Nature and Limitations of Growth Under Extractive Institutions

Key Insight

Extractive political and economic institutions, by their design, necessitate wealth creation for extraction. A centralized state with a monopolized political power can establish law and order, implement a system of rules, and stimulate economic activity. However, growth under these institutions is fundamentally different from growth spurred by inclusive institutions; it is not sustained and primarily relies on existing technologies rather than fostering technological change.

Such growth can manifest by reallocating resources to sectors with higher productivity, even if the overall process is inefficient. Examples include the allocation of resources to sugar production in Caribbean islands like Barbados and Jamaica using slave labor, or the Soviet Union's focus on heavy industry. This approach can generate significant initial growth without necessitating technological innovation or 'creative destruction', leveraging untapped potential by moving labor or capital to more productive uses by fiat.

The inherent limitations of extractive growth stem from its inability to generate sustained technological change, primarily due to a lack of economic incentives and resistance from the ruling elites. Once readily available, inefficiently utilized resources have been reallocated, further economic gains become scarce, leading to stagnation. Additionally, the significant gains accrued by elites within extractive systems create strong incentives for others to vie for control, fostering political instability and infighting, which further undermines long-term development.