Why Nations Fail: The Origins of Power, Prosperity, and Poverty

Chapter 11 examines the self-reinforcing nature of inclusive institutions, demonstrating how these systems support and perpetuate themselves over time. The chapter begins with the story of the Black Act (1723) in Britain, through which the Whig government tried to suppress public protests against governmental overreach. This act was met with resistance, highlighting the principle of the rule of law and the limits of the government’s power.

The narrative then shifts to the gradual democratization of Britain in the 19th century, which was marked by a series of reforms that expanded the electorate and the rights of workers. These reforms, such as the repeal of the Corn Laws and the implementation of the Education Act, illustrate the virtuous circle in action, where inclusive political institutions foster inclusive economic institutions, and vice versa.

In the United States, the rise of monopolies and trusts in the late 19th and early 20th centuries posed challenges to inclusive institutions. The response to these challenges, such as the Sherman Antitrust Act and the progressive movement, exemplifies the virtuous circle, showing that empowered citizens and inclusive political institutions can push back against threats to inclusivity.

By contrast, attempts to establish an independent Supreme Court in Argentina ultimately failed in an environment dominated by extractive institutions. This contrast serves to highlight the importance of a broad distribution of power and a pluralistic society in sustaining inclusive institutions.

The chapter concludes by summarizing the mechanisms of the virtuous circle: Pluralistic political institutions resist power usurpation, inclusive political institutions support inclusive economic ones, and a free media promotes transparency and accountability. These mechanisms make it more likely for inclusive institutions to persist and expand, as seen in the historical trajectories of Britain and the United States. Conversely, extractive institutions can create a vicious circle, perpetuating themselves and resisting change.

Public empowerment plays a vital role in sustaining and enhancing inclusive institutions. As citizens become more empowered, either through expanded suffrage or through increased access to education and information, they become more adept at holding their leaders accountable and demanding further reforms. This empowerment is not just political but also economic, as more inclusive economic institutions distribute wealth and opportunities more broadly, reducing inequalities and creating fairer conditions. This dynamic interaction between political empowerment and economic inclusivity is central to the virtuous circle, as it ensures that the gains from inclusive institutions are not just preserved but are also built upon. The histories of both Britain and the United States exemplify this process, where each step toward greater inclusivity in one domain reinforces and is reinforced by improvement in the other, leading to a progressive and self-sustaining cycle of institutional development.

This chapter focuses on the persistence of extractive institutions through the concept of the “vicious circle,” using Sierra Leone, Guatemala, and the US South as case studies.

In Sierra Leone, British colonial rulers set up extractive institutions like the Sierra Leone Selection Trust for diamond mining and marketing boards for agricultural produce. These institutions heavily taxed local farmers. After Sierra Leone achieved independence, these institutions were not dismantled but instead were exploited further by local leaders like Siaka Stevens. Stevens, prioritizing power over economic growth, dismantled infrastructure like the railway to Mendeland, which was crucial for the region’s economy, to weaken his political opponents.

The situation in Sierra Leone reflects a common pattern in many post-colonial African nations. Leaders who replaced colonial powers often found themselves inheriting deeply entrenched extractive institutions. Rather than dismantling these structures, they frequently exploited them for personal gain and to consolidate power. This phenomenon led to a widespread cycle of poverty and underdevelopment across the continent. In addition, it often stifled innovation, discouraged foreign investment, and perpetuated social and economic inequalities. This pattern underlines the complexity of reforming extractive institutions where the legacy of colonialism and the enticements of power create formidable barriers to change. Understanding this context is crucial to grasping why many African nations, despite their rich resources, struggle to break free from poverty.

Similarly, in Guatemala, the legacy of Spanish conquest set a precedent for extractive institutions. The elite descendants of Spanish conquistadors maintained their grip on power and economic resources for centuries, using forced labor systems and monopolies. Even after Guatemala’s independence, these extractive systems persisted, with elite land grabs and labor coercion continuing to suppress economic development.

In the US South, extractive institutions persisted even after the Civil War. Despite the legal abolition of slavery, the planter elite managed to maintain economic control through systems like the Jim Crow laws. These laws perpetuated racial segregation and economic exploitation, ensuring the elite’s continued dominance and preventing the region’s economic advancement.

These case studies demonstrate the vicious circle where extractive institutions, once established, create incentives for those in power to maintain these systems for personal gain, often at the expense of broader economic development. This cycle is hard to break, as new leaders often find it more immediately beneficial to continue exploiting these systems than to reform them. The chapter highlights the resilience of extractive institutions and the challenges of transitioning to more inclusive systems.