Comment to the book “Why nations fail” by Daron Acemoglu and James Robinson

Success or failure?

The book by Acemoglu and Robinson is inspiring, eye- and mind opening, especially for those not yet familiar with the idea of institutions structuring human societies and development. The book is very rich of historical examples underlining the theory of extractive and inclusive institutions, leading to either prosperity or failure of nations. After reading the book, which is recommended, one sees the world in a different way and one becomes aware of extractive institutions nearly everywhere: Bangladeshi workers in the garment factories, the domestic workers, the agricultural laborers, children working for little or no wages, generally poverty and environmental destruction – all are the result of extractive institutions.

The problem is that the institutional theory is rather broad and every example provided by the authors can also be explained entirely by extractive institutions only – also the success of the developed and democratic nations. Another problem is that the authors cannot draw a clear line between extractive institutions and inclusive institutions. But that is not so much a problem created by the authors as it lies in the nature of institutions: Every type of institution always includes some and excludes others because institutions are specific with regards to whom the apply. What is also outstanding is the neglect to reflect on the institutions in place in the USA and other developed nations, which may have the most extractive institutions of all nations today.

Let us set up a counter-hypothesis: only extractive institutions are at play and explain economic growth – on different levels of society, by different actors, and by different numbers of actors with more or less privileges and power. The smaller the group of actors benefiting from effective extractive institutions and the greater the inequality between the rents they extract and those of the rest of society, the less likely it is that they can keep the extractive institutions in place for long. Depending on the extent of political power they have, of course. At some point redistribution of wealth from extraction will occur, either peacefully or violently.

Not only a minority of elites in developing countries set up and benefit extractive institutions. Also a majority population or entire nations can benefit from extractive institutions, for example by dictating the terms of international trade and subsidizing their agricultural sectors. America is operating under extractive institutions despite its democratic political system – or maybe because of the opportunities it creates for economically powerful elites intertwined with the political elites. Rightly the authors point to the fact that political and economic markets interplay. A look at the situation in America shows that the less economically empowered are basically politically disempowered. Those are for example the farmers forced to grow seeds provided by multinational companies or the lower income population (economically) forced to buy and eat cheap and unhealthy food produced with subsidized maize and soybeans – just those crops which are protected by patents held by the same multinationals. The food industry in America which has spread far across its borders, is an example of extractive institutions at play par excellence.

So its not enough to set up these two categories of extractive and inclusive institutions with only one measure of success: economic growth and prosperity. Just like you need to look at the multidimensionality of poverty in order to understand it better, you need to look at the entire quality of life and that of the natural environment, which is the ultimate basis for life. Rising income inequality, decreasing happiness and degrading natural environments are indicators of extractive institutions at play also in the developed world. Maybe it is just not as visible for those residing within the nations benefiting from extraction.

Both, the developed and developing nations are operating under extractive institutions. It is just more obvious when seeing poverty on the streets of Dhaka or Delhi or unimaginable riches of dictators in Africa or Russia. Who is to judge how much is enough? These are the more pressing question of today: How many people need to benefit from extraction before extractive institutions become inclusive and how extractive can we be before the earth’s life support systems collapse?