Inclusive and Extractive Institutions – The Wealth and Poverty of Nations by Daron Acemoglu and James A Robinson

Daron Acemoglu and James A Robinson explore the nature of economic growth and failure in Why Nations Fail: The Origins of Power, Prosperity, and Poverty, looking at the world through the combined perspectives of an economist and a political scientist. In fact, the two authors’ different fields of expertise actually allow them to look at the issues of poverty in a unique, nuanced way. Acemoglu and Robinson argue that whether or not a nation achieves sustained economic growth is due to the existing political and economic institutions. In fact, Acemoglu and Robinson divide the multitude of government structures into two fundamentally separate institutions: inclusive and extractive.

Acemoglu and Robinson define these two institutions in a way that explains the differing courses of economic development. According ot Acemoglu and Robinson, “inclusive economic institutions… are those that allow and encourage participation by the great mass of people in economic activities that make the best use of their talents and skills” (p. 144). In other words, they argue that inclusive institutions are those which allow individuals to make their own decisions about their work lives. Also, this definition necessitates that broad swathes of a country’s population must be included in economic activity. Likewise, “to be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract” (p. 144). The presence of private property creates incentives for citizens to achieve success in the long term. This, combined with a system that includes the bulk of the population, allows for a system that achieves near-maximum utility of its human and physical resources.

On the other hand, extractive institutions remove the majority of the population from participation in political or economic affairs. For example, during the Age of Exploration, the island of Barbados developed into a slave based economy. In fact, “two-thirds of the population were slaves with no access to education or economic opportunities, and no ability or incentive to use their talents or skills” (p. 146). However, while the slaves were without any political or economic agency, the landowners did have quite a bit of economic power and even rights to private property. These economic and political institutions were not enough to create an inclusive society, because the bulk of the population was still barred from participation. Likewise, extractive institutions also favor the elite who are in charge, allowing them to pull materials and opportunities from those that live under them.

Throughout history, extractive institutions have typically led to stagnant economic growth. Even though certain societies (for example, the USSR) have achieved some level of economic growth under extractive methods, they do not achieve long-term, stabilized economic growth. In fact, the countries which have developed long-term growth patterns did so with the parallel, gradual development of inclusive institutions, enabling large swathes of the population to participate in the political and economic systems of the country.

Works Cited:

Acemoglu, Daron, and James A Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity and Poverty. 1st ed. New York: Crown, 529. Web.

 

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