Unsustainable Growth Under Extractive Institutions

Key Insight

Extractive institutions, provided they achieve a minimal degree of political centralization, can generate some economic growth. Elites dominating these institutions often have incentives to encourage growth, as it means more resources available for them to extract. This type of growth is often achieved through forced resource allocation, as seen in the Soviet Union's heavy industry focus, or through the adoption of existing technologies and rapid investment, as exemplified by China's recent economic development.

However, growth under extractive institutions is inherently unsustainable and short-lived, primarily due to two critical reasons. Firstly, sustained economic growth requires continuous innovation, which is inseparable from 'creative destruction.' This process involves replacing old economic structures with new ones, and crucially, it destabilizes established power relations in the political realm. Because elites in extractive systems fear this political destabilization, they actively resist creative destruction, ultimately stifling long-term innovation and growth.

Secondly, the significant benefits and concentrated power derived by those who dominate extractive institutions make political power highly desirable. This intense desirability leads to constant conflict among various groups and individuals vying to obtain and control this power. Consequently, societies operating under extractive institutions are perpetually pushed towards political instability, which further undermines any potential for sustained economic development and reinforces a 'vicious circle' of underdevelopment.