The Dynamics and Limitations of Growth Under Extractive Institutions

Key Insight

While typically leading to stagnation and poverty, extractive institutions can, under specific conditions, generate economic growth, though it is usually neither sustained nor accompanied by 'creative destruction.' One mechanism for such growth occurs when elites directly allocate resources to high-productivity activities they control. Historical examples include the Caribbean Islands between the 16th and 18th centuries, where a planter elite, despite exploiting a majority slave population, produced sugar for world markets, making these islands wealthy for a period. Similarly, the Soviet Union achieved rapid industrialization from 1928 to the 1970s by state-directed resource allocation from agriculture to industry. This growth, however, is intrinsically limited, often stalling when these initial resource reallocations are exhausted, as seen in the Soviet Union in the 1970s.

A second path for growth under extractive political institutions emerges when the elite's position is secure enough to permit the development of somewhat inclusive economic institutions, without threatening their political power. This was observed in South Korea under General Park Chung-Hee, who, despite leading an authoritarian regime after a 1961 coup, actively promoted economic growth using already relatively inclusive economic institutions. The absence of a direct reliance on highly extractive economic institutions, coupled with US influence and a strong democracy movement, eventually facilitated South Korea's transition to inclusive political institutions in the 1980s. China's current economic growth, while rapid and state-controlled, also exemplifies growth under extractive institutions, with a central party guiding resource allocation and limited signs of a transition to pluralistic politics.

A critical factor for any growth under extractive institutions is a sufficient degree of political centralization. Without it, elites cannot maintain order, protect assets, or coordinate economic activity, leading to chaos and hindering even limited growth, as seen in many non-centralized states in sub-Saharan Africa. However, this growth is inherently fragile. Extractive political and economic institutions foster infighting, as the concentration of wealth and power incentivizes rival groups to seize control, often leading to civil wars, state collapse, and persistent lawlessness. Moreover, even if growth occurs with inclusive economic aspects, there's a constant risk that ruling elites will eventually use their concentrated power to revert to more extractive practices, undermining long-term prosperity unless political institutions transform to truly inclusive forms.