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Extractive institutions discourage investment and entrepreneurship from "summary" of Why Nations Fail by Daron Acemoglu,James A. Robinson
Extractive institutions are those that are designed to extract resources from the economy for the benefit of a small elite, rather than to promote economic growth and development. In extractive societies, the political and economic institutions are set up in a way that discourages investment and entrepreneurship. This is because individuals and companies are unlikely to invest in an economy where property rights are not secure, contracts are not enforced, and there is rampant corruption. When property rights are not secure, individuals have little incentive to invest in improving their assets or starting new businesses. Without the confidence that they will be able to reap the benefits of their investments, people are hesitant to take risks. In extractive societies, property rights are often controlled by those in power, who can easily confiscate assets or change the rules to benefit themselves. Similarly, in an environment where contracts are not enforced, individuals are less likely to engage in economic transactions that require trust. If there is no mechanism to ensure that agreements will be honored, people are reluctant to enter into contracts with others. This lack of trust and enforceability hinders economic growth and discourages investment and entrepreneurship. Furthermore, corruption is pervasive in extractive institutions, as those in power use their positions to extract resources for their own benefit. This leads to a misallocation of resources, as investments are made based on political connections rather than economic efficiency. In such an environment, individuals and companies are deterred from investing in productive activities, as they know that success is often determined by political favoritism rather than merit.- Extractive institutions create a hostile environment for investment and entrepreneurship. When property rights are insecure, contracts are unenforceable, and corruption is rampant, individuals are unlikely to take the risks necessary to start businesses or make long-term investments. This perpetuates a cycle of poverty and underdevelopment, as economic opportunities are stifled by extractive institutions.
