Why Nations Fail: The Origins of Power, Prosperity, and Poverty

that would normally be set in motion by inclusive economic institutions and markets. In the Caribbean plantation economies, extractive institutions took the form of the elite using coercion to force slaves to produce sugar. In the Soviet Union, they took the form of the Communist Party reallocating resources from agriculture to industry and structuring some sort of incentives for managers and workers. As we have seen, such incentives were undermined by the nature of the system.
    The potential for creating extractive growth gives an impetus to political centralization and is the reason why King Shyaam wished to create the Kuba Kingdom, and likely accounts for why the Natufians in the Middle East set up a primitive form of law and order, hierarchy, and extractive institutions that would ultimately lead to the Neolithic Revolution. Similar processes also likely underpinned the emergenceof settled societies and the transition to agriculture in the Americas, and can be seen in the sophisticated civilization that the Mayas built on foundations laid by highly extractive institutions coercing many for the benefit of their narrow elites.
    The growth generated by extractive institutions is very different in nature from growth created under inclusive institutions, however. Most important, it is not sustainable. By their very nature, extractive institutions do not foster creative destruction and generate at best only a limited amount of technological progress. The growth they engender thus lasts for only so long. The Soviet experience gives a vivid illustration of this limit. Soviet Russia generated rapid growth as it caught up rapidly with some of the advanced technologies in the world, and resources were allocated out of the highly inefficient agricultural sector and into industry. But ultimately the incentives faced in every sector, from agriculture to industry, could not stimulate technological progress. This took place in only a few pockets where resources were being poured and where innovation was strongly rewarded because of its role in the competition with the West. Soviet growth, however rapid it was, was bound to be relatively short lived, and it was already running out of steam by the 1970s.
    Lack of creative destruction and innovation is not the only reason why there are severe limits to growth under extractive institutions. The history of the Maya city-states illustrates a more ominous and, alas, more common end, again implied by the internal logic of extractive institutions. As these institutions create significant gains for the elite, there will be strong incentives for others to fight to replace the current elite. Infighting and instability are thus inherent features of extractive institutions, and they not only create further inefficiencies but also often reverse any political centralization, sometimes even leading to the total breakdown of law and order and descent into chaos, as the Maya city-states experienced following their relative success during their Classical Era.
    Though inherently limited, growth under extractive institutions may nonetheless appear spectacular when it’s in motion. Many in the Soviet Union and many more in the Western world were awestruck by Soviet growth in the 1920s, ’30s, ’40s, ’50s, ’60s, and even as lateas the ’70s, in the same way that they are mesmerized by the breakneck pace of economic growth in China today. But as we will discuss in greater detail in chapter 15 , China under the rule of the Communist Party is another example of society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.

6.

D RIFTING A PART
H OW V ENICE B ECAME A M USEUM
    T HE GROUP OF ISLANDS that form Venice lie at the far north of the Adriatic Sea. In the Middle Ages, Venice was possibly the richest place in the world, with the most advanced set of inclusive economic institutions underpinned by nascent political inclusiveness. It gained its independence in AD 810, at what turned out to be a fortuitous time. The economy of Europe was recovering from the decline it had suffered as the Roman Empire collapsed, and kings such as Charlemagne were reconstituting strong central political power. This led to stability, greater security, and an expansion of trade, which Venice was in a unique position to take advantage of. It was a nation of seafarers,