Wednesday, July 23, 2014

Book Review: Why Nations Fail

This book is about inequality and why few nations prosper and others remain in poverty. The main thesis of the authors is that ‘nations fail because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate’. And the nations which had inclusive economic institutions prospered.

Authors define inclusive economic institutions as those help in maintain law and order, secure property rights, provide public services and regulation for markets, open to relatively free entry of new businesses, and opportunity for the great majority of citizens. And these economic institutions need to be supported by political institutions which allow broader participation of public in economic growth and place constraints and checks on politicians and rule of law.

If growth comes with inclusive institutions, why there are fewer nations which have such a system and why are extractive institutions so prevalent throughout history and even today? Authors present case studies from history to evaluate the reasons and find that it is the political power concentrated in fewer hands and their fear of losing it out is the major barrier against the emergence of inclusive institutions. Consequently, even though growth is possible under extractive institutions, this will not be sustained growth. But history is not destiny. Political revolutions and civil wars, if they are successful, will lead to reforms aiding inclusive growth bringing prosperity for the nation.

This is a well written book on recent world economic history. While you understand why nations fail reading this intriguing book, you will also know the reasons for prosperity. And that inequality is not a problem which will go away on its own.