But when you look at history and when you look at empirical evidence it is clear that the key to prosperity is in institutions, not in culture nor in geography. Moreover, history is also equally clear that bad institutions were in place not because of leaders’ mistakes but by design: because they played a useful political and economic role for the benefit of the politically powerful in society.
More explicitly, some types of economic institutions, which we call inclusive, provide incentives for investment and innovation and they provide a level playing field so that the majority of a nation’s population can deploy their talent. These economic institutions generate prosperity. But most societies are ruled not by ‘inclusive’ institutions but by extractive institutions, which create insecure property rights, don’t allow contracts, discourage innovation and technology adoption, and most importantly, instead of creating a level playing field, they create a very tilted playing field, advantaging a small segment of society, and sometimes even coercing people to work at low wages in occupations they shouldn’t be in, and banning them from occupations they wish to enter. We call these institutions extractive because they have been designed by the political powerful to extract resources from the majority of the population.
How are such bad institutions kept in place?
That’s where politics and political institutions come in. These extractive economic institutions are supported and kept in place by political institutions which concentrate political power in the hands of the elite so that they are able to create these economic institutions and maintain them, despite the fact that they are to the disadvantages of many in society. Without political institutions that are themselves extractive, concentrating power in the hands of the elite and putting no constraints on their exercise, extractive economic institutions would not survive. It is in this sense that we argue that prosperity is all about political institutions and politics.