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Why Nations Fail

"Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it, such as the $70 billion fortune apparently accumulated by ex-president Mubarak. The losers have been the Egyptian people, as they only too well understand."


"The Spaniards, while trying to survive, started sending out expeditions to find a new place that would offer greater riches and populations easier to coerce. In 1537 one of these expeditions, under the leadership of Juan de Ayolas, penetrated up the Paraná River, searching for a route to the Incas. On its way, it made contact with the Guaraní, a sedentary people with an agricultural economy based on maize and cassava. De Ayolas immediately realized that the Guaraní were a completely different proposition from the Charrúas and the Querandí. After a brief conflict, the Spanish overcame Guaraní resistance and founded a town, Nuestra Señora de Santa María de la Asunción, which remains the capital of Paraguay today."


"within four years Buenos Aires was abandoned as all the Spaniards who’d settled there moved to the new town."


"Early Spanish and, as we will see, English colonists were not interested in tilling the soil themselves; they wanted others to do it for them, and they wanted riches, gold and silver, to plunder."


"Spanish expansion and colonization of the Americas began in earnest with the invasion of Mexico by Hernán Cortés in 1519, the expedition of Francisco Pizarro to Peru a decade and a half later, and the expedition of Pedro de Mendoza to the Río de la Plata just two years after that. Over the next century, Spain conquered and colonized most of central, western, and southern South America, while Portugal claimed Brazil to the east."


"When Cortés and his men arrived at the great Aztec capital of Tenochtitlan on November 8, 1519, they were welcomed by Moctezuma, the Aztec emperor, who had decided, in the face of much advice from his counselors, to welcome the Spaniards peacefully."


"The strategy and institutions of conquest perfected in Mexico were eagerly adopted elsewhere in the Spanish Empire. Nowhere was this done more effectively than in Pizarro’s conquest of Peru."


"The Spanish laid a trap and sprang it. They killed Atahualpa’s guards and retainers, possibly as many as two thousand people, and captured the king. To gain his freedom, Atahualpa had to promise to fill one room with gold and two more of the same size with silver. He did this, but the Spanish, reneging on their promises, strangled him in July 1533. That November, the Spanish captured the Inca capital of Cusco, where the Incan aristocracy received the same treatment as Atahualpa, being imprisoned until they produced gold and silver."


"Then he revived and adapted an Inca labor institution known as the mita, which, in the Incas’ language, Quechua, means “a turn.” Under their mita system, the Incas had used forced labor to run plantations designed to provide food for temples, the aristocracy, and the army. In return, the Inca elite provided famine relief and security. In de Toledo’s hands the mita, especially the Potosí mita, was to become the largest and most onerous scheme of labor exploitation in the Spanish colonial period. De Toledo defined a huge catchment area, running from the middle of modern-day Peru and encompassing most of modern Bolivia. It covered about two hundred thousand square miles. In this area, one-seventh of the male inhabitants, newly arrived in their reducciones, were required to work in the mines at Potosí. The Potosí mita endured throughout the entire colonial period and was abolished only in 1825."


"They chose North America not because it was attractive, but because it was all that was available. The “desirable” parts of the Americas, where the indigenous population to exploit was plentiful and where the gold and silver mines were located, had already been occupied. The English got the leftovers."


"On May 14, 1607, they founded the settlement of Jamestown. Though the settlers on board the ships owned by the Virginia Company were English, they had a model of colonization heavily influenced by the template set up by Cortés, Pizarro, and de Toledo. Their first plan was to capture the local chief and use him as a way to get provisions and to coerce the population into producing food and wealth for them."


"The situation was rescued by Captain John Smith. Smith, whose writings provide one of our main sources of information about the early development of the colony, was a larger-than-life character. Born in England, in rural Lincolnshire, he disregarded his father’s desires for him to go into business and instead became a soldier of fortune."


"With Newport sailing back to England for supplies and more colonists, and Wingfield uncertain about what to do, it was Smith who saved the colony. He initiated a series of trading missions that secured vital food supplies. On one of these he was captured by Opechancanough, one of Wahunsunacock’s younger brothers, and was brought before the king at Werowocomoco. He was the first Englishman to meet Wahunsunacock, and it was at this initial meeting that according to some accounts Smith’s life was saved only at the intervention of Wahunsunacock’s young daughter Pocahontas."


"Back in the settlement, Smith was completely in charge and imposed the rule that “he that will not worke shall not eat.” Jamestown survived a second winter."


"The new mode of governance left no room for Smith, who, disgruntled, returned to England in the autumn of 1609. Without his resourcefulness, and with Wahunsunacock throttling the food supply, the colonists in Jamestown perished. Of the five hundred who entered the winter, only sixty were alive by March. The situation was so desperate that they resorted to cannibalism."


"Since it was possible to coerce neither the locals nor the settlers, the only alternative was to give the settlers incentives. In 1618 the company began the “headright system,” which gave each male settler fifty acres of land and fifty more acres for each member of his family and for all servants that a family could bring to Virginia."


"the only option for an economically viable colony was to create institutions that gave the colonists incentives to invest and to work hard."


"In all cases it proved to be impossible to force settlers into a rigid hierarchical society, because there were simply too many options open to them in the New World. Instead, they had to be provided with incentives for them to want to work. And soon they were demanding more economic freedom and further political rights."


"It was more like class or even ethnic warfare than an independence movement, and it united all the elites in opposition. If independence allowed popular participation in politics, the local elites, not just Spaniards, were against it. Consequentially, Mexican elites viewed the Cádiz Constitution, which opened the way to popular participation, with extreme skepticism; they would never recognize its legitimacy."


"The Constitution of the United States did not create a democracy by modern standards. Who could vote in elections was left up to the individual states to determine. While northern states quickly conceded the vote to all white men irrespective of how much income they earned or property they owned, southern states did so only gradually. No state enfranchised women or slaves, and as property and wealth restrictions were lifted on white men, racial franchises explicitly disenfranchising black men were introduced."


"The Civil War was bloody and destructive. But both before and after it there were ample economic opportunities for a large fraction of the population, especially in the northern and western United States. The situation in Mexico was very different."


"The striking thing about the evidence on patenting in the United States is that people who were granted patents came from all sorts of backgrounds and all walks of life, not just the rich and the elite. Many made fortunes based on their patents."


"Just as the United States in the nineteenth century was more democratic politically than almost any other nation in the world at the time, it was also more democratic than others when it came to innovation. This was critical to its path to becoming the most economically innovative nation in the world."


"In fact, in 1910, the year in which the Mexican Revolution started, there were only forty-two banks in Mexico, and two of these controlled 60 percent of total banking assets."


"Like Iturbide and Santa Ana before him, DĂ­az started life as a military commander. Such a career path into politics was certainly known in the United States. The first president of the United States, George Washington, was also a successful general in the War of Independence. Ulysses S. Grant, one of the victorious Union generals of the Civil War, became president in 1869, and Dwight D. Eisenhower, the supreme commander of the Allied Forces in Europe during the Second World War, was president of the United States between 1953 and 1961. Unlike Iturbide, Santa Ana, and DĂ­az, however, none of these military men used force to get into power."


"Díaz violated people’s property rights, facilitating the expropriation of vast amounts of land, and he granted monopolies and favors to his supporters in all lines of business, including banking."


"the profit motive, which underpinned the monopolistic nature of the banking industry in Mexico, was present in the United States, too. But this profit motive was channeled differently because of the radically different U.S. institutions. The bankers faced different economic institutions, institutions that subjected them to much greater competition. And this was largely because the politicians who wrote the rules for the bankers faced very different incentives themselves, forged by different political institutions."


"In the United States a long series of legislative acts, ranging from the Land Ordinance of 1785 to the Homestead Act of 1862, gave broad access to frontier lands. Though indigenous peoples had been sidelined, this created an egalitarian and economically dynamic frontier. In most Latin American countries, however, the political institutions there created a very different outcome. Frontier lands were allocated to the politically powerful and those with wealth and contacts, making such people even more powerful."


"The economic institutions that made Carlos Slim who he is are very different from those in the United States. If you’re a Mexican entrepreneur, entry barriers will play a crucial role at every stage of your career. These barriers include expensive licenses you have to obtain, red tape you have to cut through, politicians and incumbents who will stand in your way, and the difficulty of getting funding from a financial sector often in cahoots with the incumbents you’re trying to compete against. These barriers can be either insurmountable, keeping you out of lucrative areas, or your greatest friend, keeping your competitors at bay."


"Slim has made his money in the Mexican economy in large part thanks to his political connections. When he has ventured into the United States, he has not been successful. In 1999 his Grupo Curso bought the computer retailer CompUSA. At the time, CompUSA had given a franchise to a firm called COC Services to sell its merchandise in Mexico. Slim immediately violated this contract with the intention of setting up his own chain of stores, without any competition from COC. But COC sued CompUSA in a Dallas court. There are no amparos in Dallas, so Slim lost, and was fined $454 million."


"In rich countries, individuals are healthier, live longer, and are much better educated. They also have access to a range of amenities and options in life, from vacations to career paths, that people in poor countries can only dream of. People in rich countries also drive on roads without potholes, and enjoy toilets, electricity, and running water in their houses. They also typically have governments that do not arbitrarily arrest or harass them; on the contrary, the governments provide services, including education, health care, roads, and law and order. Notable, too, is the fact that the citizens vote in elections and have some voice in the political direction their countries take."


"The average citizen of the United States is seven times as prosperous as the average Mexican and more than ten times as the resident of Peru or Central America. She is about twenty times as prosperous as the average inhabitant of sub-Saharan Africa, and almost forty times as those living in the poorest African countries such as Mali, Ethiopia, and Sierra Leone."


"The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is simple; it is because of the very different institutions on the two sides of the border, which create very different incentives for the inhabitants of Nogales, Arizona, versus Nogales, Sonora."


"As institutions influence behavior and incentives in real life, they forge the success or failure of nations."


"These entrepreneurs were confident from the beginning that their dream projects could be implemented: they trusted the institutions and the rule of law that these generated and they did not worry about the security of their property rights."


"while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has."


"There is no necessity for a society to develop or adopt the institutions that are best for economic growth or the welfare of its citizens, because other institutions may be even better for those who control politics and political institutions. The powerful and the rest of society will often disagree about which set of institutions should remain in place and which ones should be changed. Carlos Slim would not have been happy to see his political connections disappear and the entry barriers protecting his businesses fizzle—no matter that the entry of new businesses would enrich millions of Mexicans."


"The great inequality of the modern world that emerged in the nineteenth century was caused by the uneven dissemination of industrial technologies and manufacturing production. It was not caused by divergence in agricultural performance."


"China, despite many imperfections in its economic and political system, has been the most rapidly growing nation of the past three decades. Chinese poverty until Mao Zedong’s death had nothing to do with Chinese culture; it was due to the disastrous way Mao organized the economy and conducted politics. In the 1950s, he promoted the Great Leap Forward, a drastic industrialization policy that led to mass starvation and famine. In the 1960s, he propagated the Cultural Revolution, which led to the mass persecution of intellectuals and educated people—anyone whose party loyalty might be doubted. This again led to terror and a huge waste of the society’s talent and resources. In the same way, current Chinese growth has nothing to do with Chinese values or changes in Chinese culture; it results from a process of economic transformation unleashed by the reforms implemented by Deng Xiaoping and his allies, who, after Mao Zedong’s death, gradually abandoned socialist economic policies and institutions, first in agriculture and then in industry."


"The ignorance hypothesis maintains that poor countries are poor because they have a lot of market failures and because economists and policymakers do not know how to get rid of them and have heeded the wrong advice in the past. Rich countries are rich because they have figured out better policies and have successfully eliminated these failures."


"On the face of it, the sustained economic decline that soon set in in Ghana after independence from Britain was caused by ignorance. The British economist Tony Killick, then working as an adviser for the government of Kwame Nkrumah, recorded many of the problems in great detail."


"This endless stream of economically irrational developments was not caused by the fact that Nkrumah or his advisers were badly informed or ignorant of the right economic policies. They had people like Killick and had even been advised by Nobel laureate Sir Arthur Lewis, who knew the policies were not good. What drove the form the economic policies took was the fact that Nkrumah needed to use them to buy political support and sustain his undemocratic regime."


"After all, if ignorance were the problem, well-meaning leaders would quickly learn what types of policies increased their citizens’ incomes and welfare, and would gravitate toward those policies."


"It wasn’t differences in knowledge or intentions between John Smith and Cortés that laid the seeds of divergence during the colonial period, and it wasn’t differences in knowledge between later U.S. presidents, such as Teddy Roosevelt or Woodrow Wilson, and Porfirio Díaz that made Mexico choose economic institutions that enriched elites at the expense of the rest of society at the end of the nineteenth and beginning of the twentieth centuries while Roosevelt and Wilson did the opposite. Rather, it was the differences in the institutional constraints the countries’ presidents and elites were facing."


"The experience of Ghana’s prime minister in 1971, Kofi Busia, illustrates how misleading the ignorance hypothesis can be. Busia faced a dangerous economic crisis. After coming to power in 1969, he, like Nkrumah before him, pursued unsustainable expansionary economic policies and maintained various price controls through marketing boards and an overvalued exchange rate. Though Busia had been an opponent of Nkrumah, and led a democratic government, he faced many of the same political constraints."


"The policies were chosen because they were good politics, enabling Busia to transfer resources to politically powerful groups, for example in urban areas, who needed to be kept contented."


"on December 27, 1971, Busia signed an agreement with the International Monetary Fund that included a massive devaluation of the currency. The IMF, the World Bank, and the entire international community put pressure on Busia to implement the reforms contained in the agreement."


"The immediate consequence of the currency’s devaluation was rioting and discontent in Accra, Ghana’s capital, that mounted uncontrollably until Busia was overthrown by the military, led by Lieutenant Colonel Acheampong, who immediately reversed the devaluation."


"the main obstacle to the adoption of policies that would reduce market failures and encourage economic growth is not the ignorance of politicians but the incentives and constraints they face from the political and economic institutions in their societies."


"China, for example, is one of the countries that made the switch from economic policies that caused poverty and the starvation of millions to those encouraging economic growth. But, as we will discuss in greater detail later, this did not happen because the Chinese Communist Party finally understood that the collective ownership of agricultural land and industry created terrible economic incentives. Instead, Deng Xiaoping and his allies, who were no less self-interested than their rivals but who had different interests and political objectives, defeated their powerful opponents in the Communist Party and masterminded a political revolution of sorts, radically changing the leadership and direction of the party. Their economic reforms, which created market incentives in agriculture and then subsequently in industry, followed from this political revolution. It was politics that determined the switch from communism and toward market incentives in China, not better advice or a better understanding of how the economy worked."


"poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose."


"Within a month of Japan’s August 15 unconditional surrender, Korea was divided at the 38th parallel into two spheres of influence. The South was administered by the United States. The North, by Russia. The uneasy peace of the cold war was shattered in June 1950 when the North Korean army invaded the South."


"When the brothers met, Hwang Pyŏng-Wŏn asked about how life was north of the 38th parallel. He had a car, but his brother didn’t. “Do you have a telephone?” he asked his brother. “No,” said his brother. “My daughter, who works at the Foreign Ministry, has a phone, but if you don’t know the code you can’t call.”"


"South Korea was led, and its early economic and political institutions were shaped, by the Harvard- and Princeton-educated, staunchly anticommunist Syngman Rhee, with significant support from the United States."


"Forged in the midst of the Korean War and against the threat of communism spreading to the south of the 38th parallel, South Korea was no democracy. Both Rhee and his equally famous successor, General Park Chung-Hee, secured their places in history as authoritarian presidents. But both governed a market economy where private property was recognized, and after 1961, Park effectively threw the weight of the state behind rapid economic growth, channeling credit and subsidies to firms that were successful."


"Kim Il-Sung, a leader of anti-Japanese communist partisans during the Second World War, established himself as dictator by 1947 and, with the help of the Soviet Union, introduced a rigid form of centrally planned economy as part of the so-called Juche system. Private property was outlawed, and markets were banned. Freedoms were curtailed not only in the marketplace, but in every sphere of North Koreans’ lives—except for those who happened to be part of the very small ruling elite around Kim Il-Sung and, later, his son and successor Kim Jong-Il."


"Il-Sung’s command economy and the Juche system soon proved to be a disaster. Detailed statistics are not available from North Korea, which is a secretive state, to say the least. Nonetheless, available evidence confirms what we know from the all-too-often recurring famines: not only did industrial production fail to take off, but North Korea in fact experienced a collapse in agricultural productivity."


"By the late 1990s, in just about half a century, South Korean growth and North Korean stagnation led to a tenfold gap between the two halves of this once-united country—imagine what a difference a couple of centuries could make."


"These teenagers know that they will not be able to own property, start a business, or become more prosperous even if many people engage illegally in private economic activities to make a living. They also know that they will not have legal access to markets where they can use their skills or their earnings to purchase the goods they need and desire."


"Those in the South obtain a good education, and face incentives that encourage them to exert effort and excel in their chosen vocation. South Korea is a market economy, built on private property. South Korean teenagers know that, if successful as entrepreneurs or workers, they can one day enjoy the fruits of their investments and efforts; they can improve their standard of living and buy cars, houses, and health care."


"Inclusive economic institutions, such as those in South Korea or in the United States, are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish."


"Inclusive economic institutions foster economic activity, productivity growth, and economic prosperity. Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovations."


"But such rights must exist for the majority of people in society."


"Inclusive economic institutions require secure property rights and economic opportunities not just for the elite but for a broad cross-section of society."


"In neither type of society was the vast mass of people able to make the economic decisions they wanted to; they were subject to mass coercion."


"We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset."


"Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education. Sustained economic growth is almost always accompanied by technological improvements that enable people (labor), land, and existing capital (buildings, existing machines, and so on) to become more productive."


"It should therefore be no surprise that it was U.S. society, not Mexico or Peru, that produced Thomas Edison, and that it was South Korea, not North Korea, that today produces technologically innovative companies such as Samsung and Hyundai."


"The United States could produce, or attract from foreign lands, the likes of Bill Gates, Steve Jobs, Sergey Brin, Larry Page, and Jeff Bezos, and the hundreds of scientists who made fundamental discoveries in information technology, nuclear power, biotech, and other fields upon which these entrepreneurs built their businesses. The supply of talent was there to be harnessed because most teenagers in the United States have access to as much schooling as they wish or are capable of attaining. Now imagine a different society, for example the Congo or Haiti, where a large fraction of the population has no means of attending school, or where, if they manage to go to school, the quality of teaching is lamentable, where teachers do not show up for work, and even if they do, there may not be any books."


"The low education level of poor countries is caused by economic institutions that fail to create incentives for parents to educate their children and by political institutions that fail to induce the government to build, finance, and support schools and the wishes of parents and children."


"Politics is the process by which a society chooses the rules that will govern it."


"If the distribution of power is narrow and unconstrained, then the political institutions are absolutist, as exemplified by the absolutist monarchies reigning throughout the world during much of history. Under absolutist political institutions such as those in North Korea and colonial Latin America, those who can wield this power will be able to set up economic institutions to enrich themselves and augment their power at the expense of society. In contrast, political institutions that distribute power broadly in society and subject it to constraints are pluralistic. Instead of being vested in a single individual or a narrow group, political power rests with a broad coalition or a plurality of groups."


"Max Weber, who we met in the previous chapter, provided the most famous and widely accepted definition of the state, identifying it with the “monopoly of legitimate violence” in society. Without such a monopoly and the degree of centralization that it entails, the state cannot play its role as enforcer of law and order, let alone provide public services and encourage and regulate economic activity. When the state fails to achieve almost any political centralization, society sooner or later descends into chaos, as did Somalia."


"We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions."


"When existing elites are challenged under extractive political institutions and the newcomers break through, the newcomers are likewise subject to only a few constraints. They thus have incentives to maintain these political institutions and create a similar set of economic institutions, as Porfirio DĂ­az and the elite surrounding him did at the end of the nineteenth century in Mexico."


"Such political institutions also make it harder for others to usurp power and undermine the foundations of inclusive institutions. Those controlling political power cannot easily use it to set up extractive economic institutions for their own benefit. Inclusive economic institutions, in turn, create a more equitable distribution of resources, facilitating the persistence of inclusive political institutions."


"In fact, combinations of extractive and inclusive institutions are generally unstable."


"inclusive economic institutions will neither support nor be supported by extractive political ones. Either they will be transformed into extractive economic institutions to the benefit of the narrow interests that hold power, or the economic dynamism they create will destabilize the extractive political institutions, opening the way for the emergence of inclusive political institutions."


"Economic institutions that create incentives for economic progress may simultaneously redistribute income and power in such a way that a predatory dictator and others with political power may become worse off."


"New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions."


"powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction."


"When there is a conflict, the wishes of all parties cannot be simultaneously met. Some will be defeated and frustrated, while others will succeed in securing outcomes they like. Who the winners of this conflict are has fundamental implications for a nation’s economic trajectory. If the groups standing against growth are the winners, they can successfully block economic growth, and the economy will stagnate."


"Reforming economic institutions to improve individual property rights would have made the Kongolese society at large more prosperous. But it is unlikely that the elite would have benefited from this wider prosperity. First, such reforms would have made the elite economic losers, by undermining the wealth that the slave trade and slave plantations brought them. Second, such reforms would have been possible only if the political power of the king and the elite were curtailed."


"First, even if economic institutions are extractive, growth is possible when elites can directly allocate resources to high-productivity activities that they themselves control."


"The second type of growth under extractive political institutions arises when the institutions permit the development of somewhat, even if not completely, inclusive economic institutions."


"The rapid industrialization of South Korea under General Park is an example. Park came to power via a military coup in 1961, but he did so in a society heavily supported by the United States and with an economy where economic institutions were essentially inclusive. Though Park’s regime was authoritarian, it felt secure enough to promote economic growth, and in fact did so very actively—perhaps partly because the regime was not directly supported by extractive economic institutions."


"Differently from the Soviet Union and most other cases of growth under extractive institutions, South Korea transitioned from extractive political institutions toward inclusive political institutions in the 1980s. This successful transition was due to a confluence of factors. By the 1970s, economic institutions in South Korea had become sufficiently inclusive that they reduced one of the strong rationales for extractive political institutions—the economic elite had little to gain from their own or the military’s dominance of politics. The relative equality of income in South Korea also meant that the elite had less to fear from pluralism and democracy. The key influence of the United States, particularly given the threat from North Korea, also meant that the strong democracy movement that challenged the military dictatorship could not be repressed for long."


"Though General Park’s assassination in 1979 was followed by another military coup, led by Chun Doo-hwan, Chun’s chosen successor, Roh Tae-woo, initiated a process of political reforms that led to the consolidation of a pluralistic democracy after 1992."


"While the early stages of Chinese growth were spearheaded by radical market reforms in the agricultural sector, reforms in the industrial sector have been more muted. Even today, the state and the Communist Party play a central role in deciding which sectors and which companies will receive additional capital and will expand—in the process, making and breaking fortunes. As in the Soviet Union in its heyday, China is growing rapidly, but this is still growth under extractive institutions, under the control of the state, with little sign of a transition to inclusive political institutions. The fact that Chinese economic institutions are still far from fully inclusive also suggests that a South Korean–style transition is less likely, though of course not impossible."


"Even though extractive institutions can generate some growth, they will usually not generate sustained economic growth, and certainly not the type of growth that is accompanied by creative destruction. When both political and economic institutions are extractive, the incentives will not be there for creative destruction and technological change. For a while the state may be able to create rapid economic growth by allocating resources and people by fiat, but this process is intrinsically limited. When the limits are hit, growth stops, as it did in the Soviet Union in the 1970s."


"when growth comes under extractive political institutions but where economic institutions have inclusive aspects, as they did in South Korea, there is always the danger that economic institutions become more extractive and growth stops. Those controlling political power will eventually find it more beneficial to use their power to limit competition, to increase their share of the pie, or even to steal and loot from others rather than support economic progress."


"Almighty God uses thunder, lightening [sic], and other blows which issue from his throne to scourge the sons whom he wishes to redeem. Accordingly, since a catastrophic pestilence from the East has arrived in a neighboring kingdom, it is to be very much feared that, unless we pray devoutly and incessantly, a similar pestilence will stretch its poisonous branches into this realm, and strike down and consume the inhabitants. Therefore we must all come before the presence of the Lord in confession, reciting psalms."


"The plague hit and quickly wiped out about half the English population. Such catastrophes can have a huge effect on the institutions of society. Perhaps understandably, scores of people went mad. Boccaccio noted that “some maintained that an infallible way of warding off this appalling evil was to drink heavily, enjoy life to the full, go round singing and merrymaking, gratify all one’s cravings whenever the opportunity offered, and shrug the thing off as an enormous joke . . . and this explains why those women who recovered were possibly less chaste in the period that followed.” Yet the plague also had a socially, economically, and politically transformative impact on medieval European societies."


"The massive scarcity of labor created by the plague shook the foundations of the feudal order. It encouraged peasants to demand that things change."


"Though in 1346 there were few differences between Western and Eastern Europe in terms of political and economic institutions, by 1600 they were worlds apart. In the West, workers were free of feudal dues, fines, and regulations and were becoming a key part of a booming market economy. In the East, they were also involved in such an economy, but as coerced serfs growing the food and agricultural goods demanded in the West. It was a market economy, but not an inclusive one."


"The Black Death is a vivid example of a critical juncture, a major event or confluence of factors disrupting the existing economic or political balance in society. A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On the one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe."


"The culmination of the institutional struggles of the sixteenth and seventeenth centuries were two landmark events: the English Civil War between 1642 and 1651, and particularly the Glorious Revolution of 1688."


"The Glorious Revolution limited the power of the king and the executive, and relocated to Parliament the power to determine economic institutions. At the same time, it opened up the political system to a broad cross section of society, who were able to exert considerable influence over the way the state functioned. The Glorious Revolution was the foundation for creating a pluralistic society, and it built on and accelerated a process of political centralization. It created the world’s first set of inclusive political institutions."


"is not a coincidence that the Industrial Revolution started in England a few decades following the Glorious Revolution. The great inventors such as James Watt (perfecter of the steam engine), Richard Trevithick (the builder of the first steam locomotive), Richard Arkwright (the inventor of the spinning frame), and Isambard Kingdom Brunel (the creator of several revolutionary steamships) were able to take up the economic opportunities generated by their ideas, were confident that their property rights would be respected, and had access to markets where their innovations could be profitably sold and used."


"The events leading up to the Glorious Revolution forged a broad and powerful coalition able to place durable constraints on the power of the monarchy and the executive, which were forced to be open to the demands of this coalition. This laid the foundations for pluralistic political institutions, which then enabled the development of economic institutions that would underpin the first Industrial Revolution."


"Spain this mattered little, because after 1492 the Spanish Crown had a vast American empire and benefited massively from the gold and silver found there. In England the situation was different. Elizabeth I was far less financially independent, so she had to beg Parliament for more taxes. In exchange, Parliament demanded concessions, in particular restrictions on the right of Elizabeth to create monopolies. It was a conflict Parliament gradually won. In Spain the Cortes lost a similar conflict. Trade wasn’t just monopolized; it was monopolized by the Spanish monarchy."


"Elizabeth I and her successors could not monopolize the trade with the Americas. Other European monarchs could. So while in England, Atlantic trade and colonization started creating a large group of wealthy traders with few links to the Crown, this was not the case in Spain or France. The English traders resented royal control and demanded changes in political institutions and the restriction of royal prerogatives. They played a critical role in the English Civil War and the Glorious Revolution. Similar conflicts took place everywhere. French kings, for example, faced the Fronde Rebellion between 1648 and 1652. The difference was that in England it was far more likely that the opponents to absolutism would prevail because they were relatively wealthy and more numerous than the opponents to absolutism in Spain and France."


"Though Indian merchants did trade throughout the Indian Ocean, and a major textile industry developed, the caste system and Mughal absolutism were serious impediments to the development of inclusive economic institutions in India. By the nineteenth century, things were even less hospitable for industrialization as India became an extractive colony of the English."


"China was never formally colonized by a European power, but after the English successfully defeated the Chinese in the Opium Wars between 1839 and 1842, and then again between 1856 and 1860, China had to sign a series of humiliating treaties and allow European exports to enter."


"While Tokugawa rule in Japan was absolutist and extractive, it had only a tenuous hold on the leaders of the other major feudal domains and was susceptible to challenge. Even though there were peasant rebellions and civil strife, absolutism in China was stronger, and the opposition less organized and autonomous. There were no equivalents of the leaders of the other domains in China who could challenge the absolutist rule of the emperor and trace an alternative institutional path."


"China continued in its absolutist path after the Opium Wars, while the U.S. threat cemented the opposition to Tokugawa rule in Japan and led to a political revolution, the Meiji Restoration,"


"In 1453 the Ottomans under Sultan Mehmet II captured Constantinople, making it their capital. During the rest of the century, the Ottomans conquered large parts of the Balkans and most of the rest of Turkey. In the first half of the sixteenth century, Ottoman rule spread throughout the Middle East and North Africa. By 1566, at the death of Sultan SĂĽleyman I, known as the Magnificent, their empire stretched from Tunisia in the East, through Egypt, all the way to Mecca in the Arabian Peninsula, and on to what is now modern Iraq. The Ottoman state was absolutist, with the sultan accountable to few and sharing power with none."


"“Soviet Russia,” he recalled in his 1931 autobiography, “was a revolutionary government with an evolutionary plan. Their plan was not to end evils such as poverty and riches, graft, privilege, tyranny, and war by direct action, but to seek out and remove their causes. They had set up a dictatorship, supported by a small, trained minority, to make and maintain for a few generations a scientific rearrangement of economic forces which would result in economic democracy first and political democracy last.”"


"Lenin had died in 1924, and by 1927 Joseph Stalin had consolidated his grip on the country. He purged his opponents and launched a drive to rapidly industrialize the country. He did it via energizing the State Planning Committee, Gosplan, which had been founded in 1921. Gosplan wrote the first Five-Year Plan, which ran between 1928 and 1933. Economic growth Stalin style was simple: develop industry by government command and obtain the necessary resources for this by taxing agriculture at very high rates."


"The communist state did not have an effective tax system, so instead Stalin “collectivized” agriculture. This process entailed the abolition of private property rights to land and the herding of all people in the countryside into giant collective farms run by the Communist Party. This made it much easier for Stalin to grab agricultural output and use it to feed all the people who were building and manning the new factories. The consequences of this for the rural folk were calamitous. The collective farms completely lacked incentives for people to work hard, so production fell sharply. So much of what was produced was extracted that there was not enough to eat. People began to starve to death."


"fact, between 1928 and 1960 national income grew at 6 percent a year, probably the most rapid spurt of economic growth in history up until then. This quick economic growth was not created by technological change, but by reallocating labor and by capital accumulation through the creation of new tools and factories."


"As late as 1977, a leading academic textbook by an English economist argued that Soviet-style economies were superior to capitalist ones in terms of economic growth, providing full employment and price stability and even in producing people with altruistic motivation. Poor old Western capitalism did better only at providing political freedom. Indeed, the most widely used university textbook in economics, written by Nobel Prize–winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union."


"All plans were labeled “draft” or “preliminary.” Only one copy of a plan labeled “final”—that for light industry in 1939—has ever come to light. Stalin himself said in 1937 that “only bureaucrats can think that planning work ends with the creation of the plan. The"


"If you made a decision that turned out badly, you might get shot. Better to avoid all responsibility."


"Stalin’s response was to have those who organized the census arrested and sent to Siberia or shot. He ordered another census, which took place in 1939. This time the organizers got it right; they found that the population was actually 171 million."


"Stalin understood that in the Soviet economy, people had few incentives to work hard. A natural response would have been to introduce such incentives, and sometimes he did—for example, by directing food supplies to areas where productivity had fallen—to reward improvements. Moreover, as early as 1931 he gave up on the idea of creating “socialist men and women” who would work without monetary incentives. In a famous speech he criticized “equality mongering,” and thereafter not only did different jobs get paid different wages but also a bonus system was introduced. It"


"Unlike in a market economy, prices in the Soviet Union were set by the government, and thus bore little relation to value."


"In June 1940, for example, a law made absenteeism, defined as any twenty minutes unauthorized absence or even idling on the job, a criminal offense that could be punished by six months’ hard labor and a 25 percent cut in pay."


"Though you can move someone to a factory, you cannot force people to think and have good ideas by threatening to shoot them. Coercion like this might have generated a high output of sugar in Barbados or Jamaica, but it could not compensate for the lack of incentives in a modern industrial economy."


"The fact that truly effective incentives could not be introduced in the centrally planned economy was not due to technical mistakes in the design of the bonus schemes. It was intrinsic to the whole method by which extractive growth had been achieved. It had been done by government command, which could solve some basic economic problems. But stimulating sustained economic growth required that individuals use their talent and ideas, and this could never be done with a Soviet-style economic system."


"There is a fundamental difference between farming and herding and hunting-gathering. The former is based on the domestication of plant and animal species, with active intervention in their life cycles to change genetics to make those species more useful to humans. Domestication is a technological change that enables humans to produce a lot more food from the available plants and animals."


"The early growth of the Natufians did not become sustained for the same reason that Soviet growth fizzled out. Though highly significant, even revolutionary for its time, this was growth under extractive institutions. For the Natufian society it was also likely that this type of growth created deep conflicts over who would control institutions and the extraction they enabled."


"Sometimes infighting simply replaces one elite with another. Sometimes it destroys the whole extractive society, unleashing a process of state and societal collapse, as the spectacular civilization that Maya city-states built more than one thousand years ago experienced."


"The Maya city-states in the area of southern Mexico, Belize, Guatemala, and Western Honduras in fact built a fairly sophisticated civilization under their own brand of extractive institutions. The Maya experience illustrates not only the possibility of growth under extractive institutions but also another fundamental limit to this type of growth: the political instability that emerges and ultimately leads to collapse of both society and state as different groups and people fight to become the extractors."


"Maya cities first began to develop around 500 BC. These early cities eventually failed, sometime in the first century AD. A new political model then emerged, creating the foundation for the Classic Era, between AD 250 and 900. This period marked the full flowering of Maya culture and civilization. But this more sophisticated civilization would also collapse in the course of the next six hundred years. By the time the Spanish conquistadors arrived in the early sixteenth century, the great temples and palaces of such Maya sites as Tikal, Palenque, and Calakmul had receded into the forest, not to be rediscovered until the nineteenth century."


"The Mayas were skilled builders who independently invented cement. Their buildings and their inscriptions provide vital information on the trajectories of the Maya cities, as they often recorded events dated according to the Long Count."


"Around AD 500 there are few dated monuments. For example, the Long Count date corresponding to AD 514 recorded just ten. There was then a steady increase, reaching twenty by AD 672 and forty by the middle of the eighth century. After this the number of dated monuments collapses. By the ninth century, it is down to ten per year, and by the tenth century, to zero."


"In the period AD 400–449, the population was negligible, estimated at about six hundred people. It rose steadily to a peak of twenty-eight thousand in AD 750–799. Though this does not appear large by contemporary urban standards, it was massive for that period; these numbers imply that in this period, Copán had a larger population than London or Paris. Other Maya cities, such as Tikal and Calakmul, were undoubtedly much larger. In line with the evidence from the Long Count dates, AD 800 was the population peak for Copán. After this it began to decline, and by AD 900 it had fallen to around fifteen thousand people."


"The Maya’s economy was based on extensive occupational specialization, with skilled potters, weavers, woodworkers, and tool and ornament makers. They also traded obsidian, jaguar pelts, marine shells, cacao, salt, and feathers among themselves and other polities over long distances in Mexico. They probably had money, too, and like the Aztecs, used cacao beans for currency."


"The overwhelming fact about the Maya collapse is that it coincides with the overthrow of the political model based on the k’uhul ajaw. We saw in Copán that after Yax Pasaj’s death in AD 810 there were no more kings."


"around this time the royal palaces were abandoned. Twenty miles to the north of Copán, in the city of Quiriguá, the last king, Jade Sky, ascended to the throne between AD 795 and 800. The last dated monument is from AD 810 by the Long Count, the same year that Yax Pasaj died. The city was abandoned soon after. Throughout the Maya area the story is the same; the political institutions that had provided the context for the expansion of trade, agriculture, and population vanished. Royal courts did not function, monuments and temples were not carved, and palaces were emptied. As political and social institutions unraveled, reversing the process of state centralization, the economy contracted and the population fell."


"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"


"One of the key bases for the economic expansion of Venice was a series of contractual innovations making economic institutions much more inclusive."


"The most famous was the commenda, a rudimentary type of joint stock company, which formed only for the duration of a single trading mission. A commenda involved two partners, a “sedentary” one who stayed in Venice and one who traveled. The sedentary partner put capital into the venture, while the traveling partner accompanied the cargo. Typically, the sedentary partner put in the lion’s share of the capital."


"Studying official documents, one sees how powerful a force the commenda was in fostering upward social mobility: these documents are full of new names, people who had previously not been among the Venetian elite. In government documents of AD 960, 971, and 982, the number of new names comprise 69 percent, 81 percent, and 65 percent, respectively, of those recorded."


"The debates and constitutional amendments of 1286 presaged La Serrata (“The Closure”) of Venice. In February 1297, it was decided that if you had been a member of the Great Council in the previous four years, you received automatic nomination and approval. New nominations now had to be approved by the Council of Forty, but with only twelve votes. After September 11, 1298, current members and their families no longer needed confirmation. The Great Council was now effectively sealed to outsiders, and the initial incumbents had become a hereditary aristocracy. The seal on this came in 1315, with the Libro d’Oro, or “Gold Book,” which was an official registry of the Venetian nobility."


"Having implemented a political Serrata, the Great Council then moved to adopt an economic Serrata. The switch toward extractive political institutions was now being followed by a move toward extractive economic institutions."


"Most important, they banned the use of commenda contracts, one of the great institutional innovations that had made Venice rich. This shouldn’t be a surprise: the commenda benefited new merchants, and now the established elite was trying to exclude them."


"Another step came when, starting in 1314, the Venetian state began to take over and nationalize trade. It organized state galleys to engage in trade and, from 1324 on, began to charge individuals high levels of taxes if they wanted to engage in trade. Long-distance trade became the preserve of the nobility."


"Venice appeared to have been on the brink of becoming the world’s first inclusive society, but it fell to a coup. Political and economic institutions became more extractive, and Venice began to experience economic decline. By 1500 the population had shrunk to one hundred thousand. Between 1650 and 1800, when the population of Europe rapidly expanded, that of Venice contracted. Today the only economy Venice has, apart from a bit of fishing, is tourism."


"First, moves toward inclusive institutions, as our account of Venice shows, can be reversed. Venice became prosperous. But its political and economic institutions were overthrown, and that prosperity went into reverse. Today Venice is rich only because people who make their income elsewhere choose to spend it there admiring the glory of its past."


"As in Venice, Rome’s initial economic success was based on inclusive institutions—at least by the standards of their time. As in Venice, these institutions became decidedly more extractive over time. With Rome, this was a consequence of the change from the Republic (510 BC–49 BC) to the Empire (49 BC–AD 476)."


"Roman citizens created the republic by overthrowing their king, Lucius Tarquinius Superbus, known as Tarquin the Proud, around 510 BC. The republic cleverly designed political institutions with many inclusive elements. It was governed by magistrates elected for a year. That the office of magistrate was elected, annually, and held by multiple people at the same time reduced the ability of any one person to consolidate or exploit his power. The republic’s institutions contained a system of checks and balances that distributed power fairly widely."


"Roman growth was unsustainable, occurring under institutions that were partially inclusive and partially extractive. Though Roman citizens had political and economic rights, slavery was widespread and very extractive, and the elite, the senatorial class, dominated both the economy and politics. Despite the presence of the Plebeian Assembly and plebeian tribute, for example, real power rested with the Senate, whose members came from the large landowners constituting the senatorial class."


"According to the Roman historian Plutarch, Tiberius Gracchus, when traveling through Etruria, a region in what is now central Italy, became aware of the hardship that families of citizen-soldiers were suffering. Whether because of this experience or because of other frictions with the powerful senators of his time, he would soon embark upon a daring plan to change land allocation in Italy. He stood for plebeian tribune in 133 BC, then used his office to propose land reform: a commission would investigate whether public lands were being illegally occupied and would redistribute land in excess of the legal limit of three hundred acres to landless Roman citizens."


"Things came to a head when Tiberius Gracchus claimed for his land reform commission the funds left by the king of the Greek city Pergamum to the Roman people. He also attempted to stand for tribune a second time, partly because he was afraid of persecution by the Senate after he stepped down. This gave the senators the pretext to charge that Tiberius was trying to declare himself king. He and his supporters were attacked, and many were killed. Tiberius Gracchus himself was one of the first to fall, though his death would not solve the problem, and others would attempt to reform the distribution of land and other aspects of Roman economy and society."


"The political institutions forming the core of the Roman Republic were overthrown by Julius Caesar in 49 BC when he moved his legion across the Rubicon, the river separating the Roman provinces of Cisalpine Gaul from Italy. Rome fell to Caesar, and another civil war broke out. Though Caesar was victorious, he was murdered by disgruntled senators, led by Brutus and Cassius, in 44 BC."


"Since the end of the second century, civil war had become a fact of life in the Roman Empire. Between the death of Marcus Aurelius in AD 180 until the collapse of the Western Roman Empire in AD 476, there was hardly a decade that did not see a civil war or a palace coup against an emperor. Few emperors died of natural causes or in battle. Most were murdered by usurpers or their own troops."


"THE EARLY fifth century, the barbarians were literally at the gate. Some historians argue that it was a consequence of the more formidable opponents the Romans faced during the late Empire. But the success of the Goths, Huns, and Vandals against Rome was a symptom, not the cause, of Rome’s decline. During the Republic, Rome had dealt with much more organized and threatening opponents, such as the Carthaginians."


"Rome’s increasingly extractive political and economic institutions generated its demise because they caused infighting and civil war. The origins of the decline go back at least to Augustus’s seizure of power, which set in motion changes that made political institutions much more extractive. These included changes in the structure of the army, which made secession impossible, thus removing a crucial element that ensured political representation for common Romans."


"Equally important, as the empire developed, more and more agricultural workers were reduced to semi-servile status and tied to the land. The status of these servile “coloni” is extensively discussed in legal documents such as the Codex Theodosianus and Codex Justinianus, and probably originated during the reign of Diocletian (AD 284 to 305). The rights of landlords over the coloni were progressively increased. The emperor Constantine in 332 allowed landlords to chain a colonus whom they suspected was trying to escape, and from AD 365, coloni were not allowed to sell their own property without their landlord’s permission."


"A remarkable thing about new technologies in the Roman period is that their creation and spread seem to have been driven by the state. This is good news, until the government decides that it is not interested in technological development—an all-too-common occurrence due to the fear of creative destruction."


"Another important reason for the lack of technological innovation was the prevalence of slavery. As the territories Romans controlled expanded, vast numbers were enslaved, often being brought back to Italy to work on large estates. Many citizens in Rome did not need to work: they lived off the handouts from the government."


"For instance, during the reduction of the rural population to the status of serfs, slavery disappeared from Europe. At a time when it was possible for elites to reduce the entire rural population to serfdom, it did not seem necessary to have a separate class of slaves as every previous society had had."


"How the Atlantic trade led to sharply divergent paths between Western Europe and Africa is yet another example of institutional divergence resulting from the interaction between critical junctures and existing institutional differences. While in England the profits of the slave trade helped to enrich those who opposed absolutism, in Africa they helped to create and strengthen absolutism."


"By the sixteenth century, Europe was institutionally very distinct from sub-Saharan Africa and the Americas. Though not much richer than the most spectacular Asian civilizations in India or China, Europe differed from these polities in some key ways. For example, it had developed representative institutions of a sort unseen there."


"The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions."


"Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people."


"This intra-elite conflict ended with the War of the Roses, a long duel between the Houses of Lancaster and York, two families with contenders to be king. The winners were the Lancastrians, whose candidate for king, Henry Tudor, became Henry VII in 1485."


"His son, Henry VIII, then implemented through his chief minister, Thomas Cromwell, a revolution in government. In the 1530s, Cromwell introduced a nascent bureaucratic state. Instead of the government being just the private household of the king, it could become a separate set of enduring institutions."


"Charles’s increasingly absolutist behavior and extractive policies created resentment and resistance throughout the country. In 1640 he faced conflict with Scotland and, without enough money to put a proper army into the field, was forced to call Parliament to ask for more taxes. The so-called Short Parliament sat for only three weeks. The parliamentarians who came to London refused to talk about taxes, but aired many grievances, until Charles dismissed them. The Scots realized that Charles did not have the support of the nation and invaded England, occupying the city of Newcastle."


"Under the leadership of Oliver Cromwell, the Parliamentarians—known as the Roundheads after the style in which their hair was cropped—defeated the royalists, known as Cavaliers. Charles was tried and executed in 1649. His defeat and the abolition of the monarchy did not, however, result in inclusive institutions. Instead, monarchy was replaced by the dictatorship of Oliver Cromwell. Following Cromwell’s death, the monarchy was restored in 1660 and clawed back many of the privileges that had been stripped from it in 1649. Charles’s son, Charles II, then set about the same program of creating absolutism in England."


"These attempts were only intensified by his brother James II, who ascended to the throne after Charles’s death in 1685. In 1688 James’s attempt to reestablish absolutism created another crisis and another civil war. Parliament this time was more united and organized. They invited the Dutch Statholder, William of Orange, and his wife, Mary, James’s Protestant daughter, to replace James. William would bring an army and claim the throne, to rule not as an absolutist monarch but under a constitutional monarchy forged by Parliament. Two months after William’s landing in the British Isles at Brixham in Devon (see Map 9, page 112), James’s army disintegrated and he fled to France."


"The Declaration of Rights also asserted that the monarch could not suspend or dispense with laws, and it reiterated the illegality of taxation without parliamentary consent. In addition, it stated that there could be no standing army in England without parliamentary consent."


"Even without specific constitutional rules or laws, William simply gave up on many of the practices of previous kings. He stopped interfering in legal decisions and gave up previous “rights,” such as getting the customs revenues for life. Taken together, these changes in political institutions represented the triumph of Parliament over the king, and thus the end of absolutism in England and subsequently Great Britain"


"Since many of those in Parliament had important investments in trade and industry, they had a strong stake in enforcing property rights. The Stuarts had frequently infringed on property rights; now they would be upheld. Moreover, when the Stuarts controlled how the government spent money, Parliament opposed greater taxes and balked at strengthening the power of the state."


"Now that Parliament itself controlled spending, it was happy to raise taxes and spend the money on activities that it deemed valuable. Chief among them was the strengthening of the navy, which would protect the overseas mercantile interests of many of the members of Parliament."


"Anybody could petition Parliament, and petition they did. Significantly, when people petitioned, Parliament listened. It is this more than anything that reflects the defeat of absolutism, the empowerment of a fairly broad segment of society, and the rise of pluralism in England after 1688."


"Though Charles II and James II could not bring these back, they managed to maintain the ability to grant overseas monopolies. One was the Royal African Company, whose monopoly charter was issued by Charles II in 1660. This company held a monopoly on the lucrative African slave trade, and its governor and major shareholder was Charles’s brother James, soon to become James II."


"There is one more significant change in institutions that emerged from the Glorious Revolution: Parliament continued the process of political centralization that was initiated by the Tudors. It was not just that constraints increased, or that the state regulated the economy in a different way, or that the English state spent money on different things; but also the capability and capacity of the state increased in all directions."


"The wool industry mounted attempts to protect itself as early as the 1660s. It promoted the “Sumptuary Laws,” which, among other things, prohibited the wearing of lighter cloth. It also lobbied Parliament to pass legislation in 1666 and 1678 that would make it illegal for someone to be buried in anything other than a woolen shroud."


"The Manchester Act of 1736 agreed that “great quantities of stuffs made from linen yarn and cotton wool have for several years past been manufactured, and have been printed and painted within this kingdom of Great Britain.” It then went on to assert that “nothing in the said recited Act [of 1721] shall extend or be construed to prohibit the wearing or using in apparel, household stuff, furniture or otherwise, any sort of stuff made out of linen yarn and cotton wool, manufactured and printed or painted with any colour or colours within the kingdom of Great Britain.”"


"The effects of these innovations were truly revolutionary: earlier in the century, it took 50,000 hours for hand spinners to spin one hundred pounds of cotton. Arkwright’s water frame could do it in 300 hours, and the self-acting mule in 135."


"Along with the mechanization of spinning came the mechanization of weaving."


"The English textile industry not only was the driving force behind the Industrial Revolution but also revolutionized the world economy. English exports, led by cotton textiles, doubled between 1780 and 1800."


"Only about one-fifth of the leading industrialists at this time had previously been involved in anything like manufacturing activities."


"Creative destruction redistributes not simply income and wealth, but also political power, as William Lee learned when he found the authorities so unreceptive to his invention because they feared its political consequences."


"As early as 1485 the Ottoman sultan Bayezid II issued an edict that Muslims were expressly forbidden from printing in Arabic. This rule was further reinforced by Sultan Selim I in 1515. It was not until 1727 that the first printing press was allowed in the Ottoman lands. Then Sultan Ahmed III issued a decree granting Ä°brahim MĂĽteferrika permission to set up a press."


"Müteferrika was allowed to set up a printing press, but whatever he printed had to be vetted by a panel of three religious and legal scholars, the Kadis. Maybe the wisdom and knowledge of the Kadis, like everybody else’s, would have increased much faster had the printing press been more readily available. But that was not to be, even after Müteferrika was given permission to set up his press."


"This opposition to the printing press had the obvious consequences for literacy, education, and economic success. In 1800 probably only 2 to 3 percent of the citizens of the Ottoman Empire were literate, compared with 60 percent of adult males and 40 percent of adult females in England. In the Netherlands and Germany, literacy rates were even higher. The Ottoman lands lagged far behind the European countries with the lowest educational attainment in this period, such as Portugal, where probably only around 20 percent of adults could read and write."


"Books spread ideas and make the population much harder to control. Some of these ideas may be valuable new ways to increase economic growth, but others may be subversive and challenge the existing political and social status quo."


"The reason that the economic changes that took place in England did not happen in the Ottoman Empire is the natural connection between extractive, absolutist political institutions and extractive economic institutions."


"By the fifteenth century, it represented only eighteen cities, each of whom sent two deputies. In consequence, the Cortes did not represent as broad a set of groups as the English Parliament did, and it never developed as a nexus of diverse interests vying to place constraints on absolutism. It could not legislate, and even the scope of its powers with respect to taxation was limited. This all made it easier for the Spanish monarchy to sideline the Cortes in the process of consolidating its own absolutism."


"Charles V decided to present the Cortes with demands for increased taxation. Urban elites used the moment to call for much wider change in the Cortes and its powers. This opposition turned violent and quickly became known as the Comunero Rebellion. Charles was able to crush the rebellion with loyal troops."


"“We do not desire at all that the great masses shall become well off and independent . . . How could we otherwise rule over them?”"


"Opposition to innovation was manifested in two ways. First, Francis I was opposed to the development of industry. Industry led to factories, and factories would concentrate poor workers in cities, particularly in the capital city of Vienna. Those workers might then become supporters for opponents of absolutism."


"He wanted to keep society primarily agrarian. The best way to do this, Francis believed, was to stop the factories being built in the first place. This he did directly—for instance, in 1802, banning the creation of new factories in Vienna. Instead of encouraging the importation and adoption of new machinery, the basis of industrialization, he banned it until 1811."


"he opposed the construction of railways, one of the key new technologies that came with the Industrial Revolution. When a plan to build a northern railway was put before Francis I, he replied, “No, no, I will have nothing to do with it, lest the revolution might come into the country.”"


"The economic potential for railway development in the empire had been sensed early by the banker Salomon Rothschild, the representative in Vienna of the great banking family. Salomon’s brother Nathan, who was based in England, was very impressed by George Stephenson’s engine “The Rocket” and the potential for steam locomotion. He contacted his brother to encourage him to look for opportunities to develop railways in Austria, since he believed that the family could make large profits by financing railway development. Nathan agreed, but the scheme went nowhere because Emperor Francis again simply said no."


"The radical philosopher Peter Kropotkin, one of the founders of modern anarchism, left a vivid depiction of the way serfdom worked during the reign of Tsar Nicholas I, who ruled Russia from 1825 until 1855. He recalled from his childhood stories of men and women torn from their families and their villages and sold, lost in gambling, or exchanged for a couple of hunting dogs, and transported to some remote part of Russia . . . of children taken from their parents and sold to cruel or dissolute masters; of flogging “in the stables,” which occurred every day with unheard of cruelty; of a girl who found her only salvation in drowning herself; of an old man who had grown grey-haired in his master’s service and at last hanged himself under his master’s window; and of revolts of serfs, which were suppressed by Nicholas I’s generals by flogging to death each tenth or fifth man taken out of the ranks, and by laying waste the village . . . As to the poverty which I saw during our journeys in certain villages, especially in those which belonged to the imperial family, no words would be adequate to describe the misery to readers who have not seen it."


"Urged on by Nicholas, Kankrin took specific steps to slow the potential for industry. He banned several industrial exhibitions, which had previously been held periodically to showcase new technology and facilitate technology adoption."


"Opposition to railways accompanied opposition to industry, exactly as in Austria-Hungary. Before 1842 there was only one railway in Russia. This was the Tsarskoe Selo Railway, which ran seventeen miles from Saint Petersburg to the imperial residencies of Tsarskoe Selo and Pavlovsk. Just as Kankrin opposed industry, he saw no reason to promote railways, which he argued would bring a socially dangerous mobility, noting that “railways do not always result from natural necessity, but are more an object of artificial need or luxury. They encourage unnecessary travel from place to place, which is entirely typical of our time.”"


"Kankrin turned down numerous bids to build railways, and it was only in 1851 that a line was built linking Moscow and Saint Petersburg. Kankrin’s policy was continued by Count Kleinmichel, who was made head of the main administration of Transport and Public Buildings."


"Under the Song dynasty, between 960 and 1279, China led the world in many technological innovations. The Chinese invented clocks, the compass, gunpowder, paper and paper money, porcelain, and blast furnaces to make cast iron before Europe did. They independently developed spinning wheels and waterpower at more or less the same time that these emerged at the other end of Eurasia. In consequence, in 1500 standards of living were probably at least as high in China as they were in Europe. For centuries China also had a centralized state with a meritocratically recruited civil service."


"Merchants always had a precarious status in China, and the great inventions of the Song were not spurred by market incentives but were brought into existence under the auspices, or even the orders, of the government. Little of this was commercialized. The grip of the state tightened during the Ming and Qing dynasties that followed the Song. At the root of all this was the usual logic of extractive institutions. As most rulers presiding over extractive institutions, the absolutist emperors of China opposed change, sought stability, and in essence feared creative destruction."


"In China, while private merchants were commonly involved in trade within the country, the state monopolized overseas trade."


"In 1402 Emperor Yongle came to the throne and initiated one of the most famous periods of Chinese history by restarting government-sponsored foreign trade on a big scale. Yongle sponsored Admiral Zheng He to undertake six huge missions to Southeast and South Asia, Arabia, and Africa. The Chinese knew about these places from a long history of trading relations, but nothing had ever happened on this scale before. The first fleet included 27,800 men and 62 large treasure ships, accompanied by 190 smaller ships, including ones specifically for carrying freshwater, others for supplies, and others for troops. Yet Emperor Yongle put a temporary stop on the missions after the sixth one in 1422. This was made permanent by his successor, Hongxi, who ruled from 1424 to 1425. Hongxi’s"


"Just at the time when international trade and the discovery of the Americas were fundamentally transforming the institutions of England, China was cutting itself off from this critical juncture and turning inward."


"In 1661 the emperor Kangxi ordered that all people living along the coast from Vietnam to Chekiang—essentially the entire southern coast, once the most commercially active part of China—should move seventeen miles inland. The coast was patrolled by troops to enforce the measure, and until 1693 there was a ban on shipping everywhere on the coast."


"The reasoning of the Ming and Qing states for opposing international trade is by now familiar: the fear of creative destruction. The leaders’ primary aim was political stability. International trade was potentially destabilizing as merchants were enriched and emboldened, as they were in England during the era of Atlantic expansion."


"Somalia, situated in the Horn of Africa, illustrates the devastating effects of lack of political centralization. Somalia has been dominated historically by people organized into six clan families. The four largest of these, the Dir, Darod, Isaq, and Hawiye, all trace their ancestry back to a mythical ancestor, Samaale."


"In the south, the Digil and the Rahanweyn, sedentary agriculturalists, make up the last two of the clan families."


"Somalis identify first with their clan family, but these are very large and contain many subgroups. First among these are clans that trace their descent back to one of the larger clan families. More significant are the groupings within clans called diya-paying groups, which consist of closely related kinspeople who pay and collect diya, or “blood wealth,” compensation against the murder of one of their members."


"Political power was very widely dispersed, with every Somali adult man being able to have his say on decisions that might affect the clan or group. This was achieved through an informal council made up of all adult males. There was no written law, no police, and no legal system to speak of, except that Sharia law was used as a framework within which informal laws were embedded."


"We do not know what the path of economic and political development of Southeast Asian states would have been without Dutch aggression. They may have developed their own brand of absolutism, they may have remained in the same state they were in at the end of the sixteenth century, or they may have continued their commercialization by gradually adopting more and more inclusive institutions. But as in the Moluccas, Dutch colonialism fundamentally changed their economic and political development. The people in Southeast Asia stopped trading, turned inward, and became more absolutist. In the next two centuries, they would be in no position to take advantage of the innovations that would spring up in the Industrial Revolution. And ultimately their retreat from trade would not save them from Europeans; by the end of the eighteenth century, nearly all were part of European colonial empires."


"In the Roman period slaves came from Slavic peoples around the Black Sea, from the Middle East, and also from Northern Europe. But by 1400, Europeans had stopped enslaving each other."


"The law also became a tool of enslavement. No matter what crime you committed, the penalty was slavery. The English merchant Francis Moore observed the consequences of this along the Senegambia coast of West Africa in the 1730s: Since this slave trade has been us’d, all punishments are changed into slavery; there being an advantage on such condemnations, they strain for crimes very hard, in order to get the benefit of selling the criminal. Not only murder, theft and adultery, are punished by selling the criminal for slave, but every trifling case is punished in the same manner."


"The historian Patrick Manning estimates that the population of those areas of West and West-Central Africa that provided slaves for export was around twenty-two to twenty-five million in the early eighteenth century. On the conservative assumption that during the eighteenth and early nineteenth centuries these areas would have experienced a rate of population growth of about half a percent a year without the slave trade, Manning estimated that the population of this region in 1850 ought to have been at least forty-six to fifty-three million. In fact, it was about one-half of this."


"Just as African societies took aggressive advantage of the economic opportunities presented by the slave trade, they did the same with legitimate commerce. But they did so in a peculiar context, one in which slavery was a way of life but the external demand for slaves had suddenly dried up. What were all these slaves to do now that they could not be sold to Europeans? The answer was simple: they could be profitably put to work, under coercion, in Africa, producing the new items of legitimate commerce."


"the abolition of the slave trade, rather than making slavery in Africa wither away, simply led to a redeployment of the slaves, who were now used within Africa rather than in the Americas. Moreover, many of the political institutions the slave trade had wrought in the previous two centuries were unaltered and patterns of behavior persisted."


"slavery, rather than contracting, appears to have expanded in Africa throughout the nineteenth century. Though accurate figures are hard to come by, a number of existing accounts written by travelers and merchants during this time suggest that in the West African kingdoms of Asante and Dahomey and in the Yoruba city-states well over half of the population were slaves."


"World inequality today exists because during the nineteenth and twentieth centuries some nations were able to take advantage of the Industrial Revolution and the technologies and methods of organization that it brought while others were unable to do so."


"Technological change is only one of the engines of prosperity, but it is perhaps the most critical one. The countries that did not take advantage of new technologies did not benefit from the other engines of prosperity, either."


"The story of one of the oldest civilizations in Asia, India, is similar, though the reversing of development was done not by the Dutch but by the British. India was the largest producer and exporter of textiles in the world in the eighteenth century. Indian calicoes and muslins flooded the European markets and were traded throughout Asia and even eastern Africa. The main agent that carried them to the British Isles was the English East India Company. Founded in 1600, two years before its Dutch version, the English East India Company spent the seventeenth century trying to establish a monopoly on the valuable exports from India. It had to compete with the Portuguese, who had bases in Goa, Chittagong, and Bombay, and the French with bases at Pondicherry, Chandernagore, Yanam, and Karaikal. Worse still for the East India Company was the Glorious Revolution, as we saw in chapter 7. The monopoly of the East India Company had been granted by the Stuart kings and was immediately challenged"


"In 1856 the state of Victoria, which had been carved out of New South Wales in 1851, and the state of Tasmania would become the first places in the world to introduce an effective secret ballot in elections, which stopped vote buying and coercion. Today we still call the standard method of achieving secrecy in voting in elections the Australian ballot."


"AUSTRALIA, LIKE THE UNITED STATES, experienced a different path to inclusive institutions than the one taken by England. The same revolutions that shook England during the Civil War and then the Glorious Revolution were not needed in the United States or Australia because of the very different circumstances in which those countries were founded—though this of course does not mean that inclusive institutions were established without any conflict, and, in the process, the United States had to throw off British colonialism. In England there was a long history of absolutist rule that was deeply entrenched and required a revolution to remove it. In the United States and Australia, there was no such thing. Though Lord Baltimore in Maryland and John Macarthur in New South Wales might have aspired to such a role, they could not establish a strong enough grip on society for their plans to bear fruit. The inclusive institutions established in the United States and Australia meant that the Industrial Revolution spread quickly to these lands and they began to get rich. The path these countries took was followed by colonies such as Canada and New Zealand."


"The leaders of the French Revolution and, subsequently, Napoleon exported the revolution to these lands, destroying absolutism, ending feudal land relations, abolishing guilds, and imposing equality before the law—the all-important notion of rule of law, which we will discuss in greater detail in the next chapter. The French Revolution thus prepared not only France but much of the rest of Europe for inclusive institutions and the economic growth that these would spur."


"French armies wrought much suffering in Europe, but they also radically changed the lay of the land. In much of Europe, gone were feudal relations; the power of the guilds; the absolutist control of monarchs and princes; the grip of the clergy on economic, social, and political power; and the foundation of ancien régime, which treated different people unequally based on their birth status. These changes created the type of inclusive economic institutions that would then allow industrialization to take root in these places. By the middle of the nineteenth century, industrialization was rapidly under way in almost all the places that the French controlled, whereas places such as Austria-Hungary and Russia, which the French did not conquer, or Poland and Spain, where French hold was temporary and limited, were still largely stagnant."


"Shogun Yoshinobu agreed to resign, and on January 3, 1868, the Meiji Restoration was declared; Emperor KĹŤmei and, one month later after KĹŤmei died, his son Meiji were restored to power."


"On January 27 the former shogun Yoshinobu attacked Satsuma and Chōshū forces, and civil war broke out; it raged until the summer, when finally the Tokugawas were vanquished."


"There is no-one more decided against annual Parliaments, universal suffrage and the ballot, than I am. My object is not to favour, but to put an end to such hopes and projects... The principle of my reform is, to prevent the necessity of revolution... reforming to preserve and not to overthrow."


"The end of the U.S. Civil War initiated a rapid spurt of economic growth in the North. As railways, industry, and commerce expanded, a few people made vast fortunes. Emboldened by their economic success, these men and their companies became increasingly unscrupulous. They were called the Robber Barons because of their hard-nosed business practices aimed at consolidating monopolies and preventing any potential competitor from entering the market or doing business on an equal footing. One of the most notorious of these was Cornelius Vanderbilt, who famously remarked, “What do I care about the Law? Hain’t I got the power?”"


"Another was John D. Rockefeller, who started the Standard Oil Company in 1870. He quickly eliminated rivals in Cleveland and attempted to monopolize the transportation and retailing of oil and oil products. By 1882 he had created a massive monopoly—in the language of the day, a trust. By 1890 Standard Oil controlled 88 percent of the refined oil flows in the United States, and Rockefeller became the world’s first billionaire in 1916. Contemporary cartoons depict Standard Oil as an octopus wrapping itself around not just the oil industry but also Capitol Hill."


"Almost as infamous was John Pierpont Morgan, the founder of the modern banking conglomerate J.P. Morgan, which later, after many mergers over decades, eventually became JPMorgan Chase. Along with Andrew Carnegie, Morgan founded the U.S. Steel Company in 1901, the first corporation with a capitalized value of more than $1 billion and by far the largest steel corporation in the world. In the 1890s, large trusts began to emerge in nearly every sector of the economy, and many of them controlled more than 70 percent of the market in their sector. These included several household names, such as Du Pont, Eastman Kodak, and International Harvester."


"The apogee of Progressive reforms came with the election of Woodrow Wilson in 1912. Wilson noted in his 1913 book, The New Freedom,“If monopoly persists, monopoly will always sit at the helm of government. I do not expect to see monopoly restrain itself. If there are men in this country big enough to own the government of the United States, they are going to own it.”"


"The rise of Robber Barons and their monopoly trusts in the late nineteenth and early twentieth centuries underscores that, as we already emphasized in chapter 3, the presence of markets is not by itself a guarantee of inclusive institutions. Markets can be dominated by a few firms, charging exorbitant prices and blocking the entry of more efficient rivals and new technologies. Markets, left to their own devices, can cease to be inclusive, becoming increasingly dominated by the economically and politically powerful."


"Inclusive economic institutions require not just markets, but inclusive markets that create a level playing field and economic opportunities for the majority of the people."


"Inclusive political institutions allow a free media to flourish, and a free media, in turn, makes it more likely that threats against inclusive economic and political institutions will be widely known and resisted. In contrast, such freedom is impossible under extractive political institutions, under absolutism, or under dictatorships, which helps extractive regimes to prevent serious opposition from forming in the first place."


"One of the key pillars of the New Deal was the National Industrial Recovery Act. Title I focused on industrial recovery. President Roosevelt and his team believed that restraining industrial competition, giving workers greater rights to form trade unions, and regulating working standards were crucial to the recovery effort."


"Title II established the Public Works Administration, whose infrastructure projects include such landmarks as the Thirtieth Street railroad station in Philadelphia, the Triborough Bridge, the Grand Coulee Dam, and the Overseas Highway connecting Key West, Florida, with the mainland."


"Roosevelt had moved to the next step of his agenda and had signed the Social Security Act, which introduced the modern welfare state into the United States: pensions at retirement, unemployment benefits, aid to families with dependent children, and some public health care and disability benefits."


"It was in the immediate interests of the Democratic Congress and Senate to pack the court and ensure that all New Deal legislation survived. But in the same way that British political elites in the early eighteenth century understood that suspending the rule of law would endanger the gains they had wrested from the monarchy, congressmen and senators understood that if the president could undermine the independence of the judiciary, then this would undermine the balance of power in the system that protected them from the president and ensured the continuity of pluralistic political institutions."


"Shortly after Perón’s victory, his supporters in the Chamber of Deputies proposed the impeachment of four of the five members of the Court. The charges leveled against the Court were several. One involved unconstitutionally accepting the legality of two military regimes in 1930 and 1943—rather ironic, since Perón had played a key role in the latter coup. The other focused on legislation that the court had struck down, just as its U.S. counterpart had done. In particular, just prior to Perón’s election as president, the Court had issued a decision ruling that Perón’s new national labor relations board was unconstitutional. Just as Roosevelt heavily criticized the Supreme Court in his 1936 reelection campaign, Perón did the same in his 1946 campaign. Nine months after initiating the impeachment process, the Chamber of Deputies impeached three of the judges, the fourth having already resigned. The Senate approved the motion. Perón then appointed four new justices. The undermining of the Court clearly had the effect of freeing Perón from political constraints. He could now exercise unchecked power, in much the same way the military regimes in Argentina did before and after his presidency. His newly appointed judges, for example, ruled as constitutional the conviction of Ricardo Balbín, the leader of the main opposition party to Perón, the Radical Party, for disrespecting Perón. Perón could effectively rule as a dictator."


"Since PerĂłn successfully packed the Court, it has become the norm in Argentina for any new president to handpick his own Supreme Court justices."


"Diamonds were discovered in Kono in eastern Sierra Leone in January 1930. The diamonds were alluvial, that is, not in deep mines. So the primary method of mining them was by panning in rivers. Some social scientists call these “democratic diamonds,” because they allow many people to become involved in mining, creating a potentially inclusive opportunity. Not so in Sierra Leone. Happily ignoring the intrinsically democratic nature of panning for diamonds, the British government set up a monopoly for the entire protectorate, called it the Sierra Leone Selection Trust, and granted it to De Beers, the giant South African diamond mining company. In 1936 De Beers was also given the right to create the Diamond Protection Force, a private army that would become larger than that of the colonial government in Sierra Leone."


"Sierra Leone’s development, or lack thereof, could be best understood as the outcome of the vicious circle. British colonial authorities built extractive institutions in the first place, and the postindependence African politicians were only too happy to take up the baton for themselves. The pattern was eerily similar all over sub-Saharan Africa. There were similar hopes for postindependence Ghana, Kenya, Zambia, and many other African countries. Yet in all these cases, extractive institutions were re-created in a pattern predicted by the vicious circle—only they became more vicious as time went by. In all these countries, for example, the British creation of marketing boards and indirect rule were sustained."


"Extractive political institutions lead to extractive economic institutions, which enrich a few at the expense of many. Those who benefit from extractive institutions thus have the resources to build their (private) armies and mercenaries, to buy their judges, and to rig their elections in order to remain in power."


"Under extractive political institutions, there is little check against the exercise of power, however distorted and sociopathic it may become. In 1980 Sam Bangura, then the governor of the central bank in Sierra Leone, criticized Siaka Stevens’s policies for being profligate. He was soon murdered and thrown from the top floor of the central bank building onto the aptly named Siaka Stevens Street. Extractive political institutions thus also tend to create a vicious circle because they provide no line of defense against those who want to further usurp and misuse the powers of the state."


"extractive institutions, by creating unconstrained power and great income inequality, increase the potential stakes of the political game. Because whoever controls the state becomes the beneficiary of this excessive power and the wealth that it generates, extractive institutions create incentives for infighting in order to control power and its benefits, a dynamic that we saw played out in Maya city-states and in Ancient Rome. In this light, it is no surprise that the extractive institutions that many African countries inherited from the colonial powers sowed the seeds of power struggles and civil wars."


"These struggles would be very different conflicts from the English Civil War and the Glorious Revolution. They would not be fought to change political institutions, introduce constraints on the exercise of power, or create pluralism, but to capture power and enrich one group at the expense of the rest. In Angola, Burundi, Chad, Côte d’Ivoire, the Democratic Republic of Congo, Ethiopia, Liberia, Mozambique, Nigeria, Republic of Congo Brazzaville, Rwanda, Somalia, Sudan, and Uganda, and of course in Sierra Leone,"


"Coffee production needed land and labor. To create land for coffee farms, the Liberals pushed through land privatization, in fact really a land grab in which they would be able to capture land previously held communally or by the government. Though their attempt was bitterly contested, given the highly extractive political institutions and the concentration of political power in Guatemala, the elite were ultimately victorious. Between 1871 and 1883 nearly one million acres of land, mostly indigenous communal land and frontier lands, passed into the hands of the elite, and it was only then that coffee developed rapidly. The aim was the formation of large estates. The privatized lands were auctioned off typically to members of the traditional elite or those connected with them."


"The Solomonic dynasty in Ethiopia lasted until it was overthrown by a military coup in 1974. The coup was led by the Derg, a group of Marxist army officers. The regime that the Derg pitched from power looked like it was frozen in some earlier century, a historical anachronism. The emperor Haile Selassie would start his day by arriving in the courtyard at the Grand Palace, which had been built by Emperor Menelik II in the late nineteenth century. Outside the palace would be a crowd of dignitaries anticipating his arrival, bowing and desperately trying to get his attention. The emperor would hold court in the Audience Hall, sitting on the imperial throne. (Selassie was a small man; so that his legs were not left swinging in the air, it was the job of a special pillow bearer to accompany him wherever he went to make sure there was a suitable pillow to put under his feet. The bearer kept a stock of fifty-two pillows to cope with any situation.) Selassie presided over an extreme set of extractive institutions and ran the country as his own private property, handing out favors and patronage and ruthlessly punishing lack of loyalty. There was no economic development to speak of in Ethiopia under the Solomonic dynasty."


"The real Mengistu emerged: vengeful, cruel and authoritarian... Many of us who used to talk to him with hands in our pockets, as if he were one of us, found ourselves standing stiffly to attention, cautiously respectful in his presence. In addressing him we had always used the familiar form of “you,” ante; now we found ourselves switching to the more formal “you,” ersiwo. He moved into a bigger, more lavish office in the Palace of Menelik . . . He began using the Emperor’s cars... We were supposed to have a revolution of equality; now he had become the new Emperor."


"The pattern of vicious circle depicted by the transition between Haile Selassie and Mengistu, or between the British colonial governors of Sierra Leone and Siaka Stevens, is so extreme and at some level so strange that it deserves a special name."


"The essence of the iron law of oligarchy, this particular facet of the vicious circle, is that new leaders overthrowing old ones with promises of radical change bring nothing but more of the same. At some level, the iron law of oligarchy is harder to understand than other forms of the vicious circle. There is a clear logic to the persistence of the extractive institutions in the U.S. South and in Guatemala. The same groups continued to dominate the economy and the politics for centuries."


"Rich nations are rich largely because they managed to develop inclusive institutions at some point during the past three hundred years. These institutions have persisted through a process of virtuous circles."


"The most common reason why nations fail today is because they have extractive institutions. Zimbabwe under Mugabe’s regime vividly illustrates the economic and social consequences."


"After independence, Mugabe quickly established his personal control. He either violently eliminated his opponents or co-opted them. The most egregious acts of violence happened in Matabeleland, the heartland of support for ZAPU, where as many as twenty thousand people were killed in the early 1980s. By 1987 ZAPU had merged with ZANU to create ZANU-PF, and Joshua Nkomo was sidelined politically. Mugabe was able to rewrite the constitution he had inherited as a part of the independence negotiation, making himself president (he had started as prime minister), abolishing white voter rolls that were part of the independence agreement, and eventually, in 1990, getting rid of the Senate altogether and introducing positions in the legislature that he could nominate. A de facto one-party state headed by Mugabe was the result."


"NATIONS FAIL TODAY because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate."


"Sierra Leone during her bloody civil war of ten years, from 1991 to 2001, was a typical case of a failed state. It started out as just another country marred by extractive institutions, albeit of a particularly vicious and inefficient type. Countries become failed states not because of their geography or their culture, but because of the legacy of extractive institutions, which concentrate power and wealth in the hands of those controlling the state, opening the way for unrest, strife, and civil war. Extractive institutions also directly contribute to the gradual failing of the state by neglecting investment in the most basic public services, exactly what happened in Sierra Leone."


"On December 1, 2001, the government froze all bank accounts, initially for ninety days. Only a small amount of cash was allowed for withdrawal on a weekly basis. First it was 250 pesos, still worth $250; then 300 pesos. But this was allowed to be withdrawn only from peso accounts. Nobody was allowed to withdraw money from their dollar accounts, unless they agreed to convert the dollars into pesos. Nobody wanted to do so. Argentines dubbed this situation El Corralito, “the Little Corral”: depositors were hemmed into a corral like cows, with nowhere to go. In January the devaluation was finally enacted, and instead of there being one peso for one dollar, there were soon four pesos for one dollar. This should have been a vindication of those who thought that they should put their savings in dollars. But it wasn’t, because the government then forcibly converted all the dollar bank accounts into pesos, but at the old one-for-one exchange rate. Someone who had had $1,000 saved suddenly found himself with only $250. The government had expropriated three-quarters of people’s savings."


"That elections have not brought either inclusive political or economic institutions is the typical case in Latin America. In Colombia, paramilitaries can fix one-third of national elections. In Venezuela today, as in Argentina, the democratically elected government of Hugo Chávez attacks its opponents, fires them from public-sector jobs, closes down newspapers whose editorials it doesn’t like, and expropriates property. In whatever he does, Chávez is much more powerful and less constrained than Sir Robert Walpole was in Britain in the 1720s, when he was unable to condemn John Huntridge under the Black Act (pages 302–308). Huntridge would have fared much less well in present-day Venezuela or Argentina."


"It is impossible to understand many of the poorest regions of the world at the end of the twentieth century without understanding the new absolutism of the twentieth century: communism. Marx’s vision was a system that would generate prosperity under more humane conditions and without inequality. Lenin and his Communist Party were inspired by Marx, but the practice could not have been more different from the theory. The Bolshevik Revolution of 1917 was a bloody affair, and there was no humane aspect to it. Equality was not part of the equation, either, since the first thing Lenin and his entourage did was to create a new elite, themselves, at the head of the Bolshevik Party."


"But the real tragedies were yet to come: first with the Civil War, and then under Stalin’s collectivization and his all-too-frequent purges, which may have killed as many as forty million people. Russian communism was brutal, repressive, and bloody, but not unique. The economic consequences and the human suffering were quite typical of what happened elsewhere—for example, in Cambodia in the 1970s under the Khmer Rouge, in China, and in North Korea."


"In all cases communism brought vicious dictatorships and widespread human rights abuses. Beyond the human suffering and carnage, the communist regimes all set up various types of extractive institutions. The economic institutions, with or without markets, were designed to extract resources from the people, and by entirely abhorring property rights, they often created poverty instead of prosperity. In the Soviet case, as we saw in chapter 5, the Communist system at first generated rapid growth, but then faltered and led to stagnation. The consequences were much more devastating in China under Mao, in Cambodia under the Khmer Rouge, and in North Korea, where the Communist economic institutions led to economic collapse and famine."


"The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy. But it is not impossible, and the iron law of oligarchy is not inevitable. Either some preexisting inclusive elements in institutions, or the presence of broad coalitions leading the fight against the existing regime, or just the contingent nature of history, can break vicious circles."


"The attempts at industrialization turned into the infamous Great Leap Forward after 1958 with the roll-out of the second five-year plan. Mao announced that steel output would double in a year based on small-scale “backyard” blast furnaces. He claimed that in fifteen years, China would catch up with British steel production. The only problem was that there was no feasible way of meeting these targets. To meet the plan’s goals, scrap metal had to be found, and people would have to melt down their pots and pans and even their agricultural implements such as hoes and plows. Workers who ought to have been tending the fields were making steel by destroying their plows, and thus their future ability to feed themselves and the country. The result was a calamitous famine in the Chinese countryside. Though scholars debate the role of Mao’s policy compared with the impact of droughts at the same time, nobody doubts the central role of the Great Leap Forward in contributing to the death of between twenty and forty million people. We don’t know precisely how many, because China under Mao did not collect the numbers that would have documented the atrocities. Per capita income fell by around one-quarter."


"Soon the Cultural Revolution, just like the Great Leap Forward, would start wrecking both the economy and many human lives. Units of Red Guards were formed across the country: young, enthusiastic members of the Communist Party who were used to purge opponents of the regime. Many people were killed, arrested, or sent into internal exile. Mao himself retorted to concerns about the extent of the violence, stating, “This man Hitler was even more ferocious. The more ferocious, the better, don’t you think? The more people you kill, the more revolutionary you are.”"


"In 1985 the mandatory state purchasing of grain was abandoned and replaced by a system of more voluntary contracts. Administrative control of agricultural prices was greatly relaxed in 1985."


"There should be little doubt that in fifty or even a hundred years, the United States and Western Europe, based on their inclusive economic and political institutions, will be richer, most likely considerably richer, than sub-Saharan Africa, the Middle East, Central America, or Southeast Asia."


"Journalist Richard McGregor reports that on the desk of the head of each of the biggest state companies in China stands a red phone. When it rings, it is the party calling with orders on what the company should do, where it should invest, and what its targets will be. These giant companies are still under the command of the party, a fact we are reminded of when the party decides to shuffle their chief executives, fire them, or promote them, with little explanation."


"Just as in the Soviet Union, the Chinese experience of growth under extractive political institutions is greatly facilitated because there is a lot of catching up to do. Income per capita in China is still a fraction of that in the United States and Western Europe. Of course, Chinese growth is considerably more diversified than Soviet growth; it doesn’t rely on only armaments or heavy industry, and Chinese entrepreneurs are showing a lot of ingenuity. All the same, this growth will run out of steam unless extractive political institutions make way for inclusive institutions."


"China has thus achieved economic growth not thanks to its extractive political institutions, but despite them: its successful growth experience over the last three decades is due to a radical shift away from extractive economic institutions and toward significantly more inclusive economic institutions, which was made more difficult, not easier, by the presence of highly authoritarian, extractive political institutions."


"Recent U.S. attitudes toward China, for example, have been shaped by this theory. George H. W. Bush summarized U.S. policy toward Chinese democracy as “Trade freely with China and time is on our side.” The idea was that as China traded freely with the West, it would grow, and that growth would bring democracy and better institutions in China, as modernization theory predicted. Yet the rapid increase in U.S.-China trade since the mid-1980s has done little for Chinese democracy, and the even closer integration that is likely to follow during the next decade will do equally little."


"First, growth under authoritarian, extractive political institutions in China, though likely to continue for a while yet, will not translate into sustained growth, supported by truly inclusive economic institutions and creative destruction. Second, contrary to the claims of modernization theory, we should not count on authoritarian growth leading to democracy or inclusive political institutions."


"Third, authoritarian growth is neither desirable nor viable in the long run, and thus should not receive the endorsement of the international community as a template for nations in Latin America, Asia, and sub-Saharan Africa, even if it is a path that many nations will choose precisely because it is sometimes consistent with the interests of the economic and political elites dominating them."


"The first, often advocated by international organizations such as the International Monetary Fund, recognizes that poor development is caused by bad economic policies and institutions, and then proposes a list of improvements these international organizations attempt to induce poor countries to adopt."


"Attempts by international institutions to engineer economic growth by hectoring poor countries into adopting better policies and institutions are not successful because they do not take place in the context of an explanation of why bad policies and institutions are there in the first place, except that the leaders of poor countries are ignorant. The consequence is that the policies are not adopted and not implemented, or are implemented in name only."


"Zimbabwe’s president Mugabe decided to heed international advice; he declared the Zimbabwean central bank independent in 1995. Before this, the inflation rate in Zimbabwe was hovering around 20 percent. By 2002 it had reached 140 percent; by 2003, almost 600 percent; by 2007, 66,000 percent; and by 2008, 230 million percent! Of course, in a country where the president wins the lottery (pages 368–373), it should surprise nobody that passing a law making the central bank independent means nothing."


"What this episode illustrates is a micro version of the difficulty of implementing meaningful changes when institutions are the cause of the problems in the first place. In this case, it was not corrupt politicians or powerful businesses undermining institutional reform, but rather, the local health administration and nurses who were able to sabotage Seva Mandir’s and the development economists’ incentive scheme. This suggests that many of the micro-market failures that are apparently easy to fix may be illusory: the institutional structure that creates market failures will also prevent implementation of interventions to improve incentives at the micro level. Attempting to engineer prosperity without confronting the root cause of the problems—extractive institutions and the politics that keeps them in place—is unlikely to bear fruit."


"As we have seen, democracy is no guarantee that there will be pluralism. The contrast of the development of pluralistic institutions in Brazil to the Venezuelan experience is telling in this context. Venezuela also transitioned to democracy after 1958, but this happened without empowerment at the grass-roots level and did not create a pluralistic distribution of political power. Instead, corrupt politics, patronage networks, and conflict persisted in Venezuela, and in part as a result, when voters went to the polls, they were even willing to support potential despots such as Hugo Chávez, most likely because they thought he alone could stand up to the established elites of Venezuela. In consequence, Venezuela still languishes under extractive institutions, while Brazil broke the mold."


"Authoritarian regimes are often aware of the importance of a free media, and do their best to fight it. An extreme illustration of this comes from Alberto Fujimori’s rule in Peru. Though originally democratically elected, Fujimori soon set up a dictatorial regime in Peru, mounting a coup while still in office in 1992. Thereafter, though elections continued, Fujimori built a corrupt regime and ruled through repression and bribery. In this he relied heavily on his right-hand man, Valdimiro Montesinos, who headed the powerful national intelligence service of Peru. Montesinos was an organized man, so he kept good records of how much the administration paid different individuals to buy their loyalty, even videotaping many actual acts of bribery."