Why are some nations rich while others remain trapped in poverty? Why does prosperity flourish in countries like the United States, while countries like Zimbabwe or North Korea remain impoverished? Daron Acemoglu and James A. Robinson, in their influential book Why Nations Fail: The Origins of Power, Prosperity, and Poverty, argue that the answer lies not in geography, culture, or even ignorance of good policies, but in institutions. Their central thesis is simple but powerful: nations succeed when they build inclusive political and economic institutions, and they fail when power and wealth are concentrated in the hands of a few through extractive institutions.
- Inclusive institutions: These distribute power broadly, protect private property rights, uphold the rule of law, encourage innovation, and allow people to participate in economic and political life. Countries with inclusive institutions foster creativity, competition, and prosperity.
- Extractive institutions: These concentrate power in the hands of elites, who exploit the rest of society for their benefit. They discourage innovation, block “creative destruction” (new technologies replacing old ones), and keep the majority excluded.
The authors illustrate this with the striking contrast between Nogales, Arizona (USA) and Nogales, Sonora (Mexico). Though the city is geographically the same, one side thrives with good governance and opportunities, while the other suffers from corruption, weak law enforcement, and limited economic freedom. The difference is institutional, not cultural or geographical.
1. Why Geography, Culture, and Ignorance Fail as Explanations
The book dismisses three popular but misleading theories of prosperity:
- Geography Hypothesis – Some argue that tropical climates, poor soil, or disease burden explain poverty. But countries like Singapore, located in the tropics, show that prosperity is possible anywhere if institutions are right.
- Culture Hypothesis – Others say values, religion, or work ethic explain wealth. But culturally similar nations diverge when institutions differ—for example, North Korea vs. South Korea. Despite shared history and culture, the South is prosperous while the North languishes in poverty due to dictatorship and extractive rule.
- Ignorance Hypothesis – Some claim leaders simply don’t know which policies promote growth. In reality, leaders of extractive states often understand what policies could help, but deliberately avoid them because reform threatens their power. Mugabe in Zimbabwe, for instance, knew that secure property rights would encourage investment but instead seized land to enrich his supporters.
2. Historical Patterns: Path Dependence and Critical Junctures
Institutions evolve through history, often shaped by critical junctures—major shocks like wars, revolutions, or pandemics. Small differences in how societies respond to these junctures can lock them into very different long-term trajectories.
A classic example is the Black Death in 14th-century Europe. Labor shortages gave peasants in Western Europe bargaining power, leading to the collapse of feudalism and greater freedoms. In Eastern Europe, however, elites responded by tightening serfdom. Over time, Western Europe moved toward inclusive institutions, while Eastern Europe remained extractive and lagged behind.
Another major turning point was the Glorious Revolution in England (1688). It curbed the power of the monarchy and empowered Parliament, laying the foundation for secure property rights and accountability. This institutional shift paved the way for the Industrial Revolution, which transformed England into the world’s first modern economy.
3. Extractive Growth: Why It Fails
The authors acknowledge that extractive institutions can sometimes deliver rapid economic growth, especially when elites harness centralized control to mobilize resources. Examples include:
- The Soviet Union, which industrialized rapidly in the 20th century through state control and forced labor.China, which has experienced remarkable growth under an authoritarian regime.
But such growth is unsustainable. Elites resist innovation and “creative destruction” because new industries and technologies threaten their power. The Soviet Union ultimately collapsed into stagnation, and the authors warn that China may face a similar fate unless it transitions toward inclusiveness.
4. The Virtuous and Vicious Circles
Once established, institutions reinforce themselves in feedback loops:
- Virtuous circle: Inclusive institutions generate prosperity, which empowers citizens to demand more inclusiveness. For instance, the expansion of voting rights in the United States over two centuries strengthened democracy.
- Vicious circle: Extractive institutions perpetuate themselves, as elites use their wealth and power to suppress opposition. Congo, for example, has remained trapped in a cycle of exploitation since King Leopold’s rule through Mobutu’s dictatorship to present times.
Institutions can also reverse—societies once inclusive can become extractive. The book gives the example of Venice, which prospered as an open trading hub but later saw elites close access to commerce, stifling growth and causing decline.
5. Modern Implications
Today’s global inequalities are best explained by the persistence of extractive institutions. Examples include:
- North Korea vs. South Korea: the starkest institutional contrast in the modern world.
- Zimbabwe under Mugabe: rich in resources but impoverished by corruption and authoritarianism.
- The “resource curse”: oil-rich countries like Nigeria suffer because resource wealth strengthens extractive elites rather than fostering inclusiveness.
Foreign aid, the authors argue, often fails because it flows into the hands of extractive elites and reinforces their power rather than dismantling it.
6. Escaping the Trap
Despite these challenges, change is possible. The book highlights Botswana as a positive example: at independence in the 1960s, its leaders chose inclusive policies, strong property rights, and rule of law. Today, it is one of Africa’s most stable and prosperous countries.
The key to success is not copying specific policies but creating inclusive institutions that empower citizens, limit elite capture, and encourage broad participation. Critical junctures—such as regime collapses, revolutions, or external shocks—can provide opportunities for nations to shift toward inclusiveness, but success depends on whether societies seize these moments.
7. Conclusion
In essence, Why Nations Fail delivers a profound message: Nations succeed or fail depending on the inclusiveness of their political and economic institutions. Geography, culture, or ignorance cannot explain the stark global inequalities we see today. Instead, history shows that when institutions are inclusive—when they distribute power, protect rights, and encourage innovation—societies prosper. But when institutions are extractive—when elites hoard power and resist change—nations stagnate and collapse.
The book’s lesson is both sobering and hopeful: while extractive institutions are deeply entrenched, nations are not doomed. With the right leadership, citizen pressure, and historical opportunities, even failing nations can change course toward prosperity.
8. How Can an Extractive Society Become Inclusive?
A. Critical Junctures
Big shocks (wars, revolutions, epidemics, economic crises) disrupt elite control.
- Example: Black Death → in Western Europe, peasants gained power; in Eastern Europe, nobles tightened control.
- Example: World War II → destroyed Nazi/Fascist regimes, opened space for new democracies in Western Europe.
- Outcome depends on pre-existing balance of power. If non-elites already have some organization (town councils, parliaments, unions), they can seize the opportunity to push for inclusiveness. That’s why some colonies have turned into developed, some developing and others are third world setups. So the colonial legacy matters as well, what institutions are left behind/ what’s the new will of the people.
B. Broad Coalitions: change requires coalitions that unite groups with different interests against elites.
- Example: Glorious Revolution in England → merchants, gentry, and some aristocrats aligned to limit the king.
- Example: Botswana at independence → chiefs, politicians, and citizens built consensus on property rights and democracy.
Without broad coalitions, revolutions often replace one extractive elite with another (e.g., French Revolution → Napoleon, Russian Revolution → Stalin).
C. Gradual Reforms Under Pressure: Sometimes change comes not from revolution but steady reform.
- Example: U.S. civil rights movement → expanded inclusion within existing democratic institutions.
- Example: South Korea → mass protests + middle-class/business pressure forced transition from dictatorship to democracy in the 1980s.
Extractive societies can become inclusive only when critical junctures disrupt entrenched elites and organized coalitions of citizens push for broader power-sharing—and then lock it in with institutions that reinforce the virtuous circle.
9. Extractive society in face of revolution of change towards inclusive society : How past Institutions create virtuous and vicious cycle .
A. Institution at the Root of Divergence: Why North and South America Took Different Paths
Although both North and South America were colonized by Europeans, their historical trajectories diverged sharply because of the institutions established during colonization. In South America, the Spanish and Portuguese inherited centralized empires and created extractive systems like encomienda and mita that concentrated power and wealth in the hands of a few elites, excluding the masses from rights and opportunities. These extractive institutions persisted even after independence, fueling inequality and political instability. In contrast, North America had sparse indigenous populations and few easily extractable resources, forcing settlers to build communities based on farming, trade, property rights, and representative assemblies. This nurtured inclusive institutions that encouraged participation, innovation, and long-term growth. Over time, this led to the “reversal of fortune,” where the once poorer North America became far richer and more democratic than South America. One followed a virtuous loop and other followed a vicious loop post their freedom. Leading to such stark gaps .
B. Colonial Land Settlements and Their Lasting Impact on India’s Growth
During British rule, land revenue systems differed across India. The Zamindari system, introduced by Lord Cornwallis in Bengal (Permanent Settlement of 1793), later extended to Bihar, Orissa, parts of Uttar Pradesh, and Madras Presidency, placed landlords (zamindars) as intermediaries who collected revenue from peasants and paid the state a fixed amount. This often led to exploitation, as zamindars extracted high rents but invested little in agricultural improvement. In contrast, the Ryotwari system, implemented by Thomas Munro in Madras, Bombay, Assam, and parts of Karnataka, dealt directly with cultivators (ryots), making them landholders responsible for paying revenue to the state. The Mahalwari system, prevalent in Punjab, parts of Central India, and western Uttar Pradesh, recognized entire villages (mahals) or groups of cultivators as revenue-paying units. Post-independence, these legacies shaped development: Zamindari regions remained marked by rural inequality, weak peasant rights, and slower social reforms, while Ryotwari and Mahalwari regions, with greater direct stake for cultivators, saw comparatively more equitable land ownership, stronger incentives for productivity, and smoother implementation of land reforms. This divergence reflected how colonial institutions continued to influence agricultural growth, poverty, and rural politics in independent India.The colonial land revenue systems shaped who controlled land and incentives for investment. Where peasants retained stronger rights (Ryotwari, Mahalwari), inclusive institutions encouraged higher productivity, reforms, and long-term growth. Where landlords dominated (Zamindari), extractive institutions perpetuated inequality and underdevelopment, leaving a lasting scar on India’s regional growth patterns.
