Institutions and political power
Economic institutions are created by society, and politics is the process whereby the rules in accordance with which society functions are laid down. The distribution of political power is therefore crucial ̶ when there is conflict over institutions, who wins depends on the distribution of power in society.
Under absolutist political institutions those in power can use their power to set up institutions to enrich themselves at the expense of society. What is particularly worrisome, according to A&R, is that "political institutions enable the elites controlling political power to choose economic institutions with few constraints or opposing forces. They also enable the elites to structure future political institutions and their evolution. Extractive economic institutions, in turn, enrich the same elites, and their economic wealth and power help consolidate their political dominance" (my emphasis). In short, the power of self-perpetuation is embedded in extractive political and economic institutions.
In contrast, pluralistic political institutions that widely disseminate power in society and subject it to restrictions, but which at the same time are sufficiently centralised to be effective, can be regarded as inclusive. Inclusive political institutions in turn are a prerequisite for stable, sustainable, inclusive economic institutions.
It is obvious that extractive economic and political institutions are not conducive to economic prosperity. Extractive political institutions with strong centralised power can be accompanied by high growth rates for a period of time, but they are not sustainable in the long term, inter alia because of infighting over the spoils. Inclusive economic institutions will not support extractive political institutions or be supported by them.
The problem is that it is not in the interest of powerful elites to create fully inclusive institutions that are likely to reduce their power and their ability to benefit from extractive institutions. Put differently, such elites will not be susceptible to policies that would lead to higher economic growth because of the natural link between economic growth and inclusive institutions. The incentives to accept the process of creative destruction that is an inherent part of economic growth and development, often the result of technological change, will just not be there. Furthermore, extractive institutions will not create the incentives for people to save, invest and innovate.