Chapter 9

Reversing Development
How European colonialism impoverished large parts of the world

The first contact the inhabitants had with Europeans was in the sixteenth century, with Portuguese mariners
who came to buy spices. Before then spices had to be shipped through the Middle East, via trade routes
controlled by the Ottoman Empire. Europeans searched for a passage around Africa or across the Atlantic
to gain direct access to the Spice Islands and the spice trade. The Cape of Good Hope was rounded by the
Portuguese mariner Bartolomeu Dias in 1488, and India was reached via the same route by Vasco da Gama
in 1498. For the first time the Europeans now had their own independent route to the Spice Islands.The
Portuguese immediately set about the task of trying to control the trade in spices. They capturedMelaka in
1511. Strategically situated on the western side of the Malaysian Peninsula, merchants fromall over
Southeast Asia came there to sell their spices to other merchants, Indian, Chinese, and Arabs,who then
shipped them to the West. As the Portuguese traveler Tome Pires put it in 1515: "The tradeand commerce
between the different nations for a thousand leagues on every hand must come to Melaka ... Whoever is
lord of Melaka has his hands at the throat of Venice."With Melaka in their hands, the Portuguese
systematically tried to gain a monopoly of the valuablespice trade. They failed.The opponents they faced
were not negligible. Between the fourteenth and sixteenth centuries, there was a great deal of economic
development in Southeast Asia based on trade in spices. City-states such as Aceh, Banten, Melaka,
Makassar, Pegu, and Brunei expanded rapidly, producing and exporting spices along with other products
such as hardwoods.

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 that 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.

Chapter 10
The Diffusion of Prosperity
How some parts of the world took different paths to prosperity
from that of Britain

it seems intuitive that inclusive institutions would serve to promote the exchange and the diffusion of
technology, ideas, activity, and wealth. Acemoglu and Robinson see the roots of the initial divergence in
world progress in the industrial revolution and the degree to which institutions in various parts of the world
incentivized industrialization. argues that the process of diffusion identified in Why Nations Fail is
decelerating -
"Successful long-term development therefore requires a two-pronged push. It requires an industrialization
drive, accompanied by the steady accumulation of human capital and institutional capabilities to sustain
services-driven growth once industrialization reaches its limits. Without the industrialization drive,
economic takeoff becomes quite difficult. Without sustained investments in human capital and institution-
building, growth is condemned to peter out. But this time-tested recipe has become a lot less effective these
days, owing to changes in manufacturing technologies and the global context. First, technological advances
have rendered manufacturing much more skill- and capital-intensive than it was in the past, even at the low-
quality end of the spectrum. As a result, the capacity of manufacturing to absorb labor has become much
more limited. It will be impossible for the next generation of industrializing countries to move 25% or more
of their workforce into manufacturing, as East Asian economies did.

Second, globalization in general, and the rise of China in particular, has greatly increased competition on
world markets, making it difficult for newcomers to make space for themselves. Although Chinese labor is
becoming more expensive, China remains a formidable competitor for any country contemplating entry
into manufactures.

Moreover, rich countries are unlikely to be as permissive towards industrialization policies as they were in
the past. Policymakers in the industrial core looked the other way as rapidly growing East Asian countries
acquired Western technologies and industrial capabilities through unorthodox policies such as subsidies,
local content requirements, reverse engineering, and currency undervaluation. Core countries also kept their
domestic markets open, allowing East Asian countries to export freely the manufactured products that
resulted."

I found chapter 10 to be a key one in book as the identification of diffusion as a key process in development
is supported by comparison and contrast (Japan v China). I do wonder, however, at the significance
attributed to colonization and the nature of the society colonized (see pages 299-300) by the authors and
look forward to our discussion of this chapter and examination of diffusion.

Chapter 11

The Virtuous Circle

How institutions that encourage prosperity create positive feedback
loops that prevent the efforts by elites to undermine them

". . . vicious circles create powerful forces toward the persistence of extractive institutions. History is not
destiny, and vicious circles are not unbreakable. They create a powerful process of negative feedback, with
extractive political institutions forging extractive economic institutions, which in turn create the basis for
the persistence of extractive political institutions." (365) This argument is developed via exemplification in
this chapter with examples ranging from African countries to the American south. The chapter ends with
the assertion that this vicious circle - "engender continuous infighting and civil wars" (366-7 due the
motivation of special interest groups (the iron law of oligarchy) to snatch control of extractive institutions.

Chapter 12
The Vicious Circle
How institutions that create poverty generate negative
feedback loops and endure
On the eve of the French Revolution in 1789, there were severe restrictions placed on Jews throughout
Europe. In the German city of Frankfurt, for example, their lives were regulated by orders set out in a statute
dating from the Middle Ages. There could be no more than five hundred Jewish families in Frankfurt, and
they all had to live in a small, walled part of town, the Judengasse, the Jewish ghetto. They could not leave
the ghetto at night, on Sundays, or during any Christian festival. The Judengasse was incredibly cramped.
It was a quarter of a mile long but no more than twelve feet wide and in some places less than ten feet wide.
Jews lived under constant repression and regulation. Each year, at most two new families could be admitted
to the ghetto, and at most twelve Jewish couples could get married, and only if they were both above the
age of twenty-five. Jews could not farm; they could also not trade in weapons, spices, wine, or grain. Until
1726 they had to wear specific markers, two concentric yellow rings for men and a striped veil for women.
All Jews had to pay a special poll tax. As the French Revolution erupted, a successful young businessman,
Mayer Amschel Rothschild, lived in the Frankfurt Judengasse. By the early 1780s, Rothschild had
established himself as the leading dealer in coins, metals, and antiques in Frankfurt. But like all Jews in the
city, he could not open a business outside the ghetto or even live outside it. This was all to change soon. In
1791 the French National Assembly emancipated French Jewry. The French armies were now also
occupying the Rhineland and emancipating the Jews of Western Germany. In Frankfurt their effect would
be more abrupt and perhaps somewhat unintentional. In 1796 the French bombarded Frankfurt, demolishing
half of the Judengasse in the process. Around two thousand Jews were left homeless and had to move
outside the ghetto. The Rothschilds were among them. Once outside the ghetto, and now freed from the
myriad regulations barring them from entrepreneurship, they could seize new business opportunities. This
included a contract to supply grain to the Austrian army, something they would previously not have been
allowedtodo.

The authors paint the vicious circle as starting off with extractive institutions established by a
colonial power (which builds on previous extractive institutions), which, on leaving, becomes even
more extractive under corrupt post-colonial rulers, which in turn leads to civil war as competing
factions fight for control over the extractive instittions – which then leads to a decent into chaos.

Or in more detail… The British Colonial Authorities built extractive instititions which many post
independence African politicians were only too happy to continue in order to enrich themselves. This
happened in countries such as Sierra Leone, Ghana, Kenya and Zambia. The postcolonial rulers used their
wealth to build personalised security forces which were answerable to them and also to rig elections –
money thus became essential to maintain power, with only those who have money able to maintain power.
This creates incentives among the opposition to depose the existing leaders in order to gain power and
wealth themselves, and to protect themselves from being killed off by the said existing leaders. The point
here is that power has become an end in itself rather than as a means to developing a country.
This is best illustrated through the example of Sierra Leone –

All of the West African nation of Sierra Leone became a British colony in 1896. The British
identified important rulers and and gave them a new title – paramount chief. In Eastern Sierra
Leone, for example, they encountered Suluku, a powerful warrior king, who was made Paramount
Chief Suluku.

In 1898 the British tried levying a hut tax of five shillings, which resulted in a civil war known as
the hut tax rebellion. It started in the north, but was strongest and lasted longest in the South.

In 1904, the British stopped construction of a railway line from Freetown to the North East and
instead diverted it south, to Bo, in Mendeland, to give them quick access to put down this rebellion.
When Sierra Leone became independent in 1961 the British handed power to to the SLPP, which
attracted support from the South, and in 1967 this party lost the election to the opposition party,
the APC which drew support from the North.

Though the railway line was initially established to rule SL, by 1967, its role was economic – it
allowed transportation of the country’s exports – coffee, cocoa, and diamonds, which came mostly
from Mendeland in the south.

The then leader of the APC, Siaka Stevens, who drew his political support from the north, ripped
up the railway line and sold off the track and rolling stock in order to weaken the oppostion in the
south and consolidate his political power. This decimated the SL economy, but when it came to a
choice between consolidating power and economic growth, the consolidation of power won out.
Today, you can’t take the train to Bo anymore.

There is continuity between Colonial rule and Steven’s government – both extracted wealth from
the people.

The Colonial rulers did this through agricultural marketing boards – farmers had to sell their goods
to these boards, which typically paid much less than the market price (impovershing farmers and
enriching the elite). When Stevens took power, he kept these marketing boards in place, but it got
worse – under colonial rule, the colonialists extracted about 50% of the value of agricultral
products, under Stevens, the rate of extracting rose to 90%.

Along with marketing boards, the old system of Paramount Chiefs remain in place today…. They
control local politics at the village level, and local land rights and taxation – Paramount chiefs are
elected, but only members of the ruling house can stand – and in 2005 the victor was Sheku
Fasuluka, King Suluku’s great, great grandson.

The combination of these two institutions means there is very little incentive for farmers to
increase productivity – because they have insecure land rights due to the paramount chief system
and are the victim of extractive insitutions in the form of the marketing boards.Thirdly, there
was the control of the diamond mines – The British essentially set up a monopoloy for the
entire country and handed it to DeBeers in 1936, and shortly after independence, Stevens
simply nationalised this arrangement, through which he effectively personally controlled
51% of the diamonds in SL.

Stevens used his vast fortune to buy political influence and to set up his own private
security forces – the ISU (known locally as the ‘I Shoot You’ and the Special Security
Division – known as Siaka Steven’s Dogs).All of this set the scene for the brutal civil war,
outlined below
Chapter 13
Why Nations Fail Today
Institutions, institutions, institutions

In the year 2000 Zimbabwe held a national lottery for everyone who had kept more than 5000
Zimbabwean dollars in their bank account (following a period of hyperinflation). The fact that it
was Robert Mugabe who won this lottery just goes to show the extent of his control over
Zimbabwe’s institutions and just how extractive those institutions had become. The most common
reasons nations fail today is because they have extractive institutions – and Zimbabwe illustrates
the economic and social consequences of these…. By 2008 its per capita income was half that
when it gained its independence, and 2009 the unemployment rate stood at 94%.

The roots of the political and economic instiututions lie in the colonial period. Orginally apartheid
institutions were establised for a white elite to extract wealth from the country, but when
Zimbabwe gained its indendence, these institutions were simply maintained by Mugabe.
Eventually (because of lack of inclusivity) his support waned until by the year 2000 he had to find
further resources to buy political support – so he expropriated the farms owned by white people
and when that wasn’t enough he printed money, which led to massive hyperinflation.

Nations fail today because their extractive institutions do not create the incentives to save, invest
and innovate. In many cases politicians stifle economic activity because this threatens their power
base (the economic elite) – as in Argentina, Colombia and Egypt. In the cases of Zimbabwe and
Sierra Leone this led to total state failure and economic stagnation. The countries in which this has
happened include…

 Angola
 Cameroon
 Chad
 DRC
 Haiti
 Liberia
 Nepal
 Sierra Leone
 Sudan
 Zimbabwe
And the civil war, mass displacement, famines and epidemics that accompany them… in terms of
development many of these countries are poorer today than they were in the 1960s.

A children’s crusade…
This section outlines the causes of the civil war in Sierra Leone. The authors put this down to
decades of extractive institutions by the tyrannical APC government (the economy was collapsing
by 1985, and they use the example of the TV transmitter being sold by the minister of information
in 1987 and in 1989 the country’s main radio antena collapsed, ceasing radio transmissions.) By
this point, the army had been dispanded because of the ruling elite feared it might overthrow them,
which meant by the time Charles Taylor’s RPF crossed the boarder in 1991 there was no one there
to stop them…. And then that brutal and chaotic civil war carried on for a decade – in which
competing factions competed over resources in order to keep fighting each other – diamonds/
children (soldiers) and weapons.

So in summary, the historical precendent of the SL civil war is extractive institutions… the
hollowing out the state to the point that was incapable of fending off rebels.

The authors now go on to outline three other countries which have suffered from different types
of extractive institutions – Colombia, Argentina and Egypt, and then Uzbekistan…. a country
languishing under the absolutism of a single family and the cronies surrounding them, with an
economy based on the forced labour of children. Cotton accounts for 45% of the exports of
Uzbekistan. When the country was created in 1991, its first and still only president Islam Karimov,
divided up the land among farmers, but each was required to devote at least 35% of their land to
cotton, a valuable export crop. However, because the farmers themselves receive only a fraction
of the world market price of the crop, they had no incentive to maintain, let alone invest in, cotton
harvesting machinery.

No matter, however, because the country has turned to children to harvest the cotton, and every
September-November the schools are emptied of approx. 2.7 million schoolchildren. Teachers,
instead of being instructors, become labour recruiters.

Each child is required to pick between 20-60KG a day, depending on age, and the lucky ones who
live close to their allocated farms can walk or bus to work, but the unlucky ones have to sleep over
in sheds, with no toilets or wash facilities. And it’s BYO food.

While the market price for cotton was $1.40 in 2006, the children were paid somewhere in the
region of $0.01 per kilo.

All of this has come to pass because Karimov has established a regime where opposition is
repressed and there is no free media or NGOs allowed.

Why do nations fail?

What all of the countries loooked at in the book have in common is that they have an elite who
have designed economic instiututions in order to enrich themselves and perpetuate their power at
the expense of the vast majority of people in society.

Despite differences the bigger picture is that in each of these countries extractive
political institutions that have created extractive economic insitutions which transfer
wealth and power toward the elite.

The solution is to transform the extractive institutions into inclusive ones.

Chapter 14
Breaking the Mold
How a few countries changed their economic trajectory by
changing their institutions

This chapter looks at three case studies – Botswana, The South of America, and China, which all
managed to move from, or negotiate their way around (in the case of Botswana) extractive to
inclusive political institutions which encouraged econonomic development.

Of particular interest to me is the case of Botswana – which today has the same level of
development as some Eastern European countries, despite being as poor as most of the rest of Sub-
Saharan Africa in the 1960s (at which time there were less than 100 graduates in the entire
country).

What’s especially interesting about Botswana is that in that particular region of Africa a broadly
inclusive political system was in existence pre-colonialsm – in the sense that any individual could
rise up to become head of one the various different chiefdoms in the region, and so chiefdom was
not hereditory, it was meritocratic, and someone could only be chief with the will of the people.
Thus the principal of ruling with the will of the people, and on behalf of the people had been
established for generations.

Another factor which promoted development was the fact that the English weren’t particularly
interested in Botswana. In fact in the 1890s, three Twsana chiefs visited England and negotiated
with the government to be part of a British Protectorate (different to a colony) – In return for
protecting the region against Rhode’s South African expansionary policies (the guy who colonised
Zimbabwe and Zambia, and look how they turned out!) all Enlgand wanted was enough land to
build a railway in order to open up the intererior. For this the Twsana were pretty much left alone,
crucially unextracted and without interefering institutions which had been set up to allow the
extraction to take place.

Also signficant is that, following Colonialism and the discovery of diamonds, the Tswana chiefs
passed a law that all diamond wealth was to be national property, rather than giving the rights to
individuals or Corporations (like neoliberals would claim should be done, and like what happened
in Sierra Leone). The effect of this was masses of public money which was then used to pay for
public services. Hence development……

Something else emphasised in this chapter is that in all three cases certain key actors made
important decisions at crucial junctures in the country’s history (when an existing leader died, such
as Mao, creating a power vaccum, or when Independence was gained in Botswana) – The decisions
taken at these crucial points in history in these countries involved either fighting the power of
entrenched elites (as in China) or establishing laws which would prevent political corruption (like
nationalising the diamond supplies in Botswana) – it was these decisions, in contrast to decisions
in countries like Sierra Leone where a national railline was sold off to benefit an elite, which led
to economic development.
Chapter 15

Understanding Prosperity and Poverty

How the world could have been different and how understanding
this can explain why most attempts to combat poverty have failed

The most interesting section of this concerns the predictive power of the theory – which is limited
given the role of agency and contingency in said theory. However, the authors do predict that…

America and Europe are likely to get even richer than countries in most of the rest of the world,
because these are the most inclusive institutions (I’d beg to differ given Tory Policy). Nations that
have undergone no signficant state centralisation such as Afghanistan, Somalia and Haiti are
unlikely to witness any development. Some Latin American countries are set two grow – most
noteably Brazil, Chile Mexico as are some African countries – Tanzania and Ethiopia for example.
Growth will not be sustained in China.

The irresistible charm of authoritarian growth…..

This section reminds us that modernisation theory is flawed – economic growth (more Mcdonalds
as Thomas Friedman might put it) does not necessarily lead to to more inclusive political
institutions.

Plenty of repressive regimes have pursued and achieve very rapid economic growth in the last 60
years – Germany, for example, Russia, and China.

This chapter also deals with what probably won’t work in terms of development… Firstly, any
attempt at engineering policy changes such as those attempted by neoliberalisation throughout the
1980s and 90s – Because if a country is politically corrupt, they just subvert the policy changes –
Privatisation happens, but the people winning the contracts are the brothers of the ministers for
example, or the country says it implements a policy but they just carries on as normal!

You can’t engineer prosperity

…because the actors within developing countries are constrained by their institutions, and if these
are extractive then any programmes designed to engineer change will ultimately result in further
extraction.

This is true of two approaches to foreign aid preferred by the West – both the neoliberal ‘restructure
your economy’ type approach and the micro-economic approach which focuses on specific
institutions.

The failure of foreign aid

As above, any aid money going into a country with extractive institutions will ultimately end up
being extracted. The authors do argue, however, that even if only 20% of aid money reaches its
ultimate destination then it’s worth it!

What works….?
The chapter and book round off by going back to the English and US revolutions which resulted
in institutions becoming more inclusive – what is required for development is a plurality of voices
demanding to be heard by government and actually being heard. This cannot be imposed from
above, but seems to have to become from below.

In this sense, any attempt to engineer growth and provide aid seem pointless – the only things that
make any sense are programmes oriented towards empowerment and making sure media is free
because the later fosters the former.

Thoughts and comments….

Positives
The comparative analysis of countries and territories in close geographical proximity does seem
to rule out the role of environmental and cultural factors in explaning divergent patterns of
development, leaving only political and economic institutions.

It fully recognises the importance of the legacy of extraction identified by dependency theory,
however, it also puts more emphasis on the already existing extractive institutions which the early
colonisers extracted and it recognises the continuation of extraction post-colinalism,
acknowledging the fact that corrupt elites also play a role.

This seems to deny the validity of neoliberal theory – the state seems to be crucial in helping
development, and the absence of the state seems to be crucial in explaining the descent into chaos
and civil war.

This isn’t a deterministic theory – it stresses the importance of agency and contingency at crucial
historical junctures.

Limitations
This is quite a generalist analysis – ‘extractive’ and ‘inclusive’ institutions are very general, broad
terms, and there’s lots of variation possible within these voluminous concepts.

The book only draws on a relatively few case studies – and lacks the statistical rigour of, for
example, Paul Collier’s Bottom Billion Theory.

The book doesn’t seem to deal with the globalised context of the nation state today within a ‘world
system’ – There is no mention (as far as I can see) of the role which TNCs, trade rules, the World
Bank might play in allowing a global elite (rather than nationalised elites) to extract regions of the
world.

As a final word, what’s maybe most timely (or not timely?) about the book is its suggestion that
some kind of political infrastructure which allows a plurality of voices to be heard and wealth to
be distributed so it benefits all is crucial to development – it’s time more of us started asking how
we might do this at a global, rather than a national level.