Institutional Theory of Development

The theory that long-run economic development is determined primarily by political and economic institutions — specifically whether institutions are 'inclusive' (distributing power and opportunity broadly) or 'extractive' (concentrating power for elite extraction).

Inclusive vs. extractive institutions: inclusive economic institutions (secure property rights, rule of law, open markets) create incentives for investment and innovation. Inclusive political institutions (pluralism, constraints on executives) prevent institutional capture. The vicious and virtuous cycle: extractive institutions concentrate power → elites resist change → continued extraction. Inclusive institutions → broad participation → creative destruction allowed. The colonial reversal: colonizers imposed extractive institutions in prosperous places (disease barriers low → settlement → inclusive) and inclusive in disease-ridden places (low settlement → extractive for resource extraction).