Blocking entry protects incumbents and stops resources moving to better uses

The argument

A second argument for this explanation concerns entry rather than security. Advocates point out that growth comes largely from resources moving: from less productive firms to more productive ones, from older methods to newer, from people who happen to hold an opportunity to people who can use it better. On this account that movement requires that newcomers be able to enter, compete and displace those already established, and exclusive economic institutions are precisely arrangements that prevent them from doing so. Proponents describe the forms this takes as varied but similar in effect: licences that are difficult to obtain without connections, credit available only to those who already hold assets, procurement that favours the incumbent, and regulation written in consultation with the firms it governs. Supporters argue that none of these needs to be framed as a restriction on competition to function as one, and that an economy can be formally open while being effectively closed to anyone without standing. Advocates hold that the resulting stagnation is not a matter of insufficient activity but of frozen allocation. Incumbents protected from entry have little reason to improve and considerable reason to spend on maintaining their protection, which diverts effort from production to influence. Proponents conclude that exclusive institutions explain national failure better than accounts resting on resources, culture or geography, because they identify a mechanism that holds an economy at its current level of productivity indefinitely while leaving every input apparently in place.

Premises

Counter-arguments

Critics argue that some protection of incumbents has accompanied rapid industrialisation, where scale was achieved precisely by shielding new industries from competition. They also note that entry barriers vary enormously in form and effect, so grouping them together may obscure more than it explains. A further reply is that the mechanism describes slow growth rather than failure, and that the worst national outcomes usually involve conflict or state collapse rather than merely frozen allocation.

Rejecting the premises

[Rejecting P1] Growth also comes from accumulation and from improvements within existing firms, neither of which requires reallocation. [Rejecting P2] Incumbents can be displaced by new technology without anyone entering the market on equal terms. [Rejecting P3] Protective arrangements have sometimes been used deliberately to build capacity that open entry would have prevented. [Rejecting C] Frozen allocation produces stagnation rather than failure, so the account does not reach the cases it is meant to explain.