Why Nations Fail argues that the prosperity or poverty of nations is primarily determined by the nature of their institutions. The book distinguishes between “inclusive” and “extractive” institutions, suggesting that inclusive institutions, which promote democratic governance, equitable distribution of resources, and protection of individual rights, foster sustainable economic growth. Conversely, extractive institutions concentrate power and wealth in the hands of a few, impeding innovation and leading to economic stagnation.

The book uses a variety of historical and contemporary case studies to illustrate the theme. For example, it discusses the divergence of North and South Korea, highlighting how institutional differences have led to very different economic outcomes in two geographically and culturally similar nations. Another example is the city of Nogales, which straddles the US-Mexico border. Like North and South Korea, the two sides of Nogales share similar geographic and cultural conditions, but the US side is more prosperous than its Mexican counterpart due to institutional differences between the two countries. Extractive institutions in Mexico have led to a host of challenges in Nogales, Sonora, including lower household incomes, a higher rate of adults without a high school degree, rampant crime, and inadequate public amenities like poorly maintained roads.