Why Nations Fail

by Daron Acemoglu

  The opposition to industry and steam railways stemmed from Francis’s concern about the creative destruction that accompanied the development of a modern economy. His main priorities were ensuring the stability of the extractive institutions over which he ruled and protecting the advantages of the traditional elites who supported him. Not only was there little to gain from industrialization, which would undermine the feudal order by attracting labor from the countryside to the cities, but Francis also recognized the threat that major economic changes would pose to his political power. As a consequence, he blocked industry and economic progress, locking in economic backwardness, which manifested itself in many ways. For instance, as late as 1883, when 90 percent of world iron output was produced using coal, more than half of the output in the Habsburg territories still used much less efficient charcoal. Similarly, right up to the First World War, when the empire collapsed, textile weaving was never fully mechanized but still undertaken by hand.

  Austria-Hungary was not alone in fearing industry. Farther east, Russia had an equally absolutist set of political institutions, forged by Peter the Great, as we saw earlier in this chapter. Like Austria-Hungary, Russia’s economic institutions were highly extractive, based on serfdom, keeping at least half of the population tied to the land. Serfs had to work for nothing three days a week on the lands of their lords. They could not move, they lacked freedom of occupation, and they could be sold at will by their lord to another lord. The radical philosopher Peter Kropotkin, one of the founders of modern anarchism, left a vivid depiction of the way serfdom worked during the reign of Tsar Nicholas I, who ruled Russia from 1825 until 1855. He recalled from his childhood

  stories of men and women torn from their families and their villages and sold, lost in gambling, or exchanged for a couple of hunting dogs, and transported to some remote part of Russia … of children taken from their parents and sold to cruel or dissolute masters; of flogging “in the stables,” which occurred every day with unheard of cruelty; of a girl who found her only salvation in drowning herself; of an old man who had grown grey-haired in his master’s service and at last hanged himself under his master’s window; and of revolts of serfs, which were suppressed by Nicholas I’s generals by flogging to death each tenth or fifth man taken out of the ranks, and by laying waste the village … As to the poverty which I saw during our journeys in certain villages, especially in those which belonged to the imperial family, no words would be adequate to describe the misery to readers who have not seen it.

  Exactly as in Austria-Hungary, absolutism didn’t just create a set of economic institutions that impeded the prosperity of the society. There was a similar fear of creative destruction and a fear of industry and the railways. At the heart of this during the reign of Nicholas I was Count Egor Kankrin, who served as finance minister between 1823 and 1844 and played a key role in opposing the changes in society necessary for promoting economic prosperity.

  Kankrin’s policies were aimed at strengthening the traditional political pillars of the regime, particularly the landed aristocracy, and keeping the society rural and agrarian. Upon becoming minister of finance, Kankrin quickly opposed and reversed a proposal by the previous finance minister, Gurev, to develop a government-owned Commercial Bank to lend to industry. Instead, Kankrin reopened the State Loan Bank, which had been closed during the Napoleonic Wars. This bank was originally created to lend to large landowners at subsidized rates, a policy Kankrin approved of. The loans required the applicants to put up serfs as “security,” or collateral, so that only feudal landowners could get such loans. To finance the State Loan Bank, Kankrin transferred assets from the Commercial Bank, killing two birds with one stone: there would now be little money left for industry.

  Kankrin’s attitudes were presciently shaped by the fear that economic change would bring political change, and so were those of Tsar Nicholas. Nicholas’s assumption of power in December 1825 had been almost aborted by an attempted coup by military officers, the so-called Decembrists, who had a radical program of social change. Nicholas wrote to Grand Duke Mikhail: “Revolution is on Russia’s doorstep, but I swear that it will not penetrate the country while there is breath in my body.”

  Nicholas feared the social changes that creating a modern economy would bring. As he put it in a speech he made to a meeting of manufacturers at an industrial exhibit in Moscow:

  both the state and manufacturers must turn their attention to a subject, without which the very factories would become an evil rather than a blessing; this is the care of the workers who increase in number annually. They need energetic and paternal supervision of their morals; without it this mass of people will gradually be corrupted and eventually turn into a class as miserable as they are dangerous for their masters.

  Just as with Francis I, Nicholas feared that the creative destruction unleashed by a modern industrial economy would undermine the political status quo in Russia. Urged on by Nicholas, Kankrin took specific steps to slow the potential for industry. He banned several industrial exhibitions, which had previously been held periodically to showcase new technology and facilitate technology adoption.

  In 1848 Europe was rocked by a series of revolutionary outbursts. In response, A. A. Zakrevskii, the military governor of Moscow, who was in charge of maintaining public order, wrote to Nicholas: “For the preservation of calm and prosperity, which at present time only Russia enjoys, the government must not permit the gathering of homeless and dissolute people, who will easily join every movement, destroying social or private peace.” His advice was brought before Nicholas’s ministers, and in 1849 a new law was enacted that put severe limits on the number of factories that could be opened in any part of Moscow. It specifically forbade the opening of any new cotton or woolen spinning mills and iron foundries. Other industries, such as weaving and dyeing, had to petition the military governor if they wanted to open new factories. Eventually cotton spinning was explicitly banned. The law was intended to stop any further concentration of potentially rebellious workers in the city.

  Opposition to railways accompanied opposition to industry, exactly as in Austria-Hungary. Before 1842 there was only one railway in Russia. This was the Tsarskoe Selo Railway, which ran seventeen miles from Saint Petersburg to the imperial residencies of Tsarskoe Selo and Pavlovsk. Just as Kankrin opposed industry, he saw no reason to promote railways, which he argued would bring a socially dangerous mobility, noting that “railways do not always result from natural necessity, but are more an object of artificial need or luxury. They encourage unnecessary travel from place to place, which is entirely typical of our time.”

  Kankrin turned down numerous bids to build railways, and it was only in 1851 that a line was built linking Moscow and Saint Petersburg. Kankrin’s policy was continued by Count Kleinmichel, who was made head of the main administration of Transport and Public Buildings. This institution became the main arbiter of railway construction, and Kleinmichel used it as a platform to discourage their construction. After 1849 he even used his power to censor discussion in the newspapers of railway development.

  Map 13 (opposite) shows the consequences of this logic. While Britain and most of northwest Europe was crisscrossed with railways in 1870, very few penetrated the vast territory of Russia. The policy against railways was only reversed after Russia’s conclusive defeat by British, French, and Ottoman forces in the Crimean War, 1853–1856, when the backwardness of its transportation network was understood to be a serious liability for Russian security. There was also little railway development in Austria-Hungary outside of Austria and the western parts of the empire, though the 1848 Revolutions had brought change to these territories, particularly the abolition of serfdom.

  NO SHIPPING ALLOWED

  Absolutism reigned not just in much of Europe but also in Asia, and similarly prevented industrialization during the critical juncture created by the Industrial Revolution. The Ming and Qing dynasties of China and the absolutism of the Ottoman Empire illustrate this
pattern. Under the Song dynasty, between 960 and 1279, China led the world in many technological innovations. The Chinese invented clocks, the compass, gunpowder, paper and paper money, porcelain, and blast furnaces to make cast iron before Europe did. They independently developed spinning wheels and waterpower at more or less the same time that these emerged at the other end of Eurasia. In consequence, in 1500 standards of living were probably at least as high in China as they were in Europe. For centuries China also had a centralized state with a meritocratically recruited civil service.

  Yet China was absolutist, and the growth under the Song dynasty was under extractive institutions. There was no political representation for groups other than the monarchy in society, nothing resembling a Parliament or a Cortes. Merchants always had a precarious status in China, and the great inventions of the Song were not spurred by market incentives but were brought into existence under the auspices, or even the orders, of the government. Little of this was commercialized. The grip of the state tightened during the Ming and Qing dynasties that followed the Song. At the root of all this was the usual logic of extractive institutions. As most rulers presiding over extractive institutions, the absolutist emperors of China opposed change, sought stability, and in essence feared creative destruction.

  This is best illustrated by the history of international trade. As we have seen, the discovery of the Americas and the way international trade was organized played a key role in the political conflicts and institutional changes of early modern Europe. In China, while private merchants were commonly involved in trade within the country, the state monopolized overseas trade. When the Ming dynasty came to power in 1368, it was Emperor Hongwu who first ruled, for thirty years. Hongwu was concerned that overseas trade would be politically and socially destabilizing and he allowed international trade to take place only if it were organized by the government and only if it involved tribute giving, and not commercial activity. Hongwu even executed hundreds of people accused of trying to turn tribute missions into commercial ventures. Between 1377 and 1397, no oceangoing tribute missions were allowed. He banned private individuals from trading with foreigners and would not allow Chinese to sail overseas.

  In 1402 Emperor Yongle came to the throne and initiated one of the most famous periods of Chinese history by restarting government-sponsored foreign trade on a big scale. Yongle sponsored Admiral Zheng He to undertake six huge missions to Southeast and South Asia, Arabia, and Africa. The Chinese knew about these places from a long history of trading relations, but nothing had ever happened on this scale before. The first fleet included 27,800 men and 62 large treasure ships, accompanied by 190 smaller ships, including ones specifically for carrying freshwater, others for supplies, and others for troops. Yet Emperor Yongle put a temporary stop on the missions after the sixth one in 1422. This was made permanent by his successor, Hongxi, who ruled from 1424 to 1425. Hongxi’s premature death brought to the throne Emperor Xuande, who at first allowed Zheng He a final mission, in 1433. But after this, all overseas trade was banned. By 1436 the construction of seagoing ships was even made illegal. The ban on overseas trade was not lifted until 1567.

  These events, though only the tip of the extractive iceberg that prevented many economic activities deemed to be potentially destabilizing, were to have a fundamental impact on Chinese economic development. Just at the time when international trade and the discovery of the Americas were fundamentally transforming the institutions of England, China was cutting itself off from this critical juncture and turning inward. This inward turn did not end in 1567. The Ming dynasty was overrun in 1644 by the Jurchen people, the Manchus of inner Asia, who created the Qing dynasty. A period of intense political instability then ensued. The Qings engaged in mass expropriation of property and assets. In the 1690s, T’ang Chen, a retired Chinese scholar and failed merchant, wrote:

  More than fifty years have passed since the founding of the Ch’ing [Qing] dynasty, and the empire grows poorer each day. Farmers are destitute, artisans are destitute, merchants are destitute, and officials too are destitute. Grain is cheap, yet it is hard to eat one’s fill. Cloth is cheap, yet it is hard to cover one’s skin. Boatloads of goods travel from one marketplace to another, but the cargoes must be sold at a loss. Officials upon leaving their posts discover they have no wherewithal to support their households. Indeed the four occupations are all impoverished.

  In 1661 the emperor Kangxi ordered that all people living along the coast from Vietnam to Chekiang—essentially the entire southern coast, once the most commercially active part of China—should move seventeen miles inland. The coast was patrolled by troops to enforce the measure, and until 1693 there was a ban on shipping everywhere on the coast. This ban was periodically reimposed in the eighteenth century, effectively stunting the emergence of Chinese overseas trade. Though some did develop, few were willing to invest when the emperor could suddenly change his mind and ban trade, making investments in ships, equipment, and trading relations worthless or even worse.

  The reasoning of the Ming and Qing states for opposing international trade is by now familiar: the fear of creative destruction. The leaders’ primary aim was political stability. International trade was potentially destabilizing as merchants were enriched and emboldened, as they were in England during the era of Atlantic expansion. This was not just what the rulers believed during the Ming and Qing dynasties, but also the attitude of the rulers of the Song dynasty, even if they were willing to sponsor technological innovations and permit greater commercial freedom, provided that this was under their control. Things got worse under the Ming and Qing dynasties as the control of the state on economic activity tightened and overseas trade was banned. There were certainly markets and trade in Ming and Qing China, and the government taxed the domestic economy quite lightly. However, it did little to support innovation, and it exchanged the development of mercantile or industrial prosperity for political stability. The consequence of all this absolutist control of the economy was predictable: the Chinese economy was stagnant throughout the nineteenth and early twentieth centuries while other economies were industrializing. By the time Mao set up his communist regime in 1949, China had become one of the poorest countries in the world.

  THE ABSOLUTISM OF PRESTER JOHN

  Absolutism as a set of political institutions and the economic consequences that flowed from it were not restricted to Europe and Asia. It was present in Africa, for example, with the Kingdom of Kongo, as we saw in chapter 2. An even more durable example of African absolutism is Ethiopia, or Abyssinia, whose roots we came across in chapter 6, when we discussed the emergence of feudalism after the decline of Aksum. Abyssinian absolutism was even more long-lived than its European counterparts, because it was faced with very different challenges and critical junctures.

  After the conversion of the Aksumite king Ezana to Christianity, the Ethiopians remained Christian, and by the fourteenth century they had become the focus of the myth of King Prester John. Prester John was a Christian king who had been cut off from Europe by the rise of Islam in the Middle East. Initially his kingdom was thought to be located in India. However, as European knowledge of India increased, people realized that this was not true. The king of Ethiopia, since he was a Christian, then became a natural target for the myth. Ethiopian kings in fact tried hard to forge alliances with European monarchs against Arab invasions, sending diplomatic missions to Europe from at least 1300 onward, even persuading the Portuguese king to send soldiers.

  These soldiers, along with diplomats, Jesuits, and travelers wishing to meet Prester John, left many accounts of Ethiopia. Some of the most interesting from an economic point of view are by Francisco Álvares, a chaplain accompanying a Portuguese diplomatic mission, who was in Ethiopia from 1520 to 1527. In addition, there are accounts by Jesuit Manoel de Almeida, who lived in Ethiopia from 1624, and by John Bruce, a traveler who was in the country between 1768 and 1773. The writings of these people give a rich account of political and economic institutio
ns at the time in Ethiopia and leave no doubt that Ethiopia was a perfect specimen of absolutism. There were no pluralistic institutions of any kind, nor any checks and constraints on the power of the emperor, who claimed the right to rule on the basis of supposed descent from the legendary King Solomon and the Queen of Sheba.

  The consequence of absolutism was great insecurity of property rights driven by the political strategy of the emperor. Bruce, for example, noted that

  all the land is the king’s; he gives it to whom he pleases during pleasure, and resumes it when it is his will. As soon as he dies the whole land in the kingdom is at the disposal of the Crown; and not only so, but, by death of the present owner, his possessions however long enjoyed, revert to the king, and do not fall to the eldest son.

  Álvares claimed there would be much more “fruit and tillage if the great men did not ill-treat the people.” Alameida’s account of how the society worked is very consistent. He observed:

  It is so usual for the emperor to exchange, alter and take away the lands each man holds every two or three years, sometimes every year and even many times in the course of a year, that it causes no surprise. Often one man plows the soil, another sows it and another reaps. Hence it arises that there is no one who takes care of the land he enjoys; there is not even anyone to plant a tree because he knows that he who plants it very rarely gathers the fruit. For the king, however, it is useful that they should be so dependent upon him.