THEY fail when they exclude people from effectively participating in the political process — that is, when a powerful minority takes over the government and creates a system, including laws, for its own benefit and not for the people at large. The extension of this political exclusion is economic exclusion — in other words, when the powerful and rich minority create extractive economic institutions, whereby they shield and perpetuate their own economic interests by extracting wealth from the national resources and from the people at large.
This is the central argument of an influential book Why Nations Fail: the Origins of Power, Prosperity and Poverty by Turkish-American economist Daron Acemoglu and British-American economist and political scientist James Robinson. Both are from the Massachusetts Institute of Technology. They, along with Simon Johnson, shared the 2024 Nobel Prize for their work on institutions and prosperity. Their scholarship is now known as the New Institutional School in economics.
There are few books which have captured my imagination like this one. The reason, of course, is the situation in Pakistan. Their institutional reform theory and daily life in the country makes the book essential reading for those of us who can read and write. Especially those who think they have been bestowed with the mystical power to read and understand all the problems of a complex society like ours and know how to fix it!
It is one of the books on my bedside table. The current budget announcement and the depressing discussions around it made me go back to it to appreciate its economic and historical discourse and to once again try to understand why we are failing, and what needs to be done to exit this downward vicious spiral we are caught in — knowingly, deliberately, explicitly and shamelessly.
Those who established pluralistic political systems and inclusive economic institutions prospered.
A week ago, Waqar Wadho wrote an excellent article on these pages titled ‘Inefficient by design’ in which he also began with Daron Acemoglu and James Robinson and their theory of inefficient institutions. He made the profound observation that the “puzzle of persistent underdevelopment dissolves once you accept the premise that groups holding political power choose policies, not to maximise aggregate welfare, but to transfer resources from the rest of society to themselves”. He then expands on the example of the recent petroleum levy.
I tweeted his article as a ‘must read’ and then received a message from our respected reformist Dr Ishrat Husain, who reminded me of his 2018 book Governing the Ungovernable with the subtitle Institutional Reforms for Democratic Governance.
Chapter 16 of Dr Husain’s book is titled ‘Restructuring Key Institutions’, in which he also bases his analysis and recommendations on Why Nations Fail? Something very well-articulated in the beginning of this chapter is: “Just as reforming economic institutions without changing the political equilibrium may not improve the institutional equilibrium, and therefore changing de jure power while leaving the sources of de facto power intact, may have little impact on economic performance. It is because even if de jure and de facto power change, those who acquire the power in the new political equilibrium may themselves not have the correct incentives”.
In the 500-plus pages Why Nations Fail? the authors begin by disproving all the popular theories regarding why some nations excel more than others. Is it geography, or weather, or culture, or religion, or knowledge? One by one they dispense with each by providing convincing examples of some countries that, while being neighbours with the same geography, history, culture, religion, etc, have, politically and economically, developed very differently.
There was one Korea until 1953. Today, South Korea is one of the 10 fastest-growing economies in Asia with a $35,000-$40,000 per capita income, while North Korea is among the poorest countries in the continent with $700-$2,000 per capita. South Korea has regularly conducted elections and has become an inclusive society in terms of political participation and equal economic opportunity for its citizens, which has bred innovation and technology. North Korea has had single-party rule for over 70 years, which is also single-family rule. In 1970, South Korea’s per capita income was $250-$300 while Pakistan’s was $180-$200.
There is also the case of Nogales, Arizona, and Nogales, Sonora, only divided by a fence and a road. The former falls in the US and the latter in Mexico. There are huge differences in incomes and social indicators between the two because they have developed different political and economic institutions. Closer to home, comparisons of social and many economic indicators between Pakistan and Bangladesh are instructive. Not that everything is milk and honey in Bangladesh but this comparison is most relevant. In 1971, per capita income in West Pakistan was $180-$200 and in East Pakistan $90-$130. Today, it is $2,500-$2,800 in Bangladesh and $1,600-$1,800 in Pakistan. Adult literacy in East Pakistan in 1971 was 15-20 per cent and West Pakistan 20-25pc. Today, it is 75-77pc in Bangladesh and 60-62pc in Pakistan.
After rejecting these ill-founded theories, the authors come back to institutions and provide detailed examples of the rise and fall of nations from all continents, and from mediaeval times to date. It is an amazing historical survey of economic development or the lack of it. Those who established pluralistic political systems and inclusive economic institutions prospered with the proverbial rising ocean lifting all the boats and those who could not take this path, became poorer, albeit with a rich elite, which was also not sustainable in the longer run.
Once pluralistic political institutions are established, inclusive economic institutions follow. The central government has to ensure the rule of law, inclusive lawmaking and universal property rights including time-bound intellectual property rights. All this spur competition, which leads to technological development and innovation, and local and foreign investment. This in a nutshell is the story of the rise of Britain, starting with the Magna Carta in 1215, which curtailed the powers of king in favour of the barons, and the glorious revolution of 1688 when parliament prevailed over the monarch. The Industrial Revolution was born out of these institutions, and the rest is history.
The writer is a former SAPM on health with ministerial status, adjunct professor of health systems and president of the Pakistan Association of Lifestyle Medicine.
Published in Dawn, June 26th, 2026