economic opportunities not just for the elite but for a broad
cross-section of society.
Secure property rights, the law, public services, and the
freedom to contract and exchange all rely on the state, the
institution with the coercive capacity to impose order,
prevent theft and fraud, and enforce contracts between
private parties. To function well, society also needs other
public services: roads and a transport network so that
goods can be transported; a public infrastructure so that
economic activity can flourish; and some type of basic
regulation to prevent fraud and malfeasance. Though many
of these public services can be provided by markets and
private citizens, the degree of coordination necessary to do
so on a large scale often eludes all but a central authority.
The state is thus inexorably intertwined with economic
institutions, as the enforcer of law and order, private
property, and contracts, and often as a key provider of
public services. Inclusive economic institutions need and
use the state.
The economic institutions of North Korea or of colonial
Latin America—the mita , encomienda , or repartimiento
described earlier—do not have these properties. Private
property is nonexistent in North Korea. In colonial Latin
America there was private property for Spaniards, but the
property of the indigenous peoples was highly insecure. 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. In neither type of society was the
power of the state used to provide key public services that
promoted prosperity. In North Korea, the state built an
education system to inculcate propaganda, but was unable
to prevent famine. In colonial Latin America, the state
focused on coercing indigenous peoples. In neither type of
society was there a level playing field or an unbiased legal
system. In North Korea, the legal system is an arm of the
ruling Communist Party, and in Latin America it was a tool
of discrimination against the mass of people. 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.