Acemoglu and Robinson divide countries into two types: extractive and inclusive. In extractive countries, one group–usually a very small minority–uses coercive power to grab wealth from and, often literally, enslave a larger group. In inclusive countries, political power is widely shared, and, therefore, it is hard for one small group to be in control. The majority of the people in extractive countries have very little incentive to produce wealth because they know that the powerful group will take it from them. Summarizing their case, the authors write, “Nations fail today because extractive economic institutions do not create the incentives needed for people to save, invest, and innovate.” In inclusive countries, by contrast, no one small group is in control, and so the economic institutions tend to work for most groups. And what are these institutions? The ones that a fan of Adam Smith might expect: respect for private property, the relative absence of government-granted privilege, and the rule of law.

This is from David R. Henderson, “The Wealth–and Poverty–of Nations,” in Regulation, Spring 2013. It’s a review of Why Nations Fail by Daron Acemoglu and James A. Robinson.

Another excerpt:

The authors apply their extractive/inclusive dichotomy to countries around the world and get a lot of mileage from the paradigm. We have examples of highly extractive governments even in the modern world. One shocking one, to me at least, is the case of Uzbekistan. The Soviet government had imposed a highly extractive regime–communism–on Uzbekistan, with government ownership of all farmland. But when communism ended, the new government’s first president, Ismail Karimov, simply refashioned the extractive system. He forced farmers to grow cotton and sell it to him at artificially low prices so that he could export it at world prices. Because of the low prices they received, cotton farmers were unwilling to invest in new harvesting machinery, reducing the harvest. So what did Karimov do? He turned children into slaves, taking them out of school for the two months of harvest season and assigning them to farms. How much are they paid? In 2006, when the world price of cotton was about $1.40 per kilogram, the children–who harvested 20 to 60 kilos per day (worth, therefore, between $28 and $84)–were paid three cents per day.

One of the authors’ best expositions is about the second-largest economy in the world, China. They trace the horrible results of Chairman Mao’s homicidal policies in the 1950s and 1960s and unearth a quote in which Mao expressed his admiration for Adolf Hitler. They also lay out how the relaxation of government controls on agriculture in the early 1980s “led to a dramatic increase in agricultural productivity.” Surprisingly, they do not cite Kate Zhou’s How the Farmers Changed China, which tells the story in more detail. They argue persuasively, though, that Chinese growth “will run out of steam unless extractive political institutions make way for inclusive institutions.”

Here’s part of the review in which I’m critical:

Possibly related to their mistelling of the story of U.S. trusts, all the examples they give of extractive institutions are of small, wealthy minorities extracting wealth from large, poor majorities. They omit another possibility that seems to be happening in modern-day America under President Obama: A government of elitists that, claiming to speak for the large less-wealthy majority, extracts wealth from a small wealthy minority. This omission is somewhat surprising. In their discussion of Africa, the authors point out that for the Kongolese to be productive would not have been worthwhile “since any extra output that they produced using better technology would have been subject to expropriation by the king and his elite.” We are not, in America, at the point where any extra output will be taken by the government, but we are much closer to that point than we were just a few years ago. In high-tax California, for example, where many productive people are rumored to live, those making $1 million a year or more have 13.3 percent of their extra output taken by the state government, up from “only” 10.3 percent last year, and 43.4 percent of their extra output taken by the federal government, up from “only” 37.9 percent last year. Marginal tax rates above 50 percent would certainly seem to damage incentives. Yet the authors never address this issue. That’s disappointing.

Russ Roberts interviewed Acemoglu on his book a year ago.

HT to Jeffrey Hummel for filling me in on the convergence of southern and northern incomes after the Civil War. This led to a key paragraph in the review.