James A Robinson

Why are some nations more prosperous than others? James A Robinson sets out to answer this question in his book 'Why Nations Fail: The Origins of Power, Prosperity and Poverty' which he co-authored with Daron Acemoglu. The book argues the success or failure of a nation lies not in climate, geography or culture, but in the role of inclusive and extractive institutions. Here he explains the difference between the two and offers some historical examples.

You're interested in the effects of inclusive vs. extractive institutions on the success of a nation. What makes an institution inclusive?

When we refer to nations with inclusive institutions we mean ones with a set of rules in society that allow individuals to freely make decisions in the economic sphere. This can take the form of education, the ownership of assets and the right to have them protected, the opportunity to start enterprises and take on any occupation.

The successful economic growth of a society rests on being able to harness the talents, creativity, skills and ideas of its people. I like the example of patenting in the US. People from all walks of life take out patents which proves ideas and talent are very broadly distributed in society. Inclusive intuitions offer opportunity to all.

What are extractive institutions?

Extractive economic institutions are ones that create barriers for people to use their skills which only benefits a very small subset of society. Most poor countries don't offer access to quality education. There are monopolies and barriers to entry when it comes to enterprise. Most people don't have secure property or asset rights and there's no equality before the law. This results in enormous amounts of wasted talent and wasted economic potential.

As an example, take Barbados in the 17^th century: 85 per cent of the population were slaves owned by the other 15 per cent. It's great for the slave-owning 15 per cent because it allows them to get very rich but it is bad for the overall success of society because 85 per cent have no opportunity to prosper.

What happens when you get a mix of inclusive and extractive institutions?

A nation with inclusive economic and political institutions will be fairly stable, and so will one with extractive economic and political institutions. One leads to sustained prosperity while the other leads to economic stagnation.

However, off-diagonal cases where you have extractive economic, but inclusive political, institutions or vice versa are not stable. When Apartheid collapsed in South Africa political power spread to everyone including black people. As a result, the extractive economic institutions couldn't persist because they were designed to benefit only white people, and once political power expanded this system became unsustainable.  

What does this mean for emerging economic powers such as China?

The Chinese case is a reverse of the South African example. Here you have a movement towards inclusive economic institutions but very extractive political institutions remain in place. We have seen this pattern in place like South Korea and Taiwan but in these cases economic success became sustainable as a result of the political systems becoming liberalised.

The Chinese case is much more complicated and my sense is that the current situation can't last. When political power is very concentrated it becomes too tempting to start predating on society, which in turn fuels uprising. Merchants and business people join forces to protest this predation. I think it's possible we could see this in China but the more likely outcome is that the Communist Party will eventually choose to remain in power, maintaining the extractive political institutions, at the expense of continued development of the economy.

James Robinson spoke at NESTA in March 2012. You can view a recap of the event here.