This year's Nobel Prize in Economics was awarded to Daren Adjemoglu, James Robinson and Simon Johnson for their famous work on explaining why countries are unequal. They presented their concept in the book “Why Nations Decline”. In this article we will summarize the essence of the book. 

People in poor countries are more likely to seek policy changes rather than material improvements. In Why Nations Decline, the authors provide examples beginning with quotes from young protesters in Egypt who contributed to the overthrow of Hosni Mubarak's regime. These statements reflect their key aspirations. For example, one of the leaders of the protest movement, software engineer and blogger Wael Khalil, provided a list of 12 changes he would like to see. 

Erroneous explanations for the causes of poverty and wealth

All of the demands of the protesters in Egypt were exclusively in the political sphere, while the country's economic problems stemmed directly from the monopolization of power by the elite. Control over political institutions did not allow for a change in either politics or the economy.

While the role of politics may seem obvious, many experts and professors usually cite other reasons for countries' failures. In the case of Egypt, geographical factors, cultural characteristics, and religious beliefs are often cited. It is believed that there is not enough responsibility for labor in the society, which hinders development, and Islam, practiced by the majority of the population, hinders economic success. It is also argued that the country could be more prosperous if it were governed more effectively.
The true reasons

The protesters, as Ajemoglu and Robinson emphasize, are right. In poor countries such as Egypt, Sierra Leone, Zimbabwe or North Korea, the main problem is that power has been seized by elites who exploit national resources, depriving the people of the opportunity to progress. In successful countries, by contrast, political power is extended to a wide range of citizens and governments are accountable to the public. 

The main difference between rich and poor countries, the book argues, is that their institutions create different incentives for citizens and businesses. These incentives, provided by economic institutions, are underpinned by political laws and rules.

historical experience is important, states like Britain France and the USA are rich today precisely because once upon a time each of them was overthrown by groups that monopolized power and wealth, of course, many revolutions were simply a change from one elite group to another Egypt was ruled by the Ottomans then colonial Britain by monarchy and after that by secular autocracy during which there was no real transformation in the political sphere and therefore no growth in national income and yet from time to time as in England 1688 or France 1789.

What are inclusive and extractive institutions and how do they directly determine wealth and poverty?

Inclusive institutions are political and economic systems that provide broad access to opportunities for all citizens. They encourage people to participate in political life, create conditions for free competition in the economy and promote innovation. In such societies, government structures are accountable to citizens and rights and freedoms are protected by law. Inclusive institutions enable people to realize their potential, leading to economic growth and prosperity. Examples include market democracies, where the participation of all sectors of society helps a nation to develop sustainably.

The opposite of inclusive institutions are extractive institutions, which concentrate power and wealth in the hands of a limited circle of elites. Such systems limit access to political and economic resources for the majority of citizens, and their main purpose is to maintain the privileged position of ruling groups. Extractive institutions hinder economic growth because they are not interested in innovation or equality of opportunity, but seek to maintain control and extract resources from society.

The link between types of institutions and the level of well-being of a society is clear. In countries with inclusive institutions, the economy grows because citizens are motivated to participate in economic activity, offer new ideas and create value. Extractive institutions, on the other hand, hinder development because they discourage people from working for the common good by concentrating resources in the hands of a few. This explains why countries with inclusive systems are usually rich, while those with extractive institutions are often poor.

Conclusion

The book, Why Some Nations are Rich and Others Poor, offers a fundamental perspective on differences in the wealth of nations, drawing on the theory of inclusive and extractive institutions. The authors, Adjemoglu and Robinson, argue that the key to economic success or decline lies in the political and economic systems that determine opportunities for citizens. Inclusive institutions that provide equal access to resources and opportunities lead to long-term prosperity, while extractive institutions captured by elites hinder development. Winning the Nobel Prize in Economics demonstrates the importance of this work for understanding global economic processes and finding pathways to sustainable growth for all countries.

Maria Blankfurd

Legal expert with 30 years of experience.