Why Nations Fail

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

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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 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

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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 Party is another example of
society experiencing growth under extractive institutions
and is similarly unlikely to generate sustained growth unless
it undergoes a fundamental political transformation toward
inclusive political institutions.

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