Extractive institutions

economic-dictionary

Extractive institutions are those that concentrate the wealth and political power of a country in an elite or oligarchy.

In other words, extractive institutions respond to the interests of a privileged group, excluding the rest of the population when defining economic policies, or when making government decisions of another nature.

It should be remembered that an institution is a public or private organization. Created to fulfill a function, which can be political, cultural, social, economic, military, etc. It is characterized by having a structure and a group of people who are related to each other.

Extractive institutions are the opposite of inclusive institutions.

Origin of the term «extractive institution»

The term "extractive institution" was raised in the book "Why do countries fail?" by Daron Acemoglu and James A. Robinson. This work discusses why some nations are rich and others poor, and what are the variables that influence economic development.

The aforementioned book concludes that countries with extractive institutions do not have the best conditions to achieve prosperity. This, because only a select group of the population is favored, while the rest of the people do not have the same facilities to create wealth.

Acemoglu and Robinson refer particularly to political and economic institutions. All of them linked to issues such as the protection of private property, infrastructure, education, basic public services, among others.

The authors argue that the difference between rich and poor countries is in the quality of their institutions and not, for example, in geographical conditions. This, given that there are developed countries that do not have natural resources in their territory, as well as underdeveloped countries that have been privileged by nature, but that despite this have not managed to take off economically speaking.

In the same way, Acemoglu and Robinson question that development depends on culture, since there are very close populations who share part of their idiosyncrasies, and who still have different levels of development. Consider, for example, the territories located on the border between the United States and Mexico.

Types of extractive institutions

Now that we are clear about the concept of extractive institutions, we must know that there are two types:

  • Extractive political institutions: Those whose purpose is to distribute power among the elites that make up those institutions. For example, authoritarian or absolutist political structures.
  • Extractive economic institutions: Those whose objective is to extract wealth from one part of society to favor another. For example, through monopolies or very strict entry barriers to certain sectors of the economy.

Thus, it may happen that a country has extractive political institutions and, at the same time, inclusive economic institutions, and vice versa. In fact, the book written by Daron Acemoglu claims that China presents a peculiar situation.

On the one hand, it has extractive political institutions, which are based on immutable ideas. And, on the other, it has inclusive economic institutions thanks to its growing trade openness with the rest of the world.

Although it is true that it is usual for extractive political institutions to use extractive economic ones to obtain their own benefit.

Difference between extractive institutions and inclusive institutions

On "Why do countries fail?»The concept of extractive institutions is contrasted with that of inclusive institutions. The latter are, according to the book, those that encourage more people to achieve economic development and participate in the decisions of the State.

In contrast, extractive institutions distribute wealth and political power among few actors. These can be identified, for example, as the leaders of the political parties that alternate in the Government.

Acemoglu and Robinson's approach may be applicable to multi-country analysis. For example, in Latin America, inequality and low levels of well-being indicators (such as the level of access to basic services) could be explained by the existence of extractive institutions that have failed to include an important sector of the economy in development. population.

It should be noted that in the article we have referred to rich and poor nations. However, perhaps it is more appropriate to refer to the concept of development. This considers not only the level of income, as it implements other indicators such as health and education.

An example of this type of synthetic indicator could be the Human Development Index (HDI).

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