Extractive Institutions and their Effect in the Long Run Economic Development, the Case of Huasipungo in Ecuador

Abstract

What is the effect of extractive institutions on a country’s economic performance? This research aims to test the theory of Acemoglu and Robinson, which predicts low economic development in the presence of extractive institutions, that is, those that concentrate power in the hands of a small elite, present expropriation risks for the majority, and discourage investment and economic growth. Using Process Tracing, I studied the extractive institution of ‘Huasipungo,’ a precarious work system typical of the Ecuadorian Andes, suggesting a causal mechanism that relates it to the poor economic performance of the country. The evaluation of pieces of evidence empirically found strongly suggests the presence of a causal mechanism that enforces the persistence of a sub optimal institution due to its short-term benefits to the landed elites: near-zero salaries, dominant relations, power asymmetry, and an apparent blockage to innovation and market institutions. Hence, the incentives that the extractive institution of Huasipungo presented for the landed economic and political elites, like near zero labor costs, induced the landlords to maintain suboptimal institutional trajectories because of the costs of change, assuming a path dependence dynamic.