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

N
EGATIVE
 F
EEDBACK AND
 V
ICIOUS
 C
IRCLES
Rich nations are rich largely because they managed to develop
inclusive institutions at some point during the past three hundred
years. These institutions have persisted through a process of virtuous
circles. Even if inclusive only in a limited sense to begin with, and
sometimes fragile, they generated dynamics that would create a
process of positive feedback, gradually increasing their inclusiveness.
England did not become a democracy after the Glorious Revolution of
1688. Far from it. Only a small fraction of the population had formal
representation, but crucially, she was pluralistic. Once pluralism was
enshrined, there was a tendency for the institutions to become more
inclusive over time, even if this was a rocky and uncertain process.
In this, England was typical of virtuous circles: inclusive political
institutions create constraints against the exercise and usurpation of
power. They also tend to create inclusive economic institutions,
which in turn make the continuation of inclusive political institutions
more likely.
Under inclusive economic institutions, wealth is not concentrated
in the hands of a small group that could then use its economic might
to increase its political power disproportionately. Furthermore, under
inclusive economic institutions there are more limited gains from
holding political power, thus weaker incentives for every group and
every ambitious, upstart individual to try to take control of the state.
A confluence of factors at a critical juncture, including interplay
between existing institutions and the opportunities and challenges
brought by the critical juncture, is generally responsible for the onset
of inclusive institutions, as the English case demonstrates. But once
these inclusive institutions are in place, we do not need the same
confluence of factors for them to survive. Virtuous circles, though still
subject to significant contingency, enable the institutions’ continuity
and often even unleash dynamics taking society toward greater
inclusiveness.
As virtuous circles make inclusive institutions persist, vicious
circles create powerful forces toward the persistence of extractive

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institutions. History is not destiny, and vicious circles are not
unbreakable, as we will see further in 
chapter 14
. But they are
resilient. They create a powerful process of negative feedback, with
extractive political institutions forging extractive economic
institutions, which in turn create the basis for the persistence of
extractive political institutions. We saw this most clearly in the case
of Guatemala, where the same elite held power, first under colonial
rule, then in independent Guatemala, for more than four centuries;
extractive institutions enrich the elite, and their wealth forms the
basis for the continuation of their domination.
The same process of the vicious circle is also apparent in the
persistence of the plantation economy in the U.S. South, except that it
also showcases the vicious circle’s great resilience in the face of
challenges. U.S. southern planters lost their formal control of
economic and political institutions after their defeat in the Civil War.
Slavery, which was the basis of the plantation economy, was
abolished, and blacks were given equal political and economic rights.
Yet the Civil War did not destroy the political power of the planter
elite or its economic basis, and they were able to restructure the
system, under a different guise but still under their own local political
control, and to achieve the same objective: abundance of low-cost
labor for the plantations.
This form of the vicious circle, where extractive institutions persist
because the elite controlling them and benefiting from them persists,
is not its only form. At first a more puzzling, but no less real and no
less vicious, form of negative feedback shaped the political and
economic development of many nations, and is exemplified by the
experiences of much of sub-Saharan Africa, in particular Sierra Leone
and Ethiopia. In a form that the sociologist Robert Michels would
recognize as the iron law of oligarchy, the overthrow of a regime
presiding over extractive institutions heralds the arrival of a new set
of masters to exploit the same set of pernicious extractive institutions.
The logic of this type of vicious circle is also simple to understand
in hindsight: extractive political institutions create few constraints on
the exercise of power, so there are essentially no institutions to

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restrain the use and abuse of power by those overthrowing previous
dictators and assuming control of the state; and extractive economic
institutions imply that there are great profits and wealth to be made
merely by controlling power, expropriating the assets of others, and
setting up monopolies.
Of course, the iron law of oligarchy is not a true law, in the sense
that the laws of physics are. It does not chart an inevitable path, as
the Glorious Revolution in England or the Meiji Restoration in Japan
illustrate.
A key factor in these episodes, which saw a major turn toward
inclusive institutions, was the empowerment of a broad coalition that
could stand up against absolutism and would replace the absolutist
institutions by more inclusive, pluralistic ones. A revolution by a
broad coalition makes the emergence of pluralistic political
institutions much more likely. In Sierra Leone and Ethiopia, the iron
law of oligarchy was made more likely not only because existing
institutions were highly extractive but also because neither the
independence movement in the former nor the Derg coup in the latter
were revolutions led by such broad coalitions, but rather by
individuals and groups seeking power so that they could do the
extracting.
There is yet another, even more destructive facet of the vicious
circle, anticipated by our discussion of the Maya city-states in 
chapter
5
. When extractive institutions create huge inequalities in society and
great wealth and unchecked power for those in control, there will be
many wishing to fight to take control of the state and institutions.
Extractive institutions then not only pave the way for the next
regime, which will be even more extractive, but they also engender
continuous infighting and civil wars. These civil wars then cause
more human suffering and also destroy even what little state
centralization these societies have achieved. This also often starts a
process of descent into lawlessness, state failure, and political chaos,
crushing all hopes of economic prosperity, as the next chapter will
illustrate.

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