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.
The price these nations pay for low education of their
population and lack of inclusive markets is high. They fail to
mobilize their nascent talent. They have many potential Bill
Gateses and perhaps one or two Albert Einsteins who are
now working as poor, uneducated farmers, being coerced
to do what they don’t want to do or being drafted into the
army, because they never had the opportunity to realize
their vocation in life.
The ability of economic institutions to harness the
potential of inclusive markets, encourage technological
innovation, invest in people, and mobilize the talents and
skills of a large number of individuals is critical for
economic growth. Explaining why so many economic
institutions fail to meet these simple objectives is the
central theme of this book.
E XTRACTIVE AND I NCLUSIVE P OLITICAL I NSTITUTIONS
All economic institutions are created by society. Those of
North Korea, for example, were forced on its citizens by the
communists who took over the country in the 1940s, while
those of colonial Latin America were imposed by Spanish
conquistadors. South Korea ended up with very different
economic institutions than the North because different
people with different interests and objectives made the
decisions about how to structure society. In other words,
South Korea had different politics.
Politics is the process by which a society chooses the
rules that will govern it. Politics surrounds institutions for the
simple reason that while inclusive institutions may be good
for the economic prosperity of a nation, some people or
groups, such as the elite of the Communist Party of North
Korea or the sugar planters of colonial Barbados, will be
much better off by setting up institutions that are extractive.
When there is conflict over institutions, what happens
depends on which people or group wins out in the game of
politics—who can get more support, obtain additional
resources, and form more effective alliances. In short, who