of the state, identifying it with the “monopoly of legitimate
violence” in society. Without such a monopoly and the
degree of centralization that it entails, the state cannot play
its role as enforcer of law and order, let alone provide
public services and encourage and regulate economic
activity. When the state fails to achieve almost any political
centralization, society sooner or later descends into chaos,
as did Somalia.
We will refer to political institutions that are sufficiently
centralized and pluralistic as inclusive political institutions.
When either of these conditions fails, we will refer to the
institutions as extractive political institutions.
There is strong synergy between economic and political
institutions. Extractive political institutions concentrate
power in the hands of a narrow elite and place few
constraints on the exercise of this power. Economic
institutions are then often structured by this elite to extract
resources from the rest of the society. Extractive economic
institutions thus naturally accompany extractive political
institutions. In fact, they must inherently depend on
extractive political institutions for their survival. Inclusive
political institutions, vesting power broadly, would tend to
uproot economic institutions that expropriate the resources
of the many, erect entry barriers, and suppress the
functioning of markets so that only a few benefit.
In Barbados, for example, the plantation system based
on the exploitation of slaves could not have survived without
political institutions that suppressed and completely
excluded the slaves from the political process. The
economic system impoverishing millions for the benefit of a
narrow communist elite in North Korea would also be
unthinkable without the total political domination of the
Communist Party.
This synergistic relationship between extractive
economic and political institutions introduces a strong
feedback loop: political institutions enable the elites
controlling political power to choose economic institutions
with few constraints or opposing forces. They also enable
the elites to structure future political institutions and their
evolution. Extractive economic institutions, in turn, enrich
the same elites, and their economic wealth and power help
consolidate their political dominance. In Barbados or in