Why Nations Fail

Why Nations Fail dives into the reasons why economic inequality is so common in the world today and identifies that poor decisions of those in political power are the main reason for unfairness rather than culture, geography, climate, or any other factor.

Forget age-old theories that some countries struggle economically because of their location. There are far too many countries next to each other that have different living standards to prove this as false.

The economic landscape determines the difference between these countries. These are the regulations directing the economy within a country’s borders. This includes things such as public services, property laws, and access to financing.

A country can have either inclusive or extractive economic institutions. Inclusive economic institutions pave the way for economic success because they encourage citizens to participate in economic activities. They are strong in economic freedom.

Examples of this include South Korea and the USA, where the economy benefits from private property laws, developed banking sectors, and strong public education.  This system encourages people to work hard and be creative because they know their efforts will bring wealth.

An extractive economic institution receives income from one group in society for the benefit of another group. An example of this is colonial Latin America, which had a system built on the exploitation of indigenous people to benefit colonizers. Another example is North Korea, where the Kim family created a repressive regime that didn’t allow private property and secured all power for the select elite only.

In the mid-fourteenth century, the Black Death took almost half of Europe’s population. This was an event influential enough to overturn the sociopolitical balance of a nation or continent. Before the Black Death, most of the economic and political systems in Europe were extremely extractive. A country’s monarch owned land, and he gave his land to lords who promised to give military capabilities in return. Peasants would then take care of the land. They worked hard to make a living but paid most of what they earned in taxes and had almost no freedoms. But when the Black Death hit, there were suddenly huge shortages in labor. The peasants in Western Europe seized this opportunity to demand lower taxes and more rights. Eastern European peasants were not so lucky. They were less organized, and landowners managed to take advantage of this and started hiking taxes higher and making the system even more extractive. This is why the authors call the Black Death a critical juncture in history. For Western Europe, it spelled the end of extractive feudalism. But in the east, it grew worse. Institutional drift is the result of this difference that led to divergent paths. It’s where two similar…