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

R
OOTS OF
 W
ORLD
 I
NEQUALITY
This and the previous three chapters have told the story of how
inclusive economic and political institutions emerged in England to
make the Industrial Revolution possible, and why certain countries
benefited from the Industrial Revolution and embarked on the path to
growth, while others did not or, in fact, steadfastly refused to allow
even the beginning of industrialization. Whether a country did
embark on industrialization was largely a function of its institutions.
The United States, which underwent a transformation similar to the
English Glorious Revolution, had already developed its own brand of
inclusive political and economic institutions by the end of the
eighteenth century. It would thus become the first nation to exploit
the new technologies coming from the British Isles, and would soon
surpass Britain and become the forerunner of industrialization and
technological change. Australia followed a similar path to inclusive
institutions, even if somewhat later and somewhat less noticed. Its
citizens, just like those in England and the United States, had to fight
to obtain inclusive institutions. Once these were in place, Australia
would launch its own process of economic growth. Australia and the
United States could industrialize and grow rapidly because their
relatively inclusive institutions would not block new technologies,

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innovation, or creative destruction.
Not so in most of the other European colonies. Their dynamics
would be quite the opposite of those in Australia and the United
States. Lack of a native population or resources to be extracted made
colonialism in Australia and the United States a very different sort of
affair, even if their citizens had to fight hard for their political rights
and for inclusive institutions. In the Moluccas as in the many other
places Europeans colonized in Asia, in the Caribbean, and in South
America, citizens had little chance of winning such a fight. In these
places, European colonists imposed a new brand of extractive
institutions, or took over whatever extractive institutions they found,
in order to be able to extract valuable resources, ranging from spices
and sugar to silver and gold. In many of these places, they put in
motion a set of institutional changes that would make the emergence
of inclusive institutions very unlikely. In some of them they explicitly
stamped out whatever burgeoning industry or inclusive economic
institutions existed. Most of these places would be in no situation to
benefit from industrialization in the nineteenth century or even in the
twentieth.
The dynamics in the rest of Europe were also quite different from
those in Australia and the United States. As the Industrial Revolution
in Britain was gathering speed at the end of the eighteenth century,
most European countries were ruled by absolutist regimes, controlled
by monarchs and by aristocracies whose major source of income was
from their landholdings or from trading privileges they enjoyed
thanks to prohibitive entry barriers. The creative destruction that
would be wrought by the process of industrialization would erode the
leaders’ trading profits and take resources and labor away from their
lands. The aristocracies would be economic losers from
industrialization. More important, they would also be political losers,
as the process of industrialization would undoubtedly create
instability and political challenges to their monopoly of political
power.
But the institutional transitions in Britain and the Industrial
Revolution created new opportunities and challenges for European

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states. Though there was absolutism in Western Europe, the region
had also shared much of the institutional drift that had impacted
Britain in the previous millennium. But the situation was very
different in Eastern Europe, the Ottoman Empire, and China. These
differences mattered for the dissemination of industrialization. Just
like the Black Death or the rise of Atlantic trade, the critical juncture
created by industrialization intensified the ever-present conflict over
institutions in many European nations. A major factor was the French
Revolution of 1789. The end of absolutism in France opened the way
for inclusive institutions, and the French ultimately embarked on
industrialization and rapid economic growth. The French Revolution
in fact did more than that. It exported its institutions by invading and
forcibly reforming the extractive institutions of several neighboring
countries. It thus opened the way to industrialization not only in
France, but in Belgium, the Netherlands, Switzerland, and parts of
Germany and Italy. Farther east the reaction was similar to that after
the Black Death, when, instead of crumbling, feudalism intensified.
Austria-Hungary, Russia, and the Ottoman Empire fell even further
behind economically, but their absolutist monarchies managed to stay
in place until the First World War.
Elsewhere in the world, absolutism was as resilient as in Eastern
Europe. This was particularly true in China, where the Ming-Qing
transition led to a state committed to building a stable agrarian
society and hostile to international trade. But there were also
institutional differences that mattered in Asia. If China reacted to the
Industrial Revolution as Eastern Europe did, Japan reacted in the
same way as Western Europe. Just as in France, it took a revolution to
change the system, this time one led by the renegade lords of the
Satsuma, Chōshū, Tosa, and Aki domains. These lords overthrew the
shogun, created the Meiji Restoration, and moved Japan onto the
path of institutional reforms and economic growth.
We also saw that absolutism was resilient in isolated Ethiopia.
Elsewhere on the continent the very same force of international trade
that helped to transform English institutions in the seventeenth
century locked large parts of western and central Africa into highly

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extractive institutions via the slave trade. This destroyed societies in
some places and led to the creation of extractive slaving states in
others.
The institutional dynamics we have described ultimately
determined which countries took advantage of the major
opportunities present in the nineteenth century onward and which
ones failed to do so. The roots of the world inequality we observe
today can be found in this divergence. With a few exceptions, the rich
countries of today are those that embarked on the process of
industrialization and technological change starting in the nineteenth
century, and the poor ones are those that did not.

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