Why Nations Fail

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, 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

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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 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

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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 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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