Why Nations Fail

by Daron Acemoglu

  The cotton bolls start to ripen and are ready to be picked in early September, at about the same time that children return to school. Karimov issued orders to local governors to send cotton delivery quotas to schools. In early September the schools are emptied of 2.7 million children (2006 figures). Teachers, instead of being instructors, became labor recruiters. Gulnaz, a mother of two of these children, explained what happens:

  At the beginning of each school year, approximately at the beginning of September, the classes in school are suspended, and instead of classes children are sent to the cotton harvest. Nobody asks for the consent of parents. They don’t have weekend holidays [during the harvesting season]. If a child is for any reason left at home, his teacher or class curator comes over and denounces the parents. They assign a plan to each child, from 20 to 60 kg per day depending on the child’s age. If a child fails to fulfil this plan then next morning he is lambasted in front of the whole class.

  The harvest lasts for two months. Rural children lucky enough to be assigned to farms close to home can walk or are bused to work. Children farther away or from urban areas have to sleep in the sheds or storehouses with the machinery and animals. There are no toilets or kitchens. Children have to bring their own food for lunch.

  The main beneficiaries from all this forced labor are the political elites, led by President Karimov, the de facto king of all Uzbeki cotton. The schoolchildren are supposedly paid for their labor, but only supposedly. In 2006, when the world price of cotton was around $1.40 (U.S.) per kilo, the children were paid about $0.03 for their daily quota of twenty to sixty kilos. Probably 75 percent of the cotton harvest is now picked by children. In the spring, school is closed for compulsory hoeing, weeding, and transplanting.

  How did it all come to this? Uzbekistan, like the other Soviet Socialist Republics, was supposed to gain its independence after the collapse of the Soviet Union and develop a market economy and democracy. As in many other Soviet Republics, this is not what happened, however. President Karimov, who began his political career in the Communist Party of the old Soviet Union, rising to the post of first secretary for Uzbekistan at the opportune moment of 1989, just as the Berlin Wall was collapsing, managed to reinvent himself as a nationalist. With the crucial support of the security forces, in December 1991 he won Uzbekistan’s first-ever presidential election. After taking power, he cracked down on the independent political opposition. Opponents are now in prison or exile. There is no free media in Uzbekistan, and no nongovernmental organizations are allowed. The apogee of the intensifying repression came in 2005, when possibly 750, maybe more, demonstrators were murdered by the police and army in Andijon.

  Using this command of the security forces and total control of the media, Karimov first extended his presidential term for five years, through a referendum, and then won reelection for a new seven-year term in 2000, with 91.2 percent of the vote. His only opponent declared that he had voted for Karimov! In his 2007 reelection, widely regarded as fraudulent, he won 88 percent of the vote. Elections in Uzbekistan are similar to those that Joseph Stalin used to organize in the heyday of the Soviet Union. One in 1937 was famously covered by New York Times correspondent Harold Denny, who reproduced a translation from Pravda, the newspaper of the Communist Party, which was meant to convey the tension and excitement of Soviet elections:

  Midnight has struck. The twelfth of December, the day of the first general, equal and direct elections to the Supreme Soviet, has ended. The result of the voting is about to be announced.

  The commission remains alone in its room. It is quiet, and the lamps are shining solemnly. Amid the general attentive and intense expectation the chairman performs all the necessary formalities before counting of the ballots—checking up by list how many voters there were and how many have voted—and the result is 100 per cent. 100 per cent! What election in what country for what candidate has given a 100 per cent response?

  The main business starts now. Excitedly the chairman inspects the seals on the boxes. Then the members of the commission inspect them. The seals are intact and are cut off. The boxes are opened.

  It is quiet. They sit attentively and seriously, these election inspectors and executives.

  Now it is time to open the envelopes. Three members of the commission take scissors. The chairman rises. The tellers have their copybooks ready. The first envelope is slit. All eyes are directed to it. The chairman takes out two slips—white [for a candidate for the Soviet of the Union] and blue [for a candidate for the Soviet of Nationalities]—and reads loudly and distinctly, “Comrade Stalin.”

  Instantly the solemnity is broken. Everybody in the room jumps up and applauds joyously and stormily for the first ballot of the first general secret election under the Stalinist Constitution—a ballot with the name of the Constitution’s creator.

  This mood would have captured the suspense surrounding the reelections of Karimov, who appears an apt pupil of Stalin when it comes to repression and political control and seems to organize elections that compete with those of Stalin in their surrealism.

  Under Karimov, Uzbekistan is a country with very extractive political and economic institutions. And it is poor. Probably one-third of the people live in poverty, and the average annual income is around $1,000. Not all the development indicators are bad. According to World Bank data, school enrollment is 100 percent … well, except possibly during the cotton picking season. Literacy is also very high, though apart from controlling all the media, the regime also bans books and censors the Internet. While most people are paid only a few cents a day to pick cotton, the Karimov family and former communist cadres who reinvented themselves after 1989 as the new economic and political elites of Uzbekistan have become fabulously wealthy.

  The family economic interests are run by Karimov’s daughter Gulnora, who is expected to succeed her father as president. In a country so untransparent and secretive, nobody knows exactly what the Karimov family controls or how much money they earn, but the experience of the U.S. company Interspan is indicative of what has happened in the Uzbek economy in the last two decades. Cotton is not the only agricultural crop; parts of the country are ideal for growing tea, and Interspan decided to invest. By 2005 it had taken over 30 percent of the local market, but then it ran into trouble. Gulnora decided that the tea industry looked economically promising. Soon Interspan’s local personnel started to be arrested, beaten up, and tortured. It became impossible to operate, and by August 2006 the company had pulled out. Its assets were taken over by the Karimov families’ rapidly expanding tea interests, at the time representing 67 percent of the market, up from 2 percent a couple of years earlier.

  Uzbekistan in many ways looks like a relic from the past, a forgotten age. It is a country languishing under the absolutism of a single family and the cronies surrounding them, with an economy based on forced labor—in fact, the forced labor of children. Except that it isn’t. It’s part of the current mosaic of societies failing under extractive institutions, and unfortunately it has many commonalities with other former Soviet Socialist Republics, ranging from Armenia and Azerbaijan to Kyrgyzstan, Tajikistan, and Turkmenistan, and reminds us that even in the twenty-first century, extractive economic and political institutions can take an unashamed atrociously extractive form.

  KEEPING THE PLAYING FIELD AT AN ANGLE

  The 1990s were a period of reform in Egypt. Since the military coup that removed the monarchy in 1954, Egypt had been run as a quasi-socialist society in which the government played a central role in the economy. Many sectors of the economy were dominated by state-owned enterprises. Over the years, the rhetoric of socialism lapsed, markets opened, and the private sector developed. Yet these were not inclusive markets, but markets controlled by the state and by a handful of businessmen allied with the National Democratic Party (NDP), the political party founded by President Anwar Sadat in 1978. Businessmen became more and more involved with the party, and the party became more and more involved with them under the
government of Hosni Mubarak. Mubarak, who became president in 1981 following Anwar Sadat’s assassination, ruled with the NDP until being forced from power by popular protests and the military in February 2011, as we discussed in the Preface (this page).

  Major businesspeople were appointed to key government posts in areas closely related to their economic interests. Rasheed Mohamed Rasheed, former president of Unilever AMET (Africa, Middle East, and Turkey), became minister of foreign trade and industry; Mohamed Zoheir Wahid Garana, the owner and managing director of Garana Travel Company, one of the largest in Egypt, became minister of tourism; Amin Ahmed Mohamed Osman Abaza, founder of the Nile Cotton Trade Company, the largest cotton-exporting company in Egypt, became minister of agriculture.

  In many sectors of the economy, businessmen persuaded the government to restrict entry through state regulation. These sectors included the media, iron and steel, the automotive industry, alcoholic beverages, and cement. Each sector was very concentrated with high entry barriers protecting the politically connected businessmen and firms. Big businessmen close to the regime, such as Ahmed Ezz (iron and steel), the Sawiris family (multimedia, beverages, and telecommunications), and Mohamed Nosseir (beverages and telecommunications) received not only protection from the state but also government contracts and large bank loans without needing to put up collateral. Ahmed Ezz was both the chairman of Ezz Steel, the largest company in the country’s steel industry, producing 70 percent of Egypt’s steel, and also a high-ranking member of the NDP, the chairman of the People’s Assembly Budget and Planning Committee, and a close associate of Gamal Mubarak, one of President Mubarak’s sons.

  The economic reforms of the 1990s promoted by international financial institutions and economists were aimed at freeing up markets and reducing the role of the state in the economy. A key pillar of such reforms everywhere was the privatization of state-owned assets. Mexican privatization (this page–this page), instead of increasing competition, simply turned state-owned monopolies into privately owned monopolies, in the process enriching politically connected businessmen such as Carlos Slim. Exactly the same thing took place in Egypt. The businesspeople connected to the regime were able to heavily influence implementation of Egypt’s privatization program so that it favored the wealthy business elite—or the “whales,” as they are known locally. At the time that privatization began, the economy was dominated by thirty-two of these whales.

  One was Ahmed Zayat, at the helm of the Luxor Group. In 1996 the government decided to privatize Al Ahram beverages (ABC), which was the monopoly maker of beer in Egypt. A bid came in from a consortium of the Egyptian Finance Company, led by real estate developer Farid Saad, along with the first venture capital company formed in Egypt in 1995. The consortium included Fouad Sultan, former minister of tourism, Mohamed Nosseir, and Mohamed Ragab, another elite businessman. The group was well connected, but not well connected enough. Its bid of 400 million Egyptian pounds was turned down as too low. Zayat was better connected. He didn’t have the money to purchase ABC, so he came up with a scheme of Carlos Slim–type ingenuity. ABC shares were floated for the first time on the London Stock Exchange, and the Luxor Group acquired 74.9 percent of those shares at 68.5 Egyptian pounds per share. Three months later the shares were then split in two, and the Luxor Group was able to sell all of them at 52.5 pounds each, netting a 36 percent profit, with which Zayat was able to fund the purchase of ABC for 231 million pounds the next month. At the time, ABC was making an annual profit of around 41.3 million Egyptian pounds and had cash reserves of 93 million Egyptian pounds. It was quite a bargain. In 1999 the newly privatized ABC extended its monopoly from beer into wine by buying the privatized national wine monopoly Gianaclis. Gianaclis was a very profitable company, nestling behind a 3,000 percent tariff imposed on imported wines, and it had a 70 percent profit margin on what it sold. In 2002 the monopoly changed hands again when Zayat sold ABC to Heineken for 1.3 billion Egyptian pounds. A 563 percent profit in five years.

  Mohamed Nosseir hadn’t always been on the losing side. In 1993 he purchased the privatized El Nasr Bottling Company, which had the monopoly rights to bottle and sell Coca-Cola in Egypt. Nosseir’s relations with the then-minister of the public business sector, Atef Ebeid, allowed him to make the purchase with little competition. Nosseir then sold the company after two years for more than three times the acquisition price. Another example was the move in the late 1990s to involve the private sector in the state cinema industry. Again political connections implied that only two families were allowed to bid for and operate the cinemas—one of whom was the Sawiris family.

  Egypt today is a poor nation—not as poor as most countries to the south, in sub-Saharan Africa, but still one where around 40 percent of the population is very poor and lives on less than two dollars a day. Ironically, as we saw earlier (this page–this page), in the nineteenth century Egypt was the site of an initially successful attempt at institutional change and economic modernization under Muhammad Ali, who did generate a period of extractive economic growth before it was effectively annexed to the British Empire. From the British colonial period a set of extractive institutions emerged, and were continued by the military after 1954. There was some economic growth and investment in education, but the majority of the population had few economic opportunities, while the new elite could benefit from their connections to the government.

  These extractive economic institutions were again supported by extractive political institutions. President Mubarak planned to begin a political dynasty, grooming his son Gamal to replace him. His plan was cut short only by the collapse of his extractive regime in early 2011 in the face of widespread unrest and demonstrations during the so-called Arab Spring. During the period when Nasser was president, there were some inclusive aspects of economic institutions, and the state did open up the education system and provide some opportunities that the previous regime of King Farouk had not. But this was an example of an unstable combination of extractive political institutions with some inclusivity of economic institutions.

  The inevitable outcome, which came during Mubarak’s reign, was that economic institutions became more extractive, reflecting the distribution of political power in society. In some sense the Arab Spring was a reaction to this. This was true not just in Egypt but also in Tunisia. Three decades of Tunisian growth under extractive political institutions started to go into reverse as President Ben Ali and his family began to prey more and more on the economy.

  WHY NATIONS FAIL

  Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. This is true today in Africa, in places such as Zimbabwe and Sierra Leone; in South America, in countries such as Colombia and Argentina; in Asia, in countries such as North Korea and Uzbekistan; and in the Middle East, in nations such as Egypt. There are notable differences among these countries. Some are tropical, some are in temperate latitudes. Some were colonies of Britain; others, of Japan, Spain, and Russia. They have very different histories, languages, and cultures. What they all share is extractive institutions. In all these cases the basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractive institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar—even if their intensity differs.

  In Zimbabwe, for example, the elite comprise Robert Mugabe and the core of ZANU-PF, who spearheaded the anticolonial fight in the 1970s. In North Korea, they are the clique around Kim Jong-Il and the Communist Party. In Uzbekistan it is President Islam Karimov, his family, and his reinvented Soviet Union–era cronies. These groups
are obviously very different, and these differences, along with the variegated polities and economies they govern, mean that the specific form the extractive institutions take differs. For instance, because North Korea was created by a communist revolution, it takes as its political model the one-party rule of the Communist Party. Though Mugabe did invite the North Korean military into Zimbabwe in the 1980s to massacre his opponents in Matabeleland, such a model for extractive political institutions is not applicable in Zimbabwe. Instead, because of the way he came to power in the anticolonial struggle, Mugabe had to cloak his rule with elections, even if for a while he managed actually to engineer a constitutionally sanctified one-party state.

  In contrast, Colombia has had a long history of elections, which emerged historically as a method for sharing power between the Liberal and Conservative parties in the wake of independence from Spain. Not only is the nature of elites different, but their numbers are. In Uzbekistan, Karimov could hijack the remnants of the Soviet state, which gave him a strong apparatus to suppress and murder alternative elites. In Colombia, the lack of authority of the central state in parts of the country has naturally led to much more fragmented elites—in fact, so much so that they sometimes murder one another. Nevertheless, despite these variegated elites and political institutions, these institutions often manage to cement and reproduce the power of the elite that created them. But sometimes the infighting they induce leads to the collapse of the state, as in Sierra Leone.