One other actor, or set of actors, can play a transformative role in the process of empowerment: the media. Empowerment of society at large is difficult to coordinate and maintain without widespread information about whether there are economic and political abuses by those in power.

The Bolshevik Revolution advertised its aim as replacing the exploitative economic system of tsarist Russia with a more just and efficient one that would bring freedom and prosperity to millions of Russians. Alas, the outcome was the opposite, and much more repressive and extractive institutions replaced those of the government the Bolsheviks overthrew. The experiences in China, Cuba, and Vietnam were similar. Many noncommunist, top-down reforms fared no better.

foreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it. Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can typically do little in this respect, and certainly not with the way that it is currently organized. Recognizing the roots of world inequality and poverty is important precisely so that we do not pin our hopes on false promises. As those roots lie in institutions, foreign aid, within the framework of given institutions in recipient nations, will do little to spur sustained growth.

foreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it. Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can typically do little in this respect, and certainly not with the way that it is currently organized.

the institutional structure that creates market failures will also prevent implementation of interventions to improve incentives at the micro level. Attempting to engineer prosperity without confronting the root cause of the problems—extractive institutions and the politics that keeps them in place—is unlikely to bear fruit.

growth under authoritarian, extractive political institutions in China, though likely to continue for a while yet, will not translate into sustained growth, supported by truly inclusive economic institutions and creative destruction.

China has thus achieved economic growth not thanks to its extractive political institutions, but despite them: its successful growth experience over the last three decades is due to a radical shift away from extractive economic institutions and toward significantly more inclusive economic institutions, which was made more difficult, not easier, by the presence of highly authoritarian, extractive political institutions.

Because of the party’s control over economic institutions, the extent of creative destruction is heavily curtailed, and it will remain so until there is radical reform in political institutions. Just as in the Soviet Union, the Chinese experience of growth under extractive political institutions is greatly facilitated because there is a lot of catching up to do. Income per capita in China is still a fraction of that in the United States and Western Europe. Of course, Chinese growth is considerably more diversified than Soviet growth; it doesn’t rely on only armaments or heavy industry, and Chinese entrepreneurs are showing a lot of ingenuity. All the same, this growth will run out of steam unless extractive political institutions make way for inclusive institutions. As long as political institutions remain extractive, growth will be inherently limited, as it has been in all other similar cases.

Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing technologies and rapid investment, not creative destruction. An important aspect of this is that property rights are not entirely secure in China.

History is key, since it is historical processes that, via institutional drift, create the differences that may become consequential during critical junctures. Critical junctures themselves are historical turning points. And the vicious and virtuous circles imply that we have to study history to understand the nature of institutional differences that have been historically structured.

small differences open up, and then disappear, and then reappear again. However, when a critical juncture arrives, these small differences that have emerged as a result of institutional drift may be the small differences that matter in leading otherwise quite similar societies to diverge radically.

the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability. The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions. But neither the vicious nor the virtuous circle is absolute. In fact, some nations live under inclusive institutions today because, though extractive institutions have been the norm in history, some societies have been able to break the mold and transition toward inclusive institutions.

the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.

sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived.

THERE ARE HUGE DIFFERENCES in living standards around the world. Even the poorest citizens of the United States have incomes and access to health care, education, public services, and economic and social opportunities that are far superior to those available to the vast mass of people living in sub-Saharan Africa, South Asia, and Central America.

Soon the Cultural Revolution, just like the Great Leap Forward, would start wrecking both the economy and many human lives. Units of Red Guards were formed across the country: young, enthusiastic members of the Communist Party who were used to purge opponents of the regime. Many people were killed, arrested, or sent into internal exile. Mao himself retorted to concerns about the extent of the violence, stating, “This man Hitler was even more ferocious. The more ferocious, the better, don’t you think? The more people you kill, the more revolutionary you are.”

Mao himself retorted to concerns about the extent of the violence, stating, “This man Hitler was even more ferocious. The more ferocious, the better, don’t you think? The more people you kill, the more revolutionary you are.”

In Sierra Leone and many other sub-Saharan African nations, diamonds fueled conflict between different groups and helped to sustain civil wars, earning the label Blood Diamonds for the carnage brought about by the wars fought over their control.

It was much easier for the North Koreans to create a more radically communist-style economy, since they could expropriate former Japanese assets and build on the economic model of the Chinese Revolution.

The Communist economic institutions were in turn supported by extractive political institutions, concentrating all power in the hands of Communist parties and introducing no constraints on the exercise of this power. Though these were different extractive institutions in form, they had similar effects on the livelihoods of the people as the extractive institutions in Zimbabwe and Sierra Leone.

Marx’s vision was a system that would generate prosperity under more humane conditions and without inequality. Lenin and his Communist Party were inspired by Marx, but the practice could not have been more different from the theory.

The currency reform was designed to punish people who used these markets and, more specifically, to make sure that they did not become too wealthy or powerful enough to threaten the regime. Keeping them poor was safer. Black markets are not the whole story. People in North Korea also keep their savings in wons because there are few banks in Korea, and they are all owned by the government. In effect, the government used the currency reform to expropriate much of people’s savings.

it is again the underlying extractive institutions that make politics so attractive to, and so biased in favor of, strongmen such as Perón and Chávez, rather than an effective party system producing socially desirable alternatives. Perón, Chávez, and dozens of other strongmen in Latin America are just another facet of the iron law of oligarchy, and as the name suggests, the roots of this iron law lies in the underlying elite-controlled regimes.

he set up extractive institutions to cement his power and extract the output the rest of society would produce. But even extractive institutions with central authority concentrated in his hands were an improvement over the situation without any law and order, central authority, or property rights that characterized the Lele society on the other side of the river Kasai. Such lack of order and central authority has been the fate of many African nations in recent decades, partly because the process of political centralization was historically delayed in much of sub-Saharan Africa, but also because the vicious circle of extractive institutions reversed any state centralization that existed, paving the way for state failure.