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Public and

Institutional

Economics

Prepared by: Guljahan Sammakova, Aysenem Ovezgulyyeva, Aynur Jumayeva

Why Nations Fail? (by Daron Acemoglu, James

Robinson)

Chapter 3. THE MAKING OF

PROSPERITY AND POVERTY

“The Economics of the 38

th

Parallel”

Part 1

In the section “The Economics of the 38th Parallel,” Acemoglu and Robinson explain how the division of Korea in 1945 led to the Korean War in 1950. During the war, a pharmacist named Hwang Pyŏng-Wŏn stayed in the South, while his brother, a doctor, moved North. Fifty years later, when they met again, Hwang Pyŏng-Wŏn was much wealthier than his brother. He offered his brother some money and a coat, but his brother refused both—the North Korean government would confiscate them.

Today, South Korea’s living standards are similar to Spain’s, while North Korea’s are close to sub-Saharan Africa’s. But until World War Two, they were the same. After 1945, with support from the US, South Korea’s authoritarian leaders built market economies and protected private property rights. In the Soviet-backed North, Kim Il-Sung instituted a strict centrally-planned economy, banned markets and private property, and heavily restricted civil liberties.

Part 2 “Extractive and Inclusive Economic Institutions”

Acemoglu and Robinson start the

section “Extractive and Inclusive

Economic Institutions” by comparing

the way teenagers grow up in North

and South Korea.

In the North, their education is mostly propaganda and doesn’t prepare them to work or start businesses. They are forced to join the army and have virtually no economic or civil rights. In the South, education is far better, and young people know that their standard of living will rise if they start successful businesses or work hard. Unlike in the North, they can borrow money and sell their goods or services on the market.

In contrast, societies like North Korea and colonial Latin America have extractive economic institutions. Instead of protecting the majority’s economic rights, they focus on extracting wealth from that majority and shifting it to the elite.

Part 3

“Engines of

Prosperity”

In “Engines of Prosperity,” Acemoglu and Robinson expand on the benefits of inclusive economic institutions. Inclusive markets incentivize innovation, which creates the new technologies that have made life far easier and dramatically increased productivity over the last few centuries. They also promote education by giving parents the means and incentive to send their children to school. In short, to drive economic growth, institutions have to build inclusive markets, invest in education, and reward innovation.

In contrast, societies with pluralistic political institutions—which distribute power more broadly and put constraints on its exercise—tend to have inclusive economic institutions.. For example, in Somalia, power is distributed so widely that the state can’t enforce the law or establish functional economic institutions. Thus, the authors define “inclusive political institutions” as ones that are both centralized and pluralistic, whereas “extractive political institutions” don’t meet these conditions.

Extractive political and extractive economic

institutions feed off each other. For instance,

political institutions that are extractive thrive on

economic institutions that are also extractive.

Similarly, those economic conditions generally

can’t survive without extractive political

institutions upholding them. Because of this

feedback loop, extractive political and economic

institutions tend to support each other over time.

Moreover, when newcomers disrupt the existing

elite, they have incentives to recreate an

extractive system (like Porfirio Díaz in Mexico).

All economic growth creates winners and losers

—and established elites often oppose it because

they stand to lose from creative destruction

(the process by which new firms and

technologies replace old ones). For example,

both landholding aristocrats and traditional

artisans protested the Industrial Revolution.

Part 6 “The Long Agony of the Congo” In the section “The Long Agony of the Congo,” Acemoglu and Robinson explain how extractive institutions have kept the Congo poor for centuries. In the Kingdom of Congo in the 15th and 16th centuries, the elite grew rich through slavery and arbitrary taxes. Farmers wouldn’t invest or innovate There were no property rights or free markets for trade, and people had no choice over their jobs. It was possible because of the Congo's absolutist political system, which the king defended with his personal army.

Part 7

“Growth Under Extractive

Political Institutions”

Finally, in the chapter’s last section, Acemoglu and Robinson note that “Growth Under Extractive Political Institutions” is sometimes possible. First, elites sometimes funnel their resources into highly productive activities—like plantation agriculture in colonial Caribbean slave societies, or industry in the Soviet Union from 1928 to the 1970s. Second, elites in extractive political institutions sometimes decide to create partially inclusive economic institutions— like South Korea’s leaders did from the 1960s until democracy was established in 1992.

In all these cases, extractive political institutions have needed strong centralization in order to achieve economic growth. In general, they can’t create long-term growth or creative destruction because they don’t incentivize innovation. Moreover, extractive political institutions are generally unstable, because elite groups tend to fight over power, so the growth and centralization they achieve doesn’t tend to last. Finally, whenever it benefits them, elites can simply make economic institutions more extractive. For all these reasons, sustainable economic prosperity requires inclusive political institutions.