1. Why Nations Fail (or why nations can succeed)

2. Preview Why nations fail politically Why nations fail economically Inclusive economic institutions Inclusive political institutions Inclusive legal institutions: rule of law Free information and communication Positive feedback: maintaining virtuous and vicious circles Ending virtuous or vicious circles Iron law of oligarchy: maintaining a vicious circle 2

3. Why nations fail politically Nations fail politically because non-inclusive political institutions prevent a large segment of the population from gaining (political and economic) power peacefully and legally,  so many remain downtrodden (and poor) until resentment boils over in violence, possibly in a violent revolution or a civil war. 3

4. Why nations fail politically Non-inclusive political institutions are the primary way non- inclusive, extractive economic institutions are created and allowed to persist.  Without elections or other inclusive political institutions, autocrats can more easily control resources and economic institutions.  And without inclusive economic institutions, autocrats can more easily control resources and political institutions.  To consolidate and enforce political power, autocrats need to control of economic resources. 4

5. Why nations fail economically Nations fail economically because non-inclusive institutions prevent a large segment of the population from escaping poverty due to social, legal or political constraints.  Constraints include “extraction” of resources from a significant minority or even a majority of people, including by 1. expropriating the fruits of one’s labor through taxes, slavery or serfdom enforced through violence and power. 2. expropriating land. 3. expropriating ideas (to earn income and profit). 4. restricting buying (to save money and to acquire useful products) and selling (to earn income and profit) through monopolies and monopsonies. 5

6. Why nations fail economically When an elite extracts resources and profits from the rest of the population or prevents the rest of the population from using resources profitably,  they sap the will and the ability to produce goods and services.  Likewise, they sap the wealth for the country, even if they enrich themselves. 6

7. Why nations fail economically Non-inclusive economic institutions do not create the incentives for people to save, invest, innovate, produce and sell.  They prevent people from producing and selling what we want.  We therefore can not produce as many products and earn as much income as we otherwise could.  Few are willing or able to produce things with value.  Production of goods and services and wealth stagnate or remain lower than what they otherwise could be.  Also, non-inclusive institutions prevent people from (legally) buying what we want/need at the least expensive price.  We therefore can not enjoy the products that we want/need.  We must pay a high price to obtain products if they are available.  We might need to spend resources (ex., bribes) to get products illegally. 7

8. Inclusive economic institutions In contrast, liberalized (free entry) economies that include or protect the property rights of the large majority.  We therefore can produce as many products and earn as much income as possible or desirable.  Most are willing or able to produce things with value.  Production of goods and services and wealth can grow quickly. 8

9. Inclusive political institutions Inclusive political institutions are based on democracy (free and fair elections).  Free and fair elections force those with political power to obey the will of a large segment of the population,  so that our interests are not ignored.  so that we do not need to resort to violence to satisfy our interests.  Those with political power are supposed to gain it peacefully and legitimately,  so that concerns about “unfairness” are reduced. 9

10. Inclusive legal institutions: rule of law Legal institutions can also be inclusive, based on the rule of law.  The rule of law creates pluralist (inclusive) political and economic institutions—more people than a small elite can be treated fairly and can keep political and economic power.  Also, the rule of law is supposed to be more objective, consistent and clear than the inconsistent, subjective will of an acutocrat.  However, judges and a jury must interpret the law.  Nonetheless, because of its penchant for consistency, the rule of law relies on the power of precedent, which adds another dimension of clarity. 10

11. Inclusive legal institutions: rule of law Rule of law implies  more equality in (political) power  more equality under the law and  more equality in the protection of property rights, economic resources more generally and other forms of economic power. 11

12. Free information and communication Freely available information and ideas and free communication can diffuse political power and economic power  because information, ideas and their communication influence political and economic behavior.  Independent sources of media diffuse the power of information, ideas and communication and therefore diffuse political and economic power.  When a single institution controls (publicly available) information, ideas and communication, it substantially influences political power and even economic power.  A free media also helps to educate people about the dangers of those who wish to consolidate political or economic power. 12

13. Positive feedback: maintaining virtuous and vicious circles Both non-inclusive, extractive institutions and inclusive institutions are subject to positive feedback (reinforcement).  When economic and political power are concentrated, a winner- take-all situation exists.  An elite could win and consolidate that power if they could just defeat the current regime through a coup.  Non-inclusive institutions create a bigger stake for the winner.  When economic and political power are diffuse,  there is less to gain in a single coup or in a short time.  acquiring the benefits of political or economic power is more time- consuming, costly and difficult. 13

14. Ending virtuous or vicious circles However, establishing and maintaining inclusive political and economic institutions is not easy. “Virtuous circles” can be challenged from within and without.  Coup d’etats can replace democratic governments.  Strong executives and the military can usurp power from legislatures and judiciaries.  See Argentina, the US and other countries.  All forms of government can be tempted by corruption.  Democratic or revolutionary leaders (who might have replaced autocrats) can become autocratic themselves. 14

15. Ending virtuous or vicious circles On the other hand, violence, revolutions and civil wars have sometimes led to the creation of more inclusive political and economic institutions:  England in 1688, France in 1789, the US in 1789 and 1861,  although at the time it was far from certain that institutions would become “inclusive” and the inclusiveness was far from perfect.  Expanded trade and improved agriculture and transportation meant that economic power was changing and becoming more dispersed among merchants, manufacturers, craftsmen and farmers.  Because of this dispersion of economic power, demand for shared political power and legal rights also arose. 15

16. Ending virtuous or vicious circles  A revolution that includes many people with various (somewhat conflicting) interests can make inclusive political and economic institutions more likely,  instead of re-consolidation of power by a new cabal of leaders.  Foreign-imposed violence (in Germany, Japan) have sometimes made societies more inclusive, but sometimes not (in Afghanistan?). 16

17. Iron law of oligarchy: maintaining a vicious circle But ending non-inclusive political and economic institutions is not easy either. In an attempt “to break” a vicious circle, civil wars and revolutions can overthrow the old order and allow a country to establish inclusive economic and political institutions.  But instead they may simply replace old institutions with newly named non-inclusive institutions as the old elite is replaced by a new elite, usually violently.  Names and party affiliations may change; habits and practices rarely do.  This continuation of repression by a new boss or party has been called the “iron law of oligarchy”. 17

18. Iron law of oligarchy: maintaining a vicious circle In Sierra Leone, Ethiopia, the DR Congo, Zimbabwe and other countries,  revolutions and independence movements did not create more inclusive institutions but perpetuated (or exacerbated) extractive economic institutions and the consolidation of political power.  In these societies, merchants, businessmen and other entrepreneurs and other needing the enforcement of property rights were not economically prominent and were locked out of the political process. But sometimes revolutions initially had broad support: Mexico, Russia, Spain, China, North Korea, Libya, Iran,…  but soon the new regime became as bad as or worse than the old regime. 18

19. Iron law of oligarchy: maintaining a vicious circle How can we understand those who come to power in the name of radical change re-creating the same abuse of power? There is no easy answer, but perhaps it has something to do with human nature:  greed, lust for power, the inability to fully see one’s own faults and the desire to punish those who have different desires and agendas. 19

20. Iron law of oligarchy: maintaining a vicious circle Also, because inclusive institutions are not yet established and they can not be easily created from scratch during times of revolution (or any other time) to restrain the new masters and  because (new) masters rarely like to voluntarily restrain themselves,  the new masters soon face temptations and “necessities” to consolidate the political and economic power of the old regime. 20

21. Iron law of oligarchy: maintaining a vicious circle Moreover, some violence by the state is often necessary to avoid violence by others and to enforce social order and “efficiency”.  Without police or the military, a civil society can quickly devolve into anarchy as we saw in Argentina and other countries during leftist rebellions of the 1910s-1920s and 1960s-1970s.  Violence and counter-violence in Colombia, and more recently, Libya and Syria are also examples.  In Colombia, protests and attacks by leftists led to retribution by rightist forces in the military or paramilitaries, and the violence quickly escalated into civil war.  Even rich, stable countries today like the US, UK, France, Germany and Japan have had long histories of violence and non- inclusive institutions. 21