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This idea goes back to one of the classical theories of political sociology, the theory of modernization, formulated by Seymour Martin Lipset. Modernization theory maintains that all societies, as they grow, are headed toward a more modern, developed, and civilized existence, and in particular toward democracy. Many followers of modernization theory also claim that, like democracy, inclusive institutions will emerge as a by-product of the g..
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Daron Acemoğlu |
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Inclusive economic institutions, such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provide..
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Daron Acemoğlu |
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Globalization made the large open spaces of the Americas, its "open frontiers," valuable. Often these frontiers were only mythically open, since they were inhabited by indigenous peoples who were brutally dispossessed. All the same, the scramble for this newly valuable resource was one of the defining processes of the Americas in the second half of the nineteenth century."
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Daron Acemoğlu |
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First perfected by Cortes in Mexico, it was based on the observation that the best way for the Spanish to subdue opposition was to capture the indigenous leader. This strategy enabled the Spanish to claim the accumulated wealth of the leader and coerce the indigenous peoples to give tribute and food. The next step was setting themselves up as the new elite of the indigenous society and taking control of the existing methods of taxation, tri..
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Daron Acemoğlu |
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THE CONTRAST OF South and North Korea, and of the United States and Latin America, illustrates a general principle. Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will ..
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Daron Acemoğlu |
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3266932
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Bay in January 1788 under the command of Captain Arthur Phillip. On January 26, now celebrated as Australia Day, they set up camp in Sydney Cove, the heart of the modern city of Sydney.
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Daron Acemoğlu |
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388ca83
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The average Egyptian has an income level of around 12 percent of the average citizen of the United States and can expect to live ten fewer years; 20 percent of the population is in dire poverty. Though these differences are significant, they are actually quite small compared with those between the United States and the poorest countries in the world, such as North Korea, Sierra Leone, and Zimbabwe, where well over half the population lives ..
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Daron Acemoğlu |
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31f098a
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it is the political institutions of a nation that determine the ability of citizens to control politicians and influence how they behave. This in turn determines whether politicians are agents of the citizens, albeit imperfect, or are able to abuse the power entrusted to them, or that they have usurped, to amass their own fortunes and to pursue their own agendas, ones detrimental to those of the citizens.
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Daron Acemoğlu |
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Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.
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Daron Acemoğlu |
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The fact that bonuses were paid monthly also kept everyone focused on the present, while innovation is about making sacrifices today in order to have more tomorrow. Even when bonuses and incentives were effective in changing behavior, they often created other problems. Central planning was just not good at replacing what the great eighteenth-century economist Adam Smith called the "invisible hand" of the market. When the plan was formulated..
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Daron Acemoğlu |
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9e46160
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the prime determinant of why agricultural productivity--agricultural output per acre--is so low in many poor countries, particularly in sub-Saharan Africa, has little to do with soil quality. Rather, it is a consequence of the ownership structure of the land and the incentives that are created for farmers by the governments and institutions under which they live.
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Daron Acemoğlu |
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cb6a2cc
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Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people.
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Daron Acemoğlu |
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China, despite many imperfections in its economic and political system, has been the most rapidly growing nation of the past three decades. Chinese poverty until Mao Zedong's death had nothing to do with Chinese culture; it was due to the disastrous way Mao organized the economy and conducted politics. In the 1950s, he promoted the Great Leap Forward, a drastic industrialization policy that led to mass starvation and famine. In the 1960s, h..
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Daron Acemoğlu |
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a7be7c0
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Growth was so rapid that it took in generations of Westerners, not just Lincoln Steffens. It took in the Central Intelligence Agency of the United States. It even took in the Soviet Union's own leaders, such as Nikita Khrushchev, who famously boasted in a speech to Western diplomats in 1956 that "we will bury you [the West]." As late as 1977, a leading academic textbook by an English economist argued that Soviet-style economies were superio..
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Daron Acemoğlu |
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Westerners, not just Lincoln Steffens. It took in the Central Intelligence Agency of the United States. It even took in the Soviet Union's own leaders, such as Nikita Khrushchev, who famously boasted in a speech to Western diplomats in 1956 that "we will bury you [the West]." As late as 1977, a leading academic textbook by an English economist argued that Soviet-style economies were superior to capitalist ones in terms of economic growth, p..
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Daron Acemoğlu |
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Countries differ in their economic success because of their different institutions, the rules influencing how the economy works, and the incentives that motivate people.
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Daron Acemoğlu |
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Such critical junctures are important because there are formidable barriers against gradual improvements, resulting from the synergy between extractive political and economic institutions and the support they give each other. The persistence of this feedback loop creates a vicious circle. Those who benefit from the status quo are wealthy and well organized, and can effectively fight major changes that will take away their economic privilege..
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Daron Acemoğlu |
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Though Mexico had constitutions in the nineteenth century, they put few constraints on what Iturbide, Santa Ana, and Diaz could do. These men could be removed from power only the same way they had attained it: by the use of force. D
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Daron Acemoğlu |
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5b97e02
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Economic growth Stalin style was simple: develop industry by government command and obtain the necessary resources for this by taxing agriculture at very high rates. The communist state did not have an effective tax system, so instead Stalin "collectivized" agriculture. This process entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Part..
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Daron Acemoğlu |
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As the United States began to experience the Industrial Revolution in the first half of the nineteenth century, Mexico got poorer.
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Daron Acemoğlu |
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Diaz violated people's property rights, facilitating the expropriation of vast amounts of land, and he granted monopolies and favors to his supporters in all lines of business, including banking. There was nothing new about this behavior. This is exactly what Spanish conquistadors had done, and what Santa Ana did in their footsteps. The
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Daron Acemoğlu |
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The situation was similar in the Soviet Union, with industry playing the role of sugar in the Caribbean. Industrial growth in the Soviet Union was further facilitated because its technology was so backward relative to what was available in Europe and the United States, so large gains could be reaped by reallocating resources to the industrial sector, even if all this was done inefficiently and by force. Before 1928 most Russians lived in th..
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Daron Acemoğlu |
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The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions. But neither the vicious nor the virtuous circle is absolute. In fact, some nations live under inclusive institutions today because, though extractive institutions have been the norm in h..
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Daron Acemoğlu |
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As such, the usual pattern of interaction between a critical juncture and existing institutional differences leading to further institutional and economic divergence played out again in the nineteenth century, and this time with an even bigger bang and more fundamental effects on the prosperity and poverty of nations.
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Daron Acemoğlu |
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poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose. To understand this, you have to go beyond economics and expert advice on the best thing to do and, instead, study how decisions actually get made, who gets to make them, and why those people decide to do what they do.
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Daron Acemoğlu |
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160faae
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As we will see many times in this book, economies based on the repression of labor and systems such as slavery and serfdom are notoriously noninnovative. This is true from the ancient world to the modern era.
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Daron Acemoğlu |
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7139471
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Those controlling political power will eventually find it more beneficial to use their power to limit competition, to increase their share of the pie, or even to steal and loot from others rather than support economic progress. The distribution and ability to exercise power will ultimately undermine the very foundations of economic prosperity,
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Daron Acemoğlu |
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Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society. Secure
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Daron Acemoğlu |
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the rulers were, in serious senses, whether willingly or unwillingly, the prisoners of their own rhetoric; they played games of power according to rules which suited them, but they could not break those rules or the whole game would be thrown away. Throwing
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Daron Acemoğlu |
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The "dual economy" paradigm, originally proposed in 1955 by Sir Arthur Lewis, still shapes the way that most social scientists think about the economic problems of less-developed countries. According to Lewis, many less-developed or underdeveloped economies have a dual structure and are divided into a modern sector and a traditional sector. The modern sector, which corresponds to the more developed part of the economy, is associated with ur..
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Daron Acemoğlu |
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24d05c1
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Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded. Conflict
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Daron Acemoğlu |
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Today Ethiopia is one of the poorest countries in the world. The income of an average Ethiopian is about one-fortieth that of an average citizen of England. Most people live in rural areas and practice subsistence agriculture. They lack clean water, electricity, and access to proper schools or health care. Life expectancy is about fifty-five years and only one-third of adults are literate. A comparison between England and Ethiopia spans wor..
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Daron Acemoğlu |
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stimulating sustained economic growth required that individuals use their talent and ideas, and this could never be done with a Soviet-style economic system.
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Daron Acemoğlu |
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WE SAW HOW INCLUSIVE economic and political institutions emerge. But why do they persist over time? The history of the Black Act and the limits to its implementation illustrate the virtuous circle, a powerful process of positive feedback that preserves these institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circles stems partly from the fact..
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Daron Acemoğlu |
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At the dawn of the nineteenth century, many parts of the world, especially in Africa, lacked a state that could provide even a minimal degree of law and order, which is a prerequisite for having a modern economy.
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Daron Acemoğlu |
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6014298
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Inclusive economic and political institutions do not emerge by themselves. They are often the outcome of significant conflict between elites resisting economic growth and political change and those wishing to limit the economic and political power of existing elites. Inclusive institutions emerge during critical junctures, such as during the Glorious Revolution in England or the foundation of the Jamestown colony in North America, when a se..
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Daron Acemoğlu |
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762237b
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The Maya's economy was based on extensive occupational specialization, with skilled potters, weavers, woodworkers, and tool and ornament makers. They also traded obsidian, jaguar pelts, marine shells, cacao, salt, and feathers among themselves and other polities over long distances in Mexico. They probably had money, too, and like the Aztecs, used cacao beans for currency. The
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Daron Acemoğlu |
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NATIONS FAIL TODAY because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction. Extractive economic and political institutions, though their details vary under different circumstances, are always at the root of this failure. In many cases, for e..
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Daron Acemoğlu |
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The government in North Korea is a communist dictatorship opposed to private property and markets. But it is difficult to control black markets, and black markets make transactions in cash. Of course quite a bit of foreign exchange is involved, particularly Chinese currency, but many transactions use won. The currency reform was designed to punish people who used these markets and, more specifically, to make sure that they did not become to..
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Daron Acemoğlu |
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7c5d24e
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Infighting and instability are thus inherent features of extractive institutions, and they not only create further inefficiencies but also often reverse any political centralization, sometimes even leading to the total breakdown of law and order and descent into chaos, as the Maya city-states experienced following their relative success during their Classical Era. Though
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Daron Acemoğlu |
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The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy. But it is not impossible, and the iron law of oligarchy is not inevitable. Either some preexisting inclusive elements in institutions, or the presence of broad coalitions leading the fight against the existing regime, or just the contingent nature of history,..
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Daron Acemoğlu |
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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..
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Daron Acemoğlu |
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BOTSWANA, CHINA, and the U.S. South, just like the Glorious Revolution in England, the French Revolution, and the Meiji Restoration in Japan, are vivid illustrations that history is not destiny. Despite the vicious circle, extractive institutions can be replaced by inclusive ones. But it is neither automatic nor easy. A confluence of factors, in particular a critical juncture coupled with a broad coalition of those pushing for reform or oth..
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Daron Acemoğlu |
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Political power was thus widely dispersed in Somali society, almost pluralistically. But without the authority of a centralized state to enforce order, let alone property rights, this led not to inclusive institutions. Nobody respected the authority of another, and nobody, including the British colonial state when it eventually arrived, was able to impose order. The lack of political centralization made it impossible for Somalia to benefit ..
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Daron Acemoğlu |