Why Nations Fail: The Origins of Power, Prosperity, and Poverty

W
HAT
 G
OES
 W
RONG
?
Extractive institutions are so common in history because they have a
powerful logic: they can generate some limited prosperity while at
the same time distributing it into the hands of a small elite. For this
growth to happen, there must be political centralization. Once this is
in place, the state—or the elite controlling the state—typically has
incentives to invest and generate wealth, encourage others to invest
so that the state can extract resources from them, and even mimic
some of the processes that would normally be set in motion by
inclusive economic institutions and markets. In the Caribbean
plantation economies, extractive institutions took the form of the elite
using coercion to force slaves to produce sugar. In the Soviet Union,
they took the form of the Communist Party reallocating resources
from agriculture to industry and structuring some sort of incentives
for managers and workers. As we have seen, such incentives were
undermined by the nature of the system.
The potential for creating extractive growth gives an impetus to
political centralization and is the reason why King Shyaam wished to
create the Kuba Kingdom, and likely accounts for why the Natufians
in the Middle East set up a primitive form of law and order,
hierarchy, and extractive institutions that would ultimately lead to
the Neolithic Revolution. Similar processes also likely underpinned
the emergence of settled societies and the transition to agriculture in
the Americas, and can be seen in the sophisticated civilization that
the Mayas built on foundations laid by highly extractive institutions
coercing many for the benefit of their narrow elites.
The growth generated by extractive institutions is very different in
nature from growth created under inclusive institutions, however.
Most important, it is not sustainable. By their very nature, extractive
institutions do not foster creative destruction and generate at best
only a limited amount of technological progress. The growth they
engender thus lasts for only so long. The Soviet experience gives a
vivid illustration of this limit. Soviet Russia generated rapid growth as
it caught up rapidly with some of the advanced technologies in the

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world, and resources were allocated out of the highly inefficient
agricultural sector and into industry. But ultimately the incentives
faced in every sector, from agriculture to industry, could not
stimulate technological progress. This took place in only a few
pockets where resources were being poured and where innovation
was strongly rewarded because of its role in the competition with the
West. Soviet growth, however rapid it was, was bound to be relatively
short lived, and it was already running out of steam by the 1970s.
Lack of creative destruction and innovation is not the only reason
why there are severe limits to growth under extractive institutions.
The history of the Maya city-states illustrates a more ominous and,
alas, more common end, again implied by the internal logic of
extractive institutions. As these institutions create significant gains for
the elite, there will be strong incentives for others to fight to replace
the current elite. Infighting and instability are thus inherent features
of extractive institutions, and they not only create further
inefficiencies but also often reverse any political centralization,
sometimes even leading to the total breakdown of law and order and
descent into chaos, as the Maya city-states experienced following
their relative success during their Classical Era.
Though inherently limited, growth under extractive institutions
may nonetheless appear spectacular when it’s in motion. Many in the
Soviet Union and many more in the Western world were awestruck by
Soviet growth in the 1920s, ’30s, ’40s, ’50s, ’60s, and even as late as
the ’70s, in the same way that they are mesmerized by the breakneck
pace of economic growth in China today. But as we will discuss in
greater detail in 
chapter 15
, China under the rule of the Communist