How do we make sense of the disparity between the rich and poor? Why do some nations prosper and others fail? Daron Acemoglu and James A. Robinson argue that the common explanations of geography, culture, and ignorance are all inadequate. The answer to the question of inequality is found in institutions. Some nations have political and economic institutions conducive to growth while others do not. Why Nations Fail tells us why popular hypotheses don’t work and why institutions are the true difference makers.

The first country to experience lasting economic growth was England, beginning in the mid-to-late 1700s. Technological improvements gave rise to the Industrial Revolution, which allowed industries to grow in ways unprecedented throughout human history. Shortly after, through similar mechanisms, Western European economies began to grow as well. The British success then spread to their colonies like Canada, Australia, and New Zealand. If you look at the top 30 richest countries, most of them are Western European nations and their former colonies.

The bottom 30 nations have a pattern of their own: other than a few scattered nations like Haiti and Afghanistan, the vast majority are sub-Saharan African countries. If you went back 50, 100, or even 150 years, you would find that the top and bottom lists have changed very little.

This raises questions of why Western Europe and their settlements full of Europeans grew at a rapid and mostly uninterrupted pace. Why has much of Africa and the Americas and Central Asia been rife with poverty, inequality, and failed to achieve the levels of economic success seen in Western Europe? Why have China, Japan and the Asian Tigers—Hong Kong, Singapore, South Korea, and Taiwan—begun experiencing remarkable economic upturn?

With such stark and consistent contrasts, it is surprising that researchers haven’t managed to construct a convincing theory that explains the reasons why nations fail.

The geography hypothesis maintains that people groups in temperate climates tend to be more prosperous than peoples of tropical regions. The French philosopher Montesquieu was an early proponent of this view. He argued that the heat of tropical regions makes people sluggish, lazy, and passive, rather than industrious and innovative. The political consequence of this laziness is the emergence of dictatorships. Singapore and Malaysia are both clear counterexamples to the Montesquieu thesis.

Modern variations of the geography argument point to the prevalence of tropical diseases and nutrient-deficient soils. Both of these explanations are unsatisfactory. Tropical disease is not a cause of poverty but an effect of it. It shows that governments either lack the funds or refuse to allocate them for dealing with the diseases. And the main determinant of productivity has far less to do with the soil than the system of incentives and constraints that governments put in place for farmers and landowners.

The geography argument also doesn’t make sense of cases like North and South Korea or East and West Germany during the Soviet era. The climates and locations were one and the same, but the economic outcomes have been very different in such cases. Geography also fails to make sense of why countries like China and Japan face lengthy periods of stagnation followed by bursts of rapid growth. There is halting and surging within the same countries.

Max Weber, considered by some to be the father of sociology, was a major proponent of the cultural thesis. He is perhaps best known for his Protestant work ethic idea, which connects the economic success in Northern Europe with a Protestant value system that prized thrift, industry, honesty, and delayed gratification.

Those who see values as the factor that makes or breaks nations look at Africa and Latin America as cases in point. Latin America, for example, exhibits a mañana attitude to work and obligations that leads to mediocre results at best. If they were future-oriented and hardworking, the outcomes would likely be more favorable.

While social norms are ingrained and can perpetuate harmful institutions, the common values that culture proponents cite do little to help us understand how particular nations ended up in poverty or why their poverty continues.

Cases like those of North and South Korea are problematic, too, as these cultures are wildly divergent, but it was not culture that gave rise to the differing trajectories—it was the very different political institutions put in place that have led to different outcomes.

The Protestant work ethic doesn’t make sense of the prosperity that Catholic France enjoyed shortly after Protestant England and Holland by mimicking their approach. The Weber hypothesis has a hard time explaining the economic success in the East, where Buddhism and Confucianism—not Protestantism—form the prevalent ethical frameworks. There are just too many exceptions to accept the culture hypothesis.

Popular among economists, the ignorance hypothesis suggests that rulers of poor countries have not figured out how to make their countries wealthy.

Those who favor the ignorance explanation typically begin with the assumption that without a robust market economy, which allows for the buying and selling of goods and services without interference, there will be market failures. Market failures are far more common in poor countries, and they deal poorly with such failures. By contrast, the wealthy countries are wealthy because they have adopted the economist-approved strategies for rectifying market failures.

But if ignorance were the issue, wouldn’t rulers of these failing nations quickly realize it and adjust policies? In an increasingly globalized world, it is now hard to claim ignorance. Furthermore, this theory attempts to explain why world prosperity and inequality persists, but it cannot tell us where these things come from.

Unlike the geography and culture hypotheses, the ignorance hypothesis puts forward a ready solution: an enlightened group to advise a nation about the most strategic policies. Unfortunately, prosperity is not simply a matter of engineering, as many economists seem to believe. Even if a ruler has an excellent grasp of political economy and a desire to enact policies that would benefit his nation, he will still have to navigate his country’s specific political and economic institutions, which take time to transform and will meet with significant resistance if the politician is serious about confronting systemic problems.

It was a slow, bloody trudge toward democracy in England. The rule of law was a significant step toward establishing inclusive political institutions. Rule of law means that all people—whether peasant, noble, or king—are equal under the law and punishable if found in violation of the law. The establishment of the rule of law was significant because it meant kings could not rise above the law to become tyrannical. Traditionally, kings had few constraints to negotiate, but the rule of law was an important check on their power and gave rights to average citizens.

For nations to prosper, economic and political institutions must be inclusive. When even the common man can have skin in the game, virtuous cycles can be established. The virtuous cycle will persist only if several basic pieces are in place in a society.

For one, political institutions must be pluralistic and able to resist takeover bids by the power-hungry and well-intentioned. When FDR was president, he sought to establish new norms that would have exceeded his powers as commander-in-chief. To grant FDR the dissolution of key checks and balances would have meant the consolidation of power rather than keeping power diffuse. Keeping power divided rather than concentrated is the foundation of the pluralistic institutions, and an institution’s ability to withstand and guard against breaches is a good measure of its robustness.

It’s not enough for political institutions to be inclusive, however. Economic institutions must also be inclusive. Inclusive economic institutions must do away with slavery and serfdom and limit the power of monopolies.

The third piece that is essential for the maintenance of virtuous cycles is a media that can disseminate information freely and galvanize opposition when threats to inclusive institutions crop up. Virtuous cycles lead to more equitable distribution of income and power in a society.

The more positive feedback these political and economic institutions receive, the more solidified they become. However, they are never immune to decay or collapse.

In contrast to the virtuous cycles, vicious cycles develop when political and economic institutions become extractive, meaning they benefit only a small elite who amass a large portion of the nation’s money and power. This comes at the expense of the poor and their labor.

Elites running extractive political institutions have few constraints on their power. This enables them to control industries and production, thus making economic institutions extractive, too. Inequality abounds under these conditions because there are no checks or balances to keep power and wealth evenly distributed.

These cycles can become entrenched, but, like the virtuous cycles, they are not invincible. Under conditions of upheaval and instability for elites, new structures can be ushered in.

Nations fail when political and economic institutions are not inclusive. In Latin America, Colombia and Argentina are very poor nations. In Africa, Sierra Leone and Zimbabwe are. In Asia, North Korea and Uzbekistan are poverty-stricken. These countries span a wide range of climates, cultures, colonial legacies, languages, and histories, but each has extractive political and economic institutions. In each of these countries, there is a small elite that shapes economic institutions in a way that benefits them to the exclusion of each country’s majority. The particular economic and political arrangements may differ, but the result is the same in each country: political power and wealth in the hands of a few and grinding poverty for just about everyone else.

If the problem is extractive political and economic institutions, then the solution—and the very real challenge—is for nations to develop more inclusive institutions.

Political and economic institutions in the American South were extremely extractive during the pre-Civil War era, with plantation owners comprising a small elite that grew wealthy by the sweat of the slave’s brow. However, federal-level decisions like the Emancipation Proclamation and the ratification of the Thirteenth Amendment did not end oppression of blacks. Under Jim Crow, political institutions remained markedly extractive and discriminatory, with segregated education systems, enforced preference for whites on public transportation, and literacy tests and poll taxes that effectively blocked many blacks from exercising their right to vote.

Despite extractive political institutions at state level, an alliance began to develop between blacks and the inclusive federal-level institutions. This bond limited the influence of the Southern elite that wanted to maintain the status quo. Elites began to lose influence over key economic institutions as well. Manual handpicking of crops became less and less essential to the agricultural process that was becoming increasingly mechanized by the 1950s. This development undercut the elite’s arguments that blacks were still needed for plantation labor.  

Taken together, these kinds of political and economic changes formed a critical juncture in which change was possible. The time was right to challenge faltering extractive systems and get support from alliances with inclusive institutions. The Civil Rights Movement put pressure on the institutions, insisting on more equitable policies. Supreme Court rulings like Brown v. Board of Education and federal legislation like Voting Rights Act of 1957 and the Civil Rights Act of 1967 were critical in the reshaping of institutions in the South.

It was a long and arduous, but as political and economic systems granted greater opportunity to blacks, blacks gained more political power. In some Southern states, black voting turnout was as low as 5 percent in 1960, but rose to 50 percent a decade later. A larger proportion of blacks became gainfully employed in textile mills and other industries.

As the South rejected discriminatory systems in favor of more inclusive ones, historically lagging regions of the United States began to catch up with the economic pace of the rest of the country. By the 1990s, the South had completely bridged the gap.