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

Why exactly do nations fail? A friend recommended Why Nations Fail to me after hearing the authors shared a Nobel Prize for their work, and the question stuck with me before I even cracked it open.

Before reading, a lot of possible theories come to mind. Maybe certain countries have better natural resources than others? Or maybe it has to do with a country’s geography? Could it be religion? Or could it just come down to a country’s culture and history?

I had thought about all of these potential hypotheses before this book. But early into reading, the authors point out that there are flaws with almost all of them. There are several places in the world where you can cross a border and the quality of life drastically changes. That rules out theories like natural resources or geography. There are places with a drastically different quality of life that share the same dominant religion. Another theory ruled out! North and South Korea are made up of the same people with the same culture and the same history, yet one side is among the poorest places on earth and the other is among the richest. So why do nations fail?

In engineering grad school, I spent a lot of time learning about control theory. The idea behind control theory is that if you have a way to add input into a system, you can design algorithms to control and manipulate the output of the system to get what you want. Here is an example: think of cruise control in a car. You set a desired speed, and the algorithm adjusts the throttle to maintain it. What is interesting about control theory is that in order to design a control algorithm well, you have to have a very good model of the system itself. If you took that same cruise control algorithm and dropped it into a fully loaded semi-truck, it would fail. The truck has way more mass, different engine dynamics, and the throttle inputs that worked for a sedan would not keep it at speed going up a hill. To have a well functioning control system, you have to focus on modeling the system at hand.

This is what the authors of the book propose. They don’t say it is because of culture or geography or any of the other theories floating around. They propose that a nation’s prosperity is a function of its political institutions. Similar to the modeling of dynamics, some political dynamics give rise to corrupt governments whereas others lead to prosperity. You can’t fix a country unless you change the underlying system.

They give three key points about what is needed to have these prosperous political institutions.

1. Inclusivity. The greater part of the population needs to be eligible to hold political power and elect representatives.
2. Pluralism. Similar to how the US has separation of powers, it is about limiting the power that one individual can possess.
3. Enforcement. What is the point of having laws if nobody is held accountable to them?

For a lot of Americans (I used to be this way), it is easy to view developing nations as the way they are because they are less sophisticated or not as educated. But when you start viewing everything from the lens of political incentives, things start to make a lot more sense.

One thing I love about the book is that it doesn’t just lay out theory in an abstract way. A lot of the arguments come through stories and historical examples, and that is what makes it actually engaging to read. Instead of feeling like a textbook, it feels like a series of short case studies from different countries and time periods. Each one is interesting on its own, but together they all point back to the same underlying idea about institutions and incentives. That structure makes the book both educational and entertaining at the same time, because you are constantly learning history while also slowly seeing the main theory come together. Sometimes those stories feel like distant history lessons, but other times they connect directly to your own experiences.

I remember taking train rides throughout northern India and being struck by just how many rural farmers there were without any industrial farming equipment. I will admit that earlier in my life I might have looked at that and thought something like, “why haven’t they figured this out yet?” But if you take a step back and think about the incentive structure, things start to make sense. India has laws restricting how much agricultural land a single person or company can own. Those laws actually started as land redistribution in the 1960s, breaking up estates that the British colonial system had concentrated. The original goal was helping landless farmers, not blocking industry. But once the laws existed, they created a huge constituency that fights to keep them. India is a democracy, and rural farmers are a massive voting bloc. Any politician who wants to win is going to think twice before pushing reforms that put those voters out of work. That’s the institutional dynamic the book is really pointing at. It’s not that politicians cynically design bad laws, it’s that even well-intentioned ones get locked in by the incentives they create.

The book isn’t without its critics. Some economists, like Jeffrey Sachs, argue that the authors lean too hard on institutions and ignore other factors like geography and technology. South Korea, for example, did most of its rapid growing under authoritarian military rule before transitioning to a democracy in the late 1980s. And Singapore, which is one of the richest countries in the world, has been run by the same party since 1959 and isn’t really an inclusive democracy by the book’s standard even today. I think that’s a fair pushback, but it doesn’t really break the core argument for me. It just means institutions might not be the whole story.

If this book taught me anything, it’s that you can tell a lot about a country and its people by the way that its political institutions are shaped. If you know what someone is motivated by, it’s not too hard to figure out what they are about to do next. Would highly recommend this book!