Why Nations Fail
The Origins of Power, Prosperity, and Poverty
By HUANG Guohua (黄国华)
【Editor’s Note： Why Nations Fail is an expansive book that explores the roots of national success and failure through two central concepts: inclusive and extractive institutions. Inclusive institutions—characterized by democratic transitions, free economies, and fair social distribution—foster national prosperity, while extractive institutions, often zero-sum in nature, lead to poverty, conflict, and stagnation. This core argument challenges many conclusions from Jared Diamond’s Guns, Germs, and Steel, which emphasizes geography and culture as determinants of development. Instead, Why Nations Fail argues that systems of governance define a nation’s fate. The book illustrates this theory with diverse examples: stark contrasts between the US and Mexico’s Nogales border towns, North and South Korea, and the divergent fates of China and Japan following Western intrusion. The authors warn that without adopting inclusive reforms, even rapidly developing nations like China may falter, following the paths of past powers like the Soviet Union and Nazi Germany.】
This is quite a substantial book—the main text alone reaches 489 pages. For readers who enjoy comprehensive topics related to economics, politics, history, and social development, this is undoubtedly a monumental work that can keep one engrossed day and night. But interestingly, the promotional blurb for this book states:
"The most enlightening and explanatory classic since 'Guns, Germs, and Steel.'"
Even more intriguing is that Jared Diamond, the author of Guns, Germs, and Steel, also recommends this book. On the back cover, Diamond writes:
"It should be required reading for politicians and anyone concerned with economic development. Three reasons will make you love this book: It's about income disparities among modern nations, perhaps the biggest issue facing the world today. It's filled with many fascinating stories that will let you hold forth at cocktail parties—for example, why Botswana in Africa develops rapidly while Sierra Leone does not at all. And it's a great read. Like me, you might devour it in one go, then go back to read it again and again."
However, the main arguments of this book completely overturn many of the important conclusions in Guns, Germs, and Steel (《枪炮、病菌与钢铁》). In the second part, "Ineffective Theories," the discussion directly addresses the chapters in Professor Diamond's Guns, Germs, and Steel. This book refutes Diamond's "geography hypothesis," explicitly stating that "Diamond's theory cannot explain modern global inequality" (p.77). It also contends that the "cultural hypothesis" does not help explain many aspects of today's world. Professor Diamond believes that some countries are poor due to ignorance, but this book uses many real-world examples to prove that ignorance is not the fundamental key to a nation's wealth or poverty.
Interestingly, Professor Diamond graciously accepts this book and writes words of praise, showing that not all creators in this world suffer from professional jealousy.
The fundamental theory of Why Nations Fail (《国家为什么会失败》) lies in two aspects: extractive institutions and inclusive institutions. The main reason why nations degenerate into failure and poverty is that their economic, political, and social systems adopt extractive institutions, while industrialized wealthy countries are prosperous because their national development adopts inclusive institutions. To put it simply in my own words, inclusive institutions are essentially win-win systems, while extractive institutions are zero-sum systems.
If a country's economic and political development is zero-sum, it will fall into a vicious cycle of poverty, war, and disease. The most easily identifiable extractive institution is a colonial economy. Conversely, the reason why nations are strong and prosperous with inclusive institutions, although the authors provide many examples from ancient and modern times, boils down to a few conclusions: regular and effective democratic transitions of power, a free economy, and relatively fair social distribution.
Democracy, freedom, and justice are the core values the book seeks to express. Unfortunately, in recent years, many people in Taiwan have scoffed at these values that once led Taiwan to prosperity.
The book provides many contrasting examples, such as:
1. The two border towns between the United States and Mexico are Nogales, Arizona, USA, and Nogales, Sonora, Mexico. The two towns share the same name, similar population and ethnic structures, identical climate and geographical location (only separated by a wall), and no differences in natural climate and biological resources. However, the two towns differ vastly in income, average life expectancy, medical resources, educational levels, public security, and employment opportunities.
2. The artificially divided North and South Korea—a situation everyone is familiar with.
3. Why did the development of North America and Latin America, both colonized by Europeans in the New World, differ so significantly?
4. Similarly, why do countries like China, led by elites who seized power through undemocratic or even revolutionary means and many African countries liberated from colonizers, have fundamentally irreversible developmental differences?
5. In the past, both China and Japan were weak East Asian countries, both ravaged and plundered by the powerful guns and cannons of the West, and both implemented reform policies at the same time to shake off their decline. But why did China's reforms have no effect, while Japan's Meiji Restoration transformed it into one of the world's great powers, a status it maintains to this day?
6. Why did Venice, the most prosperous European city-state seven hundred years ago, now lag far behind Western Europe, reduced to rowing boats and making ice cream for tourists?
7. Why has the Austro-Hungarian Empire, once a European power alongside Britain, become nothing more than a relic of the past?
8. Why, since the 1970s, under the wave of globalization in the industrial world, did East Asia and West Africa both try to embrace an industrial-export system, but after decades, East Asian countries have joined the ranks of newly emerging industrialized wealthy nations, while almost all of West Africa has fallen into the ranks of failed states?
For such questions and comparisons, the book provides a considerable number of examples. The authors use repeated historical data and explanations to elucidate the differences between extractive economic institutions and inclusive economic institutions, why different places and times have adopted diametrically opposed systems and the long-term impact of these two systems on most countries.
The scope covered in this book is vast; it almost recounts all the significant global developments over the past few hundred years. Reading it might be somewhat strenuous if readers lack a basic understanding or interest in modern and contemporary history. Conversely, after reading this book, whether one agrees with its arguments or not, it is indeed quite helpful for increasing one's knowledge. For example, parts that I found particularly interesting include:
1. The Black Death enabled Western Europe to smoothly transition from feudal to urban and national systems.
2. The United States, especially North America, did not follow the colonial economies of Latin America or Africa because Britain could not govern the colonies effectively, and the indigenous population in North America was too sparse for colonizers to rely on capturing slaves for survival.
3. Strong nations like Britain, America, and France could develop free-market economies because politics and commerce were separated, with hostility between businessmen and those in power—unlike in many poor countries where politicians and businessmen are almost inseparable.
4. From 1990 to 2003, Argentina pegged its currency at 1 peso = 1 U.S. dollar, resulting in long-term economic recession and hyperinflation. This proves that "the more stable the policy, the greater the risk of instability." This should serve as a warning to politicians who regard stability as the highest principle of governance.
5. Among the many failed states in southwestern Africa, there is surprisingly a stable and highly affluent country: Botswana, with a national income of $14,000 in 2011.
In the final chapter, the authors specifically mention China. China shifted from a completely extractive political and economic system (whether Chiang Kai-shek's colonial-style Kuomintang regime or Mao Zedong's totalitarian Communist regime) to introducing partial inclusive economic institutions under Deng Xiaoping's leadership. Although this brought significant economic growth to China, the authors believe that China has not implemented comprehensive, inclusive institutions, such as political pluralism, fair distribution of social resources, regular and popular transitions of power, and social liberalization. The authors cite examples of Germany from 1930 to 1945 and the Soviet Union from 1920 to 1980. Because they did not fully adopt democratic, free, fair, and pluralistic comprehensive political, economic, and social institutions, no matter how strong their growth was, they eventually became powerless—either heading toward militarism and self-destruction or disintegrating and losing their prosperity.
Of course, we in Taiwan, who have benefited 100% from Western inclusive education and institutions, should agree with what the authors say throughout the book. However, whether China will be forced into political reform or follow in the footsteps of the Soviet Union is probably not something that can be verified in the near future. In any case, I firmly believe in and adhere to the so-called inclusive institutions in this book, particularly democratic politics, a free economy, fair distribution, and social diversification.
Published in Huaxia Digest (华夏文摘) on October 21, 2024.
