exploration of the topic can be revealed through its relativeness to other ideologies on economic imbalance. The authors’ reasoning can be seen as a cure to the ignorance hypothesis. Additionally, the different set of examples the authors offer, with their in-depth analyses and historical facts, provide a great way in understanding inclusive and extractive economic and political institutions, and how these institutions are developed as well as their impact on the society.
As can be seen, the authors of the book Why Nations Fail, Acemoglu and Robinson, provide a coherent and consistent account of the different types of economic institutions. Inclusive and extractive institutions aren’t only spoken of in this book, but seem to be theme of it since the authors repetitively emphasize the importance of the type of institution within an economy. The reader of this book can walk away with knowing the differences between inclusive and extractive economic institutions as well as how these institutions have played certain roles in different economies since the authors also provide a look back into history. The historical realities the authors offer definitely do fit the authors’ framework. Last, but not least, by providing those historical realities and historical facts, Acemoglu and Robinson answers questions that have had their readers baffled for years. The authors successfully get across the message of why some nations are succeeding while others are failing by analyzing the institutions within those nations, and providing in-depth examples.
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