Why is Good Governance so Hard?

Inclusion leads to success. Extraction leads to failure. Human nature is flawed. Without strong guardrails and protections for freedom, the natural human greed and hubris of leaders frequently lead to corruption, then extraction, then inevitable failure of a nation.

Note to the reader. While I hope this book review is accurate concerning the book, I have added some additional facts and comments. These are identified by the notation [Reviewer addition].

In the book Why Nations Fail (2012), authors Daron Acemoglu and James A. Robinson tackle the question “Why Do Nations Fail?” Note the peculiar assumption here, that nations normally succeed. Historically, that assumption might be difficult to validate.

If you have read books like More from Less, Productivity, Birth of Plenty, or even Wealth of Nations, perhaps you have wondered why good state governance is so hard. Some nations achieve the nirvana of a strong democracy coupled with a vibrant free market and productive capitalist economy while other nations simply descend into the old familiar swamp of corrupt dictators leading an oligarchy of disreputable kleptocrats.

In this book, the authors attempt to answer that question. The authors define two types of institutions, extractive and inclusive, to explain what causes the success or failure of nations. These two terms provide the foundational premise for the entire book. Institutions can be political, economic, educational, or even religious. They are simply the institutions that control the state.

The authors define politics as ” the process by which a society chooses the rules that will govern it.” In reading this book, and even in reading this review, remember that politics is not used as a pejorative word, but simply identifies a process.

The fundamental premise of the book is:

Politics, the choice of either inclusive or extractive institutions, determines the path of the state toward success or failure.

Extractive institutions simply extract the wealth of the country for the benefit of the ruling class, which is almost always less than 1% of the population, often only a few thousand, or even a few hundred. A predominance of extractive institutions always leads to a failed state.

The authors use the word “institutions” to include all structures used by the ruling class to maintain its control. Military, internal security, and police forces are almost always established or subverted to support the ruling class. Economic actors, primarily businesses, are established as monopolies to subvert them into extractive institutions. Legislatures, courts, and local authorities are also bought, controlled by, and subverted into the ruling class of extractive institutions. Frequently religious and, more recently, educational institutions have been manipulated into support of extractive institutions, even becoming extractive institutions themselves.

Inclusive institutions are pretty much the polar opposite of extractive institutions. Inclusive institutions are more open, transparent, less hierarchical, and with much more individual freedom of action. More democratic and capitalist.

With less hierarchy and more mobility, inclusive institutions become more diverse. Note here that diversity is not a hard goal of inclusive institutions, but more of an inexorable outcome.

[Reviewer addition] But the most stunning and fundamental difference between extractive and inclusive institutions is this:

  • Extractive institutions do not create wealth, but simply extract wealth from the state into the pockets of the ruling class, making everybody else much poorer.
  • Inclusive institutions actually create wealth, making everybody richer.

How do inclusive institutions create wealth? This is a large topic and a considerable digression from the book, so here is one viewpoint, without any supporting discussion.

Value, which is related to wealth but not the same, is created by the imaginaiton, energy, industry, and persistence of an individual, often working in a team. For example, a good writer can create value through a good book. A good book promoter can create additional value by promoting the book to many people.

Value creators amass wealth by sharing value with many people and collecting a portion of the wealth created for themselves. By working together, the author and promoter each create and amass more wealth than either one could achieve individually. In complex societies, value creators working together can create substantially more value and amass much more wealth than a person working individually.

The more freedom individuals have to think and create and work together voluntarily, the more value is created and wealth amassed. Every person can create value and amass wealth, some more some less; the amount of value depends directly on the freedom and ability of each individual to think and act. the amount of wealth depends upon how widely and effectively the value is shared. Inclusive institutions give freedom of thought and action to many more people than extractive institutions, so inclusive institutions create more value , enabling more individuls to amass more wealthexponentially more wealth.

The authors do not differentiate between governing institutions and economic institutions or systems. For them, monopolies are just more extractive institutions, while free markets and capitalism are simply the outgrowths of inclusive institutions that eventually grow strong enough to become inclusive institutions in their own rights.

Reality is seldom binary, usually a very mixed muddle. Almost all states include a mixture of extractive and inclusive institutions. In failed states, the extractive institutions dominate to the exclusion of almost all inclusive institutions, while successful states have some mix of inclusive and extractive institutions, with inclusive institutions predominant.

Conditions for Extractive Institutions to Grow

The Spanish explorers of the New World created extractive economies everywhere they landed in South America and southern North America. In fairness to them, they were only recreating the extractive institutions that King Ferdinand and Queen Isabella operated back in Spain. In fact, the Spanish royalty exacted a tax of 20%, the “royal fifth,” on all wealth extracted from the New World.

Extractive institutions, which lead to a failed state, require two conditions to grow:

  • Wealth to extract
  • Weak pluralistic institutions

Wealth to Extract – First Condition for Extractive Institutions

Gold and silver such as found in South America and Mexico are obvious targets for extractive institutions. They have a high ratio of value to weight and can be melted into ingots for easy transportation. Other targets for extractive institutions include diamonds (think DeBeers in South Africa) and coal, gas, and oil into the present day. Even humans can be a target resource for extractive institutions. Throughout history, the victors in wars have often captured and sold the defeated peoples as slaves.

In recent centuries extractive institutions in Africa sold and exported over 40 million people as slaves. In many of these states, the colonial overseers operated the slavery markets, but in some states, the local and regional chiefs simply chose the path of personal wealth through extraction. Of course, the slavery business required willing buyers, which many countries including Europe and the United States happily provided.

Bluntly, extractive institutions do not create wealth, but simply extract it for the benefit of the ruling class. Examples are so common as to be uninteresting, but a few, both historical and modern-day, do stand out, if only for their insatiable greed and incredibly destructive power. Hurricanes and earthquakes are insignificant compared to the death and destruction caused by extractive institutions. A few examples:

[Reviewer addition] Venezuela, only 30 years ago, was the richest country in South America, and a democracy with a growing economy based on mostly free markets and capitalism. Today, after 20 years of destruction under the extractive institutions set up by Chavez (2002-2013) and continued by Maduro (2013-to date), Venezuela is collapsing into a failed state as shown in these statistics.

Metric20142021% Change
Oil Production (K bpd)2,400500-80%
GDP (USD)$ 482 B$ 284 B-41%
Population (millions)3028.4-5%
Inflation (annual)56%2,358%Yikes

Russia has had perennial problems with governance since Peter the Great concentrated all power to himself as the tsar. His ruling class never exceeded 1% of the population, yet captured 95% of the country’s wealth. Things got no better under the Communists, who simply captured the ruling beaurocracy, renamed it, and continued to extract the wealth.

[Reviewer addition] Stalin demonstrated the destructive power of his extractive institutions by relocating the entire Cossack peasantry to other locations, destroying them as a people, and then starving them, killing over 20 million from starvation alone. In fact, Stalin ranks as the second greatest killer in history, killing more than Hitler and second only to Mao Zedong.

[Reviewer addition] Today, Russia is now a Potemkin Village of democracy, in fact, a kleptocracy. Under Putin, a new ruling class, this time big-business oligarchs rather than landowners and nobles, captured the state beaurocracy once again, pasted on a facade of democratic structures, and proceeded to extract the wealth from the new resource – oil. Putin now presides over a declining economy (-35% since the peak in 2013) and a declining population (-3% since the peak in 1990).

Guatemala was run by the Mayans, who set up extractive institutions well before the Spanish conquistadores. Droughts caused a partial collapse of the Mayan civilization before the Spanish Conquistadores arrived. They killed the remaining Mayan ruling class, continued extracting the gold and silver, and set up extractive institutions to run the country for their personal benefit.

Guatemala demonstrates the amazing persistence of extractive institutions and their ruling classes. Like weeds, you just can’t kill ‘em. In January 1993, Ramiro de Leon Carpio took over as President of Guatemala. He, his minister of finance and his minister of development, were all descendants of Spanish conquistadores who came to Guatemala in the 1530s. The ancestors of this illustrious trio were Juan de Leon Cardona and Bernal Diaz de Castillo who received governing and land grants from the Spanish king and founded ruling dynasties in Guatemala. Their extractive ruling dynasties were so enduring that today, only 48 families, all intermarried and all descendants of conquistadores, still rule Guatemala. This is just one more example, though a striking one, of how ruling dynasties capture the extractive institutions and resist every attempt at removal or power-sharing.

North Korea, Cuba, East Germany, the eastern bloc countries under the USSR, some African countries, and middle eastern oil oligarchies round out the list of extractive institutions that controlled or still control countries today.

Weak Pluralistic Institutions – Second Condition for Extractive Institutions

Pluralistic institutions, i.e., vibrant democracies, can resist attacks by extractive institutions and groups (juntas, cabals, etc.). One challenge is that pluralistic institutions require a high degree of centralization together with the considerable distribution of power to many different groups and even individuals.

Extractive institutions are, by definition, also highly centralized. So the precondition of centralized power provides the foundation for both pluralistic and extractive institutions. Therein lies a rub, and one of the central challenges for states desiring to develop inclusive institutions.

History Lessons – Chapters 4-12

The authors spend many chapters, about 50% of the entire book, reviewing history from their viewpoint of the governing institutions. The history lessons, starting with the Roman republic and working through the development of the British Empire, colonialism in Africa, and the French Revolutions, are well written and entertaining. However, they do not provide any clear pattern of how and why some nations develop inclusive institutions and others don’t.

If anything, the history lessons are almost too easy and obvious. North vs. South Korea, East vs. West Germany, Cuba vs. other Caribbean nations, Venezuela before and after Chavez, The United States vs. the Confederacy, and the list goes on. And yet, we continue to ignore the lessons of history.

[Reviewer addition] A recent example of failure to learn historical lessons in the US is the desire to tax wealth instead of income. Setting aside any discussion of the morality of taxing wealth, it just does not work. France and Sweden instituted wealth taxes less than 30 years ago. Rather than increasing tax revenue as expected, both tax revenue and GDP declined in both countries because wealthy people simply left. Thus France and Sweden lost not only the wealth of these rich people but also their energy and ongoing income taxes.

Why Nations Fail, and Sometimes Succeed – Chapters 13-15

If you want just the answers, then read chapters 13-15 of the book:

  • Chapter 13: Why Nations Fail Today – Institutions, Institutions, Institutions
  • Chapter 14: Breaking the Mold – How a few countries changed their economic trajectory by changing their institutions.
  • Chapter 15: Understanding Prosperity and Poverty – How the world could have been different and how understanding this can explain why most attempts to conbat poverty have failed.

The authors finally attempt to answer this fundamental question on page 372 (in my Kindle copy):

Nations fail today because their extractive economic institutions to not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these (extractive) economic institutions by cementing the power of those who benefit from the extraction.

[Reviewer Addition] Nations fail economically because extractive institutions drive a vicious circle that weakens, then destroys inclusive institutions. The inevitable result is the loss of freedom, opportunity, transparency, diversity, national wealth. People begin to flee and the nation descends into a failed state. Often the nation becomes a literal jail, with walls to keep the prisoners locked inside, and armed guards to shoot anyone desperate enough to climb over the wall.

Inevitably, as the authors point out, these destructive institutions eventually destroy themselves in a catastrophic economic collapse. Rome was perhaps the largest and most visible. Ancient Greece, Egypt under the pharaohs, the Venetian empire, and the Ottoman empire all suffered catastrophic economic collapse. In recent history, Venezuela is the poster child for an economic collapse, along with the USSR and the eastern bloc countries a few decades ago. North Korea and Cuba, both failed countries, have limped along as failed states for decades.

In the authors’ words, the cause of extractive institutions in the 20th Century has been communism, the “new absolutism.”

The Communist economic institutions spawned more extractive political institutions, concentrating all power in the hands of Communist parties and providing no constraints on the exercise of this power. Though these were different extractive institutions in form, they had similar effects on the livelihoods of the people as the extractive institutions in Zimbabwe and Sierra Leone.

[Reviewer addition] China under Mao deserves special mention because of the scope of Mao’s destruction. With the Long March, the Great Leaps Forward, and the Cultural Revolution, Mao’s policies killed approximately 30-45 million Chinese people, thus making him the greatest mass murderer in history.

[Reviewer addition] Pol Pot, the leader of the Marxist Khmer Rouge, also deserves a special mention in the communist Hall of Shame. Pol Pot attempted to take the entire country of Cambodia back to the dark ages of subsistence farming, which was his vision of a communist agrarian utopia. Between 1975-1979 he and his Khmer Rouge killed two million Cambodians. It may be a small number compared to deaths caused by Mao, Stalin, and Hitler, but the entire population of Cambodia in 1975 was only 7.5 million. He and his Khmer Rouge exterminated almost 30% of the entire country.

Small Glimmers of Hope

How can we break the vicious circle caused by extractive institutions? Even better, how can we encourage and grow inclusive institutions while simultaneously shrinking and eliminating extractive institutions?

The authors use the examples of Botswana, early civil rights in the southern US, and China after the Great Leap Forward to illustrate turning points in the development of specific nations. Before the Civil War, the southern US had developed an extractive agricultural industry based on slave labor. The Civil War ended slavery but did not offer an alternative to the extractive agricultural industry and culture. Thus, the south limped along as essentially a failed region for another century, until manufacturing began to expand there in the 1950s.

inclusive institutions such as Supreme Court rulings against discrimination, federal legislation for civil rights, and the civil rights movement all coincided with the emergence of inclusive economic institutions. The result was a profound shift from extractive to inclusive institutions throughout the nation, but especially in the south. That shift is still ongoing today.

For China, the inflection point was much sharper. Mao Zedong and the Communist party rapidly took control of China after World War II. Under Mao, the Communist Party became the ultimate extractive institution, controlling everything, even down to the number of children allowed, only one per family. The Great Leap Forward and Cultural Revolution created massive destruction, killing between 20-45 million Chinese and destroying the agricultural subsistence farming that was the core of Chinese life at the time.

This crisis created the opportunity for Deng Xiaoping, a successful general during the revolution to lead a very modest change back toward very modest economic inclusivity:

Deng argued, “No matter whether the cat isblack or white, if it catches mice it is a good cat.” It did not matter whether policies appeared communist or not, China needed policiesthatwould encourage production so that it could feed its people.

The authors demonstrate that change from the vicious circle of extractive institutions is possible, given a critical juncture.

History is not destiny. Despite the vicious circle, extractive institutions can be replaced by inclusive ones. But it is neither automatic nor easy. A confluence of factors, in particular critical juncture coupled with a broad coalition of those pushing for reform or other propitious existing institutions, is often necessary for a nation to make strides toward more inclusive institutions. In addition, some luck is key.

Predictions are Difficult, Especially about the Future

-Casey Stengal

In the final chapter, the authors consider the predictive power of their framework of inclusive vs. extractive institutions. They acknowledge some of the difficulties of predictions, especially about the lifecycle of nations. Historical trajectory matters. But small differences, contingencies, and timing can make outsize differences in trajectories.

Ultimately the authors offer little concrete guidance as to either predictions or how to encourage the growth of inclusive institutions. Powerful analysis, with a fatalistic view of the future.

Human Nature Does not Change

[Reviewer addition] This entire section is my addition and opinion.

Change is slow, with significant hysteresis. Creative destruction, a critical factor in capitalism identified by Joseph Schumpeter, is required for growth. Creative destruction is changing, and existing institutions and rulers, whether in extractive or inclusive institutions always resist change. Why? Because the ruling actors of any nation-state, no matter how ephemeral, want to remain as rulers. Dictators and oligarchs want to remain in power and rich. Elected officials want to remain in power and rich. Unelected bureaucrats want to remain in power, and get richer. Hence the resistance to change.

This is my fundamental disagreement with a delightful book and a considerable effort by the authors. Human nature does not change. To repeat the famous statement by John Dalberg, “Power tends to corrupt, and absolute power corrupts absolutely.” The authors simply fail to acknowledge the power of human nature as it affects the trajectory of nation-states.

This fundamental understanding of human nature is only one of the many insights of the authors of the Constitution of the United States. These founders intentionally and specifically created numerous checks and balances against the institutions of governance: States vs. federal government, federal Senate with equal representation and longer terms vs. federal House with short terms and proportional representation, and three branches of the federal government, each with specific powers to check the other two branches.

Benjamin Franklin perhaps phrased it best when asked after the Constitutional Convention, “What kind of government do we have?” He responded, “A republic if you can keep it.”

Thomas Jefferson defined the cost of the republic, “The price of liberty is eternal vigilance.” He also identified the threat: “The greatest danger to American freedom is a government that ignores the Constitution.”

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