Daron Acemoglu & James Robinson

by Prosperity;Poverty Why Nations Fail: The Origins of Power

  I cunningly opened a private bank account into which I diverted a portion of my savings … This went only until I had saved eighty pounds … [I bought] a span of oxen with yokes, gear, plough and the rest of agricultural paraphernalia … I now purchased a small farm … I cannot too strongly recommend [farming] as a profession to my fellow man … They should however adopt modern methods of profit making.

  An extraordinary piece of evidence supporting the economic dynamism and prosperity of African farmers in this period is revealed in a letter sent in 1869 by a Methodist missionary, W. J. Davis. Writing to England, he recorded with pleasure that he had collected forty-six pounds in cash “for the Lancashire Cotton Relief Fund.” In this period the prosperous African farmers were donating money for relief of the poor English textile workers!

  This new economic dynamism, not surprisingly, did not please the traditional chiefs, who, in a pattern that is by now familiar to us, saw this as eroding their wealth and power. In 1879 Matthew Blyth, the chief magistrate of the Transkei, observed that there was opposition to surveying the land so that it could be divided into private property. He recorded that “some of the chiefs … objected, but most of the people were pleased … the chiefs see that the granting of individual titles will destroy their influence among the headmen.”

  Chiefs also resisted improvements made on the lands, such as the digging of irrigation ditches or the building of fences. They recognized that these improvements were just a prelude to individual property rights to the land, the beginning of the end for them. European observers even noted that chiefs and other traditional authorities, such as witch doctors, attempted to prohibit all “European ways,” which included new crops, tools such as plows, and items of trade. But the integration of the Ciskei and the Transkei into the British colonial state weakened the power of the traditional chiefs and authorities, and their resistance would not be enough to stop the new economic dynamism in South Africa. In Fingoland in 1884, a European observer noted that the people had

  transferred their allegiance to us. Their chiefs have been changed to a sort of titled landowner … without political power. No longer afraid of the jealousy of the chief or of the deadly weapon … the witchdoctor, which strikes down the wealthy cattle owner, the able counsellor, the introduction of novel customs, the skilful agriculturalist, reducing them all to the uniform level of mediocrity—no longer apprehensive of this, the Fingo clansman … is a progressive man. Still remaining a peasant farmer … he owns wagons and ploughs; he opens water furroughs for irrigation; he is the owner of a flock of sheep.

  Even a modicum of inclusive institutions and the erosion of the powers of the chiefs and their restrictions were sufficient to start a vigorous African economic boom. Alas, it would be short lived. Between 1890 and 1913 it would come to an abrupt end and go into reverse. During this period two forces worked to destroy the rural prosperity and dynamism that Africans had created in the previous fifty years. The first was antagonism by European farmers who were competing with Africans. Successful African farmers drove down the price of crops that Europeans also produced. The response of Europeans was to drive the Africans out of business. The second force was even more sinister. The Europeans wanted a cheap labor force to employ in the burgeoning mining economy, and they could ensure this cheap supply only by impoverishing the Africans. This they went about methodically over the next several decades.

  The 1897 testimony of George Albu, the chairman of the Association of Mines, given to a Commission of Inquiry pithily describes the logic of impoverishing Africans so as to obtain cheap labor. He explained how he proposed to cheapen labor by “simply telling the boys that their wages are reduced.” His testimony goes as follows:

  Commission: Suppose the kaffirs [black Africans] retire back to their kraal [cattle pen]? Would you be in favor of asking the Government to enforce labour?

  Albu: Certainly … I would make it compulsory … Why should a nigger be allowed to do nothing? I think a kaffir should be compelled to work in order to earn his living.

  Commission: If a man can live without work, how can you force him to work?

  Albu: Tax him, then …

  Commission: Then you would not allow the kaffir to hold land in the country, but he must work for the white man to enrich him?

  Albu: He must do his part of the work of helping his neighbours.

  Both of the goals of removing competition with white farmers and developing a large low-wage labor force were simultaneously accomplished by the Natives Land Act of 1913. The act, anticipating Lewis’s notion of dual economy, divided South Africa into two parts, a modern prosperous part and a traditional poor part. Except that the prosperity and poverty were actually being created by the act itself. It stated that 87 percent of the land was to be given to the Europeans, who represented about 20 percent of the population. The remaining 13 percent was to go to the Africans. The Land Act had many predecessors, of course, because gradually Europeans had been confining Africans onto smaller and smaller reserves. But it was the act of 1913 that definitively institutionalized the situation and set the stage for the formation of the South African Apartheid regime, with the white minority having both the political and economic rights and the black majority being excluded from both. The act specified that several land reserves, including the Transkei and the Ciskei, were to become the African “Homelands.” Later these would become known as the Bantustans, another part of the rhetoric of the Apartheid regime in South Africa, since it claimed that the African peoples of Southern Africa were not natives of the area but were descended from the Bantu people who had migrated out of Eastern Nigeria about a thousand years before. They thus had no more—and of course, in practice, less—entitlement to the land than the European settlers.

  Map 16 (this page) shows the derisory amount of land allocated to Africans by the 1913 Land Act and its successor in 1936. It also records information from 1970 on the extent of a similar land allocation that took place during the construction of another dual economy in Zimbabwe, which we discuss in chapter 13.

  The 1913 legislation also included provisions intended to stop black sharecroppers and squatters from farming on white-owned land in any capacity other than as labor tenants. As the secretary for native affairs explained, “The effect of the act was to put a stop, for the future, to all transactions involving anything in the nature of partnership between Europeans and natives in respect of land or the fruits of land. All new contracts with natives must be contracts of service. Provided there is a bona fide contract of this nature there is nothing to prevent an employer from paying a native in kind, or by the privilege of cultivating a defined piece of ground … But the native cannot pay the master anything for his right to occupy the land.”

  To the development economists who visited South Africa in the 1950s and ’60s, when the academic discipline was taking shape and the ideas of Arthur Lewis were spreading, the contrast between these Homelands and the prosperous modern white European economy seemed to be exactly what the dual economy theory was about. The European part of the economy was urban and educated, and used modern technology. The Homelands were poor, rural, and backward; labor there was very unproductive; people, uneducated. It seemed to be the essence of timeless, backward Africa.

  Except that the dual economy was not natural or inevitable. It had been created by European colonialism. Yes, the Homelands were poor and technologically backward, and the people were uneducated. But all this was an outcome of government policy, which had forcibly stamped out African economic growth and created the reservoir of cheap, uneducated African labor to be employed in European-controlled mines and lands. After 1913 vast numbers of Africans were evicted from their lands, which were taken over by whites, and crowded into the Homelands, which were too small for them to earn an independent living from. As intended, therefore, they would be forced to look for a living in the white economy, supplying their labor cheaply. As their economic incentives collapsed, the advances that had taken place i
n the preceding fifty years were all reversed. People gave up their plows and reverted to farming with hoes—that is, if they farmed at all. More often they were just available as cheap labor, which the Homelands had been structured to ensure.

  It was not only the economic incentives that were destroyed. The political changes that had started to take place also went into reverse. The power of chiefs and traditional rulers, which had previously been in decline, was strengthened, because part of the project of creating a cheap labor force was to remove private property in land. So the chiefs’ control over land was reaffirmed. These measures reached their apogee in 1951, when the government passed the Bantu Authorities Act. As early as 1940, G. Findlay put his finger right on the issue:

  Tribal tenure is a guarantee that the land will never properly be worked and will never really belong to the natives. Cheap labour must have a cheap breeding place, and so it is furnished to the Africans at their own expense.

  The dispossession of the African farmers led to their mass impoverishment. It created not only the institutional foundations of a backward economy, but the poor people to stock it.

  The available evidence demonstrates the reversal in living standards in the Homelands after the Natives Land Act of 1913. The Transkei and the Ciskei went into a prolonged economic decline. The employment records from the gold mining companies collected by the historian Francis Wilson show that this decline was widespread in the South African economy as a whole. Following the Natives Land Act and other legislation, miners’ wages fell by 30 percent between 1911 and 1921. In 1961, despite relatively steady growth in the South African economy, these wages were still 12 percent lower than they had been in 1911. No wonder that over this period South Africa became the most unequal country in the world.

  But even in these circumstances, couldn’t black Africans have made their way in the European, modern economy, started a business, or have become educated and begun a career? The government made sure these things could not happen. No African was allowed to own property or start a business in the European part of the economy—the 87 percent of the land. The Apartheid regime also realized that educated Africans competed with whites rather than supplying cheap labor to the mines and to white-owned agriculture. As early as 1904 a system of job reservation for Europeans was introduced in the mining economy. No African was allowed to be an amalgamator, an assayer, a banksman, a blacksmith, a boiler maker, a brass finisher, a brassmolder, a bricklayer … and the list went on and on, all the way to woodworking machinist. At a stroke, Africans were banned from occupying any skilled job in the mining sector. This was the first incarnation of the famous “colour bar,” one of the several racist inventions of South Africa’s regime. The colour bar was extended to the entire economy in 1926, and lasted until the 1980s. It is not surprising that black Africans were uneducated; the South African state not only removed the possibility of Africans benefiting economically from an education but also refused to invest in black schools and discouraged black education. This policy reached its peak in the 1950s, when, under the leadership of Hendrik Verwoerd, one of the architects of the Apartheid regime that would last until 1994, the government passed the Bantu Education Act. The philosophy behind this act was bluntly spelled out by Verwoerd himself in a speech in 1954:

  The Bantu must be guided to serve his own community in all respects. There is no place for him in the European community above the level of certain forms of labour … For that reason it is to no avail to him to receive a training which has as its aim absorption in the European community while he cannot and will not be absorbed there.

  Naturally, the type of dual economy articulated in Verwoerd’s speech is rather different from Lewis’s dual economy theory. In South Africa the dual economy was not an inevitable outcome of the process of development. It was created by the state. In South Africa there was to be no seamless movement of poor people from the backward to the modern sector as the economy developed. On the contrary, the success of the modern sector relied on the existence of the backward sector, which enabled white employers to make huge profits by paying very low wages to black unskilled workers. In South Africa there would not be a process of the unskilled workers from the traditional sector gradually becoming educated and skilled, as Lewis’s approach envisaged. In fact, the black workers were purposefully kept unskilled and were barred from high-skill occupations so that skilled white workers would not face competition and could enjoy high wages. In South Africa black Africans were indeed “trapped” in the traditional economy, in the Homelands. But this was not the problem of development that growth would make good. The Homelands were what enabled the development of the white economy.

  It should also be no surprise that the type of economic development that white South Africa was achieving was ultimately limited, being based on extractive institutions the whites had built to exploit the blacks. South African whites had property rights, they invested in education, and they were able to extract gold and diamonds and sell them profitably in the world market. But over 80 percent of the South African population was marginalized and excluded from the great majority of desirable economic activities. Blacks could not use their talents; they could not become skilled workers, businessmen, entrepreneurs, engineers, or scientists. Economic institutions were extractive; whites became rich by extracting from blacks. Indeed, white South Africans shared the living standards of people of Western European countries, while black South Africans were scarcely richer than those in the rest of sub-Saharan Africa. This economic growth without creative destruction, from which only the whites benefited, continued as long as revenues from gold and diamonds increased. By the 1970s, however, the economy had stopped growing.

  And it will again be no surprise that this set of extractive economic institutions was built on foundations laid by a set of highly extractive political institutions. Before its overthrow in 1994, the South African political system vested all power in whites, who were the only ones allowed to vote and run for office. Whites dominated the police force, the military, and all political institutions. These institutions were structured under the military domination of white settlers. At the time of the foundation of the Union of South Africa in 1910, the Afrikaner polities of the Orange Free State and the Transvaal had explicit racial franchises, barring blacks completely from political participation. Natal and the Cape Colony allowed blacks to vote if they had sufficient property, which typically they did not. The status quo of Natal and the Cape Colony was kept in 1910, but by the 1930s, blacks had been explicitly disenfranchised everywhere in South Africa.

  The dual economy of South Africa did come to an end in 1994. But not because of the reasons that Sir Arthur Lewis theorized about. It was not the natural course of economic development that ended the color bar and the Homelands. Black South Africans protested and rose up against the regime that did not recognize their basic rights and did not share the gains of economic growth with them. After the Soweto uprising of 1976, the protests became more organized and stronger, ultimately bringing down the Apartheid state. It was the empowerment of blacks who managed to organize and rise up that ultimately ended South Africa’s dual economy in the same way that South African whites’ political force had created it in the first place.

  DEVELOPMENT REVERSED

  World inequality today exists because during the nineteenth and twentieth centuries some nations were able to take advantage of the Industrial Revolution and the technologies and methods of organization that it brought while others were unable to do so. Technological change is only one of the engines of prosperity, but it is perhaps the most critical one. The countries that did not take advantage of new technologies did not benefit from the other engines of prosperity, either. As we have shown in this and the previous chapter, this failure was due to their extractive institutions, either a consequence of the persistence of their absolutist regimes or because they lacked centralized states. But this chapter has also shown that in several instances the extractive institutions th
at underpinned the poverty of these nations were imposed, or at the very least further strengthened, by the very same process that fueled European growth: European commercial and colonial expansion. In fact, the profitability of European colonial empires was often built on the destruction of independent polities and indigenous economies around the world, or on the creation of extractive institutions essentially from the ground up, as in the Caribbean islands, where, following the almost total collapse of the native populations, Europeans imported African slaves and set up plantation systems.

  We will never know what the trajectories of independent city-states such as those in the Banda Islands, in Aceh, or in Burma (Myanmar) would have been without the European intervention. They may have had their own indigenous Glorious Revolution or slowly moved toward more inclusive political and economic institutions based on growing trade in spices and other valuable commodities. But this possibility was removed by the expansion of the Dutch East India Company. The company stamped out any hope of indigenous development in the Banda Islands by carrying out its genocide. Its threat also made the city-states in many other parts of Southeast Asia pull back from commerce.

  The story of one of the oldest civilizations in Asia, India, is similar, though the reversing of development was done not by the Dutch but by the British. India was the largest producer and exporter of textiles in the world in the eighteenth century. Indian calicoes and muslins flooded the European markets and were traded throughout Asia and even eastern Africa. The main agent that carried them to the British Isles was the English East India Company. Founded in 1600, two years before its Dutch version, the English East India Company spent the seventeenth century trying to establish a monopoly on the valuable exports from India. It had to compete with the Portuguese, who had bases in Goa, Chittagong, and Bombay, and the French with bases at Pondicherry, Chandernagore, Yanam, and Karaikal. Worse still for the East India Company was the Glorious Revolution, as we saw in chapter 7. The monopoly of the East India Company had been granted by the Stuart kings and was immediately challenged after 1688, and even abolished for over a decade. The loss of power was significant, as we saw earlier (this page–this page), because British textile producers were able to induce Parliament to ban the import of calicoes, the East India Company’s most profitable item of trade. In the eighteenth century, under the leadership of Robert Clive, the East India Company switched strategies and began to develop a continental empire. At the time, India was split into many competing polities, though many were still nominally under the control of the Mughal emperor in Delhi. The East India Company first expanded in Bengal in the east, vanquishing the local powers at the battles of Plassey in 1757 and Buxar in 1764. The East India Company looted local wealth and took over, and perhaps even intensified, the extractive taxation institutions of the Mughal rulers of India. This expansion coincided with the massive contraction of the Indian textile industry, since, after all, there was no longer a market for these goods in Britain. The contraction went along with de-urbanization and increased poverty. It initiated a long period of reversed development in India. Soon, instead of producing textiles, Indians were buying them from Britain and growing opium for the East India Company to sell in China.