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Why Nations Fail


Why nations fail is one of the most important questions of our time when gaps of income of the world’s richest nations has become about 54 times larger than the poorest nations. It means that if the average income of a person in a poor country is $1000, it is $54,000 in a rich country.


Many economists and thinkers have been trying to answer this question for a long time. Some concluded that the income gap is because of geographic factors, natural resources, environment, climate, access to rivers, or sea shores. Other thoughts include cultural matters such as work ethics, religious values or incompatibility of a religion with democratic values, etc. Also, some suggested that nations fail because their leaders are greedy, selfish, and ignorant of history.

In their book “Why Nations Fail”, M.I.T. economist Daron Acemoglu and the Harvard political scientist James A. Robinson, argue that the key differentiator between countries is “institutions.” Nations thrive when they develop “inclusive” political and economic institutions, and they fail when those institutions become “extractive” and concentrate power and opportunity in the hands of only a few.


To progress, countries must build political and economic institutions that unleash, empower and protect the full potential of each citizen to innovate, invest and develop. It means the institutions enforce property rights and provide a leveled playing field in terms of regulations that do not prevent people from entering businesses and provide right investment in public infrastructure including healthcare and education that make it possible for a large population to participate in the economic game.


Sustainable economic growth is based on innovation, technological changes, and creative destruction. Any society that uses energy and creativity of only a small part of the society can not sustain economic growth.  


In his famous book Birth of Plenty, William Bernstein writes that the four institutes that are prerequisite for economic growth are:


    1- Secure property rights including physical and intellectual property and civil liberties for all

    2- Reason: Scientific Rationalism/method – A systematic procedure for examining and interpreting the world

    3- The Modern Capital Marketplace: A widely available and open source of funding for the development and production of new inventions

    4- Fast and efficient communications and transportation

The lessons, that the West have learned centuries ago, from both of the books that have done extensive research about why nations fail or how nations achieve sustainable economic growths are below. Pakistan must follow these steps for its very survival. Attempting to engineer prosperity without confronting the root cause of the problems—extractive institutes and the politics that keep them in place is unlikely to bear fruit.


      1- Abolish Extractive Institutes such as Feudalism: The most effective way to promote prosperity and democracy is through “English-style land reform” – the distribution of land to small farmers through secure property rights and free and open markets for lands.

      2- Separation of Religion and State in Pakistan: Pakistan must separate religion from state and treat every citizen (man or woman, poor or rich, Muslim or non-Muslim) equal, as developed countries do. Separation of religion and state is essential for intellectual freedom, elimination of religious violence, building a nation, and for scientific and economic growth.

      3- Peace Culture and not of War: Spending on a big army has been a major cause for decline for even world powers such as Spain and the Soviet Union in the past. A country moves fast toward a disaster if it spends more money on defense than on education, healthcare and other developmental programs.

      4- Rule of Law: After the structural/fundamentals problems mentioned above have been fixed, establishment of rule of law is the first thing to do. Building schools and factories is not very useful if property rights and the rule of law are ignored.


Rule of Law or law and order under a bad political system is actually used to control masses and move both power and wealth upward. The narrow elite like slave owners and feudals are able to create laws that favor them at the expense of the masses. Rule of law or justice is meaningless in a system where rules themselves are bad. So, again, a political transformation by abolishing extractive institutes such as feudalism is the key to create a first world society.


History of Nations for Inclusive/Extractive Institutions  


It’s all started in England—Magna Carta and Glorious Revolution
Rule of Law: Magana Carta (1215) was the first step for the foundation for creating a pluralistic society. It created the world’s first set of inclusive political institutions. For the first time in history, the English law was applicable to all citizens including the King. Arbitrary taxation was ceased and monopolies were abolished almost completely. In 1688, people fought for and won more political rights (Glorious revolution.) Secure political and property rights facilitated the creation of infrastructure, particularly roads, canals, and later railways, that would prove to be crucial for industrial growth. It is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution. The great inventors of the steam engine, steam locomotive, spinning frame, and revolutionary steamships were able to take up the economic opportunities generated by their ideas, were confident that their property rights would be respected, and had access to markets where their innovations could be profitably sold and used.


Freedom of Speech: It is highly significant that the English state stopped censoring the media after 1688.


Education for All: The education act of 1870 committed the government for universal education for the first time. Education was free of charge in 1891.


Feudal System in Europe
At the turn of 14th century, Europe had a feudal system in which the King granted the land to lords in exchange for the military service. The lords then allocated it to the peasants, in exchange for extensive unpaid labor. The peasants called serfs were tied to the land, unable to move elsewhere without the permission of their lord, who was not just the landlord, but also the judge, jury, and police force. It was a highly extractive system, with wealth flowing upward from the many peasants to the few lords.


The history then provided a critical juncture in the form of the Black Death in 1346 that wiped out about half the population of Europe and created shortage of labor. In the Western Europe, peasants demanded more rights and got them. Workers were free of feudal dues, fines, and regulations and were becoming a key part of a booming market economy. In the East, the feudals became bigger and more powerful and workers were involved in the economy but as coerced serfs. In 1346 (the Black Death), there were few differences between Western and Eastern Europe in terms of political and economic institutions; by 1600 they were worlds apart. Western Europe became much richer in the next few centuries. 


French Revolution
For the three centuries prior to 1789 (French Revolution), France was ruled by an absolutist monarchy. The nobility and the clergy did not pay taxes, while the rest of the citizens had to pay several different taxes. Not only was the Church exempt from taxes, but also it owned large swaths of land and could impose its own taxes on peasants. The monarch, the nobility, and the clergy enjoyed a luxurious lifestyle. The French revolution prepared not only France but also much of the rest of Europe for inclusive institutions and economic growth.


South America VS North America
When the Spanish came to South America, initially they were not able to capture and control the population in some areas as people fought back. Then they found a dense area where there was already an elite culture and a tribal king ruling the area. They were able to replace the rulers and control the population that they used as slaves.


In North America, Virginia Company of England tried to use people also like slaves to maximize its profit but people resisted and refused to work. Finally the company offered them properties to work on and pay the company taxes in return. As people did not trust the company, they demanded political rights and got them in 1619.


Therefore, while inclusive institutes were being developed in North America, the elite were able to use extractive institutes to become rich at the expense of the society in South America.

Even within the United States of America, Northern and Western States took part in the Industrial Revolution but not the South. Southern States kept slavery as long as they could. Of course, slavery and serfdom created huge profit for those who owned the slaves and controlled the serfs, but it did not create technological innovation or prosperity for the society. In 1940, Southern States had only 50% of the per capita income of the USA. By the 1990s, this difference vanished.


South Korea VS North Korea
Korea was divided in 1945 at the end of Second World War. The South Korea was then administered by the United States and North Korea was by Russia. South Korea developed inclusive institutions that distribute political power and economic opportunities with secure property rights. While North Koreas, under a dictatorship since 1947 developed extractive institutions that concentrate power and economic opportunities in the hand of a small group. By the late 1990s, in just about 50 years, South Korea’s income became about 10 times as compared to North Korea’s. Living standards and healthcare are so bad in North Korea that North Koreans can expect to live 10 years less than their cousins in South Korea. At night, North Korea is almost completely dark due to lack of electricity; South Korea is blazing with light.


In Japan, in 1869 feudalism was abolished. Spending on education and other reforms, made Japan the primary beneficiary of the Industrial Revolution in Asia. By 1890, Japan was the first Asian country to adopt a written constitution, the Diet, and an independent Judiciary. (See Japan Story for more details about Japan.)


Absolutist Control that Kept the Countries Poor


Ottoman Empire: No Printing Allowed
In 1445, Gutenberg invented the printing press based on movable type that had a profound influence on future economic growth. It quickly spread in Europe but was not allowed in the Ottoman Empire based on the suggestion of the Mullahs. The printing press was allowed after 270 years with limited and censored printing. This opposition to the printing press had the obvious consequences for literacy, education and economic success. In 1800, probably 2% to 3% of the citizens of the Ottoman Empire were literate, compared to 60% adult males and 40% adult females in England.


China: No Shipping Allowed
In 1433, Chinese ships were three times larger than European ships when the Emperor decided to ban overseas trade and then made the construction of seagoing ships illegal in 1436.

In the mid 19th century both China and Japan were poor nations, under absolutist regimes. Japan realized that it is a matter of its survival and overthrew the King in order to make dramatic changes.  China could not do it; forces pushing for institutional changes were not strong enough.

Mughals were extracting resources of India by using an absolutist regime. Then the British replaced them and did the same thing. Both regimes made themselves rich at the expense of the society.


“Separating Caesar from God is not an impossibility in the Muslim world. It has already been largely, if tenuously, accomplished in both Turkey and Malaysia,” says William Bernstein. “Beginning in the sixteenth century, Western Europe slowly began to overthrow religion as its organizing principle [separated religion from state.] If the Muslim world truly wishes to enter the modern era, it must do that. The process will require centuries, not decades or years,” he continues.


I hope Pakistani youths will draw the same conclusions as Japan did in 1853 when they saw the big black ships, abolished feudalism and provided education to every citizen. Pakistanis will also develop a culture of peace and not of war as Japan learned the hard way. The big black ships of Western wealth and power and the institutions that support them are no less visible to Pakistanis. Avoiding the disastrous fate Pakistan is headed toward is still a possibility. 




1) Why Nations Fail, by Daron Acemoglu and James A. Robinson
2) Birth of Plenty by William Bernstein