Why Nations Fail

by Daron Acemoglu

  Before the Court’s ruling came in, Roosevelt had moved to the next step of his agenda and had signed the Social Security Act, which introduced the modern welfare state into the United States: pensions at retirement, unemployment benefits, aid to families with dependent children, and some public health care and disability benefits. He also signed the National Labor Relations Act, which further strengthened the rights of workers to organize unions, engage in collective bargaining, and conduct strikes against their employers. These measures also faced challenges in the Supreme Court. As these were making their way through the judiciary, Roosevelt was reelected in 1936 with a strong mandate, receiving 61 percent of the popular vote.

  With his popularity at record highs, Roosevelt had no intention of letting the Supreme Court derail more of his policy agenda. He laid out his plans in one of his regular Fireside Chats, which was broadcast live on the radio on March 9, 1937. He started by pointing out that in his first term, much-needed policies had only cleared the Supreme Court by a whisker. He went on:

  I am reminded of that evening in March, four years ago, when I made my first radio report to you. We were then in the midst of the great banking crisis. Soon after, with the authority of the Congress, we asked the nation to turn over all of its privately held gold, dollar for dollar, to the government of the United States. Today’s recovery proves how right that policy was. But when, almost two years later, it came before the Supreme Court its constitutionality was upheld only by a five-to-four vote. The change of one vote would have thrown all the affairs of this great nation back into hopeless chaos. In effect, four justices ruled that the right under a private contract to exact a pound of flesh was more sacred than the main objectives of the Constitution to establish an enduring nation.

  Obviously, this should not be risked again. Roosevelt continued:

  Last Thursday I described the American form of government as a three-horse team provided by the Constitution to the American people so that their field might be plowed. The three horses are, of course, the three branches of government—the Congress, the executive, and the courts. Two of the horses, the Congress and the executive, are pulling in unison today; the third is not.

  Roosevelt then pointed out that the U.S. Constitution had not actually endowed the Supreme Court with the right to challenge the constitutionality of legislation, but that it had assumed this role in 1803. At the time, Justice Bushrod Washington had stipulated that the Supreme Court should “presume in favor of [a law’s] validity until its violation of the Constitution is proved beyond all reasonable doubt.” Roosevelt then charged:

  In the last four years the sound rule of giving statutes the benefit of all reasonable doubt has been cast aside. The Court has been acting not as a judicial body, but as a policymaking body.

  Roosevelt claimed that he had an electoral mandate to change this situation and that “after consideration of what reform to propose the only method which was clearly constitutional … was to infuse new blood into all our courts.” He also argued that the Supreme Court judges were overworked, and the load was just too much for the older justices—who happened to be the ones striking down his legislation. He then proposed that all judges should face compulsory retirement at the age of seventy and that he should be allowed to appoint up to six new justices. This plan, which Roosevelt presented as the Judiciary Reorganization Bill, would have sufficed to remove the justices who had been appointed earlier by more conservative administrations and who had most strenuously opposed the New Deal.

  Though Roosevelt skillfully tried to win popular support for the measure, opinion polls suggested that only about 40 percent of the population was in favor of the plan. Louis Brandeis was now a Supreme Court justice. Though Brandeis sympathized with much of Roosevelt’s legislation, he spoke against the president’s attempts to erode the power of the Supreme Court and his allegations that the justices were overworked. Roosevelt’s Democratic Party had large majorities in both houses of Congress. But the House of Representatives more or less refused to deal with Roosevelt’s bill. Roosevelt then tried the Senate. The bill was sent to the Senate Judiciary Committee, which then held highly contentious meetings, soliciting various opinions on the bill. They ultimately sent it back to the Senate floor with a negative report, arguing that the bill was a “needless, futile and utterly dangerous abandonment of constitutional principle … without precedent or justification.” The Senate voted 70 to 20 to send it back to committee to be rewritten. All the “court packing” elements were stripped away. Roosevelt would be unable to remove the constraints placed on his power by the Supreme Court. Even though Roosevelt’s powers remained constrained, there were compromises, and the Social Security and the National Labor Relations Acts were both ruled constitutional by the Court.

  More important than the fate of these two acts was the general lesson from this episode. Inclusive political institutions not only check major deviations from inclusive economic institutions, but they also resist attempts to undermine their own continuation. It was in the immediate interests of the Democratic Congress and Senate to pack the court and ensure that all New Deal legislation survived. But in the same way that British political elites in the early eighteenth century understood that suspending the rule of law would endanger the gains they had wrested from the monarchy, congressmen and senators understood that if the president could undermine the independence of the judiciary, then this would undermine the balance of power in the system that protected them from the president and ensured the continuity of pluralistic political institutions.

  Perhaps Roosevelt would have decided next that obtaining legislative majorities took too much compromise and time and that he would instead rule by decree, totally undermining pluralism and the U.S. political system. Congress certainly would not have approved this, but then Roosevelt could have appealed to the nation, asserting that Congress was impeding the necessary measures to fight the Depression. He could have used the police to close Congress. Sound farfetched? This is exactly what happened in Peru and Venezuela in the 1990s. Presidents Fujimori and Chávez appealed to their popular mandate to close uncooperative congresses and subsequently rewrote their constitutions to massively strengthen the powers of the president. The fear of this slippery slope by those sharing power under pluralistic political institutions is exactly what stopped Walpole from fixing British courts in the 1720s, and it is what stopped the U.S. Congress from backing Roosevelt’s court-packing plan. Roosevelt had encountered the power of virtuous circles.

  But this logic does not always play out, particularly in societies that may have some inclusive features but that are broadly extractive. We have already seen these dynamics in Rome and Venice. Another illustration comes from comparing Roosevelt’s failed attempt to pack the Court with similar efforts in Argentina, where crucially the same struggles took place in the context of predominantly extractive economic and political institutions.

  The 1853 constitution of Argentina created a Supreme Court with duties similar to those of the U.S. Supreme Court. An 1887 decision allowed the Argentine court to assume the same role as that of the U.S. Supreme Court in deciding whether specific laws were constitutional. In theory, the Supreme Court could have developed as one of the important elements of inclusive political institutions in Argentina, but the rest of the political and economic system remained highly extractive, and there was neither empowerment of broad segments of society nor pluralism in Argentina. As in the United States, the constitutional role of the Supreme Court would also be challenged in Argentina. In 1946 Juan Domingo Perón was democratically elected president of Argentina. Perón was a former colonel and had first come to national prominence after a military coup in 1943, which had appointed him minister of labor. In this post, he built a political coalition with trade unions and the labor movement, which would be crucial for his presidential bid.

  Shortly after Perón’s victory, his supporters in the Chamber of Deputies proposed the impeachment of four of the five members of the C
ourt. The charges leveled against the Court were several. One involved unconstitutionally accepting the legality of two military regimes in 1930 and 1943—rather ironic, since Perón had played a key role in the latter coup. The other focused on legislation that the court had struck down, just as its U.S. counterpart had done. In particular, just prior to Perón’s election as president, the Court had issued a decision ruling that Perón’s new national labor relations board was unconstitutional. Just as Roosevelt heavily criticized the Supreme Court in his 1936 reelection campaign, Perón did the same in his 1946 campaign. Nine months after initiating the impeachment process, the Chamber of Deputies impeached three of the judges, the fourth having already resigned. The Senate approved the motion. Perón then appointed four new justices. The undermining of the Court clearly had the effect of freeing Perón from political constraints. He could now exercise unchecked power, in much the same way the military regimes in Argentina did before and after his presidency. His newly appointed judges, for example, ruled as constitutional the conviction of Ricardo Balbín, the leader of the main opposition party to Perón, the Radical Party, for disrespecting Perón. Perón could effectively rule as a dictator.

  Since Perón successfully packed the Court, it has become the norm in Argentina for any new president to handpick his own Supreme Court justices. So a political institution that might have exercised some constraints on the power of the executive is gone. Perón’s regime was removed from power by another coup in 1955, and was followed by a long sequence of transitions between military and civilian rule. Both new military and civilian regimes picked their own justices. But picking Supreme Court justices in Argentina was not an activity confined to transitions between military and civilian rule. In 1990 Argentina finally experienced a transition between democratically elected governments—one democratic government followed by another. Yet, by this time democratic governments did not behave much differently from military ones when it came to the Supreme Court. The incoming president was Carlos Saúl Menem of the Perónist Party. The sitting Supreme Court had been appointed after the transition to democracy in 1983 by the Radical Party president Raúl Alfonsín. Since this was a democratic transition, there should have been no reason for Menem to appoint his own court. But in the run-up to the election, Menem had already shown his colors. He continually, though not successfully, tried to encourage (or even intimidate) members of the court to resign. He famously offered Justice Carlos Fayt an ambassadorship. But he was rebuked, and Fayt responded by sending him a copy of his book Law and Ethics, with the note “Beware I wrote this” inscribed. Undeterred, within three months of taking office, Menem sent a law to the Chamber of Deputies proposing to expand the Court from five to nine members. One argument was the same Roosevelt used in 1937: the court was overworked. The law quickly passed the Senate and Chamber, and this allowed Menem to name four new judges. He had his majority.

  Menem’s victory against the Supreme Court set in motion the type of slippery-slope dynamics we mentioned earlier. His next step was to rewrite the constitution to remove the term limit so he could run for president again. After being reelected, Menem moved to rewrite the constitution again, but was stopped not by Argentina political institutions but by factions within his own Perónist Party, who fought back against his personal domination.

  Since independence, Argentina has suffered from most of the institutional problems that have plagued Latin America. It has been trapped in a vicious, not a virtuous, circle. As a consequence, positive developments, such as first steps toward the creation of an independent Supreme Court, never gained a foothold. With pluralism, no group wants or dares to overthrow the power of another, for fear that its own power will be subsequently challenged. At the same time, the broad distribution of power makes such an overthrow difficult. A Supreme Court can have power if it receives significant support from broad segments of society willing to push back attempts to vitiate the Court’s independence. That has been the case in the United States, but not Argentina. Legislators there were happy to undermine the Court even if they anticipated that this could jeopardize their own position. One reason is that with extractive institutions there is much to gain from overthrowing the Supreme Court, and the potential benefits are worth the risks.

  POSITIVE FEEDBACK AND VIRTUOUS CIRCLES

  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 series of factors weaken the hold of the elites in power, make their opponents stronger, and create incentives for the formation of a pluralistic society. The outcome of political conflict is never certain, and even if in hindsight we see many historical events as inevitable, the path of history is contingent. Nevertheless, once in place, inclusive economic and political institutions tend to create a virtuous circle, a process of positive feedback, making it more likely that these institutions will persist and even expand.

  The virtuous circle works through several mechanisms. First, the logic of pluralistic political institutions makes usurpation of power by a dictator, a faction within the government, or even a well-meaning president much more difficult, as Franklin Roosevelt discovered when he tried to remove the checks on his power imposed by the Supreme Court, and as Sir Robert Walpole discovered when he attempted to summarily implement the Black Act. In both cases, concentrating power further in the hands of an individual or a narrow group would have started undermining the foundations of pluralistic political institutions, and the true measure of pluralism is precisely its ability to resist such attempts. Pluralism also enshrines the notion of the rule of law, the principle that laws should be applied equally to everybody—something that is naturally impossible under an absolutist monarchy. But the rule of law, in turn, implies that laws cannot simply be used by one group to encroach upon the rights of another. What’s more, the principle of the rule of law opens the door for greater participation in the political process and greater inclusivity, as it powerfully introduces the idea that people should be equal not only before the law but also in the political system. This was one of the principles that made it difficult for the British political system to resist the forceful calls for greater democracy throughout the nineteenth century, opening the way to the gradual extension of the franchise to all adults.

  Second, as we have seen several times before, inclusive political institutions support and are supported by inclusive economic institutions. This creates another mechanism of the virtuous circle. Inclusive economic institutions remove the most egregious extractive economic relations, such as slavery and serfdom, reduce the importance of monopolies, and create a dynamic economy, all of which reduces the economic benefits that one can secure, at least in the short run, by usurping political power. Because economic institutions had already become sufficiently inclusive in Britain by the eighteenth century, the elite had less to gain by clinging to power and, in fact, much to lose by using widespread repression against those demanding greater democracy. This facet of the virtuous circle made the gradual march of democracy in nineteenth-century Britain both less threatening to the elite and more likely to succeed. This contrasts with the situation in absolutist regimes such as the Austro-Hungarian or Russian empires, where economic institutions were still highly extractive and, in consequence, where calls for greater political inclusion later in the nineteenth century would be met by repression because the elite had too much to lose from sharing power.

  Finally, inclusive political institutions allow a free media to flourish, and a free media often provides information about and mobilizes opposition to threats against inclusive institutions, as it did during the last quarter of the nineteenth century and first quarter of the twentieth century, when the increasing econom
ic domination of the Robber Barons was threatening the essence of inclusive economic institutions in the United States.

  Though the outcome of the ever-present conflicts continues to be contingent, through these mechanisms the virtuous circle creates a powerful tendency for inclusive institutions to persist, to resist challenges, and to expand as they did in both Britain and the United States. Unfortunately, as we will see in the next chapter, extractive institutions create equally strong forces toward their persistence—the process of the vicious circle.

  12.

  THE VICIOUS CIRCLE

  YOU CAN’T TAKE THE TRAIN TO BO ANYMORE

  ALL OF THE WEST AFRICAN nation of Sierra Leone became a British colony in 1896. The capital city, Freetown, had originally been founded in the late eighteenth century as a home for repatriated and freed slaves. But when Freetown became a British colony, the interior of Sierra Leone was still made up of many small African kingdoms. Gradually, in the second half of the nineteenth century, the British extended their rule into the interior through a long series of treaties with African rulers. On August 31, 1896, the British government declared the colony a protectorate on the basis of these treaties. The British identified important rulers and gave them a new title, paramount chief. In eastern Sierra Leone, for example, in the modern diamond-mining district of Kono, they encountered Suluku, a powerful warrior king. King Suluku was made Paramount Chief Suluku, and the chieftaincy of Sandor was created as an administrative unit in the protectorate.

  Though kings such as Suluku had signed treaties with a British administrator, they had not understood that these treaties would be interpreted as carte blanche to set up a colony. When the British tried to levy a hut tax—a tax of five shillings to be raised from every house—in January 1898, the chiefs rose up in a civil war that became known as the Hut Tax Rebellion. It started in the north, but was strongest and lasted longer in the south, particularly in Mendeland, dominated by the Mende ethnic group. The Hut Tax Rebellion was soon defeated, but it warned the British about the challenges of controlling the Sierra Leonean hinterland. The British had already started to build a railway from Freetown into the interior. Work began in March 1896, and the line reached Songo Town in December 1898, in the midst of the Hut Tax Rebellion. British parliamentary papers from 1904 recorded that: