PRAISEFORWhyNationsFail

“Acemoglu and Robinson havemade an important contribution to thedebate as to why similar-looking nations differ so greatly in theireconomic and political development. Through a broad multiplicity ofhistorical examples, they show how institutional developments,sometimesbasedonveryaccidentalcircumstances,havehadenormousconsequences. The openness of a society, its willingness to permitcreative destruction, and the rule of law appear to be decisive foreconomicdevelopment.”

—KennethJ.Arrow,Nobellaureateineconomics,1972

“The authors convincingly show that countries escape poverty onlywhen they have appropriate economic institutions, especially privateproperty and competition. More originally, they argue countries aremore likely to develop the right institutions when they have an openpluralistic political system with competition for political office, awidespread electorate, and openness to new political leaders. Thisintimate connection between political and economic institutions is theheart of theirmajor contribution, and has resulted in a study of greatvitality on one of the crucial questions in economics and politicaleconomy.”

—GaryS.Becker,Nobellaureateineconomics,1992

“This important and insightful book, packed with historical examples,makesthecasethatinclusivepoliticalinstitutionsinsupportofinclusiveeconomic institutions is key to sustained prosperity. The book reviewshow some good regimes got launched and then had a virtuous spiral,whilebadregimesremaininaviciousspiral.Thisisimportantanalysisnottobemissed.”

—PeterDiamond,Nobellaureateineconomics,2010

“For those who think that a nation’s economic fate is determined by

geography or culture, Daron Acemoglu and Jim Robinson have badnews. It’smanmade institutions,not the layof the landor the faithofour forefathers, that determine whether a country is rich or poor.Synthesizing brilliantly the work of theorists from Adam Smith toDouglass North with more recent empirical research by economichistorians, Acemoglu and Robinson have produced a compelling andhighlyreadablebook.”

—NiallFerguson,authorofTheAscentofMoney

“Acemoglu and Robinson—two of the world’s leading experts ondevelopment—reveal why it is not geography, disease, or culture thatexplainwhysomenationsarerichandsomepoor,butratheramatterofinstitutions andpolitics. Thishighly accessiblebookprovideswelcomeinsighttospecialistsandgeneralreadersalike.”

—FrancisFukuyama,authorofTheEndofHistoryandtheLastManandTheOriginsofPoliticalOrder

“A brilliant and uplifting book—yet also a deeply disturbing wake-upcall. Acemoglu and Robinson lay out a convincing theory of almosteverythingtodowitheconomicdevelopment.Countriesrisewhentheyput in place the right pro-growth political institutions and they fail—often spectacularly—when those institutions ossify or fail to adapt.Powerfulpeoplealwaysandeverywhere seek tograbcomplete controlover government, undermining broader social progress for their owngreed. Keep those people in check with effective democracy or watchyournationfail.”

—SimonJohnson,coauthorof13BankersandprofessoratMITSloan

“Twooftheworld’sbestandmosteruditeeconomiststurntothehardestissueofall:whyaresomenationspoorandothersrich?Writtenwithadeepknowledgeof economics andpoliticalhistory, this is perhaps themost powerful statement made to date that ‘institutions matter.’ Aprovocative,instructive,yetthoroughlyenthrallingbook.”—JoelMokyr,RobertH.StrotzProfessorofArtsandSciencesand

ProfessorofEconomicsandHistory,NorthwesternUniversity

“In this delightfully readable romp through four hundred years ofhistory, two of the giants of contemporary social science bring us aninspiring and important message: it is freedom that makes the worldrich.Lettyrantseverywheretremble!”—IanMorris,StanfordUniversity,authorofWhytheWestRules—

forNow

“Imagine sitting around a table listening to Jared Diamond, JosephSchumpeter, and James Madison reflect on more than two thousandyearsof political andeconomichistory. Imagine that theyweave theirideasintoacoherenttheoreticalframeworkbasedonlimitingextraction,promotingcreativedestruction,andcreatingstrongpoliticalinstitutionsthatsharepower,andyoubegintoseethecontributionofthisbrilliantandengaginglywrittenbook.”

—ScottE.Page,UniversityofMichiganandSantaFeInstitute

“In this stunningly wide-ranging book, Acemoglu and Robinson ask asimplebutvitalquestion,whydosomenationsbecomerichandothersremain poor? Their answer is also simple—because some politiesdevelopmore inclusivepolitical institutions.What is remarkableaboutthebookisthecrispnessandclarityofthewriting,theeleganceoftheargument,andtheremarkablerichnessofhistoricaldetail.Thisbookisamust-read at a moment when governments across the Western worldmustcomeupwiththepoliticalwilltodealwithadebtcrisisofunusualproportions.”

—StevenPincus,BradfordDurfeeProfessorofHistoryandInternationalandAreaStudies,YaleUniversity

“It’s the politics, stupid! That is Acemoglu and Robinson’s simple yetcompellingexplanationforwhysomanycountriesfailtodevelop.FromtheabsolutismoftheStuartstotheantebellumSouth,fromSierraLeoneto Colombia, this magisterial work shows how powerful elites rig therules to benefit themselves at the expense of the many. Charting a

careful course between the pessimists and optimists, the authorsdemonstrate history and geographyneednot be destiny. But they alsodocumenthowsensibleeconomicideasandpoliciesoftenachievelittleintheabsenceoffundamentalpoliticalchange.”

—DaniRodrik,KennedySchoolofGovernment,HarvardUniversity

“This is not only a fascinating and interesting book: it is a reallyimportant one. The highly original research that Professors AcemogluandRobinsonhavedone,andcontinuetodo,onhoweconomicforces,politics, and policy choices evolve together and constrain each other,andhowinstitutionsaffect thatevolution, isessential tounderstandingthe successes and failures of societies and nations. And here, in thisbook, these insights come in ahighly accessible, indeed riveting form.Thosewhopickthisbookupandstartreadingwillhavetroubleputtingitdown.”

—MichaelSpence,Nobellaureateineconomics,2001

“This fascinating and readable book centers on the complex jointevolutionofpoliticalandeconomic institutions, ingooddirectionsandbad. It strikes a delicate balance between the logic of political andeconomic behavior and the shifts in direction created by contingenthistorical events, large and small, at ‘critical junctures.’Acemoglu andRobinson provide an enormous range of historical examples to showhow such shifts can tilt toward favorable institutions, progressiveinnovation,andeconomic successor towardrepressive institutionsandeventual decay or stagnation. Somehow they can generate bothexcitementandreflection.”

—RobertSolow,Nobellaureateineconomics,1987

Copyright©2012byDaronAcemogluandJamesA.Robinson

Allrightsreserved.

PublishedintheUnitedStatesbyCrownPublishers,animprintoftheCrownPublishingGroup,adivisionofRandomHouse,Inc.,NewYork.

www.crownpublishing.com

CROWNandtheCROWNcolophonareregisteredtrademarksofRandomHouse,Inc.

LibraryofCongressCataloging-in-PublicationDataAcemoglu,Daron.

Whynationsfail:theoriginsofpower,prosperity,andpoverty/DaronAcemoglu,JamesA.Robinson.—1sted.

p.cm.Includesbibliographicalreferences.

1.Economics—Politicalaspects.2.Economichistory—Politicalaspects.3.Poverty—Developingcountries.4.Economicdevelopment—Developingcountries.

5.Revolutions—Economicaspects.6.Developingcountries—Economicpolicy.7.Developingcountries—Socialpolicy.I.Robinson,JamesA.,1960–.II.Title.

HB74.P65A282012330—dc232011023538

eISBN:978-0-307-71923-2

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v3.1

ForArdaandAsu—DA

ParaMaríaAngélica,mividaymialma—JR

CONTENTS

Cover

TitlePage

Copyright

Dedication

PREFACEWhyEgyptiansfilledTahrirSquaretobringdownHosniMubarakandwhatitmeansforourunderstandingofthecausesofprosperityandpoverty

1.SOCLOSEANDYETSODIFFERENT

Nogales,Arizona,andNogales,Sonora,havethesamepeople,culture,andgeography.Whyisonerichandonepoor?

2.THEORIESTHATDON’TWORK

Poorcountriesarepoornotbecauseoftheirgeographiesorcultures,orbecausetheirleadersdonotknowwhichpolicieswillenrichtheircitizens

3.THEMAKINGOFPROSPERITYANDPOVERTY

Howprosperityandpovertyaredeterminedbytheincentivescreatedbyinstitutions,andhowpoliticsdetermineswhatinstitutionsanationhas

4.SMALLDIFFERENCESANDCRITICALJUNCTURES:THEWEIGHTOFHISTORY

Howinstitutionschangethroughpoliticalconflictandhowthepastshapesthe

present

5.“I’VESEENTHEFUTURE,ANDITWORKS”:GROWTHUNDEREXTRACTIVEINSTITUTIONS

WhatStalin,KingShyaam,theNeolithicRevolution,andtheMayacity-statesallhadincommonandhowthisexplainswhyChina’scurrenteconomic

growthcannotlast

6.DRIFTINGAPART

Howinstitutionsevolveovertime,oftenslowlydriftingapart

7.THETURNINGPOINT

Howapoliticalrevolutionin1688changedinstitutionsinEnglandandledtotheIndustrialRevolution

8.NOTONOURTURF:BARRIERSTODEVELOPMENT

WhythepoliticallypowerfulinmanynationsopposedtheIndustrialRevolution

PhotoInserts

9.REVERSINGDEVELOPMENT

HowEuropeancolonialismimpoverishedlargepartsoftheworld

10.THEDIFFUSIONOFPROSPERITY

HowsomepartsoftheworldtookdifferentpathstoprosperityfromthatofBritain

11.THEVIRTUOUSCIRCLE

Howinstitutionsthatencourageprosperitycreatepositivefeedbackloopsthatpreventtheeffortsbyelitestounderminethem

12.THEVICIOUSCIRCLE

Howinstitutionsthatcreatepovertygeneratenegativefeedbackloopsandendure

13.WHYNATIONSFAILTODAY

Institutions,institutions,institutions

14.BREAKINGTHEMOLD

Howafewcountrieschangedtheireconomictrajectorybychangingtheirinstitutions

15.UNDERSTANDINGPROSPERITYANDPOVERTY

Howtheworldcouldhavebeendifferentandhowunderstandingthiscanexplainwhymostattemptstocombatpovertyhavefailed

ACKNOWLEDGMENTS

BIBLIOGRAPHICALESSAYANDSOURCES

REFERENCES

PREFACE

THISBOOKISaboutthehugedifferencesinincomesandstandardsoflivingthatseparatetherichcountriesoftheworld,suchastheUnitedStates,GreatBritain,andGermany,fromthepoor,suchasthoseinsub-SaharanAfrica,CentralAmerica,andSouthAsia.Aswewritethispreface,NorthAfricaandtheMiddleEasthavebeen

shakenbythe“ArabSpring”startedbytheso-calledJasmineRevolution,whichwasinitiallyignitedbypublicoutrageovertheself-immolationofastreetvendor,MohamedBouazizi,onDecember17,2010.ByJanuary14,2011,PresidentZineElAbidineBenAli,whohadruledTunisiasince1987,hadsteppeddown,butfarfromabating,therevolutionaryfervoragainst theruleofprivilegedelites inTunisiawasgettingstrongerandhadalreadyspreadtotherestoftheMiddleEast.HosniMubarak,whohadruledEgyptwithatightgripforalmostthirtyyears,wasoustedonFebruary11,2011.ThefatesoftheregimesinBahrain,Libya,Syria,andYemenareunknownaswecompletethispreface.The roots of discontent in these countries lie in their poverty. The

average Egyptian has an income level of around 12 percent of theaverage citizen of the United States and can expect to live ten feweryears; 20 percent of the population is in dire poverty. Though thesedifferencesaresignificant, theyareactuallyquitesmallcomparedwiththosebetweentheUnitedStatesandthepoorestcountriesintheworld,suchasNorthKorea,SierraLeone,andZimbabwe,wherewelloverhalfthepopulationlivesinpoverty.Why is Egypt somuch poorer than theUnited States?What are the

constraintsthatkeepEgyptiansfrombecomingmoreprosperous?IsthepovertyofEgypt immutable,orcan itbeeradicated?AnaturalwaytostartthinkingaboutthisistolookatwhattheEgyptiansthemselvesaresayingabout theproblems they faceandwhy they roseupagainst theMubarakregime.NohaHamed,twenty-four,aworkeratanadvertisingagency in Cairo, made her views clear as she demonstrated in Tahrir

Square: “We are suffering from corruption, oppression and badeducation.Weare livingamidacorrupt systemwhichhas tochange.”Another in the square,MosaabEl Shami, twenty, a pharmacy student,concurred:“Ihopethatbytheendofthisyearwewillhaveanelectedgovernmentandthatuniversalfreedomsareappliedandthatweputanendtothecorruptionthathastakenoverthiscountry.”TheprotestorsinTahrir Square spoke with one voice about the corruption of thegovernment, its inability to deliver public services, and the lack ofequality of opportunity in their country. They particularly complainedabout repression and the absence of political rights. As MohamedElBaradei, former director of the International Atomic Energy Agency,wroteonTwitteronJanuary13,2011,“Tunisia:repression+absenceof social justice+denial of channels forpeaceful change=a tickingbomb.” Egyptians and Tunisians both saw their economic problems asbeing fundamentally caused by their lack of political rights.When theprotestors started to formulate their demandsmore systematically, thefirst twelve immediate demands posted by Wael Khalil, the softwareengineerandbloggerwhoemergedasoneoftheleadersoftheEgyptianprotestmovement,wereall focusedonpolitical change. Issues suchasraising the minimum wage appeared only among the transitionaldemandsthatweretobeimplementedlater.To Egyptians, the things that have held them back include anineffectiveandcorruptstateandasocietywhere theycannotuse theirtalent, ambition, ingenuity,andwhateducation theycanget.But theyalso recognize that the roots of these problems are political. All theeconomic impediments they face stem fromthewaypoliticalpower inEgypt is exercised and monopolized by a narrow elite. This, theyunderstand,isthefirstthingthathastochange.Yet, in believing this, the protestors of Tahrir Square have sharplydivergedfromtheconventionalwisdomonthistopic.Whentheyreasonabout why a country such as Egypt is poor, most academics andcommentators emphasize completely different factors. Some stress thatEgypt’s poverty is determined primarily by its geography, by the factthatthecountryismostlyadesertandlacksadequaterainfall,andthatitssoilsandclimatedonotallowproductiveagriculture.OthersinsteadpointtoculturalattributesofEgyptiansthataresupposedlyinimicaltoeconomic development and prosperity. Egyptians, they argue, lack the

samesortofworkethicandcultural traits thathaveallowedothers toprosper,and insteadhaveaccepted Islamicbeliefs thatare inconsistentwith economic success. A third approach, the one dominant amongeconomistsandpolicypundits,isbasedonthenotionthattherulersofEgypt simply don’t know what is needed to make their countryprosperous, and have followed incorrect policies and strategies in thepast. If these rulers would only get the right advice from the rightadvisers,thethinkinggoes,prosperitywouldfollow.Totheseacademicsand pundits, the fact that Egypt has been ruled by narrow elitesfeathering their nests at the expense of society seems irrelevant tounderstandingthecountry’seconomicproblems.Inthisbookwe’llarguethattheEgyptiansinTahrirSquare,notmostacademicsandcommentators,havetherightidea.Infact,Egyptispoorpreciselybecauseithasbeenruledbyanarrowelitethathaveorganizedsocietyfortheirownbenefitattheexpenseofthevastmassofpeople.Political powerhas beennarrowly concentrated, andhas beenused tocreate great wealth for those who possess it, such as the $70 billionfortune apparently accumulated by ex-president Mubarak. The losershavebeentheEgyptianpeople,astheyonlytoowellunderstand.We’ll show that this interpretation of Egyptian poverty, the people’sinterpretation,turnsouttoprovideageneralexplanationforwhypoorcountries are poor. Whether it is North Korea, Sierra Leone, orZimbabwe,we’llshowthatpoorcountriesarepoorforthesamereasonthatEgyptispoor.CountriessuchasGreatBritainandtheUnitedStatesbecame richbecause their citizensoverthrew the eliteswhocontrolledpower and created a society where political rights were much morebroadly distributed, where the government was accountable andresponsive to citizens, andwhere the greatmass of people could takeadvantage of economic opportunities. We’ll show that to understandwhy there is such inequality in theworld todaywehave todelve intothepastandstudythehistoricaldynamicsofsocieties.We’llseethatthereason thatBritain is richer thanEgypt isbecause in1688,Britain (orEngland,tobeexact)hadarevolutionthattransformedthepoliticsandthus the economics of the nation. People fought for and won morepolitical rights, and they used them to expand their economicopportunities. The result was a fundamentally different political andeconomictrajectory,culminatingintheIndustrialRevolution.

The Industrial Revolution and the technologies it unleashed didn’tspreadtoEgypt,as thatcountrywasunder thecontrolof theOttomanEmpire, which treated Egypt in rather the same way as the Mubarakfamily later did. Ottoman rule in Egypt was overthrown by NapoleonBonapartein1798,butthecountrythenfellunderthecontrolofBritishcolonialism,which had as little interest as theOttomans in promotingEgypt’s prosperity. Though the Egyptians shook off the Ottoman andBritishempiresand,in1952,overthrewtheirmonarchy,thesewerenotrevolutionslikethatof1688inEngland,andratherthanfundamentallytransforming politics in Egypt, they brought to power another elite asdisinterested in achieving prosperity for ordinary Egyptians as theOttoman and British had been. In consequence, the basic structure ofsocietydidnotchange,andEgyptstayedpoor.Inthisbookwe’llstudyhowthesepatternsreproducethemselvesover

time andwhy sometimes they are altered, as theywere in England in1688 and in Francewith the revolution of 1789. This will help us tounderstandifthesituationinEgypthaschangedtodayandwhethertherevolutionthatoverthrewMubarakwillleadtoanewsetofinstitutionscapable of bringing prosperity to ordinary Egyptians. Egypt has hadrevolutions in the past that did not change things, because thosewhomounted the revolutions simply took over the reins from those they’ddeposed and re-created a similar system. It is indeed difficult forordinary citizens to acquire real political power and change the waytheirsocietyworks.Butitispossible,andwe’llseehowthishappenedinEngland, France, and the United States, and also in Japan, Botswana,andBrazil.Fundamentallyitisapoliticaltransformationofthissortthatisrequiredforapoorsocietytobecomerich.ThereisevidencethatthismaybehappeninginEgypt.RedaMetwaly,anotherprotestorinTahrirSquare,argued,“NowyouseeMuslimsandChristianstogether,nowyouseeoldandyoungtogether,allwantingthesamething.”We’llseethatsuchabroadmovementinsocietywasakeypartofwhathappenedinthese other political transformations. If we understandwhen andwhysuchtransitionsoccur,wewillbeinabetterpositiontoevaluatewhenweexpect suchmovements to fail as theyhaveoftendone in thepastandwhenwemayhopethattheywillsucceedandimprovethelivesofmillions.

1.

SOCLOSEANDYETSODIFFERENT

THEECONOMICSOFTHERIOGRANDE

THE CITYOFNOGALES iscut inhalfbya fence. Ifyoustandby itand looknorth, you’ll see Nogales, Arizona, located in Santa Cruz County. Theincome of the average household there is about $30,000 a year.Mostteenagersare in school,and themajorityof theadultsarehigh schoolgraduates.Despite all the arguments peoplemake abouthowdeficienttheU.S.healthcaresystemis,thepopulationisrelativelyhealthy,withhigh life expectancy by global standards. Many of the residents areabove age sixty-five and have access to Medicare. It’s just one of themanyservicesthegovernmentprovidesthatmosttakeforgranted,suchas electricity, telephones, a sewage system, public health, a roadnetwork linking them toother cities in theareaand to the restof theUnited States, and, last but not least, law and order. The people ofNogales,Arizona,cangoabouttheirdailyactivitieswithoutfearforlifeorsafetyandnotconstantlyafraidoftheft,expropriation,orotherthingsthatmight jeopardize their investments in theirbusinessesandhouses.Equallyimportant,theresidentsofNogales,Arizona,takeitforgrantedthat,withallitsinefficiencyandoccasionalcorruption,thegovernmentis theiragent.Theycanvote toreplace theirmayor,congressmen,andsenators;theyvoteinthepresidentialelectionsthatdeterminewhowillleadtheircountry.Democracyissecondnaturetothem.Lifesouthofthefence,justafewfeetaway,isratherdifferent.While

theresidentsofNogales,Sonora, live inarelativelyprosperouspartofMexico, the income of the average household there is about one-thirdthatinNogales,Arizona.MostadultsinNogales,Sonora,donothaveahighschooldegree,andmanyteenagersarenotinschool.Mothershave

to worry about high rates of infant mortality. Poor public healthconditionsmeanit’snosurprisethattheresidentsofNogales,Sonora,donotliveaslongastheirnorthernneighbors.Theyalsodon’thaveaccesstomanypublicamenities.Roadsareinbadconditionsouthofthefence.Law and order is in worse condition. Crime is high, and opening abusinessisariskyactivity.Notonlydoyouriskrobbery,butgettingallthe permissions and greasing all the palms just to open is no easyendeavor.ResidentsofNogales,Sonora,livewithpoliticians’corruptionandineptitudeeveryday.In contrast to their northern neighbors, democracy is a very recentexperience for them. Until the political reforms of 2000, Nogales,Sonora,justliketherestofMexico,wasunderthecorruptcontroloftheInstitutionalRevolutionaryParty,orPartidoRevolucionarioInstitucional(PRI).Howcould the twohalvesofwhat is essentially the samecitybe sodifferent?There isnodifference ingeography, climate,or the typesofdiseasesprevalent in thearea, sincegermsdonot faceany restrictionscrossing back and forth between the United States and Mexico. Ofcourse,healthconditionsareverydifferent,but thishasnothing todowith the disease environment; it is because the people south of theborderlivewithinferiorsanitaryconditionsandlackdecenthealthcare.But perhaps the residents are very different. Could it be that theresidents of Nogales, Arizona, are grandchildren of migrants fromEurope,whilethoseinthesoutharedescendantsofAztecs?Notso.Thebackgrounds of people on both sides of the border are quite similar.AfterMexicobecameindependentfromSpainin1821,theareaaround“LosdosNogales”waspartoftheMexicanstateofViejaCaliforniaandremained so even after the Mexican-American War of 1846–1848.Indeed, it was only after the Gadsden Purchase of 1853 that the U.S.borderwas extended into this area. ItwasLieutenantN.Michlerwho,whilesurveyingtheborder,notedthepresenceofthe“prettylittlevalleyofLosNogales.”Here,oneither sideof theborder, the twocities roseup. The inhabitants of Nogales, Arizona, and Nogales, Sonora, shareancestors, enjoy the same food and the same music, and, we wouldhazardtosay,havethesame“culture.”Of course, there is a very simple and obvious explanation for thedifferencesbetweenthetwohalvesofNogalesthatyou’veprobablylong

since guessed: the very border that defines the two halves. Nogales,Arizona, is in the United States. Its inhabitants have access to theeconomicinstitutionsoftheUnitedStates,whichenablethemtochoosetheir occupations freely, acquire schooling and skills, and encouragetheiremployers to invest in thebest technology,which leads tohigherwagesforthem.Theyalsohaveaccesstopoliticalinstitutionsthatallowthem to take part in the democratic process, to elect theirrepresentatives, and replace them if they misbehave. In consequence,politicians provide the basic services (ranging from public health toroads to law and order) that the citizens demand. Those of Nogales,Sonora, are not so lucky. They live in a different world shaped bydifferent institutions. These different institutions create very disparateincentives for the inhabitants of the two Nogaleses and for theentrepreneurs and businesses willing to invest there. These incentivescreatedbythedifferentinstitutionsoftheNogalesesandthecountriesinwhich they are situated are the main reason for the differences ineconomicprosperityonthetwosidesoftheborder.WhyaretheinstitutionsoftheUnitedStatessomuchmoreconducivetoeconomicsuccessthanthoseofMexicoor,forthatmatter,therestofLatinAmerica?Theanswertothisquestionliesinthewaythedifferentsocieties formed during the early colonial period. An institutionaldivergence took place then, with implications lasting into the presentday. To understand this divergence we must begin right at thefoundationofthecoloniesinNorthandLatinAmerica.

THEFOUNDINGOFBUENOSAIRES

Earlyin1516theSpanishnavigatorJuanDíazdeSolíssailedintoawideestuary on theEastern Seaboard of SouthAmerica.Wading ashore, deSolís claimed the land for Spain,naming the river theRíode laPlata,“RiverofSilver,”sincethelocalpeoplepossessedsilver.Theindigenouspeoples on either side of the estuary—the Charrúas in what is nowUruguay,andtheQuerandíontheplainsthatweretobeknownasthePampas inmodern Argentina—regarded the newcomerswith hostility.These locals were hunter-gatherers who lived in small groupswithoutstrong centralized political authorities. Indeed it was such a band of

CharrúaswhoclubbeddeSolístodeathasheexploredthenewdomainshehadattempedtooccupyforSpain.In1534theSpanish,stilloptimistic,sentoutafirstmissionofsettlers

fromSpainundertheleadershipofPedrodeMendoza.TheyfoundedatownonthesiteofBuenosAiresinthesameyear.Itshouldhavebeenan ideal place for Europeans. Buenos Aires, literally meaning “goodairs,” had a hospitable, temperate climate. Yet the first stay of theSpaniards there was short lived. They were not after good airs, butresourcestoextractandlabortocoerce.TheCharrúasandtheQuerandíwere not obliging, however. They refused to provide food to theSpaniards, and refused to work when caught. They attacked the newsettlement with their bows and arrows. The Spaniards grew hungry,since they had not anticipated having to provide food for themselves.BuenosAireswasnotwhattheyhaddreamedof.Thelocalpeoplecouldnot be forced into providing labor. The area had no silver or gold toexploit,andthesilverthatdeSolísfoundhadactuallycomeallthewayfromtheIncastateintheAndes,fartothewest.TheSpaniards,whiletryingtosurvive,startedsendingoutexpeditions

to find a new place that would offer greater riches and populationseasiertocoerce.In1537oneoftheseexpeditions,undertheleadershipofJuandeAyolas,penetrateduptheParanáRiver,searchingforaroutetotheIncas.Onitsway,itmadecontactwiththeGuaraní,asedentarypeople with an agricultural economy based onmaize and cassava. DeAyolas immediately realized that the Guaraní were a completelydifferentpropositionfromtheCharrúasandtheQuerandí.Afterabriefconflict, theSpanishovercameGuaraníresistanceandfoundeda town,Nuestra Señora de Santa María de la Asunción, which remains thecapital of Paraguay today. The conquistadors married the Guaraníprincesses and quickly set themselves up as a new aristocracy. TheyadaptedtheexistingsystemsofforcedlaborandtributeoftheGuaraní,withthemselvesatthehelm.Thiswasthekindofcolonytheywantedtoset up, and within four years Buenos Aires was abandoned as all theSpaniardswho’dsettledtheremovedtothenewtown.BuenosAires,the“ParisofSouthAmerica,”acityofwideEuropean-

styleboulevardsbasedon thegreatagriculturalwealthof thePampas,wasnotresettleduntil1580.TheabandonmentofBuenosAiresandtheconquestoftheGuaranírevealsthelogicofEuropeancolonizationofthe

Americas.EarlySpanishand,aswewillsee,Englishcolonistswerenotinterestedintillingthesoil themselves; theywantedotherstodoit forthem,andtheywantedriches,goldandsilver,toplunder.

FROMCAJAMARCA…

The expeditions of de Solís, de Mendoza, and de Ayolas came in thewake of more famous ones that followed Christopher Columbus’ssighting of one of the islands of the Bahamas on October 12, 1492.Spanish expansion and colonization of the Americas began in earnestwiththeinvasionofMexicobyHernánCortésin1519,theexpeditionofFranciscoPizarrotoPeruadecadeandahalflater,andtheexpeditionofPedrodeMendozatotheRíodelaPlatajusttwoyearsafterthat.Overthe next century, Spain conquered and colonized most of central,western,andsouthernSouthAmerica,whilePortugalclaimedBrazil totheeast.The Spanish strategy of colonization was highly effective. FirstperfectedbyCortésinMexico,itwasbasedontheobservationthatthebest way for the Spanish to subdue opposition was to capture theindigenous leader. This strategy enabled the Spanish to claim theaccumulatedwealthoftheleaderandcoercetheindigenouspeoplestogive tribute and food. The next stepwas setting themselves up as thenew elite of the indigenous society and taking control of the existingmethodsoftaxation,tribute,and,particularly,forcedlabor.When Cortés and his men arrived at the great Aztec capital ofTenochtitlanonNovember8,1519,theywerewelcomedbyMoctezuma,theAztecemperor,whohaddecided, in the faceofmuchadvice fromhis counselors, to welcome the Spaniards peacefully. What happenednext is well described by the account compiled after 1545 by theFranciscan priest Bernardino de Sahagún in his famous FlorentineCodices.

[At] once they [the Spanish] firmly seizedMoctezuma … then each of the guns shot off … Fearprevailed. It was as if everyone had swallowed his heart.Evenbefore it had growndark, therewas terror, therewas

astonishment, therewasapprehension, therewasastunningofthepeople.And when it dawned thereupon were proclaimed all the

thingswhich[theSpaniards]required:whitetortillas,roastedturkey hens, eggs, fresh water, wood, firewood,charcoal…ThishadMoctezumaindeedcommanded.AndwhentheSpaniardswerewellsettled,theythereupon

inquired ofMoctezuma as to all the city’s treasure…withgreatzealtheysoughtgold.AndMoctezumathereuponwentleading the Spaniards. Theywent surrounding him… eachholdinghim,eachgraspinghim.And when they reached the storehouse, a place called

Teocalco, thereupon they brought forth all the brilliantthings;thequetzalfeatherheadfan,thedevices,theshields,thegoldendiscs…thegoldennosecrescents,thegoldenlegbands,thegoldenarmbands,thegoldenforeheadbands.Thereuponwasdetachedthegold…atoncetheyignited,

setfireto…allthepreciousthings.Theyallburned.Andthegold the Spaniards formed into separate bars … And theSpanish walked everywhere… They took all, all that theysawwhichtheysawtobegood.Thereupon they went to Moctezuma’s own storehouse

… at the place called Totocalco … they brought forth[Moctezuma’s] own property … precious things all; thenecklaceswithpendants,thearmbandswithtuftsofquetzalfeathers, the golden arm bands, the bracelets, the goldenbandswithshells…andtheturquoisediadem,theattributeoftheruler.Theytookitall.

ThemilitaryconquestoftheAztecswascompletedby1521.Cortés,asgovernoroftheprovinceofNewSpain,thenbegandividingupthemostvaluableresource,theindigenouspopulation,throughtheinstitutionoftheencomienda.Theencomienda had first appeared in fifteenth-centurySpain as part of the reconquest of the south of the country from theMoors,Arabswhohadsettledduringandaftertheeighthcentury.IntheNewWorld, it tookonamuchmoreperniciousform:itwasagrantofindigenous peoples to a Spaniard, known as the encomendero. The

indigenous peoples had to give the encomendero tribute and laborservices, in exchange for which the encomendero was charged withconvertingthemtoChristianity.A vivid early account of the workings of the encomienda has come

down to us from Bartolomé de las Casas, a Dominican priest whoformulatedtheearliestandoneofthemostdevastatingcritiquesoftheSpanish colonial system.De lasCasas arrivedon the Spanish islandofHispaniolain1502withafleetofshipsledbythenewgovernor,NicolásdeOvando.Hebecame increasinglydisillusioned anddisturbedby thecruelandexploitativetreatmentoftheindigenouspeopleshewitnessedeveryday.In1513hetookpartasachaplainintheSpanishconquestofCuba, even being granted an encomienda for his service. However, herenounced the grant and began a long campaign to reform Spanishcolonialinstitutions.HiseffortsculminatedinhisbookAShortAccountoftheDestructionoftheIndies,writtenin1542,awitheringattackonthebarbarity of Spanish rule.On the encomienda he has this to say in thecaseofNicaragua:

Eachofthesettlerstookupresidenceinthetownallottedtohim(orencommendedtohim,asthelegalphrasehasit),putthe inhabitants to work for him, stole their already scarcefoodstuffs for himself and took over the lands owned andworkedbythenativesandonwhichtheytraditionallygrewtheirownproduce.Thesettlerwouldtreat thewholeof thenativepopulation—dignitaries,oldmen,womenandchildren—as members of his household and, as such, make themlabor night and day in his own interests, without any restwhatsoever.

For the conquest of New Granada, modern Colombia, de las CasasreportsthewholeSpanishstrategyinaction:

Torealizetheirlong-termpurposeofseizingalltheavailablegold, the Spaniards employed their usual strategy ofapportioningamongthemselves(oren-commending,as theyhaveit)thetownsandtheirinhabitants…andthen,asever,treating them as common slaves. The man in overall

command of the expedition seized the King of the wholeterritory for himself and held himprisoner for six or sevenmonths, quite illicitly demandingmore andmore gold andemeralds fromhim. This King, one Bogotá,was so terrifiedthat, in his anxiety to free himself from the clutches of histormentors,heconsentedtothedemandthathefillanentirehouse with gold and hand it over; to this end he sent hispeople off in search of gold, and bit by bit they brought italongwithmanypreciousstones.ButstillthehousewasnotfilledandtheSpaniardseventuallydeclaredthattheywouldputhim todeath forbreakinghispromise.Thecommandersuggested they should bring the case before him, as arepresentative of the law, and when they did so, enteringformal accusations against the King, he sentenced him totorture should he persist in not honoring the bargain. Theytortured himwith the strappado, put burning tallow on hisbelly,pinnedbothhis legs topoleswith ironhoopsandhisneckwithanotherandthen,withtwomenholdinghishands,proceededtoburnthesolesofhisfeet.Fromtimetotime,thecommanderwouldlookinandrepeatthattheywouldtorturehimtodeathslowlyunlessheproducedmoregold,andthisis what they did, the King eventually succumbing to theagoniestheyinflictedonhim.

The strategy and institutions of conquest perfected in Mexico wereeagerly adopted elsewhere in the Spanish Empire. Nowhere was thisdonemoreeffectivelythaninPizarro’sconquestofPeru.AsdelasCasasbeginshisaccount:

In 1531 another great villain journeyed with a number ofmentothekingdomofPeru.HesetoutwitheveryintentionofimitatingthestrategyandtacticsofhisfellowadventurersinotherpartsoftheNewWorld.

Pizarro began on the coast near the Peruvian town of Tumbes andmarchedsouth.OnNovember15,1532,hereachedthemountaintownofCajamarca,wheretheIncaemperorAtahualpawasencampedwithhis

army. The next day, Atahualpa, who had just vanquished his brotherHuáscar in a contest over who would succeed their deceased father,Huayna Capac, came with his retinue to where the Spanish werecamped. Atahualpa was irritated because news of atrocities that theSpanish had already committed, such as violating a temple of the SunGod Inti, had reached him. What transpired next is well known. TheSpanish laid a trap and sprang it. They killed Atahualpa’s guards andretainers, possibly asmany as two thousand people, and captured theking. To gain his freedom,Atahualpa had to promise to fill one roomwithgoldandtwomoreofthesamesizewithsilver.Hedidthis,buttheSpanish, reneging on their promises, strangledhim in July 1533. ThatNovember, the Spanish captured the Inca capital of Cusco, where theIncan aristocracy received the same treatment as Atahualpa, beingimprisoned until they produced gold and silver. When they did notsatisfy Spanish demands, they were burned alive. The great artistictreasures of Cusco, such as the Temple of the Sun, had their goldstrippedfromthemandmelteddownintoingots.AtthispointtheSpanishfocusedonthepeopleoftheIncaEmpire.Asin Mexico, citizens were divided into encomiendas, with one going toeach of the conquistadors who had accompanied Pizarro. Theencomienda was the main institution used for the control andorganization of labor in the early colonial period, but it soon faced avigorouscontender.In1545alocalnamedDiegoGualpawassearchingforanindigenousshrinehighintheAndesinwhatistodayBolivia.Hewasthrowntothegroundbyasuddengustofwindandinfrontofhimappearedacacheofsilverore.Thiswaspartofavastmountainofsilver,which the Spanish baptized El Cerro Rico, “The Rich Hill.” Around itgrewthecityofPotosí,whichatitsheightin1650hadapopulationof160,000people,largerthanLisbonorVeniceinthisperiod.To exploit the silver, the Spanish needed miners—a lot of miners.Theysentanewviceroy,thechiefSpanishcolonialofficial,FranciscodeToledo,whosemainmissionwastosolvethelaborproblem.DeToledo,arriving in Peru in 1569, first spent five years traveling around andinvestigatinghisnewcharge.Healsocommissionedamassivesurveyoftheentireadultpopulation.Tofindthelaborheneeded,deToledofirstmoved almost the entire indigenous population, concentrating them innew towns called reducciones—literally “reductions”—which would

facilitate the exploitation of labor by the Spanish Crown. Then herevivedandadaptedanIncalaborinstitutionknownasthemita,which,in the Incas’ language, Quechua, means “a turn.” Under their mitasystem, the Incashadused forced labor to runplantationsdesigned toprovide food for temples, the aristocracy, and the army. In return, theIncaeliteprovidedfaminereliefandsecurity. IndeToledo’shandsthemita, especially the Potosímita, was to become the largest and mostonerousschemeoflaborexploitationintheSpanishcolonialperiod.DeToledo defined a huge catchment area, running from the middle ofmodern-dayPeruandencompassingmostofmodernBolivia.Itcoveredabout twohundred thousandsquaremiles. In thisarea,one-seventhofthemaleinhabitants,newlyarrivedintheirreducciones,wererequiredtowork in the mines at Potosí. The Potosímita endured throughout theentirecolonialperiodandwasabolishedonlyin1825.Map1showsthecatchment area of the mita superimposed on the extent of the Incaempire at the timeof the Spanish conquest. It illustrates the extent towhich the mita overlapped with the heartland of the empire,encompassingthecapitalCusco.

Remarkably, you still see the legacyof themita inPeru today.Takethe differences between the provinces of Calca and nearby Acomayo.There appears to be few differences among these provinces. Both arehigh in themountains,andeach is inhabitedby theQuechua-speaking

descendants of the Incas. Yet Acomayo is much poorer, with itsinhabitants consuming about one-third less than those in Calca. Thepeopleknowthis. InAcomayo theyask intrepid foreigners, “Don’tyouknow that the people here are poorer than the people over there inCalca?Whywouldyoueverwanttocomehere?”Intrepidbecauseitismuch harder to get to Acomayo from the regional capital of Cusco,ancientcenteroftheIncaEmpire,thanitistogettoCalca.TheroadtoCalcaissurfaced,theonetoAcomayoisinaterriblestateofdisrepair.To get beyond Acomayo, you need a horse or a mule. In Calca andAcomayo,peoplegrow the samecrops, but inCalca they sell themonthe market for money. In Acomayo they grow food for their ownsubsistence. These inequalities, apparent to the eye and to the peoplewho live there, can be understood in terms of the institutionaldifferences between these departments—institutional differences withhistorical roots going back to de Toledo and his plan for effectiveexploitationofindigenouslabor.ThemajorhistoricaldifferencebetweenAcomayoandCalca is thatAcomayowas in thecatchmentareaof thePotosímita.Calcawasnot.In addition to the concentration of labor and the mita, de Toledo

consolidated the encomienda into a head tax, a fixed sum payable byeachadultmaleeveryyearinsilver.Thiswasanotherschemedesignedto force people into the labor market and reduce wages for Spanishlandowners. Another institution, the repartimiento de mercancias, alsobecamewidespreadduringdeToledo’stenure.DerivedfromtheSpanishverbrepartir,todistribute,thisrepartimiento,literally“thedistributionofgoods,”involvedtheforcedsaleofgoodstolocalsatpricesdeterminedby Spaniards. Finally, de Toledo introduced the trajin—meaning,literally,“theburden”—whichusedtheindigenouspeopletocarryheavyloadsofgoods,suchaswineorcocaleavesortextiles,asasubstituteforpackanimals,forthebusinessventuresoftheSpanishelite.Throughout the Spanish colonial world in the Americas, similar

institutions and social structures emerged. After an initial phase oflooting, and gold and silver lust, the Spanish created a web ofinstitutionsdesignedtoexploittheindigenouspeoples.Thefullgamutofencomienda, mita, repartimiento, and trajin was designed to forceindigenous people’s living standards down to a subsistence level andthusextractallincomeinexcessofthisforSpaniards.Thiswasachieved

byexpropriatingtheirland,forcingthemtowork,offeringlowwagesforlaborservices, imposinghightaxes,andcharginghighprices forgoodsthat were not even voluntarily bought. Though these institutionsgenerated a lot of wealth for the Spanish Crown and made theconquistadors and their descendants very rich, they also turned LatinAmericaintothemostunequalcontinentintheworldandsappedmuchofitseconomicpotential.

…TOJAMESTOWN

As the Spanish began their conquest of the Americas in the 1490s,EnglandwasaminorEuropeanpower recovering from thedevastatingeffectsofacivilwar,theWarsoftheRoses.Shewasinnostatetotakeadvantage of the scramble for loot and gold and the opportunity toexploit the indigenous peoples of the Americas. Nearly one hundredyears later, in1588, the luckyroutof theSpanishArmada,anattemptbyKingPhilipIIofSpainto invadeEngland,sentpoliticalshockwavesaround Europe. Fortunate though England’s victorywas, it was also asignofgrowingEnglishassertivenessontheseasthatwouldenablethemtofinallytakepartinthequestforcolonialempire.It is thusnocoincidencethat theEnglishbegantheircolonizationof

North America at exactly the same time. But they were alreadylatecomers.TheychoseNorthAmericanotbecauseitwasattractive,butbecause it was all that was available. The “desirable” parts of theAmericas,wheretheindigenouspopulationtoexploitwasplentifulandwhere the gold and silver mines were located, had already beenoccupied. The English got the leftovers. When the eighteenth-centuryEnglish writer and agriculturalist Arthur Young discussed whereprofitable“stapleproducts,”bywhichhemeantexportableagriculturalgoods,wereproduced,henoted:

Itappearsuponthewhole,thatthestapleproductionsofourcolonies decrease in value in proportion to their distancefromthesun.IntheWestIndies,whicharethehottestofall,they make to the amount of 8l. 12s. 1d. per head. In thesouthern continental ones, to the amount of 5l. 10s. In the

central ones, to the amount of 9s. 6 1/2d. In the northernsettlements, to that of 2s. 6d. This scale surely suggests amost important lesson—to avoid colonizing in northernlatitudes.

The first English attempt to plant a colony, at Roanoke, in NorthCarolina,between1585and1587,wasacompletefailure.In1607theytriedagain.Shortlybeforetheendof1606,threevessels,SusanConstant,Godspeed, and Discovery, under the command of Captain ChristopherNewport, set off for Virginia. The colonists, under the auspices of theVirginia Company, sailed into Chesapeake Bay and up a river theynamedtheJames,aftertherulingEnglishmonarch,JamesI.OnMay14,1607,theyfoundedthesettlementofJamestown.Though the settlers on board the ships owned by the Virginia

Company were English, they had a model of colonization heavilyinfluenced by the template set up by Cortés, Pizarro, and de Toledo.Their firstplanwastocapturethe localchiefandusehimasawaytoget provisions and to coerce the population into producing food andwealthforthem.When they first landed in Jamestown, the English colonists did not

know that they were within the territory claimed by the PowhatanConfederacy, a coalition of some thirty polities owing allegiance to aking calledWahunsunacock.Wahunsunacock’s capitalwas at the townofWerowocomoco, amere twentymiles fromJamestown.Theplanofthecolonistswas to learnmoreabout the layof the land. If the localscouldnotbe inducedtoprovide foodand labor, thecolonistsmightatleastbeabletotradewiththem.Thenotionthatthesettlersthemselveswouldwork and grow their own food seemsnot tohave crossed theirminds.ThatisnotwhatconquerorsoftheNewWorlddid.Wahunsunacockquicklybecameawareofthecolonists’presenceand

viewedtheir intentionswithgreatsuspicion.HewasinchargeofwhatforNorthAmericawasquitealargeempire.Buthehadmanyenemiesand lacked theoverwhelmingcentralizedpolitical controlof the Incas.WahunsunacockdecidedtoseewhattheintentionsoftheEnglishwere,initially sending messengers saying that he desired friendly relationswiththem.As thewinter of 1607 closed in, the settlers in Jamestownbegan to

runlowonfood,andtheappointedleaderofthecolony’srulingcouncil,Edward Marie Wingfield, dithered indecisively. The situation wasrescued by Captain John Smith. Smith,whosewritings provide one ofour main sources of information about the early development of thecolony, was a larger-than-life character. Born in England, in ruralLincolnshire, he disregarded his father’s desires for him to go intobusiness and instead became a soldier of fortune.He first foughtwithEnglisharmiesintheNetherlands,afterwhichhejoinedAustrianforcesserving inHungary fightingagainst thearmiesof theOttomanEmpire.CapturedinRomania,hewassoldasaslaveandputtoworkasafieldhand. He managed one day to overcome his master and, stealing hisclothesandhishorse,escapebackintoAustrianterritory.Smithhadgothimself into trouble on the voyage toVirginia andwas imprisoned onthe Susan Constant for mutiny after defying the orders of Wingfield.When the ships reached the NewWorld, the plan was to put him ontrial. To the immense horror of Wingfield, Newport, and other elitecolonists, however, when they opened their sealed orders, theydiscovered that the Virginia Company had nominated Smith to be amemberoftherulingcouncilthatwastogovernJamestown.WithNewportsailingbacktoEnglandforsuppliesandmorecolonists,andWingfielduncertainaboutwhattodo,itwasSmithwhosavedthecolony.He initiatedaseriesof tradingmissions thatsecuredvital foodsupplies.Ononeof thesehewascapturedbyOpechancanough,oneofWahunsunacock’syoungerbrothers,andwasbroughtbeforethekingatWerowocomoco.Hewas the firstEnglishman tomeetWahunsunacock,anditwasatthisinitialmeetingthataccordingtosomeaccountsSmith’slife was saved only at the intervention of Wahunsunacock’s youngdaughter Pocahontas. Freed on January 2, 1608, Smith returned toJamestown, which was still perilously low on food, until the timelyreturnofNewportfromEnglandlateronthesameday.ThecolonistsofJamestownlearnedlittlefromthisinitialexperience.As 1608 proceeded, they continued their quest for gold and preciousmetals.Theystilldidnotseemtounderstandthattosurvive,theycouldnotrelyon the locals to feed themthrougheithercoercionor trade. Itwas Smithwhowas the first to realize that themodel of colonizationthathadworkedsowellforCortésandPizarrosimplywouldnotworkinNorth America. The underlying circumstances were just too different.

Smithnotedthat,unliketheAztecsandIncas,thepeoplesofVirginiadidnothavegold.Indeed,henotedinhisdiary,“Victualsyoumustknowisall their wealth.” Anas Todkill, one of the early settlers who left anextensive diary, expressed well the frustrations of Smith and the fewothersonwhichthisrecognitiondawned:

“Therewasnotalke,nohope,noworke,butdiggold,refinegold,loadgold.”

WhenNewport sailed for England in April 1608 he took a cargo ofpyrite,fool’sgold.HereturnedattheendofSeptemberwithordersfromtheVirginiaCompanytotakefirmercontroloverthelocals.Theirplanwas to crown Wahunsunacock, hoping this would render himsubservienttotheEnglishkingJamesI.TheyinvitedhimtoJamestown,but Wahunsunacock, still deeply suspicious of the colonists, had nointention of risking capture. John Smith recorded Wahunsunacock’sreply:“IfyourKinghavesentmepresents,IalsoamaKing,andthisismyland…Yourfatheristocometome,notItohim,noryettoyourfort,neitherwillIbiteatsuchabait.”IfWahunsunacockwouldnot“biteatsuchabait,”NewportandSmithwouldhave togo toWerowocomoco toundertake the coronation.Thewholeeventappearstohavebeenacompletefiasco,withtheonlythingcomingoutofitaresolveonthepartofWahunsunacockthatitwastimetogetridofthecolony.Heimposedatradeembargo.Jamestowncouldnolongertradeforsupplies.Wahunsunacockwouldstarvethemout.Newportsetsailoncemore forEngland, inDecember1608.Hetookwith him a letter written by Smith pleadingwith the directors of theVirginia Company to change the way they thought about the colony.There was no possibility of a get-rich-quick exploitation of Virginiaalong the lines of Mexico and Peru. There were no gold or preciousmetals, and the indigenous people could not be forced to work orprovide food. Smith realized that if there were going to be a viablecolony, it was the colonists who would have to work. He thereforepleadedwith thedirectors tosendtherightsortofpeople:“Whenyousend againe I entreat you rather to send some thirty carpenters,husbandmen,gardeners,fishermen,blacksmiths,masons,anddiggersupoftrees,roots,wellprovided,thenathousandofsuchaswehave.”

Smith did not want any more useless goldsmiths. Once moreJamestownsurvivedonlybecauseofhisresourcefulness.Hemanagedtocajole and bully local indigenous groups to tradewith him, andwhentheywouldn’t,hetookwhathecould.Backinthesettlement,Smithwascompletelyinchargeandimposedtherulethat“hethatwillnotworkeshallnoteat.”Jamestownsurvivedasecondwinter.TheVirginiaCompanywasintendedtobeamoneymakingenterprise,andaftertwodisastrousyears,therewasnowhiffofprofit.Thedirectorsof thecompanydecided that theyneededanewmodelofgovernance,replacing the ruling council with a single governor. The first manappointedtothispositionwasSirThomasGates.HeedingsomeaspectsofSmith’swarning,thecompanyrealizedthattheyhadtotrysomethingnew. This realizationwas driven home by the events of thewinter of1609/1610—theso-called“starvingtime.”Thenewmodeofgovernanceleft no room for Smith, who, disgruntled, returned to England in theautumnof1609.Withouthisresourcefulness,andwithWahunsunacockthrottling the foodsupply, thecolonists inJamestownperished.Of thefive hundredwho entered thewinter, only sixtywere alive byMarch.Thesituationwassodesperatethattheyresortedtocannibalism.The “somethingnew” thatwas imposedon the colonybyGates andhisdeputy, SirThomasDale,wasawork regimeofdraconian severityfor English settlers—though not of course for the elite running thecolony. It was Dale who propagated the “Lawes Divine, Morall andMartiall.”Thisincludedtheclauses

NomanorwomanshallrunawayfromthecolonytotheIndians,uponpainofdeath.Anyonewho robs a garden, public or private, or a vineyard, orwhostealsearsofcornshallbepunishedwithdeath.Nomemberofthecolonywillsellorgiveanycommodityofthiscountrytoacaptain,mariner,masterorsailortotransportoutofthecolony,forhisownprivateuses,uponpainofdeath.

Iftheindigenouspeoplescouldnotbeexploited,reasonedtheVirginiaCompany, perhaps the colonists could. The new model of colonialdevelopment entailed the Virginia Company owning all the land.Menwerehousedinbarracks,andgivencompany-determinedrations.Workgangswere chosen, eachoneoverseenbyanagentof the company. Itwas close to martial law, with execution as the punishment of firstresort.Aspartofthenewinstitutionsforthecolony,thefirstclausejustgivenissignificant.Thecompanythreatenedwithdeaththosewhoranaway.Giventhenewworkregime,runningawaytolivewiththelocalsbecamemoreandmoreofanattractiveoptionforthecolonistswhohad

todothework.Alsoavailable,giventhelowdensityofevenindigenouspopulations inVirginiaat that time,wastheprospectofgoingitaloneonthefrontierbeyondthecontroloftheVirginiaCompany.Thepowerof the company in the face of these optionswas limited. It could notcoercetheEnglishsettlersintohardworkatsubsistencerations.Map2showsanestimateofthepopulationdensityofdifferentregions

of the Americas at the time on the Spanish conquest. The populationdensityoftheUnitedStates,outsideofafewpockets,wasatmostthree-quartersofapersonpersquaremile.IncentralMexicoorAndeanPeru,thepopulationdensitywas as high as fourhundredpeople per squaremile,morethanfivehundredtimeshigher.WhatwaspossibleinMexicoorPeruwasnotfeasibleinVirginia.It took theVirginia Company some time to recognize that its initial

modelofcolonizationdidnotworkinVirginia,andittookawhile,too,for the failure of the “Lawes Divine, Morall and Martiall” to sink in.Startingin1618,adramaticallynewstrategywasadopted.Sinceitwaspossibletocoerceneitherthelocalsnorthesettlers,theonlyalternativewas to give the settlers incentives. In 1618 the company began the“headrightsystem,”whichgaveeachmalesettlerfiftyacresoflandandfiftymoreacresforeachmemberofhisfamilyandforallservantsthatafamilycouldbringtoVirginia.Settlersweregiventheirhousesandfreedfrom their contracts, and in 1619 a General Assemblywas introducedthat effectively gave all adult men a say in the laws and institutionsgoverningthecolony.ItwasthestartofdemocracyintheUnitedStates.IttooktheVirginiaCompanytwelveyearstolearnitsfirstlessonthat

what hadworked for the Spanish inMexico and inCentral and SouthAmerica would not work in the north. The rest of the seventeenthcentury sawa long series of struggles over the second lesson: that theonlyoptionforaneconomicallyviablecolonywastocreateinstitutionsthatgavethecolonistsincentivestoinvestandtoworkhard.AsNorthAmericadeveloped,Englishelitestriedtimeandtimeagain

to set up institutions that would heavily restrict the economic andpolitical rights for all but a privileged few of the inhabitants of thecolony,justastheSpanishdid.Yetineachcasethismodelbrokedown,asithadinVirginia.One of themost ambitious attempts began soon after the change in

strategyof theVirginiaCompany. In1632tenmillionacresof landon

theupperChesapeakeBayweregrantedbytheEnglishkingCharlesItoCecilius Calvert, Lord Baltimore. The Charter of Maryland gave LordBaltimorecompletefreedomtocreateagovernmentalonganylineshewished, with clause VII noting that Baltimore had “for the good andhappyGovernmentofthesaidProvince, free, full,andabsolutePower,by the Tenor of these Presents, to Ordain, Make, and Enact Laws, ofwhatKindsoever.”Baltimoredrewupadetailedplan for creatingamanorial society, a

NorthAmerican variant of an idealized version of seventeenth-centuryrural England. It entailed dividing the land into plots of thousands ofacres, which would be run by lords. The lords would recruit tenants,who would work the lands and pay rents to the privileged elitecontrolling the land.Another similar attemptwasmade later in 1663,with the founding of Carolina by eight proprietors, including SirAnthony Ashley-Cooper. Ashley-Cooper, along with his secretary, thegreat English philosopher John Locke, formulated the FundamentalConstitutionsofCarolina.Thisdocument, like theCharterofMarylandbefore it, providedablueprint for an elitist, hierarchical societybasedoncontrolbyalandedelite.Thepreamblenotedthat“thegovernmentof this provincemay bemademost agreeable to themonarchy underwhichwe live and ofwhich this province is a part; and thatwemayavoiderectinganumerousdemocracy.”The clauses of the Fundamental Constitutions laid out a rigid social

structure.Atthebottomwerethe“leet-men,”withclause23noting,“Allthe children of leet-men shall be leet-men, and so to all generations.”Above the leet-men,who had no political power,were the landgravesandcaziques,whoweretoformthearistocracy.Landgravesweretobeallocatedforty-eight thousandacresof landeach,andcaziquestwenty-fourthousandacres.Therewastobeaparliament,inwhichlandgravesandcaziqueswererepresented,butitwouldbepermittedtodebateonlythose measures that had previously been approved by the eightproprietors.JustastheattempttoimposedraconianruleinVirginiafailed,sodid

theplansforthesametypeofinstitutionsinMarylandandCarolina.Thereasons were similar. In all cases it proved to be impossible to forcesettlers intoa rigidhierarchical society,because thereweresimply toomanyoptionsopento themintheNewWorld. Instead, theyhadtobe

providedwithincentivesforthemtowanttowork.Andsoontheyweredemanding more economic freedom and further political rights. InMaryland, too, settlers insisted on getting their own land, and theyforcedLordBaltimore intocreatinganassembly. In1691theassemblyinduced the king to declareMaryland a Crown colony, thus removingthe political privileges of Baltimore and his great lords. A similarprotracted struggle took place in the Carolinas, again with theproprietorslosing.SouthCarolinabecamearoyalcolonyin1729.By the 1720s, all the thirteen colonies of what was to become the

United States had similar structures of government. In all cases therewasagovernor,andanassemblybasedonafranchiseofmalepropertyholders. They were not democracies; women, slaves, and thepropertyless could not vote. But political rights were very broadcompared with contemporary societies elsewhere. It was theseassembliesandtheirleadersthatcoalescedtoformtheFirstContinentalCongressin1774,thepreludetotheindependenceoftheUnitedStates.Theassembliesbelievedtheyhadtherighttodetermineboththeirownmembership and the right to taxation. This, as we know, createdproblemsfortheEnglishcolonialgovernment.

ATALEOFTWOCONSTITUTIONS

It shouldnowbeapparent that it is not a coincidence that theUnitedStates, and not Mexico, adopted and enforced a constitution thatespoused democratic principles, created limitations on the use ofpolitical power, and distributed that power broadly in society. Thedocument that thedelegates satdown towrite inPhiladelphia inMay1787wastheoutcomeofalongprocessinitiatedbytheformationoftheGeneralAssemblyinJamestownin1619.Thecontrastbetweentheconstitutionalprocessthattookplaceatthe

time of the independence of the United States and the one that tookplacea littleafterward inMexico isstark. InFebruary1808,NapoleonBonaparte’s French armies invaded Spain. By May they had takenMadrid, theSpanish capital.BySeptember theSpanishkingFerdinandhad been captured and had abdicated. A national junta, the JuntaCentral,tookhisplace,takingthetorchinthefightagainsttheFrench.

The Juntamet first atAranjuez, but retreated south in the faceof theFrench armies. Finally it reached the port of Cádiz, which, thoughbesieged by Napoleonic forces, held out. Here the Junta formed aparliament,calledtheCortes.In1812theCortesproducedwhatbecameknownastheCádizConstitution,whichcalledfortheintroductionofaconstitutionalmonarchybasedonnotionsofpopularsovereignty.Italsocalled for theendofspecialprivilegesandthe introductionofequalitybeforethelaw.ThesedemandswereallanathematotheelitesofSouthAmerica,whowere still ruling an institutional environment shapedbytheencomienda,forcedlabor,andabsolutepowervestedinthemandthecolonialstate.ThecollapseoftheSpanishstatewiththeNapoleonicinvasioncreated

a constitutional crisis throughout colonial Latin America. There wasmuch dispute about whether to recognize the authority of the JuntaCentral,andinresponse,manyLatinAmericansbegantoformtheirownjuntas. It was only a matter of time before they began to sense thepossibility of becoming truly independent from Spain. The firstdeclaration of independence took place in La Paz, Bolivia, in 1809,though it was quickly crushed by Spanish troops sent from Peru. InMexicothepoliticalattitudesoftheelitehadbeenshapedbythe1810HidalgoRevolt,ledbyapriest,FatherMiguelHidalgo.WhenHidalgo’sarmysackedGuanajuatoonSeptember23,theykilledtheintendant,thesenior colonial official, and then started indiscriminately to kill whitepeople. It was more like class or even ethnic warfare than anindependence movement, and it united all the elites in opposition. Ifindependenceallowedpopularparticipation inpolitics, the localelites,not just Spaniards, were against it. Consequentially, Mexican elitesviewed the Cádiz Constitution, which opened the way to popularparticipation,with extreme skepticism; theywould never recognize itslegitimacy.In1815,asNapoleon’sEuropeanempirecollapsed,KingFerdinandVII

returned to power and the Cádiz Constitution was abrogated. As theSpanishCrownbegantryingtoreclaimitsAmericancolonies,itdidnotfaceaproblemwithloyalistMexico.Yet, in1820,aSpanisharmythathadassembled inCádiz to sail to theAmericas tohelp restoreSpanishauthority mutinied against Ferdinand VII. They were soon joined byarmyunitsthroughoutthecountry,andFerdinandwasforcedtorestore

theCádizConstitutionandrecalltheCortes.ThisCorteswasevenmoreradical than the one that had written the Cádiz Constitution, and itproposedabolishingallformsoflaborcoercion.Italsoattackedspecialprivileges—forexample,therightofthemilitarytobetriedforcrimesintheirowncourts.FacedfinallywiththeimpositionofthisdocumentinMexico, the elites there decided that it was better to go it alone anddeclareindependence.This independencemovementwas led byAugustín de Iturbide,who

had been an officer in the Spanish army. On February 24, 1821, hepublishedthePlandeIguala,hisvisionforanindependentMexico.Theplan featured a constitutionalmonarchywith aMexican emperor, andremoved the provisions of the Cádiz Constitution that Mexican elitesfound so threatening to their status and privileges. It receivedinstantaneoussupport,andSpainquicklyrealizedthatitcouldnotstopthe inevitable. But Iturbide did not just organize Mexican secession.Recognizing the power vacuum, he quickly took advantage of hismilitarybacking tohavehimself declared emperor, aposition that thegreatleaderofSouthAmericanindependenceSimónBolivardescribedas“bythegraceofGodandofbayonets.”Iturbidewasnotconstrainedbythesamepolitical institutionsthatconstrainedpresidentsof theUnitedStates;hequicklymadehimselfadictator,andbyOctober1822hehaddismissedtheconstitutionallysanctionedcongressandreplaceditwithajuntaofhischoosing.ThoughIturbidedidnotlastlong,thispatternofevents was to be repeated time and time again in nineteenth-centuryMexico.TheConstitutionof theUnitedStatesdidnotcreateademocracyby

modern standards. Who could vote in elections was left up to theindividual states to determine.While northern states quickly concededthevotetoallwhitemenirrespectiveofhowmuchincometheyearnedorpropertytheyowned,southernstatesdidsoonlygradually.Nostateenfranchisedwomenor slaves, and as property andwealth restrictionswere lifted on white men, racial franchises explicitly disenfranchisingblack men were introduced. Slavery, of course, was deemedconstitutionalwhentheConstitutionoftheUnitedStateswaswritteninPhiladelphia,andthemostsordidnegotiationconcernedthedivisionoftheseatsintheHouseofRepresentativesamongthestates.Theseweretobeallocatedonthebasisofastate’spopulation,butthecongressional

representatives of southern states then demanded that the slaves becounted. Northerners objected. The compromise was that inapportioningseatstotheHouseofRepresentatives,aslavewouldcountas three-fifths of a free person. The conflicts between the North andSouth of the United States were repressed during the constitutionalprocessasthethree-fifthsruleandothercompromiseswereworkedout.New fixes were added over time—for example, the MissouriCompromise,anarrangementwhereoneproslaveryandoneantislaverystatewerealways added to theunion together, tokeep thebalance inthe Senate between those for and those against slavery. These fudgeskept the political institutions of the United States working peacefullyuntiltheCivilWarfinallyresolvedtheconflictsinfavoroftheNorth.TheCivilWarwasbloodyanddestructive.Butbothbeforeandafterit

there were ample economic opportunities for a large fraction of thepopulation, especially in the northern and western United States. ThesituationinMexicowasverydifferent.IftheUnitedStatesexperiencedfive years of political instability between 1860 and 1865, Mexicoexperienced almost nonstop instability for the first fifty years ofindependence.ThisisbestillustratedviathecareerofAntonioLópezdeSantaAna.SantaAna,sonofacolonialofficialinVeracruz,cametoprominence

asasoldierfightingfortheSpanishintheindependencewars.In1821he switched sides with Iturbide and never looked back. He becamepresident of Mexico for the first time in May of 1833, though heexercisedpowerforlessthanamonth,preferringtoletValentínGómezFarías act as president. Gómez Farías’s presidency lasted fifteen days,afterwhichSantaAnaretookpower.Thiswasasbriefashisfirstspell,however, and he was again replaced by Gómez Farías, in early July.SantaAna andGómez Farías continued this dance until themiddle of1835,whenSantaAnawasreplacedbyMiguelBarragán.ButSantaAnawasnotaquitter.Hewasbackaspresidentin1839,1841,1844,1847,and, finally, between 1853 and 1855. In all, he was president eleventimes,duringwhichhepresidedover the lossof theAlamoandTexasandthedisastrousMexican-AmericanWar,whichledtothelossofwhatbecameNewMexicoandArizona.Between1824and1867 therewerefifty-twopresidents inMexico, fewofwhomassumedpoweraccordingtoanyconstitutionallysanctionedprocedure.

The consequence of this unprecedented political instability foreconomicinstitutionsandincentivesshouldbeobvious.Suchinstabilityledtohighlyinsecurepropertyrights.ItalsoledtoasevereweakeningoftheMexicanstate,whichnowhadlittleauthorityandlittleabilitytoraise taxes or provide public services. Indeed, even though Santa Anawaspresident inMexico, largepartsof thecountrywerenotunderhiscontrol,whichenabledtheannexationofTexasbytheUnitedStates.Inaddition,aswejustsaw,themotivationbehindtheMexicandeclarationof independence was to protect the set of economic institutionsdeveloped during the colonial period,which hadmadeMexico, in thewords of the great German explorer and geographer of Latin AmericaAlexandervonHumbolt,“thecountryofinequality.”Theseinstitutions,bybasing the societyon theexploitationof indigenouspeopleand thecreationofmonopolies,blockedtheeconomicincentivesandinitiativesof the great mass of the population. As the United States began toexperience the Industrial Revolution in the first half of the nineteenthcentury,Mexicogotpoorer.

HAVINGANIDEA,STARTINGAFIRM,ANDGETTINGALOAN

The Industrial Revolution started in England. Its first success was torevolutionize the production of cotton cloth using new machinespoweredbywaterwheelsandlaterbysteamengines.Mechanizationofcotton production massively increased the productivity of workers in,first, textiles and, subsequently, other industries. The engine oftechnological breakthroughs throughout the economy was innovation,spearheadedbynewentrepreneursandbusinessmeneagertoapplytheirnewideas.ThisinitialfloweringsoonspreadacrosstheNorthAtlantictotheUnitedStates.PeoplesawthegreateconomicopportunitiesavailableinadoptingthenewtechnologiesdevelopedinEngland.Theywerealsoinspiredtodeveloptheirowninventions.Wecantrytounderstandthenatureoftheseinventionsbylookingat

whowas granted patents. The patent system, which protects propertyrightsinideas,wassystematizedintheStatuteofMonopolieslegislatedby the English Parliament in 1623, partially as an attempt to stop thekingfromarbitrarilygranting“letterspatent”towhomeverhewanted—

effectively granting exclusive rights to undertake certain activities orbusinesses. The striking thing about the evidence on patenting in theUnited States is that people who were granted patents came from allsortsofbackgroundsandallwalksoflife,notjusttherichandtheelite.Manymade fortunes based on their patents. Take Thomas Edison, theinventorofthephonogramandthelightbulbandthefounderofGeneralElectric,stilloneoftheworld’slargestcompanies.Edisonwasthelastofsevenchildren.His father, SamuelEdison, followedmanyoccupations,fromsplittingshinglesforroofstotailoringtokeepingatavern.Thomashadlittleformalschoolingbutwashomeschooledbyhismother.Between1820and1845,only19percentofpatentees in theUnited

States had parents who were professionals or were from recognizablemajorlandowningfamilies.Duringthesameperiod,40percentofthosewho took out patents had only primary schooling or less, just likeEdison.Moreover, they often exploited their patent by starting a firm,againlikeEdison.JustastheUnitedStatesinthenineteenthcenturywasmoredemocraticpoliticallythanalmostanyothernationintheworldatthe time, it was also more democratic than others when it came toinnovation. This was critical to its path to becoming the mosteconomicallyinnovativenationintheworld.If you were poor with a good idea, it was one thing to take out a

patent, which was not so expensive, after all. It was another thingentirelytousethatpatenttomakemoney.Oneway,ofcourse,wastosellthepatenttosomeoneelse.ThisiswhatEdisondidearlyon,toraisesomecapital,whenhesoldhisQuadruplextelegraphtoWesternUnionfor$10,000.ButsellingpatentswasagoodideaonlyforsomeonelikeEdison,whohadideasfasterthanhecouldputthemtopractice.(Hehada world-record 1,093 patents issued to him in the United States and1,500worldwide.)The realway tomakemoney fromapatentwas tostart yourownbusiness.But to start abusiness, youneed capital, andyouneedbankstolendthecapitaltoyou.Inventors in theUnitedStateswereonceagain fortunate.Duringthe

nineteenth century there was a rapid expansion of financialintermediation and banking that was a crucial facilitator of the rapidgrowth and industrialization that the economy experienced. While in1818therewere338banksinoperationintheUnitedStates,withtotalassets of $160 million, by 1914 there were 27,864 banks, with total

assetsof$27.3billion.PotentialinventorsintheUnitedStateshadreadyaccess to capital to start their businesses. Moreover, the intensecompetitionamongbanksandfinancialinstitutionsintheUnitedStatesmeantthatthiscapitalwasavailableatfairlylowinterestrates.ThesamewasnottrueinMexico.Infact,in1910,theyearinwhich

the Mexican Revolution started, there were only forty-two banks inMexico,andtwoof thesecontrolled60percentof totalbankingassets.Unlike in the United States, where competition was fierce, there waspractically no competition among Mexican banks. This lack ofcompetitionmeant that thebankswere able to charge their customersveryhighinterestrates,andtypicallyconfinedlendingtotheprivilegedand thealreadywealthy,whowould thenuse their access to credit toincreasetheirgripoverthevarioussectorsoftheeconomy.The form that theMexican banking industry took in the nineteenth

and twentieth centuries was a direct result of the postindependencepoliticalinstitutionsofthecountry.ThechaosoftheSantaAnaerawasfollowedbyanabortiveattemptbytheFrenchgovernmentofEmperorNapoleon II to create a colonial regime in Mexico under EmperorMaximilian between1864 and1867. The Frenchwere expelled, and anewconstitutionwaswritten.ButthegovernmentformedfirstbyBenitoJuárez and, after his death, by Sebastián Lerdo de Tejada was soonchallengedbyayoungmilitarymannamedPorfirioDíaz.Díazhadbeena victorious general in thewar against the French and had developedaspirationsofpower.Heformedarebelarmyand,inNovemberof1876,defeatedthearmyofthegovernmentattheBattleofTecoac.InMayofthe next year, he had himself elected president. He went on to ruleMexico in a more or less unbroken and increasingly authoritarianfashionuntilhisoverthrowattheoutbreakoftherevolutionthirty-fouryearslater.LikeIturbideandSantaAnabeforehim,Díazstartedlifeasamilitary

commander.SuchacareerpathintopoliticswascertainlyknownintheUnited States. The first president of the United States, GeorgeWashington,wasalsoasuccessfulgeneral intheWarof Independence.UlyssesS.Grant,oneofthevictoriousUniongeneralsoftheCivilWar,became president in 1869, and Dwight D. Eisenhower, the supremecommanderoftheAlliedForcesinEuropeduringtheSecondWorldWar,was president of the United States between 1953 and 1961. Unlike

Iturbide,SantaAna,andDíaz,however,noneofthesemilitarymenusedforce to get into power. Nor did they use force to avoid having torelinquishpower.TheyabidedbytheConstitution.ThoughMexicohadconstitutionsinthenineteenthcentury,theyputfewconstraintsonwhatIturbide, Santa Ana, andDíaz could do. Thesemen could be removedfrompoweronlythesamewaytheyhadattainedit:bytheuseofforce.Díazviolatedpeople’spropertyrights,facilitatingtheexpropriationofvast amounts of land, and he granted monopolies and favors to hissupportersinalllinesofbusiness,includingbanking.Therewasnothingnewaboutthisbehavior.ThisisexactlywhatSpanishconquistadorshaddone,andwhatSantaAnadidintheirfootsteps.The reason that the United States had a banking industry that wasradicallybetterfortheeconomicprosperityofthecountryhadnothingtodowithdifferencesinthemotivationofthosewhoownedthebanks.Indeed,theprofitmotive,whichunderpinnedthemonopolisticnatureofthebanking industry inMexico,was present in theUnited States, too.Butthisprofitmotivewaschanneleddifferentlybecauseoftheradicallydifferent U.S. institutions. The bankers faced different economicinstitutions, institutions that subjected them to much greatercompetition.Andthiswaslargelybecausethepoliticianswhowrotetherules for thebankers facedverydifferent incentives themselves, forgedbydifferentpoliticalinstitutions.Indeed,inthelateeighteenthcentury,shortlyaftertheConstitutionoftheUnitedStatescameintooperation,abanking system looking similar to that which subsequently dominatedMexico began to emerge. Politicians tried to set up state bankingmonopolies, which they could give to their friends and partners inexchange for part of themonopoly profits. The banks also quickly gotinto the business of lending money to the politicians who regulatedthem, just as in Mexico. But this situation was not sustainable in theUnited States, because the politicians who attempted to create thesebankingmonopolies,unliketheirMexicancounterparts,weresubjecttoelectionandreelection.Creatingbankingmonopoliesandgivingloanstopoliticiansisgoodbusinessforpoliticians,iftheycangetawaywithit.Itisnotparticularlygood for thecitizens,however.Unlike inMexico, intheUnitedStatesthecitizenscouldkeeppoliticiansincheckandgetridof ones who would use their offices to enrich themselves or createmonopolies for their cronies. In consequence, the bankingmonopolies

crumbled.ThebroaddistributionofpoliticalrightsintheUnitedStates,especiallywhencomparedtoMexico,guaranteedequalaccesstofinanceand loans. This in turn ensured that those with ideas and inventionscouldbenefitfromthem.

PATH-DEPENDENTCHANGE

Theworldwas changing in the1870s and ’80s. LatinAmericawasnoexception. The institutions that Porfirio Díaz established were notidenticaltothoseofSantaAnaortheSpanishcolonialstate.Theworldeconomy boomed in the second half of the nineteenth century, andinnovationsintransportationsuchasthesteamshipandtherailwayledto a huge expansion of international trade. Thiswave of globalizationmeant that resource-rich countries such as Mexico—or, moreappropriately, the elites in such countries—couldenrich themselvesbyexporting rawmaterials and natural resources to industrializing NorthAmericaorWesternEurope.Díazandhiscroniesthusfoundthemselvesinadifferentandrapidlyevolvingworld.TheyrealizedthatMexicohadtochange, too.But thisdidn’tmeanuprooting thecolonial institutionsand replacing them with institutions similar to those in the UnitedStates.Instead,theirswas“path-dependent”changeleadingonlytothenext stage of the institutions that had already made much of LatinAmericapoorandunequal.Globalizationmade the largeopen spacesof theAmericas, its “openfrontiers,” valuable. Often these frontiers were only mythically open,since they were inhabited by indigenous peoples who were brutallydispossessed.Allthesame,thescrambleforthisnewlyvaluableresourcewasoneofthedefiningprocessesoftheAmericasinthesecondhalfofthenineteenthcentury.ThesuddenopeningofthisvaluablefrontierlednottoparallelprocessesintheUnitedStatesandLatinAmerica,buttoafurther divergence, shaped by the existing institutional differences,especially those concerningwhohad access to the land. In theUnitedStatesalongseriesoflegislativeacts,rangingfromtheLandOrdinanceof 1785 to the Homestead Act of 1862, gave broad access to frontierlands. Though indigenous peoples had been sidelined, this created anegalitarianandeconomicallydynamic frontier. InmostLatinAmerican

countries, however, the political institutions there created a verydifferent outcome. Frontier lands were allocated to the politicallypowerfulandthosewithwealthandcontacts,makingsuchpeopleevenmorepowerful.Díaz also started to dismantle many of the specific colonialinstitutional legacies preventing international trade, which heanticipated could greatly enrich him and his supporters. His model,however,continuedtobenotthetypeofeconomicdevelopmenthesawnorth of the Rio Grande but that of Cortés, Pizarro, and de Toledo,wheretheelitewouldmakehugefortuneswhiletherestwereexcluded.When the elite invested, the economy would grow a little, but sucheconomicgrowthwasalwaysgoingtobedisappointing.Italsocameattheexpenseofthoselackingrightsinthisneworder,suchastheYaquipeopleofSonora,inthehinterlandofNogales.Between1900and1910,possiblythirtythousandYaquiweredeported,essentiallyenslaved,andsenttoworkinthehenequenplantationsofYucatán.(Thefibersofthehenequen plant were a valuable export, since they could be used tomakeropeandtwine.)The persistence into the twentieth century of a specific institutionalpattern inimical to growth in Mexico and Latin America is wellillustratedbythefactthat,justasinthenineteenthcentury,thepatterngenerated economic stagnation and political instability, civil wars andcoups, as groups struggled for the benefits of power. Díaz finally lostpower to revolutionary forces in 1910. The Mexican Revolution wasfollowedbyothers inBolivia in1952,Cubain1959,andNicaraguain1979.Meanwhile, sustainedcivilwars raged inColombia,ElSalvador,Guatemala, and Peru. Expropriation or the threat of expropriation ofassets continued apace, with mass agrarian reforms (or attemptedreforms) in Bolivia, Brazil, Chile, Colombia, Guatemala, Peru, andVenezuela. Revolutions, expropriations, and political instability camealong with military governments and various types of dictatorships.Thoughtherewasalsoagradualdrifttowardgreaterpoliticalrights, itwas only in the 1990s that most Latin American countries becamedemocracies,andeventhentheyremainmiredininstability.Thisinstabilitywasaccompaniedbymassrepressionandmurder.The1991NationalCommissionforTruthandReconciliationReportinChiledetermined that 2,279 personswere killed for political reasons during

thePinochetdictatorshipbetween1973and1990.Possibly50,000wereimprisoned and tortured, and hundreds of thousands of people werefired from their jobs. The Guatemalan Commission for HistoricalClarificationReportin1999identifiedatotalof42,275namedvictims,thoughothershaveclaimedthatasmanyas200,000weremurderedinGuatemala between 1962 and 1996, 70,000 during the regime ofGeneralEfrainRíosMontt,whowasable to commit these crimeswithsuchimpunitythathecouldrunforpresidentin2003;fortunatelyhedidnotwin.TheNationalCommissionon theDisappearanceofPersons inArgentinaput thenumberofpeoplemurderedby themilitary thereat9,000 persons from 1976 to 1983, although it noted that the actualnumber could be higher. (Estimates by human rights organizationsusuallyplaceitat30,000.)

MAKINGABILLIONORTWO

The enduring implications of the organization of colonial society andthose societies’ institutional legacies shape the modern differencesbetween the United States and Mexico, and thus the two parts ofNogales.The contrastbetweenhowBillGatesandCarlosSlimbecamethetworichestmenintheworld—WarrenBuffettisalsoacontender—illustrates the forces at work. The rise of Gates andMicrosoft is wellknown,butGates’sstatusastheworld’srichestpersonandthefounderofoneofthemosttechnologicallyinnovativecompaniesdidnotstoptheU.S.DepartmentofJusticefromfilingcivilactionsagainsttheMicrosoftCorporation on May 8, 1998, claiming that Microsoft had abusedmonopolypower. Particularly at issuewas theway thatMicrosoft hadtied its Web browser, Internet Explorer, to its Windows operatingsystem. The government had been keeping an eye on Gates for quitesome time, and as early as 1991, the Federal Trade Commission hadlaunched an inquiry intowhetherMicrosoftwas abusing itsmonopolyonPCoperating systems. InNovember2001,Microsoft reachedadealwith the Justice Department. It had its wings clipped, even if thepenaltieswerelessthanmanydemanded.InMexico,CarlosSlimdidnotmakehismoneybyinnovation.Initiallyhe excelled in stock market deals, and in buying and revamping

unprofitable firms. Hismajor coupwas the acquisition of Telmex, theMexicantelecommunicationsmonopolythatwasprivatizedbyPresidentCarlosSalinas in1990.Thegovernmentannouncedits intentiontosell51 percent of the voting stock (20.4 percent of total stock) in thecompanyinSeptember1989andreceivedbidsinNovember1990.Eventhough Slim did not put in the highest bid, a consortium led by hisGrupo Corso won the auction. Instead of paying for the shares rightaway, Slimmanaged todelaypayment, using thedividends ofTelmexitself to pay for the stock. What was once a public monopoly nowbecameSlim’smonopoly,anditwashugelyprofitable.The economic institutions thatmadeCarlos Slimwhohe is are verydifferent from those in the United States. If you’re a Mexicanentrepreneur, entry barriers will play a crucial role at every stage ofyour career. These barriers include expensive licenses you have toobtain, red tape you have to cut through, politicians and incumbentswhowillstandinyourway,andthedifficultyofgettingfundingfromafinancial sector often in cahoots with the incumbents you’re trying tocompete against. These barriers can be either insurmountable, keepingyou out of lucrative areas, or your greatest friend, keeping yourcompetitors at bay. The difference between the two scenarios is ofcoursewhomyouknowandwhomyoucan influence—andyes,whomyoucanbribe.CarlosSlim,atalented,ambitiousmanfromarelativelymodest background of Lebanese immigrants, has been a master atobtaining exclusive contracts; hemanaged tomonopolize the lucrativetelecommunicationsmarket inMexico,and then toextendhis reach totherestofLatinAmerica.TherehavebeenchallengestoSlim’sTelmexmonopoly.Buttheyhavenot been successful. In 1996 Avantel, a long-distance phone provider,petitioned the Mexican Competition Commission to check whetherTelmexhadadominantposition in the telecommunicationsmarket. In1997 the commission declared that Telmex had substantial monopolypowerwithrespecttolocaltelephony,nationallong-distancecalls,andinternational long-distance calls, among other things. But attempts bythe regulatory authorities in Mexico to limit these monopolies havecome to nothing.One reason is that SlimandTelmex canusewhat isknown as a recurso de amparo, literally an “appeal for protection.” Anamparo is in effect a petition to argue that a particular law does not

apply to you. The idea of the amparo dates back to the Mexicanconstitution of 1857 and was originally intended as a safeguard ofindividual rights and freedoms. In the hands of Telmex and otherMexican monopolies, however, it has become a formidable tool forcementingmonopolypower.Ratherthanprotectingpeople’srights, theamparoprovidesaloopholeinequalitybeforethelaw.SlimhasmadehismoneyintheMexicaneconomyinlargepartthanksto his political connections. When he has ventured into the UnitedStates,hehasnotbeensuccessful.In1999hisGrupoCursoboughtthecomputer retailer CompUSA. At the time, CompUSA had given afranchisetoafirmcalledCOCServicestosellitsmerchandiseinMexico.Slimimmediatelyviolatedthiscontractwiththeintentionofsettinguphis own chain of stores,without any competition fromCOC. But COCsuedCompUSAinaDallascourt.TherearenoamparosinDallas,soSlimlost, and was fined $454million. The lawyer for COC, MarkWerner,noted afterward that “themessageof this verdict is that in this globaleconomy, firms have to respect the rules of the United States if theywant to come here.”When Slimwas subject to the institutions of theUnitedStates,hisusualtacticsformakingmoneydidn’twork.

TOWARDATHEORYOFWORLDINEQUALITY

Weliveinanunequalworld.ThedifferencesamongnationsaresimilartothosebetweenthetwopartsofNogales,justonalargerscale.Inrichcountries, individuals are healthier, live longer, and are much bettereducated.Theyalsohaveaccesstoarangeofamenitiesandoptionsinlife, from vacations to career paths, that people in poor countries canonly dream of. People in rich countries also drive on roads withoutpotholes, and enjoy toilets, electricity, and running water in theirhouses. They also typically have governments that do not arbitrarilyarrestorharassthem;onthecontrary,thegovernmentsprovideservices,includingeducation,healthcare,roads,andlawandorder.Notable,too,isthefactthatthecitizensvoteinelectionsandhavesomevoiceinthepoliticaldirectiontheircountriestake.Thegreatdifferencesinworldinequalityareevidenttoeveryone,eventothoseinpoorcountries,thoughmanylackaccesstotelevisionorthe

Internet. It is theperceptionand realityof thesedifferences thatdrivepeople to cross the Rio Grande or the Mediterranean Sea illegally tohave the chance to experience rich-country living standards andopportunities. This inequality doesn’t just have consequences for thelivesofindividualpeopleinpoorcountries;italsocausesgrievancesandresentment,with huge political consequences in theUnited States andelsewhere.Understandingwhy these differences exist andwhat causesthemisourfocusinthisbook.Developingsuchanunderstandingisnotjustanendinitself,butalsoafirststeptowardgeneratingbetterideasabouthowtoimprovethelivesofbillionswhostillliveinpoverty.ThedisparitiesonthetwosidesofthefenceinNogalesarejustthetipof the iceberg.As in the rest of northernMexico,which benefits fromtradewiththeUnitedStates,evenifnotallofitislegal,theresidentsofNogales are more prosperous than other Mexicans, whose averageannual household income is around $5,000. This greater relativeprosperity ofNogales, Sonora, comes frommaquiladoramanufacturingplants centered in industrial parks, the first of which was started byRichardCampbell,Jr.,aCaliforniabasketmanufacturer.ThefirsttenantwasCoin-Art, amusical instrument companyownedbyRichardBosse,ownerof theArtleyfluteandsaxophonecompanyinNogales,Arizona.Coin-Artwas followedbyMemorex (computerwiring);Avent (hospitalclothing); Grant (sunglasses); Chamberlain (a manufacturer of garagedooropenersforSears);andSamsonite(suitcases).Significantly,allareU.S.-based businesses and businessmen, using U.S. capital and know-how. The greater prosperity ofNogales, Sonora, relative to the rest ofMexico,therefore,comesfromoutside.The differences between the United States and Mexico are in turnsmallcomparedwiththoseacross theentireglobe.TheaveragecitizenoftheUnitedStatesisseventimesasprosperousastheaverageMexicanandmorethantentimesastheresidentofPeruorCentralAmerica.Sheis about twenty times as prosperous as the average inhabitant of sub-Saharan Africa, and almost forty times as those living in the poorestAfricancountriessuchasMali,Ethiopia,andSierraLeone.Andit’snotjust the United States. There is a small but growing group of richcountries—mostly in Europe and North America, joined by Australia,Japan, New Zealand, Singapore, South Korea, and Taiwan—whosecitizens enjoy very different lives from those of the inhabitants of the

restoftheglobe.The reason that Nogales, Arizona, is much richer than Nogales,Sonora, is simple; it isbecauseof theverydifferent institutionson thetwo sides of the border,which create very different incentives for theinhabitants of Nogales, Arizona, versus Nogales, Sonora. The UnitedStatesisalsofarrichertodaythaneitherMexicoorPerubecauseofthewayitsinstitutions,botheconomicandpolitical,shapetheincentivesofbusinesses,individuals,andpoliticians.Eachsocietyfunctionswithasetofeconomicandpoliticalrulescreatedandenforcedbythestateandthecitizens collectively. Economic institutions shape economic incentives:the incentivestobecomeeducated, tosaveandinvest, to innovateandadopt new technologies, and so on. It is the political process thatdetermineswhat economic institutions people live under, and it is thepolitical institutions that determine how this process works. Forexample, it is the political institutions of a nation that determine theabilityofcitizenstocontrolpoliticiansandinfluencehowtheybehave.This in turn determines whether politicians are agents of the citizens,albeit imperfect, or are able to abuse the power entrusted to them, orthattheyhaveusurped,toamasstheirownfortunesandtopursuetheirown agendas, ones detrimental to those of the citizens. Politicalinstitutions include but are not limited towritten constitutions and towhether the society is a democracy. They include the power andcapacityofthestatetoregulateandgovernsociety.Itisalsonecessarytoconsidermorebroadlythefactorsthatdeterminehowpoliticalpowerisdistributedinsociety,particularlytheabilityofdifferentgroupstoactcollectively to pursue their objectives or to stop other people frompursuingtheirs.Asinstitutionsinfluencebehaviorandincentivesinreallife,theyforgethesuccessorfailureofnations.Individualtalentmattersateverylevelofsociety,buteventhatneedsaninstitutionalframeworktotransformitinto a positive force. Bill Gates, like other legendary figures in theinformation technology industry (such as Paul Allen, Steve Ballmer,SteveJobs,LarryPage,SergeyBrin,andJeffBezos),hadimmensetalentandambition.Butheultimatelyrespondedtoincentives.TheschoolingsystemintheUnitedStatesenabledGatesandotherslikehimtoacquirea unique set of skills to complement their talents. The economicinstitutions in theUnited States enabled thesemen to start companies

with ease, without facing insurmountable barriers. Those institutionsalsomadethefinancingoftheirprojectsfeasible.TheU.S.labormarketsenabledthemtohirequalifiedpersonnel,andtherelativelycompetitivemarket environment enabled them to expand their companies andmarket their products. These entrepreneurs were confident from thebeginningthattheirdreamprojectscouldbeimplemented:theytrustedtheinstitutionsandtheruleoflawthatthesegeneratedandtheydidnotworry about the security of their property rights. Finally, the politicalinstitutions ensured stability and continuity. For one thing, theymadesurethattherewasnoriskofadictatortakingpowerandchangingtherules of the game, expropriating their wealth, imprisoning them, orthreatening their lives and livelihoods. They also made sure that noparticular interest in society could warp the government in aneconomically disastrous direction, because political power was bothlimited and distributed sufficiently broadly that a set of economicinstitutionsthatcreatedtheincentivesforprosperitycouldemerge.This bookwill show thatwhile economic institutions are critical fordeterminingwhetheracountry ispoororprosperous, it ispoliticsandpoliticalinstitutionsthatdeterminewhateconomicinstitutionsacountryhas. Ultimately the good economic institutions of the United Statesresulted from the political institutions that gradually emerged after1619.Ourtheoryforworldinequalityshowshowpoliticalandeconomicinstitutionsinteractincausingpovertyorprosperity,andhowdifferentpartsoftheworldendedupwithsuchdifferentsetsofinstitutions.OurbriefreviewofthehistoryoftheAmericasbeginstogiveasenseoftheforces that shapepoliticalandeconomic institutions.Differentpatternsofinstitutionstodayaredeeplyrootedinthepastbecauseoncesocietygetsorganizedinaparticularway,thistendstopersist.We’llshowthatthis fact comes from the way that political and economic institutionsinteract.Thispersistenceandtheforcesthatcreateitalsoexplainwhyitissodifficult to remove world inequality and to make poor countriesprosperous.Though institutions are thekey to thedifferencesbetweenthe two Nogaleses and between Mexico and the United States, thatdoesn’tmeantherewillbeaconsensusinMexicotochangeinstitutions.There isnonecessity for a society todevelopor adopt the institutionsthatarebestforeconomicgrowthorthewelfareofitscitizens,because

otherinstitutionsmaybeevenbetterforthosewhocontrolpoliticsandpolitical institutions. The powerful and the rest of society will oftendisagree about which set of institutions should remain in place andwhichonesshouldbechanged.CarlosSlimwouldnothavebeenhappyto see his political connections disappear and the entry barriersprotecting his businesses fizzle—no matter that the entry of newbusinesseswouldenrichmillionsofMexicans.Becausethereisnosuchconsensus, what rules society ends up with is determined by politics:whohaspowerandhowthispowercanbeexercised.CarlosSlimhasthepower to get what he wants. Bill Gates’s power is far more limited.That’swhyourtheoryisaboutnotjusteconomicsbutalsopolitics.Itisabout theeffectsof institutionson the successand failureofnations—thus the economics of poverty and prosperity; it is also about howinstitutionsaredeterminedandchangeovertime,andhowtheyfail tochangeevenwhentheycreatepovertyandmiseryformillions—thusthepoliticsofpovertyandprosperity.

2.

THEORIESTHATDON’TWORK

THELAYOFTHELAND

THEFOCUSOFourbookisonexplainingworldinequalityandalsosomeoftheeasilyvisiblebroadpatternsthatnestwithinit.Thefirstcountrytoexperience sustained economic growthwas England—or Great Britain,usually justBritain,as theunionofEngland,Wales,andScotlandafter1707 is known. Growth emerged slowly in the second half of theeighteenth century as the Industrial Revolution, based on majortechnologicalbreakthroughsandtheirapplicationinindustry,tookroot.Industrialization in England was soon followed by industrialization inmost ofWesternEurope and theUnited States. Englishprosperity alsospread rapidly to Britain’s “settler colonies” of Canada, Australia, andNewZealand.A listof the thirtyrichestcountries todaywould includethem,plusJapan,Singapore,andSouthKorea.Theprosperityof theselatterthreeisinturnpartofabroaderpatterninwhichmanyEastAsiannations, including Taiwan and subsequently China, have experiencedrecentrapidgrowth.The bottomof theworld incomedistribution paints as sharp and as

distinctiveapictureasthetop.Ifyouinsteadmakealistofthepoorestthirtycountries in theworldtoday,youwill findalmostallof theminsub-Saharan Africa. They are joined by countries such as Afghanistan,Haiti, and Nepal, which, though not in Africa, all share somethingcritical with African nations, as we’ll explain. If you went back fiftyyears, the countries in the top and bottom thirty wouldn’t be greatlydifferent. Singapore and South Koreawould not be among the richestcountries,andtherewouldbeseveraldifferentcountries inthebottomthirty, but the overall picture that emerged would be remarkably

consistent with what we see today. Go back one hundred years, or ahundredandfifty,andyou’dfindnearlythesamecountriesinthesamegroups.Map3showsthelayofthelandin2008.Thecountriesshadedinthedarkest color are the poorest in the world, those where average per-capitaincomes(calledbyeconomistsGDP,grossdomesticproduct)areless than $2,000 annually. Most of Africa is in this color, as areAfghanistan,Haiti,andpartsofSoutheastAsia(forexample,Cambodiaand Laos). North Korea is also among this group of countries. Thecountries inwhitearetherichest, thosewithannual incomeper-capitaof $20,000 ormore. Here we find the usual suspects: North America,westernEurope,Australasia,andJapan.AnotherinterestingpatterncanbediscernedintheAmericas.MakealistofthenationsintheAmericasfromrichesttopoorest.Youwillfindthat at the top are the United States and Canada, followed by Chile,Argentina, Brazil, Mexico, and Uruguay, and maybe also Venezuela,depending on the price of oil. After that you have Colombia, theDominicanRepublic,Ecuador,andPeru.Atthebottomthereisanotherdistinct, much poorer group, comprising Bolivia, Guatemala, andParaguay.Gobackfiftyyears,andyou’llfindanidenticalranking.Onehundredyears:samething.Onehundredandfiftyyears:againthesame.SoitisnotjustthattheUnitedStatesandCanadaarericherthanLatinAmerica; there isalsoadefiniteandpersistentdividebetweentherichandpoornationswithinLatinAmerica.AfinalinterestingpatternisintheMiddleEast.Therewefindoil-richnations such as Saudi Arabia and Kuwait, which have income levelsclose to those of our top thirty. Yet if the oil price fell, they wouldquicklyfallbackdownthetable.MiddleEasterncountrieswithlittleorno oil, such as Egypt, Jordan, and Syria, all cluster around a level ofincomesimilartothatofGuatemalaorPeru.Withoutoil,MiddleEasterncountriesarealsoallpoor,though,likethoseinCentralAmericaandtheAndes,notsopoorasthoseinsub-SaharanAfrica.Whilethereisalotofpersistenceinthepatternsofprosperityweseearoundustoday,thesepatternsarenotunchangingorimmutable.First,as we have already emphasized, most of current world inequalityemergedsincethelateeighteenthcentury,followingonthetailsoftheIndustrialRevolution.Notonlyweregapsinprosperitymuchsmalleras

late as the middle of the eighteenth century, but the rankings whichhavebeensostablesincethenarenotthesamewhenwegofurtherbackinhistory.IntheAmericas,forexample,therankingweseeforthelasthundredandfiftyyearswascompletelydifferentfivehundredyearsago.Second,manynationshaveexperiencedseveraldecadesofrapidgrowth,such as much of East Asia since the Second World War and, morerecently, China. Many of these subsequently saw that growth go intoreverse.Argentina, for example, grew rapidly for fivedecadesupuntil1920, becoming one of the richest countries in the world, but thenstarted a long slide. The Soviet Union is an even more noteworthyexample, growing rapidly between 1930 and 1970, but subsequentlyexperiencingarapidcollapse.

Whatexplains thesemajordifferences inpovertyandprosperityandthe patterns of growth?Why didWestern European nations and theircolonial offshoots filled with European settlers start growing in thenineteenthcentury,scarcelylookingback?Whatexplainsthepersistentranking of inequality within the Americas? Why have sub-SaharanAfrican and Middle Eastern nations failed to achieve the type of

economicgrowthseeninWesternEurope,whilemuchofEastAsiahasexperiencedbreakneckratesofeconomicgrowth?Onemight think that the fact that world inequality is so huge andconsequentialandhassuchsharplydrawnpatternswouldmeanthat itwouldhave awell-accepted explanation.Not so.Most hypotheses thatsocialscientistshaveproposedfortheoriginsofpovertyandprosperityjustdon’tworkandfailtoconvincinglyexplainthelayoftheland.

THEGEOGRAPHYHYPOTHESIS

One widely accepted theory of the causes of world inequality is thegeographyhypothesis,whichclaims that thegreatdividebetweenrichand poor countries is created by geographical differences. Many poorcountries,suchasthoseofAfrica,CentralAmerica,andSouthAsia,arebetweenthetropicsofCancerandCapricorn.Richnations, incontrast,tend to be in temperate latitudes. This geographic concentration ofpoverty and prosperity gives a superficial appeal to the geographyhypothesis,whichisthestartingpointofthetheoriesandviewsofmanysocial scientists and pundits alike. But this doesn’t make it any lesswrong.As early as the late eighteenth century, the great French politicalphilosopher Montesquieu noted the geographic concentration ofprosperity andpoverty, andproposedan explanation for it.Hearguedthat people in tropical climates tended to be lazy and to lackinquisitiveness.Asa consequence, theydidn’tworkhardandwerenotinnovative, and thiswas the reasonwhy theywerepoor.Montesquieualso speculated that lazy people tended to be ruled by despots,suggestingthatatropicallocationcouldexplainnotjustpovertybutalsosomeofthepoliticalphenomenaassociatedwitheconomicfailure,suchasdictatorship.The theory that hot countries are intrinsically poor, thoughcontradictedbytherecentrapideconomicadvanceofcountriessuchasSingapore,Malaysia,andBotswana,isstillforcefullyadvocatedbysome,such as the economist Jeffrey Sachs. Themodern version of this viewemphasizes not the direct effects of climate onwork effort or thoughtprocesses, but two additional arguments: first, that tropical diseases,

particularly malaria, have very adverse consequences for health andthereforelaborproductivity;andsecond,thattropicalsoilsdonotallowfor productive agriculture. The conclusion, though, is the same:temperate climates have a relative advantage over tropical andsemitropicalareas.World inequality, however, cannot be explained by climate or

diseases, or any version of the geography hypothesis. Just think ofNogales. What separates the two parts is not climate, geography, ordiseaseenvironment,buttheU.S.-Mexicoborder.If the geography hypothesis cannot explain differences between the

northandsouthofNogales,orNorthandSouthKorea,orthosebetweenEastandWestGermanybeforethefalloftheBerlinWall,coulditstillbea useful theory for explaining differences between North and SouthAmerica?BetweenEuropeandAfrica?Simply,no.History illustrates that there is no simple or enduring connection

betweenclimateorgeographyandeconomicsuccess.Forinstance,it isnot true that the tropics have always been poorer than temperatelatitudes.Aswesawin the lastchapter,at the timeof theconquestoftheAmericasbyColumbus,theareassouthoftheTropicofCancerandnorthof theTropicofCapricorn,which today includeMexico,CentralAmerica,Peru,andBolivia,held thegreatAztecand Incacivilizations.Theseempireswerepoliticallycentralizedandcomplex,builtroads,andprovidedfaminerelief.TheAztecshadbothmoneyandwriting,andtheIncas, even though they lacked both these two key technologies,recordedvastamountsofinformationonknottedropescalledquipus.Insharpcontrast,atthetimeoftheAztecsandIncas,thenorthandsouthoftheareainhabitedbytheAztecsandIncas,whichtodayincludestheUnitedStates,Canada,Argentina, andChile,weremostly inhabitedbyStone Age civilizations lacking these technologies. The tropics in theAmericaswere thusmuch richer than the temperate zones, suggestingthatthe“obviousfact”oftropicalpovertyisneitherobviousnorafact.Instead, thegreater riches in theUnitedStatesandCanadarepresentastarkreversaloffortunerelativetowhatwastherewhentheEuropeansarrived.This reversal clearly had nothing to do with geography and, as we

have already seen, something to do with the way these areas werecolonized. This reversal was not confined to the Americas. People in

SouthAsia,especiallytheIndiansubcontinent,andinChinaweremoreprosperous than those inmany other parts ofAsia and certainlymorethan thepeoples inhabitingAustralia andNewZealand.This, too,wasreversed, with South Korea, Singapore, and Japan emerging as therichestnationsinAsia,andAustraliaandNewZealandsurpassingalmostallofAsiaintermsofprosperity.Evenwithinsub-SaharanAfricatherewas a similar reversal. More recently, before the start of intenseEuropeancontactwithAfrica, the southernAfrica regionwas themostsparselysettledandthefarthestfromhavingdevelopedstateswithanykindofcontrolovertheirterritories.YetSouthAfricaisnowoneofthemostprosperousnations in sub-SaharanAfrica.Furtherback inhistorywe again see much prosperity in the tropics; some of the greatpremodern civilizations, such as Angkor in modern Cambodia,VijayanagarainsouthernIndia,andAksuminEthiopia,flourishedinthetropics,asdidthegreatIndusValleycivilizationsofMohenjoDaroandHarappainmodernPakistan.Historythusleaveslittledoubtthatthereis no simple connection between a tropical location and economicsuccess.Tropical diseases obviously cause much suffering and high rates of

infant mortality in Africa, but they are not the reason Africa is poor.Disease is largely a consequence of poverty and of governments beingunableorunwilling toundertake thepublichealthmeasuresnecessaryto eradicate them. England in the nineteenth century was also a veryunhealthyplace,butthegovernmentgraduallyinvestedincleanwater,in the proper treatment of sewage and effluent, and, eventually, in aneffective health service. Improved health and life expectancywere notthe cause of England’s economic success but one of the fruits of itspreviouspoliticalandeconomicchanges.Thesameis trueforNogales,Arizona.Theotherpartofthegeographyhypothesisisthatthetropicsarepoor

because tropical agriculture is intrinsicallyunproductive.Tropical soilsare thin and unable to maintain nutrients, the argument goes, andemphasizeshowquicklythesesoilsareerodedbytorrentialrains.Therecertainly is somemerit in this argument, but aswe’ll show, theprimedeterminant of why agricultural productivity—agricultural output peracre—is so low in many poor countries, particularly in sub-SaharanAfrica,haslittletodowithsoilquality.Rather,itisaconsequenceofthe

ownership structureof the landand the incentives thatarecreated forfarmersbythegovernmentsandinstitutionsunderwhichtheylive.Wewillalsoshowthatworldinequalitycannotbeexplainedbydifferencesin agricultural productivity. The great inequality of themodernworldthat emerged in the nineteenth century was caused by the unevendisseminationof industrial technologiesandmanufacturingproduction.Itwasnotcausedbydivergenceinagriculturalperformance.Another influential version of the geography hypothesis is advancedby the ecologist and evolutionary biologist Jared Diamond. He arguesthattheoriginsofintercontinentalinequalityatthestartofthemodernperiod,fivehundredyearsago,restedindifferenthistoricalendowmentsofplantandanimalspecies,whichsubsequentlyinfluencedagriculturalproductivity.Insomeplaces,suchastheFertileCrescentinthemodernMiddle East, there were a large number of species that could bedomesticatedbyhumans. Elsewhere, such as theAmericas, therewerenot.Havingmany species capable of being domesticatedmade it veryattractiveforsocietiestomakethetransitionfromahunter-gatherertoafarming lifestyle. As a consequence, farming developed earlier in theFertileCrescentthanintheAmericas.Populationdensitygrew,allowingspecialization of labor, trade, urbanization, and political development.Crucially, inplaceswherefarmingdominated,technological innovationtook placemuchmore rapidly than in other parts of theworld. Thus,according toDiamond, thedifferential availabilityof animal andplantspeciescreateddifferentialintensitiesoffarming,whichledtodifferentpathsoftechnologicalchangeandprosperityacrossdifferentcontinents.Though Diamond’s thesis is a powerful approach to the puzzle onwhich he focuses, it cannot be extended to explain modern worldinequality.Forexample,DiamondarguesthattheSpanishwereabletodominate the civilizations of the Americas because of their longerhistory of farming and consequent superior technology. But we nowneedtoexplainwhytheMexicansandPeruviansinhabitingtheformerlands of theAztecs and Incas are poor.While having access towheat,barley,andhorsesmighthavemade theSpanish richer than the Incas,the gap in incomes between the twowas not very large. The averageincomeofaSpaniardwasprobablylessthandoublethatofacitizenoftheIncaEmpire.Diamond’sthesisimpliesthatoncetheIncashadbeenexposed toall the speciesand resulting technologies that theyhadnot

beenabletodevelopthemselves,theyoughtquicklytohaveattainedthelivingstandardsoftheSpanish.Yetnothingofthesorthappened.Onthecontrary,inthenineteenthandtwentiethcenturies,amuchlargergapinincomesbetweenSpainandPeruemerged.TodaytheaverageSpaniardis more than six times richer than the average Peruvian. This gap inincomes is closely connected to the uneven dissemination of modernindustrialtechnologies,butthishaslittletodoeitherwiththepotentialfor animal and plant domestication or with intrinsic agriculturalproductivitydifferencesbetweenSpainandPeru.While Spain, albeit with a lag, adopted the technologies of steampower, railroads, electricity, mechanization, and factory production,Peru did not, or at best did so very slowly and imperfectly. Thistechnologicalgappersists todayandreproduces itselfonabiggerscaleas new technologies, in particular those related to informationtechnology, fuel further growth in many developed and some rapidlydevelopingnations.Diamond’sthesisdoesnottelluswhythesecrucialtechnologiesarenotdiffusingandequalizing incomesacross theworldanddoesnotexplainwhythenorthernhalfofNogalesissomuchricherthanitstwinjusttothesouthofthefence,eventhoughbothwerepartofthesamecivilizationfivehundredyearsago.The story of Nogales highlights another major problem in adaptingDiamond’s thesis:aswehavealreadyseen,whatever thedrawbacksofthe Inca and Aztec empires were in 1532, Peru and Mexico wereundoubtedlymoreprosperousthanthosepartsoftheAmericasthatwenton to become the United States and Canada. North America becamemore prosperous precisely because it enthusiastically adopted thetechnologiesandadvancesof theIndustrialRevolution.Thepopulationbecame educated and railways spread out across the Great Plains instark contrast to what happened in South America. This cannot beexplained by pointing to differential geographic endowments of NorthandSouthAmerica,which,ifanything,favoredSouthAmerica.Inequality in the modern world largely results from the unevendisseminationandadoptionof technologies,andDiamond’s thesisdoesinclude important arguments about this. For instance, he argues,following thehistorianWilliamMcNeill, that the east–west orientationof Eurasia enabled crops, animals, and innovations to spread from theFertileCrescentintoWesternEurope,whilethenorth–southorientation

oftheAmericasaccountsforwhywritingsystems,whichwerecreatedinMexico, did not spread to the Andes or North America. Yet theorientation of continents cannot provide an explanation for today’sworldinequality.ConsiderAfrica.ThoughtheSaharaDesertdidpresentasignificantbarriertothemovementofgoodsandideasfromthenorthtosub-SaharanAfrica,thiswasnotinsurmountable.ThePortuguese,andthenotherEuropeans,sailedaroundthecoastandeliminateddifferencesinknowledgeatatimewhengapsinincomeswereverysmallcomparedwith what they are today. Since then, Africa has not caught up withEurope;onthecontrary,thereisnowamuchlargerincomegapbetweenmostAfricanandEuropeancountries.It should also be clear that Diamond’s argument, which is about

continental inequality, isnotwellequipped toexplainvariationwithincontinents—anessentialpartofmodernworld inequality.Forexample,while the orientation of the Eurasian landmass might explain howEngland managed to benefit from the innovations of the Middle Eastwithouthaving to reinvent them, it doesn’t explainwhy the IndustrialRevolutionhappenedinEnglandratherthan,say,Moldova.Inaddition,asDiamondhimselfpointsout,Chinaand Indiabenefitedgreatly fromvery rich suites of animals and plants, and from the orientation ofEurasia.Butmostofthepoorpeopleoftheworldtodayareinthosetwocountries.Infact,thebestwaytoseethescopeofDiamond’sthesisisintermsof

hisownexplanatoryvariables.Map4showsdataonthedistributionofSusscrofa,theancestorofthemodernpig,andtheaurochs,ancestorofthe modern cow. Both species were widely distributed throughoutEurasiaandevenNorthAfrica.Map5(thispage)showsthedistributionof some of the wild ancestors of modern domesticated crops, such asOryzasativa, theancestorofAsiancultivatedrice,andtheancestorsofmodernwheatandbarley.Itdemonstratesthatthewildancestorofricewas distributed widely across south and southeast Asia, while theancestorsofbarleyandwheatweredistributedalongalongarcfromtheLevant, reaching through Iran and into Afghanistan and the cluster of“stans” (Turkmenistan, Tajikistan, and Krgyzistan). These ancestralspecies are present in much of Eurasia. But their wide distributionsuggeststhatinequalitywithinEurasiacannotbeexplainedbyatheorybasedontheincidenceofthespecies.

The geography hypothesis is not only unhelpful for explaining theorigins of prosperity throughout history, and mostly incorrect in itsemphasis,butalsounabletoaccountforthelayofthelandwestartedthischapterwith.Onemightarguethatanypersistentpattern,suchasthe hierarchy of incomes within the Americas or the sharp and long-ranging differences between Europe and the Middle East, can beexplainedbyunchanginggeography.Butthisisnotso.Wehavealreadyseen that thepatternswithin theAmericas arehighlyunlikely tohavebeendrivenbygeographicalfactors.Before1492itwasthecivilizationsinthecentralvalleyofMexico,CentralAmerica,andtheAndesthathadsuperior technology and living standards to North America or placessuchasArgentinaandChile.Whilethegeographystayedthesame,theinstitutions imposed by European colonists created a “reversal offortune.”GeographyisalsounlikelytoexplainthepovertyoftheMiddleEast forsimilarreasons.Afterall, theMiddleEast ledtheworld in theNeolithicRevolution,andthefirsttownsdevelopedinmodernIraq.IronwasfirstsmeltedinTurkey,andas lateastheMiddleAgestheMiddleEast was technologically dynamic. It was not the geography of theMiddleEast thatmadetheNeolithicRevolution flourish in thatpartoftheworld,aswewillseeinchapter5,anditwas,again,notgeographythat made the Middle East poor. Instead, it was the expansion andconsolidationoftheOttomanEmpire,anditistheinstitutionallegacyofthisempirethatkeepstheMiddleEastpoortoday.

Finally, geographic factors are unhelpful for explaining not only thedifferencesweseeacrossvariouspartsoftheworldtodaybutalsowhymanynationssuchasJapanorChinastagnateforlongperiodsandthenstartarapidgrowthprocess.Weneedanother,bettertheory.

THECULTUREHYPOTHESIS

The second widely accepted theory, the culture hypothesis, relatesprosperity to culture. The culture hypothesis, just like the geographyhypothesis,hasadistinguishedlineage,goingbackatleasttothegreatGerman sociologist Max Weber, who argued that the ProtestantReformation and the Protestant ethic it spurred played a key role infacilitatingtheriseofmodernindustrialsocietyinWesternEurope.Theculturehypothesisnolongerreliessolelyonreligion,butstressesothertypesofbeliefs,values,andethicsaswell.Thoughitisnotpoliticallycorrecttoarticulateinpublic,manypeople

still maintain that Africans are poor because they lack a good workethic, still believe in witchcraft and magic, or resist new Westerntechnologies.Many also believe that Latin America will never be richbecause its people are intrinsically profligate and impecunious, andbecausetheysufferfromsome“Iberian”or“mañana”culture.Ofcourse,manyoncebelievedthattheChinesecultureandConfucianvalueswereinimicaltoeconomicgrowth,thoughnowtheimportanceoftheChineseworkethicastheengineofgrowthinChina,HongKong,andSingaporeistrumpeted.Is the culture hypothesis useful for understandingworld inequality?

Yes and no. Yes, in the sense that social norms, which are related toculture, matter and can be hard to change, and they also sometimessupport institutional differences, this book’s explanation for worldinequality. But mostly no, because those aspects of culture oftenemphasized—religion,nationalethics,AfricanorLatinvalues—are justnot important for understanding how we got here and why theinequalities in the world persist. Other aspects, such as the extent towhichpeopletrusteachotherorareabletocooperate,areimportantbuttheyaremostlyanoutcomeofinstitutions,notanindependentcause.Let us go back to Nogales. As we noted earlier, many aspects of

culture are the samenorth and southof the fence.Nevertheless, theremaybesomemarkeddifferencesinpractices,norms,andvalues,thoughthese are not causes but outcomes of the two places’ divergentdevelopmentpaths.Forexample,insurveysMexicanstypicallysaytheytrust other people less than the citizens of the United States say theytrustothers.ButitisnotasurprisethatMexicanslacktrustwhentheirgovernment cannot eliminate drug cartels or provide a functioningunbiasedlegalsystem.ThesameistruewithNorthandSouthKorea,aswediscussinthenextchapter.TheSouthisoneoftherichestcountriesintheworld,whiletheNorthgrappleswithperiodicfamineandabjectpoverty. While “culture” is very different between the South and theNorth today, it played no role in causing the diverging economicfortunes of these two half nations. The Korean peninsula has a longperiodofcommonhistory.BeforetheKoreanWarandthedivisionatthe38th parallel, it had an unprecedented homogeneity in terms oflanguage,ethnicity,andculture.JustasinNogales,whatmattersistheborder. To the north is a different regime, imposing different

institutions, creating different incentives. Any difference in culturebetweensouthandnorthofthebordercuttingthroughthetwopartsofNogalesorthetwopartsofKoreaisthusnotacauseofthedifferencesinprosperitybut,rather,aconsequence.What about Africa and African culture? Historically, sub-SaharanAfricawas poorer thanmost other parts of theworld, and its ancientcivilizations did not develop thewheel,writing (with the exception ofEthiopiaandSomalia),ortheplow.ThoughthesetechnologieswerenotwidelyuseduntiltheadventofformalEuropeancolonizationinthelatenineteenth and early twentieth century, African societies knew aboutthemmuchearlier.Europeansbegansailingaroundthewestcoastinthelatefifteenthcentury,andAsianswerecontinuallysailingtoEastAfricafrommuchearliertimes.WecanunderstandwhythesetechnologieswerenotadoptedfromthehistoryoftheKingdomofKongoatthemouthoftheCongoRiver,whichhasgivenitsnametothemodernDemocraticRepublicofCongo.Map6shows where the Kongo was along with another important centralAfricanstate,theKubaKingdom,whichwediscusslaterinthebook.KongocameintointensecontactwiththePortugueseafteritwasfirstvisited by themariner Diogo Cão in 1483. At the time, Kongo was ahighly centralized polity byAfrican standards,whose capital,Mbanza,hadapopulationofsixtythousand,whichmadeitaboutthesamesizeasthePortuguesecapitalofLisbonandlargerthanLondon,whichhadapopulationofaboutfiftythousandin1500.ThekingofKongo,NzingaaNkuwu,convertedtoCatholicismandchangedhisnametoJoãoI.LaterMbanza’snamewaschangedtoSãoSalvador.ThankstothePortuguese,theKongoleselearnedaboutthewheelandtheplow,andthePortugueseevenencouragedtheiradoptionwithagriculturalmissions in1491and1512.Butall these initiatives failed.Still, theKongolesewere far fromaversetomoderntechnologiesingeneral.Theywereveryquicktoadoptone venerable Western innovation: the gun. They used this new andpowerful tool to respond to market incentives: to capture and exportslaves.ThereisnosignherethatAfricanvaluesorculturepreventedtheadoption of new technologies and practices. As their contacts withEuropeans deepened, the Kongolese adopted other Western practices:literacy,dressstyles,andhousedesigns.Inthenineteenthcentury,manyAfrican societies also took advantage of the rising economic

opportunities created by the Industrial Revolution by changing theirproduction patterns. In West Africa there was rapid economicdevelopment based on the export of palm oil and ground nuts;throughout southern Africa, Africans developed exports to the rapidlyexpandingindustrialandminingareasoftheRandinSouthAfrica.YetthesepromisingeconomicexperimentswereobliteratednotbyAfricanculture or the inability of ordinary Africans to act in their own self-interest,butfirstbyEuropeancolonialismandthenbypostindependenceAfricangovernments.

TherealreasonthattheKongolesedidnotadoptsuperiortechnologywasbecausetheylackedanyincentivestodoso.Theyfacedahighriskofalltheiroutputbeingexpropriatedandtaxedbytheall-powerfulking,whetherornothehadconvertedtoCatholicism.Infact, itwasn’tonlytheirpropertythatwasinsecure.Theircontinuedexistencewasheldbya thread.Many of themwere captured and sold as slaves—hardly theenvironment to encourage investment to increase long-termproductivity.Neitherdidthekinghaveincentivestoadopttheplowona

large scale or to make increasing agricultural productivity his mainpriority;exportingslaveswassomuchmoreprofitable.ItmightbetruetodaythatAfricanstrusteachotherlessthanpeopleinotherpartsof theworld.But this isanoutcomeofa longhistoryofinstitutions which have undermined human and property rights inAfrica. The potential to be captured and sold as a slave no doubtinfluencedtheextenttowhichAfricanstrustedothershistorically.WhataboutMaxWeber’sProtestantethic?Thoughitmaybetruethatpredominantly Protestant countries, such as the Netherlands andEngland,were the first economic successesof themodernera, there islittle relationship between religion and economic success. France, apredominantly Catholic country, quickly mimicked the economicperformance of the Dutch and English in the nineteenth century, andItalyisasprosperousasanyofthesenationstoday.Lookingfarthereast,you’llseethatnoneoftheeconomicsuccessesofEastAsiahaveanythingtodowithanyformofChristianreligion,sothereisnotmuchsupportfor a special relationship between Protestantism and economic successthere,either.Let’s turn to a favorite area for the enthusiasts of the culturehypothesis: the Middle East. Middle Eastern countries are primarilyIslamic, and the non–oil producers among them are very poor, as wehavealreadynoted.Oilproducersarericher,butthiswindfallofwealthhasdonelittletocreatediversifiedmoderneconomiesinSaudiArabiaorKuwait. Don’t these facts show convincingly that religion matters?Thoughplausible,thisargumentisnotright,either.Yes,countriessuchasSyriaandEgyptarepoor,andtheirpopulationsareprimarilyMuslim.But these countries also systemically differ in other ways that are farmore important forprosperity. Forone, theywereall provincesof theOttoman Empire, which heavily, and adversely, shaped the way theydeveloped.AfterOttomanrulecollapsed,theMiddleEastwasabsorbedintotheEnglishandFrenchcolonialempires,which,again,stuntedtheirpossibilities. After independence, they followed much of the formercolonial world by developing hierarchical, authoritarian politicalregimeswithfewofthepoliticalandeconomicinstitutionsthat,wewillargue, are crucial for generating economic success. This developmentpathwas forged largelyby thehistoryofOttomanandEuropean rule.TherelationshipbetweentheIslamicreligionandpovertyintheMiddle

Eastislargelyspurious.The role of these historical events, rather than cultural factors, inshaping theMiddle East’s economic trajectory is also seen in the factthatthepartsoftheMiddleEastthattemporarilybrokeawayfromthehold of theOttoman Empire and the European powers, such as Egyptbetween1805and1848underMuhammadAli,couldembarkonapathofrapideconomicchange.MuhammadAliusurpedpowerfollowingthewithdrawal of the French forces that had occupied Egypt underNapoleonBonaparte.ExploitingtheweaknessoftheOttomanholdovertheEgyptianterritoryatthetime,hewasabletofoundhisowndynasty,whichwould,inoneformoranother,ruleuntiltheEgyptianRevolutionunder Nasser in 1952.Muhammad Ali’s reforms, though coercive, didbringgrowth toEgypt as the statebureaucracy, thearmy, and the taxsystem were modernized and there was growth in agriculture andindustry.Nevertheless, thisprocessofmodernizationandgrowthcametoanendafterAli’sdeath,asEgyptfellunderEuropeaninfluence.Butperhapsthisisthewrongwaytothinkaboutculture.Maybethecultural factors that matter are not tied to religion but rather toparticular “national cultures.” Perhaps it is the influence of EnglishculturethatisimportantandexplainswhycountriessuchastheUnitedStates, Canada, and Australia are so prosperous? Though this ideasounds initiallyappealing, itdoesn’twork,either.Yes,Canadaand theUnited States were English colonies, but so were Sierra Leone andNigeria.ThevariationinprosperitywithinformerEnglishcoloniesisasgreatasthatintheentireworld.TheEnglishlegacyisnotthereasonforthesuccessofNorthAmerica.Thereisyetonemoreversionoftheculturehypothesis:perhapsitisnotEnglishversusnon-Englishthatmattersbut,rather,Europeanversusnon-European.CoulditbethatEuropeansaresuperiorsomehowbecauseof theirwork ethic, outlook on life, Judeo-Christian values, or Romanheritage? It is true that Western Europe and North America, filledprimarilybypeopleofEuropeandescent,arethemostprosperouspartsoftheworld.PerhapsitisthesuperiorEuropeanculturallegacythatisattherootofprosperity—andthelastrefugeoftheculturehypothesis.Alas, this version of the culture hypothesis has as little explanatorypotential as the others. A greater proportion of the population ofArgentina andUruguay, comparedwith the population of Canada and

theUnitedStates,isofEuropeandescent,butArgentina’sandUruguay’seconomicperformanceleavesmuchtobedesired.JapanandSingaporeneverhadmorethanasprinklingofinhabitantsofEuropeandescent,yettheyareasprosperousasmanypartsofWesternEurope.China, despite many imperfections in its economic and political

system, has been the most rapidly growing nation of the past threedecades. Chinese poverty untilMao Zedong’s death had nothing to dowithChinese culture; itwas due to the disastrouswayMao organizedthe economy and conducted politics. In the 1950s, he promoted theGreat Leap Forward, a drastic industrialization policy that led tomassstarvation and famine. In the 1960s, he propagated the CulturalRevolution, which led to the mass persecution of intellectuals andeducated people—anyone whose party loyaltymight be doubted. Thisagainledtoterrorandahugewasteofthesociety’stalentandresources.Inthesameway,currentChinesegrowthhasnothingtodowithChinesevalues or changes in Chinese culture; it results from a process ofeconomic transformation unleashed by the reforms implemented byDengXiaopingandhisallies,who,afterMaoZedong’sdeath,graduallyabandoned socialist economic policies and institutions, first inagricultureandtheninindustry.Just like the geography hypothesis, the culture hypothesis is also

unhelpful forexplainingotheraspectsof the layof the landaroundustoday.Thereareofcoursedifferences inbeliefs,culturalattitudes,andvaluesbetweentheUnitedStatesandLatinAmerica,butjustlikethosethat exist between Nogales, Arizona, and Nogales, Sonora, or thosebetweenSouthandNorthKorea,thesedifferencesareaconsequenceofthetwoplaces’differentinstitutionsandinstitutionalhistories.Culturalfactors that emphasize how “Hispanic” or “Latin” culture molded theSpanishEmpirecan’texplain thedifferenceswithinLatinAmerica—forexample,whyArgentinaandChilearemoreprosperous thanPeruandBolivia.Othertypesofculturalarguments—forinstance,thosethatstresscontemporary indigenous culture—fare equally badly. Argentina andChile have few indigenous people compared with Peru and Bolivia.Thoughthisistrue,indigenouscultureasanexplanationdoesnotwork,either. Colombia, Ecuador, and Peru have similar income levels, butColombiahasveryfewindigenouspeopletoday,whileEcuadorandPeruhave many. Finally, cultural attitudes, which are in general slow to

change,areunlikelytoaccountbythemselvesforthegrowthmiraclesinEastAsia andChina.Though institutions arepersistent, too, in certaincircumstancestheydochangerapidly,aswe’llsee.

THEIGNORANCEHYPOTHESIS

The finalpopular theory forwhy somenations arepoor and somearerich is the ignorance hypothesis, which asserts that world inequalityexistsbecauseweorourrulersdonotknowhowtomakepoorcountriesrich.This idea is theoneheldbymosteconomists,who take theircuefrom the famous definition proposed by the English economist LionelRobbins in 1935 that “economics is a science which studies humanbehaviorasa relationshipbetweenendsand scarcemeanswhichhavealternativeuses.”Itisthenasmallsteptoconcludethatthescienceofeconomicsshould

focusonthebestuseofscarcemeanstosatisfysocialends.Indeed,themostfamoustheoreticalresultineconomics,theso-calledFirstWelfareTheorem, identifies the circumstances under which the allocation ofresourcesina“marketeconomy”issociallydesirablefromaneconomicpoint of view. A market economy is an abstraction that is meant tocaptureasituationinwhichallindividualsandfirmscanfreelyproduce,buy, and sell any products or services that they wish. When thesecircumstancesarenotpresent there isa“market failure.”Such failuresprovide thebasis fora theoryofworld inequality, since themore thatmarketfailuresgounaddressed,thepooreracountryislikelytobe.Theignorance hypothesis maintains that poor countries are poor becausethey have a lot of market failures and because economists andpolicymakersdonotknowhowtogetridofthemandhaveheededthewrong advice in the past. Rich countries are rich because they havefigured out better policies and have successfully eliminated thesefailures.Couldtheignorancehypothesisexplainworldinequality?Coulditbe

thatAfricancountriesarepoorerthantherestoftheworldbecausetheirleaders tend to have the same mistaken views of how to run theircountries,leadingtothepovertythere,whileWesternEuropeanleadersare better informed or better advised, which explains their relative

success?Whiletherearefamousexamplesofleadersadoptingdisastrouspoliciesbecausetheyweremistakenaboutthosepolicies’consequences,ignorancecanexplainatbestasmallpartofworldinequality.On the faceof it, the sustainedeconomicdecline that soon set in in

Ghana after independence from Britain was caused by ignorance. TheBritish economist Tony Killick, then working as an adviser for thegovernment of Kwame Nkrumah, recorded many of the problems ingreat detail. Nkrumah’s policies focused on developing state industry,whichturnedouttobeveryinefficient.Killickrecalled:

The footwear factory … that would have linked the meatfactory in the North through transportation of the hides tothe South (for a distance of over 500 miles) to a tannery(nowabandoned); the leatherwas tohavebeenbackhauledto the footwear factory in Kumasi, in the center of thecountryandabout200milesnorthofthetannery.SincethemajorfootwearmarketisintheAccrametropolitanarea,theshoeswould then have to be transported an additional 200milesbacktotheSouth.

Killick somewhat understatedly remarks that this was an enterprise“whoseviabilitywasunderminedbypoorsiting.”Thefootwearfactorywas one of many such projects, joined by the mango canning plantsituated in a part of Ghana which did not grow mangos and whoseoutputwas to bemore than the entireworlddemand for the product.This endless stream of economically irrational developments was notcausedbythefactthatNkrumahorhisadviserswerebadlyinformedorignorantoftherighteconomicpolicies.TheyhadpeoplelikeKillickandhad even been advised byNobel laureate SirArthur Lewis,who knewthepolicieswerenotgood.Whatdrovetheformtheeconomicpoliciestook was the fact that Nkrumah needed to use them to buy politicalsupportandsustainhisundemocraticregime.Neither Ghana’s disappointing performance after independence nor

the countless other cases of apparent economic mismanagement cansimplybeblamedonignorance.Afterall,ifignoranceweretheproblem,well-meaning leaders would quickly learn what types of policiesincreased their citizens’ incomes and welfare, and would gravitate

towardthosepolicies.ConsiderthedivergentpathsoftheUnitedStatesandMexico.Blaming

this disparity on the ignorance of the leaders of the twonations is, atbest,highlyimplausible.Itwasn’tdifferencesinknowledgeorintentionsbetweenJohnSmithandCortésthatlaidtheseedsofdivergenceduringthecolonialperiod,anditwasn’tdifferencesinknowledgebetweenlaterU.S. presidents, such as Teddy Roosevelt or Woodrow Wilson, andPorfirio Díaz that made Mexico choose economic institutions thatenriched elites at the expense of the rest of society at the end of thenineteenthandbeginningofthetwentiethcenturieswhileRooseveltandWilson did the opposite. Rather, it was the differences in theinstitutionalconstraintsthecountries’presidentsandeliteswerefacing.Similarly, leadersofAfricannations thathave languishedover the lasthalf century under insecure property rights and economic institutions,impoverishingmuchof theirpopulations,didnotallow this tohappenbecause they thought itwasgoodeconomics; theydidsobecause theycouldgetawaywithitandenrichthemselvesattheexpenseoftherest,or because they thought it was good politics, a way of keepingthemselvesinpowerbybuyingthesupportofcrucialgroupsorelites.The experience of Ghana’s prime minister in 1971, Kofi Busia,

illustrateshowmisleadingtheignorancehypothesiscanbe.Busiafaceda dangerous economic crisis. After coming to power in 1969, he, likeNkrumah before him, pursued unsustainable expansionary economicpoliciesandmaintainedvariouspricecontrolsthroughmarketingboardsandanovervaluedexchangerate.ThoughBusiahadbeenanopponentof Nkrumah, and led a democratic government, he facedmany of thesamepoliticalconstraints.AswithNkrumah,hiseconomicpolicieswereadoptednotbecausehewas“ignorant”andbelievedthatthesepolicieswere good economics or an ideal way to develop the country. Thepolicieswerechosenbecausetheyweregoodpolitics,enablingBusiatotransfer resources to politically powerful groups, for example in urbanareas, who needed to be kept contented. Price controls squeezedagriculture, delivering cheap food to the urban constituencies andgeneratingrevenuestofinancegovernmentspending.Butthesecontrolswereunsustainable.Ghanawassoonsufferingfromaseriesofbalance-of-payment crises and foreign exchange shortages. Faced with thesedilemmas,onDecember27,1971,Busia signedanagreementwith the

InternationalMonetaryFundthatincludedamassivedevaluationofthecurrency.TheIMF,theWorldBank,andtheentireinternationalcommunityput

pressureonBusiatoimplementthereformscontainedintheagreement.Though the international institutions were blissfully unaware, Busiaknew he was taking a huge political gamble. The immediateconsequenceofthecurrency’sdevaluationwasriotinganddiscontentinAccra, Ghana’s capital, that mounted uncontrollably until Busia wasoverthrown by the military, led by Lieutenant Colonel Acheampong,whoimmediatelyreversedthedevaluation.The ignorance hypothesis differs from the geography and culture

hypotheses in that it comes readily with a suggestion about how to“solve”theproblemofpoverty:ifignorancegotushere,enlightenedandinformedrulersandpolicymakerscangetusoutandweshouldbeableto“engineer”prosperityaroundtheworldbyprovidingtherightadviceand by convincing politicians of what is good economics. Yet Busia’sexperienceunderscoresthefactthatthemainobstacletotheadoptionofpolicies that would reduce market failures and encourage economicgrowth is not the ignorance of politicians but the incentives andconstraintstheyfacefromthepoliticalandeconomicinstitutionsintheirsocieties.Although the ignorance hypothesis still rules supreme among most

economists and inWesternpolicymaking circles—which, almost to theexclusion of anything else, focus on how to engineer prosperity—it isjustanotherhypothesisthatdoesn’twork.Itexplainsneithertheoriginsof prosperity around theworldnor the layof the landaroundus—forexample, why some nations, such as Mexico and Peru, but not theUnited States or England, adopted institutions and policies thatwouldimpoverishthemajorityoftheircitizens,orwhyalmostallsub-SaharanAfrica andmost of Central America are somuch poorer thanWesternEuropeorEastAsia.Whennationsbreakoutofinstitutionalpatternscondemningthemto

povertyandmanagetoembarkonapathtoeconomicgrowth,thisisnotbecausetheirignorantleaderssuddenlyhavebecomebetterinformedorless self-interested or because they’ve received advice from bettereconomists. China, for example, is one of the countries thatmade theswitchfromeconomicpoliciesthatcausedpovertyandthestarvationof

millionstothoseencouragingeconomicgrowth.But,aswewilldiscussin greater detail later, this did not happen because the ChineseCommunist Party finally understood that the collective ownership ofagricultural land and industry created terrible economic incentives.Instead,DengXiaoping andhis allies,whowereno less self-interestedthantheirrivalsbutwhohaddifferentinterestsandpoliticalobjectives,defeated their powerful opponents in the Communist Party andmasterminded a political revolution of sorts, radically changing theleadership and direction of the party. Their economic reforms, whichcreated market incentives in agriculture and then subsequently inindustry, followed from this political revolution. It was politics thatdetermined the switch fromcommunismand towardmarket incentivesin China, not better advice or a better understanding of how theeconomyworked.

WEWILLARGUEthattounderstandworldinequalitywehavetounderstandwhy some societies are organized in very inefficient and sociallyundesirable ways. Nations sometimes do manage to adopt efficientinstitutions and achieve prosperity, but alas, these are the rare cases.Most economists and policymakers have focused on “getting it right,”whilewhatisreallyneededisanexplanationforwhypoornations“getitwrong.”Gettingitwrongismostlynotaboutignoranceorculture.Aswewill show, poor countries are poor because thosewhohave powermakechoices thatcreatepoverty.Theyget itwrongnotbymistakeorignorance but on purpose. To understand this, youhave to go beyondeconomicsandexpertadviceonthebestthingtodoand,instead,studyhowdecisionsactuallygetmade,whogetstomakethem,andwhythosepeople decide to do what they do. This is the study of politics andpolitical processes. Traditionally economics has ignored politics, butunderstandingpolitics iscrucial forexplainingworldinequality.AstheeconomistAbbaLernernoted in the1970s, “Economicshasgained thetitleQueenoftheSocialSciencesbychoosingsolvedpoliticalproblemsasitsdomain.”Wewillarguethatachievingprosperitydependsonsolvingsomebasic

political problems. It is precisely because economics has assumed thatpoliticalproblemsaresolvedthatithasnotbeenabletocomeupwitha

convincingexplanationforworldinequality.Explainingworldinequalitystillneedseconomicstounderstandhowdifferenttypesofpoliciesandsocialarrangementsaffecteconomicincentivesandbehavior.Butitalsoneedspolitics.

3.

THEMAKINGOFPROSPERITYANDPOVERTY

THEECONOMICSOFTHE38THPARALLEL

IN THE SUMMEROF1945,as theSecondWorldWarwasdrawingtoaclose,the Japanese colony in Korea began to collapse. Within a month ofJapan’s August 15 unconditional surrender, Korea was divided at the38thparallelintotwospheresofinfluence.TheSouthwasadministeredbytheUnitedStates.TheNorth,byRussia.Theuneasypeaceofthecoldwarwasshattered inJune1950whentheNorthKoreanarmy invadedthe South. Though initially the North Koreans made large inroads,capturing the capital city, Seoul, by the autumn, they were in fullretreat. It was then that Hwang Pyŏng-Wŏn and his brother wereseparated.HwangPyŏng-Wŏnmanagedtohideandavoidbeingdraftedinto theNorthKorean army.He stayed in the South andworked as apharmacist. His brother, a doctor working in Seoul treating woundedsoldiers from the South Korean army, was taken north as the NorthKoreanarmyretreated.Draggedapartin1950,theymetagainin2000inSeoulforthefirsttimeinfiftyyears,afterthetwogovernmentsfinallyagreedtoinitiatealimitedprogramoffamilyreunification.As adoctor,HwangPyŏng-Wŏn’sbrotherhad endedupworking for

theairforce,agoodjobinamilitarydictatorship.Buteventhosewithprivileges in North Korea don’t do that well. When the brothers met,HwangPyŏng-Wŏnaskedabouthowlifewasnorthofthe38thparallel.He had a car, but his brother didn’t. “Do you have a telephone?” heaskedhisbrother. “No,” saidhisbrother. “Mydaughter,whoworksattheForeignMinistry,hasaphone,but ifyoudon’tknowthecodeyoucan’t call.” Hwang Pyŏng-Wŏn recalled how all the people from theNorthat thereunionwereaskingformoney,soheofferedsometohis

brother.Buthisbrothersaid,“IfIgobackwithmoneythegovernmentwillsay,‘Givethatmoneytous,’sokeepit.”HwangPyŏng-Wŏnnoticedhisbrother’scoatwasthreadbare:“Takeoffthatcoatandleaveit,andwhen you go backwear this one,” he suggested. “I can’t do that,” hisbrother replied. “This is just borrowed from the government to comehere.” Hwang Pyŏng-Wŏn recalled howwhen they parted, his brotherwasillateaseandalwaysnervousasthoughsomeonewerelistening.HewaspoorerthanHwangPyŏng-Wŏnimagined.Hisbrothersaidhelivedwell,butHwangPyŏng-Wŏnthoughthelookedawfulandwasthinasarake.The people of SouthKorea have living standards similar to those ofPortugal andSpain.To thenorth, in the so-calledDemocraticPeople’sRepublicofKorea,orNorthKorea,livingstandardsareakintothoseofasub-SaharanAfricancountry,aboutone-tenthofaveragelivingstandardsinSouthKorea.ThehealthofNorthKoreansis inanevenworsestate;the average North Korean can expect to live ten years less than hiscousins southof the38thparallel.Map7 illustrates inadramaticwaytheeconomicgapbetween theKoreas. Itplotsdataon the intensityoflight at night from satellite images. North Korea is almost completelydarkduetolackofelectricity;SouthKoreaisblazingwithlight.These strikingdifferences arenot ancient. In fact, theydidnot existpriortotheendoftheSecondWorldWar.Butafter1945,thedifferentgovernmentsintheNorthandtheSouthadoptedverydifferentwaysoforganizingtheireconomies.SouthKoreawasled,anditsearlyeconomicand political institutionswere shaped, by theHarvard- and Princeton-educated, staunchly anticommunist Syngman Rhee, with significantsupport from the United States. Rhee was elected president in 1948.Forged in the midst of the Korean War and against the threat ofcommunismspreadingtothesouthofthe38thparallel,SouthKoreawasno democracy. Both Rhee and his equally famous successor, GeneralPark Chung-Hee, secured their places in history as authoritarianpresidents.Butbothgovernedamarketeconomywhereprivatepropertywasrecognized,andafter1961,Parkeffectivelythrewtheweightofthestatebehindrapideconomicgrowth,channelingcreditandsubsidiestofirmsthatweresuccessful.

Thesituationnorthof the38thparallelwasdifferent.KimIl-Sung,aleader of anti-Japanese communist partisans during the SecondWorldWar, establishedhimselfasdictatorby1947and,with thehelpof theSovietUnion, introducedarigid formofcentrallyplannedeconomyaspartof theso-calledJuchesystem.Privatepropertywasoutlawed,andmarkets were banned. Freedoms were curtailed not only in themarketplace, but in every sphere of North Koreans’ lives—except forthosewhohappenedtobepartoftheverysmallrulingelitearoundKimIl-Sungand,later,hissonandsuccessorKimJong-Il.It should not surprise us that the economic fortunes of South and

NorthKoreadivergedsharply.KimIl-Sung’scommandeconomyandtheJuche system soon proved to be a disaster. Detailed statistics are notavailablefromNorthKorea,whichisasecretivestate, tosaythe least.Nonetheless, available evidence confirms what we know from the all-too-often recurring famines: not only did industrial production fail totakeoff,butNorthKorea in fact experienceda collapse inagriculturalproductivity. Lack of private property meant that few people hadincentives to invest or to exert effort to increase or even maintainproductivity.The stifling, repressive regimewas inimical to innovationandtheadoptionofnewtechnologies.ButKimIl-Sung,KimJong-Il,andtheir cronies had no intention of reforming the system, or introducingprivateproperty,markets,privatecontracts,orchangingeconomicandpoliticalinstitutions.NorthKoreacontinuestostagnateeconomically.Meanwhile,intheSouth,economicinstitutionsencouragedinvestment

and trade. South Korean politicians invested in education, achievinghighratesofliteracyandschooling.SouthKoreancompanieswerequickto take advantage of the relatively educated population, the policiesencouraging investment and industrialization, exports, and the transferof technology.SouthKoreaquicklybecameoneofEastAsia’s “MiracleEconomies,”oneofthemostrapidlygrowingnationsintheworld.Bythelate1990s, in justabouthalfacentury,SouthKoreangrowth

andNorthKoreanstagnationledtoatenfoldgapbetweenthetwohalvesof this once-united country—imagine what a difference a couple ofcenturiescouldmake.TheeconomicdisasterofNorthKorea,whichledto the starvation of millions, when placed against the South Koreaneconomic success, is striking: neither culture nor geography norignorancecanexplainthedivergentpathsofNorthandSouthKorea.Wehavetolookatinstitutionsforananswer.

EXTRACTIVEANDINCLUSIVEECONOMICINSTITUTIONS

Countries differ in their economic success because of their differentinstitutions, the rules influencing how the economy works, and theincentives thatmotivatepeople. Imagine teenagers inNorthandSouthKorea andwhat they expect from life. Those in theNorth growup inpoverty, without entrepreneurial initiative, creativity, or adequate

educationtopreparethemforskilledwork.Muchoftheeducationtheyreceiveatschoolispurepropaganda,meanttoshoreupthelegitimacyoftheregime;therearefewbooks, letalonecomputers.Afterfinishingschool,everyonehastogointothearmyfortenyears.Theseteenagersknow that they will not be able to own property, start a business, orbecomemoreprosperousevenifmanypeopleengageillegallyinprivateeconomicactivitiestomakealiving.Theyalsoknowthattheywillnothave legal access to markets where they can use their skills or theirearnings to purchase the goods they need and desire. They are evenunsureaboutwhatkindofhumanrightstheywillhave.ThoseintheSouthobtainagoodeducation,andfaceincentivesthatencouragethemtoexerteffortandexcelintheirchosenvocation.SouthKorea is a market economy, built on private property. South Koreanteenagersknowthat,ifsuccessfulasentrepreneursorworkers,theycanone day enjoy the fruits of their investments and efforts; they canimprovetheirstandardoflivingandbuycars,houses,andhealthcare.IntheSouththestatesupportseconomicactivity.Soitispossibleforentrepreneurs to borrowmoney from banks and financialmarkets, forforeign companies to enter into partnershipswith SouthKorean firms,forindividualstotakeupmortgagestobuyhouses.IntheSouth,byandlarge,youarefreetoopenanybusinessyoulike.IntheNorth,youarenot. In theSouth,youcanhireworkers, sellyourproductsorservices,andspendyourmoneyinthemarketplaceinwhicheverwayyouwant.IntheNorth,thereareonlyblackmarkets.ThesedifferentrulesaretheinstitutionsunderwhichNorthandSouthKoreanslive.Inclusiveeconomicinstitutions,suchasthoseinSouthKoreaorintheUnited States, are those that allowand encourageparticipationby thegreatmassofpeople ineconomicactivities thatmakebestuseof theirtalentsand skills and that enable individuals tomake thechoices theywish.Tobeinclusive,economicinstitutionsmustfeaturesecureprivateproperty,anunbiasedsystemoflaw,andaprovisionofpublicservicesthat provides a level playing field in which people can exchange andcontract; it also must permit the entry of new businesses and allowpeopletochoosetheircareers.

THECONTRASTOFSouthandNorthKorea,andoftheUnitedStatesandLatin

America, illustrates a general principle. Inclusive economic institutionsfostereconomicactivity,productivitygrowth,andeconomicprosperity.Secure private property rights are central, since only those with suchrightswillbewillingtoinvestandincreaseproductivity.Abusinessmanwhoexpectshisoutputtobestolen,expropriated,orentirelytaxedawaywillhave little incentive towork, let aloneany incentive toundertakeinvestmentsandinnovations.Butsuchrightsmustexistforthemajorityofpeopleinsociety.In1680theEnglishgovernmentconductedacensusofthepopulation

of itsWest IndiancolonyofBarbados.Thecensus revealed thatof thetotal population on the island of around 60,000, almost 39,000 wereAfricanslaveswhowerethepropertyoftheremainingone-thirdofthepopulation. Indeed, they were mostly the property of the largest 175sugarplanters,whoalsoownedmost of the land.These largeplantershad secure andwell-enforcedproperty rights over their land and evenovertheirslaves.Ifoneplanterwantedtosellslavestoanother,hecoulddosoandexpectacourttoenforcesuchasaleoranyothercontracthewrote.Why?Ofthefortyjudgesandjusticesofthepeaceontheisland,twenty-nine of them were large planters. Also, the eight most seniormilitary officials were all large planters. Despite well-defined, secure,and enforced property rights and contracts for the island’s elite,Barbadosdidnothave inclusiveeconomic institutions, since two-thirdsof thepopulationwereslaveswithnoaccess toeducationoreconomicopportunities, and no ability or incentive to use their talents or skills.Inclusive economic institutions require secure property rights andeconomicopportunitiesnotjustfortheelitebutforabroadcross-sectionofsociety.Secure property rights, the law, public services, and the freedom to

contract and exchange all rely on the state, the institution with thecoercivecapacitytoimposeorder,preventtheftandfraud,andenforcecontracts between private parties. To functionwell, society also needsotherpublicservices:roadsandatransportnetworksothatgoodscanbetransported; a public infrastructure so that economic activity canflourish; and some type of basic regulation to prevent fraud andmalfeasance.Thoughmanyof thesepublicservicescanbeprovidedbymarketsandprivatecitizens,thedegreeofcoordinationnecessarytodosoonalargescaleofteneludesallbutacentralauthority.Thestateis

thus inexorably intertwinedwitheconomic institutions,as theenforcerof law and order, private property, and contracts, and often as a keyproviderofpublicservices.Inclusiveeconomicinstitutionsneedandusethestate.TheeconomicinstitutionsofNorthKoreaorofcolonialLatinAmerica

—themita,encomienda, or repartimiento described earlier—donot havethese properties. Private property is nonexistent in North Korea. IncolonialLatinAmericatherewasprivatepropertyforSpaniards,butthepropertyoftheindigenouspeopleswashighlyinsecure.Inneithertypeof society was the vast mass of people able to make the economicdecisionstheywantedto;theyweresubjecttomasscoercion.Inneithertype of societywas the power of the state used to provide key publicservices that promoted prosperity. In North Korea, the state built aneducation system to inculcate propaganda, but was unable to preventfamine. In colonial Latin America, the state focused on coercingindigenouspeoples.Inneithertypeofsocietywastherealevelplayingfieldoranunbiasedlegalsystem.InNorthKorea,thelegalsystemisanarmoftherulingCommunistParty,andinLatinAmericaitwasatoolofdiscrimination against the mass of people. We call such institutions,which have opposite properties to those we call inclusive, extractiveeconomicinstitutions—extractivebecausesuchinstitutionsaredesignedto extract incomes andwealth from one subset of society to benefit adifferentsubset.

ENGINESOFPROSPERITY

Inclusiveeconomicinstitutionscreateinclusivemarkets,whichnotonlygivepeople freedom topursue thevocations in life thatbest suit theirtalents but also provide a level playing field that gives them theopportunity todo so.Thosewhohavegood ideaswill be able to startbusinesses,workerswilltendtogotoactivitieswheretheirproductivityisgreater,andlessefficientfirmscanbereplacedbymoreefficientones.Contrasthowpeoplechoosetheiroccupationsunderinclusivemarketstocolonial Peru andBolivia,where under themita,manywere forced towork in silverandmercurymines, regardlessof their skillsorwhethertheywantedto.Inclusivemarketsarenotjustfreemarkets.Barbadosin

the seventeenthcenturyalsohadmarkets.But in the sameway that itlacked property rights for all but the narrow planter elite, itsmarketswere far from inclusive;markets in slaveswere in factonepartof theeconomic institutions systematically coercing the majority of thepopulationandrobbingthemof theabilitytochoosetheiroccupationsandhowtheyshouldutilizetheirtalents.Inclusive economic institutions also pave the way for two otherengines of prosperity: technology and education. Sustained economicgrowth is almost always accompanied by technological improvementsthatenablepeople(labor),land,andexistingcapital(buildings,existingmachines, and so on) to becomemore productive. Think of our great-great-grandparents,justoveracenturyago,whodidnothaveaccesstoplanesorautomobilesormostofthedrugsandhealthcarewenowtakeforgranted,nottomentionindoorplumbing,air-conditioning,shoppingmalls, radio, or motion pictures; let alone information technology,robotics,orcomputer-controlledmachinery.Andgoingbackafewmoregenerations,thetechnologicalknow-howandlivingstandardswereevenmorebackward,somuchsothatwewouldfindithardtoimaginehowmost people struggled through life. These improvements follow fromscience and from entrepreneurs such as Thomas Edison, who appliedscience to create profitable businesses. This process of innovation ismadepossiblebyeconomicinstitutionsthatencourageprivateproperty,upholdcontracts,createa levelplayingfield,andencourageandallowthe entry of newbusinesses that canbringnew technologies to life. Itshould thereforebeno surprise that itwasU.S. society,notMexicoorPeru, that produced Thomas Edison, and that itwas South Korea, notNorthKorea,thattodayproducestechnologicallyinnovativecompaniessuchasSamsungandHyundai.Intimately linked to technology are the education, skills,competencies, andknow-howof theworkforce, acquired in schools, athome,andonthejob.Wearesomuchmoreproductivethanacenturyagonotjustbecauseofbettertechnologyembodiedinmachinesbutalsobecause of the greater know-how that workers possess. All thetechnology in the world would be of little use without workers whoknew how to operate it. But there ismore to skills and competenciesthanjusttheabilitytorunmachines.Itistheeducationandskillsoftheworkforce that generate the scientific knowledge upon which our

progress is built and that enable the adaptation and adoption of thesetechnologies in diverse lines of business. Thoughwe saw in chapter 1thatmanyoftheinnovatorsoftheIndustrialRevolutionandafterward,likeThomasEdison,werenothighly educated, these innovationsweremuch simpler than modern technology. Today technological changerequireseducationbothfortheinnovatorandtheworker.Andherewesee the importanceof economic institutions that create a level playingfield.TheUnitedStatescouldproduce,orattractfromforeignlands,thelikesofBillGates,SteveJobs,SergeyBrin,LarryPage,andJeffBezos,and the hundreds of scientists who made fundamental discoveries ininformation technology, nuclear power, biotech, and other fields uponwhich these entrepreneurs built their businesses. The supply of talentwas there tobeharnessedbecausemost teenagers in theUnitedStateshave access to as much schooling as they wish or are capable ofattaining. Now imagine a different society, for example the Congo orHaiti,wherealargefractionofthepopulationhasnomeansofattendingschool,orwhere,iftheymanagetogotoschool,thequalityofteachingislamentable,whereteachersdonotshowupforwork,andeveniftheydo,theremaynotbeanybooks.The low education level of poor countries is caused by economicinstitutions that fail to create incentives for parents to educate theirchildrenandbypoliticalinstitutionsthatfailtoinducethegovernmentto build, finance, and support schools and the wishes of parents andchildren. The price these nations pay for low education of theirpopulationand lackof inclusivemarkets ishigh.They fail tomobilizetheirnascenttalent.TheyhavemanypotentialBillGatesesandperhapsoneor twoAlbertEinsteinswhoarenowworkingaspoor,uneducatedfarmers,beingcoercedtodowhattheydon’twanttodoorbeingdraftedinto thearmy,because theyneverhad theopportunity to realize theirvocationinlife.The ability of economic institutions to harness the potential ofinclusivemarkets,encouragetechnologicalinnovation,investinpeople,andmobilize the talents and skills of a large number of individuals iscritical for economic growth. Explaining why so many economicinstitutions fail tomeet these simpleobjectives is the central themeofthisbook.

EXTRACTIVEANDINCLUSIVEPOLITICALINSTITUTIONS

Alleconomic institutionsarecreatedbysociety.ThoseofNorthKorea,for example, were forced on its citizens by the communists who tookover the country in the 1940s, while those of colonial Latin Americawere imposed by Spanish conquistadors. South Korea ended up withvery different economic institutions than the North because differentpeoplewithdifferent interestsandobjectivesmadethedecisionsabouthow to structure society. In other words, South Korea had differentpolitics.Politics is theprocessbywhicha society chooses the rules thatwill

governit.Politicssurroundsinstitutionsforthesimplereasonthatwhileinclusive institutions may be good for the economic prosperity of anation,somepeopleorgroups,suchastheeliteoftheCommunistPartyofNorthKoreaorthesugarplantersofcolonialBarbados,willbemuchbetter off by setting up institutions that are extractive.When there isconflict over institutions, what happens depends on which people orgroup wins out in the game of politics—who can get more support,obtainadditionalresources,andformmoreeffectivealliances.Inshort,whowinsdependsonthedistributionofpoliticalpowerinsociety.The political institutions of a society are a key determinant of the

outcome of this game. They are the rules that govern incentives inpolitics.Theydeterminehowthegovernmentischosenandwhichpartof the government has the right to do what. Political institutionsdeterminewhohaspowerinsocietyandtowhatendsthatpowercanbeused.Ifthedistributionofpowerisnarrowandunconstrained,thenthepolitical institutions are absolutist, as exemplified by the absolutistmonarchies reigning throughout the world during much of history.Underabsolutistpolitical institutionssuchas those inNorthKoreaandcolonialLatinAmerica,thosewhocanwieldthispowerwillbeabletoset up economic institutions to enrich themselves and augment theirpower at the expense of society. In contrast, political institutions thatdistribute power broadly in society and subject it to constraints arepluralistic. Instead of being vested in a single individual or a narrowgroup, political power rests with a broad coalition or a plurality ofgroups.Thereisobviouslyacloseconnectionbetweenpluralismandinclusive

economic institutions. But the key to understanding why South Koreaand the United States have inclusive economic institutions is not justtheir pluralistic political institutions but also their sufficientlycentralized and powerful states. A telling contrast is with the EastAfrican nation of Somalia. As we will see later in the book, politicalpower inSomaliahas longbeenwidelydistributed—almostpluralistic.Indeed there is no real authority that can control or sanction whatanyone does. Society is divided into deeply antagonistic clans thatcannotdominateoneanother.Thepowerofoneclanisconstrainedonlybythegunsofanother.Thisdistributionofpowerleadsnottoinclusiveinstitutionsbuttochaos,andattherootofitistheSomalistate’slackofany kind of political centralization, or state centralization, and itsinability to enforce even the minimal amount of law and order tosupport economic activity, trade, or even the basic security of itscitizens.MaxWeber,whowemet in thepreviouschapter,provided themost

famous andwidely accepted definition of the state, identifying itwiththe “monopoly of legitimate violence” in society. Without such amonopoly and the degree of centralization that it entails, the statecannotplayitsroleasenforceroflawandorder,letaloneprovidepublicservicesandencourageandregulateeconomicactivity.When the statefailstoachievealmostanypoliticalcentralization,societysoonerorlaterdescendsintochaos,asdidSomalia.Wewill refer topolitical institutions that are sufficiently centralized

and pluralistic as inclusive political institutions. When either of theseconditions fails, wewill refer to the institutions as extractive politicalinstitutions.There is strong synergy between economic and political institutions.

Extractive political institutions concentrate power in the hands of anarrow elite and place few constraints on the exercise of this power.Economic institutions are then often structured by this elite to extractresources from the rest of the society. Extractive economic institutionsthus naturally accompany extractive political institutions. In fact, theymust inherently depend on extractive political institutions for theirsurvival. Inclusive political institutions, vesting power broadly, wouldtend to uproot economic institutions that expropriate the resources ofthemany,erectentrybarriers,andsuppressthefunctioningofmarkets

sothatonlyafewbenefit.In Barbados, for example, the plantation system based on the

exploitation of slaves could not have survived without politicalinstitutionsthatsuppressedandcompletelyexcludedtheslavesfromthepolitical process. The economic system impoverishing millions for thebenefit of a narrow communist elite in North Korea would also beunthinkable without the total political domination of the CommunistParty.Thissynergisticrelationshipbetweenextractiveeconomicandpolitical

institutions introduces a strong feedback loop: political institutionsenable the elites controlling political power to choose economicinstitutionswithfewconstraintsoropposingforces.Theyalsoenabletheelites to structure future political institutions and their evolution.Extractive economic institutions, in turn, enrich the same elites, andtheir economic wealth and power help consolidate their politicaldominance.InBarbadosorinLatinAmerica,forexample,thecolonistswere able to use their political power to impose a set of economicinstitutionsthatmadethemhugefortunesat theexpenseof therestofthe population. The resources these economic institutions generatedenabled theseelites tobuildarmiesandsecurity forces todefend theirabsolutistmonopolyofpoliticalpower.Theimplicationofcourseisthatextractive political and economic institutions support each other andtendtopersist.Thereisinfactmoretothesynergybetweenextractiveeconomicand

political institutions. When existing elites are challenged underextractive political institutions and the newcomers break through, thenewcomersarelikewisesubjecttoonlyafewconstraints.Theythushaveincentivestomaintainthesepoliticalinstitutionsandcreateasimilarsetofeconomicinstitutions,asPorfirioDíazandtheelitesurroundinghimdidattheendofthenineteenthcenturyinMexico.Inclusiveeconomicinstitutions,inturn,areforgedonfoundationslaid

byinclusivepoliticalinstitutions,whichmakepowerbroadlydistributedinsocietyandconstrainitsarbitraryexercise.Suchpoliticalinstitutionsalso make it harder for others to usurp power and undermine thefoundations of inclusive institutions. Those controlling political powercannot easilyuse it to set up extractive economic institutions for theirown benefit. Inclusive economic institutions, in turn, create a more

equitable distribution of resources, facilitating the persistence ofinclusivepoliticalinstitutions.Itwas not a coincidence thatwhen, in 1618, theVirginia Company

gaveland,andfreedomfromtheirdraconiancontracts,tothecolonistsithad previously tried to coerce, the General Assembly in the followingyear allowed the colonists to begin governing themselves. Economicrights without political rights would not have been trusted by thecolonists,whohadseenthepersistenteffortsoftheVirginiaCompanytocoerce them. Neither would these economies have been stable anddurable.Infact,combinationsofextractiveandinclusiveinstitutionsaregenerally unstable. Extractive economic institutions under inclusivepoliticalinstitutionsareunlikelytosurviveforlong,asourdiscussionofBarbadossuggests.Similarly, inclusiveeconomic institutionswillneither supportnorbe

supported by extractive political ones. Either theywill be transformedinto extractive economic institutions to the benefit of the narrowinterests that hold power, or the economic dynamism they createwilldestabilize theextractivepolitical institutions,opening theway for theemergence of inclusive political institutions. Inclusive economicinstitutionsalsotendtoreducethebenefitstheelitescanenjoybyrulingover extractive political institutions, since those institutions facecompetitioninthemarketplaceandareconstrainedbythecontractsandpropertyrightsoftherestofsociety.

WHYNOTALWAYSCHOOSEPROSPERITY?

Political and economic institutions,which are ultimately the choice ofsociety, canbe inclusiveandencourageeconomicgrowth.Or theycanbeextractiveandbecomeimpedimentstoeconomicgrowth.Nationsfailwhentheyhaveextractiveeconomicinstitutions,supportedbyextractivepolitical institutionsthat impedeandevenblockeconomicgrowth.Butthis means that the choice of institutions—that is, the politics ofinstitutions—iscentraltoourquestforunderstandingthereasonsforthesuccessandfailureofnations.Wehavetounderstandwhythepoliticsofsomesocietiesleadtoinclusiveinstitutionsthatfostereconomicgrowth,whilethepoliticsofthevastmajorityofsocietiesthroughouthistoryhas

led,andstillleadstoday,toextractiveinstitutionsthathampereconomicgrowth.It might seem obvious that everyone should have an interest in

creating the type of economic institutions that will bring prosperity.Wouldn’t every citizen, everypolitician, and even apredatorydictatorwanttomakehiscountryaswealthyaspossible?Let’s return to the Kingdom of Kongo we discussed earlier. Though

thiskingdomcollapsedintheseventeenthcentury,itprovidedthenameforthemoderncountrythatbecameindependentfromBelgiancolonialrule in 1960. As an independent polity, Congo experienced almostunbroken economic decline and mounting poverty under the rule ofJosephMobutu between 1965 and 1997. This decline continued afterMobutu was overthrown by Laurent Kabila. Mobutu created a highlyextractivesetofeconomicinstitutions.Thecitizenswereimpoverished,but Mobutu and the elite surrounding him, known as Les GrossesLegumes(theBigVegetables),becamefabulouslywealthy.Mobutubuilthimselfapalaceathisbirthplace,Gbadolite,inthenorthofthecountry,withanairportlargeenoughtolandasupersonicConcordjet,aplanehefrequently rented from Air France for travel to Europe. In Europe heboughtcastlesandownedlargetractsoftheBelgiancapitalofBrussels.Wouldn’t it have been better for Mobutu to set up economic

institutions that increased the wealth of the Congolese rather thandeepening their poverty? If Mobutu had managed to increase theprosperity of his nation, would he not have been able to appropriateeven more money, buy a Concord instead of renting one, have morecastles and mansions, possibly a bigger and more powerful army?Unfortunatelyforthecitizensofmanycountriesintheworld,theanswerisno.Economicinstitutionsthatcreateincentivesforeconomicprogressmaysimultaneouslyredistributeincomeandpowerinsuchawaythatapredatory dictator and otherswith political powermay becomeworseoff.Thefundamentalproblemisthattherewillnecessarilybedisputesand

conflictover economic institutions.Different institutionshavedifferentconsequences for the prosperity of a nation, how that prosperity isdistributed, and who has power. The economic growth which can beinducedby institutionscreatesbothwinnersand losers.ThiswasclearduringtheIndustrialRevolutioninEngland,whichlaidthefoundations

of the prosperity we see in the rich countries of the world today. Itcentered on a series of pathbreaking technological changes in steampower, transportation, and textile production. Even thoughmechanizationledtoenormousincreasesintotalincomesandultimatelybecame the foundation of modern industrial society, it was bitterlyopposedbymany.Not because of ignorance or shortsightedness; quitetheopposite.Rather, suchopposition toeconomicgrowthhas itsown,unfortunately coherent, logic. Economic growth and technologicalchange are accompanied by what the great economist JosephSchumpeter called creative destruction. They replace the old with thenew.Newsectorsattractresourcesawayfromoldones.Newfirmstakebusiness away from established ones. New technologies make existingskills andmachines obsolete. Theprocess of economic growth and theinclusive institutions upon which it is based create losers as well aswinnersinthepoliticalarenaandintheeconomicmarketplace.Fearofcreative destruction is often at the root of the opposition to inclusiveeconomicandpoliticalinstitutions.European history provides a vivid example of the consequences ofcreative destruction. On the eve of the Industrial Revolution in theeighteenth century, the governments ofmost European countrieswerecontrolledbyaristocraciesandtraditionalelites,whosemajorsourceofincomewas from landholdingsor from tradingprivileges they enjoyedthankstomonopoliesgrantedandentrybarriersimposedbymonarchs.Consistentwiththeideaofcreativedestruction,thespreadofindustries,factories, and towns took resources away from the land, reduced landrents, and increased the wages that landowners had to pay theirworkers.These elites also saw the emergenceofnewbusinessmenandmerchantserodingtheirtradingprivileges.Allinall,theywerethecleareconomiclosersfromindustrialization.Urbanizationandtheemergenceof a socially conscious middle and working class also challenged thepolitical monopoly of landed aristocracies. So with the spread of theIndustrialRevolutionthearistocraciesweren’t justtheeconomiclosers;theyalsoriskedbecomingpolitical losers, losingtheirholdonpoliticalpower. With their economic and political power under threat, theseelitesoftenformedaformidableoppositionagainstindustrialization.Thearistocracywasnottheonlyloserfromindustrialization.Artisanswhose manual skills were being replaced by mechanization likewise

opposed the spreadof industry.Manyorganizedagainst it, riotinganddestroyingthemachinestheysawasresponsibleforthedeclineoftheirlivelihood. They were the Luddites, a word that has today becomesynonymouswithresistancetotechnologicalchange.JohnKay,Englishinventor of the “flying shuttle” in 1733, one of the first significantimprovements in themechanization ofweaving, hadhis house burneddownbyLudditesin1753.JamesHargreaves,inventorofthe“spinningjenny,” a complementary revolutionary improvement in spinning, gotsimilartreatment.In reality, theartisansweremuch lesseffective than the landownersandelitesinopposingindustrialization.TheLudditesdidnotpossessthepolitical power—the ability to affect political outcomes against thewishes of other groups—of the landed aristocracy. In England,industrializationmarchedon,despite theLuddites’ opposition, becausearistocraticopposition,thoughreal,wasmuted.IntheAustro-HungarianandtheRussianempires,wheretheabsolutistmonarchsandaristocratshadfarmoretolose,industrializationwasblocked.Inconsequence,theeconomiesofAustria-HungaryandRussiastalled.TheyfellbehindotherEuropean nations, where economic growth took off during thenineteenthcentury.Thesuccessandfailureofspecificgroupsnotwithstanding,onelessonis clear: powerful groups often stand against economic progress andagainsttheenginesofprosperity.Economicgrowthisnotjustaprocessofmoreandbettermachines,andmoreandbettereducatedpeople,butalso a transformative and destabilizing process associated withwidespreadcreativedestruction.Growththusmovesforwardonlyifnotblocked by the economic losers who anticipate that their economicprivileges will be lost and by the political losers who fear that theirpoliticalpowerwillbeeroded.Conflict over scarce resources, income and power, translates intoconflictovertherulesofthegame,theeconomicinstitutions,whichwilldetermine the economic activities and who will benefit from them.When there is a conflict, the wishes of all parties cannot besimultaneouslymet.Somewillbedefeatedandfrustrated,whileotherswill succeed in securing outcomes they like. Who the winners of thisconflict are has fundamental implications for a nation’s economictrajectory. If thegroups standingagainst growthare thewinners, they

cansuccessfullyblockeconomicgrowth,andtheeconomywillstagnate.The logicofwhy thepowerfulwouldnotnecessarilywant to setuptheeconomicinstitutionsthatpromoteeconomicsuccessextendseasilytothechoiceofpoliticalinstitutions.Inanabsolutistregime,someelitescanwieldpowertosetupeconomicinstitutionstheyprefer.Wouldtheybe interested in changing political institutions to make them morepluralistic? In general not, since this would only dilute their politicalpower,makingitmoredifficult,maybeimpossible,forthemtostructureeconomicinstitutionstofurthertheirowninterests.Hereagainweseeaready source of conflict. The people who suffer from the extractiveeconomic institutions cannot hope for absolutist rulers to voluntarilychangepoliticalinstitutionsandredistributepowerinsociety.Theonlyway to change thesepolitical institutions is to force theelite to createmorepluralisticinstitutions.In the same way that there is no reason why political institutionsshould automatically become pluralistic, there is no natural tendencytoward political centralization. There would certainly be incentives tocreatemorecentralized state institutions inany society,particularly inthosewithnosuchcentralizationwhatsoever.Forexample,inSomalia,ifoneclancreatedacentralizedstatecapableofimposingorderonthecountry,thiscouldleadtoeconomicbenefitsandmakethisclanricher.What stops this?Themainbarrier topolitical centralization is againaformof fear from change: any clan, group, or politician attempting tocentralizepowerinthestatewillalsobecentralizingpowerintheirownhands, and this is likely to meet the ire of other clans, groups, andindividuals, whowould be the political losers of this process. Lack ofpoliticalcentralizationmeansnotonlylackoflawandorderinmuchofa territory but also there beingmany actorswith sufficient powers toblock or disrupt things, and the fear of their opposition and violentreaction will often deter many would-be centralizers. Politicalcentralization is likely only when one group of people is sufficientlymorepowerfulthanotherstobuildastate.InSomalia,powerisevenlybalanced,andnooneclancanimpose itswillonanyother.Therefore,thelackofpoliticalcentralizationpersists.

THELONGAGONYOFTHECONGO

There are few better, ormore depressing, examples of the forces thatexplain the logic of why economic prosperity is so persistently rareunder extractive institutions or that illustrate the synergy betweenextractive economic and political institutions than the Congo.Portuguese and Dutch visitors to Kongo in the fifteenth and sixteenthcenturies remarked on the “miserable poverty” there. Technology wasrudimentarybyEuropeanstandards,withtheKongolesehavingneitherwriting, thewheel, nor theplow.The reason for this poverty, and thereluctanceofKongolesefarmerstoadoptbettertechnologieswhentheylearnedofthem,isclearfromexistinghistoricalaccounts.Itwasduetotheextractivenatureofthecountry’seconomicinstitutions.Aswehaveseen,theKingdomofKongowasgovernedbythekinginMbanza, subsequentlySãoSalvador.Areas away from the capitalwereruledbyanelitewhoplayedtherolesofgovernorsofdifferentpartsofthe kingdom. The wealth of this elite was based on slave plantationsaround São Salvador and the extraction of taxes from the rest of thecountry.Slaverywascentraltotheeconomy,usedbytheelitetosupplytheir own plantations and by Europeans on the coast. Taxes werearbitrary;onetaxwasevencollectedeverytimetheking’sberetfelloff.Tobecomemoreprosperous, theKongolesepeoplewouldhavehad tosaveand invest—forexample,bybuyingplows.But itwouldnothavebeenworthwhile,sinceanyextraoutputthattheyproducedusingbettertechnologywouldhavebeensubjecttoexpropriationbythekingandhiselite.Insteadofinvestingtoincreasetheirproductivityandsellingtheirproductsinmarkets,theKongolesemovedtheirvillagesawayfromthemarket;theyweretryingtobeasfarawayfromtheroadsaspossible,inordertoreducetheincidenceofplunderandtoescapethereachofslavetraders.The poverty of the Kongo was therefore the result of extractiveeconomicinstitutionsthatblockedalltheenginesofprosperityorevenmadethemworkinreverse.TheKongo’sgovernmentprovidedveryfewpublic services to its citizens, not even basic ones, such as securepropertyrightsorlawandorder.Onthecontrary,thegovernmentwasitself thebiggest threat to its subjects’propertyandhumanrights.Theinstitutionofslaverymeantthatthemostfundamentalmarketofall,aninclusivelabormarketwherepeoplecanchoosetheiroccupationorjobsin ways that are so crucial for a prosperous economy, did not exist.

Moreover, long-distancetradeandmercantileactivitieswerecontrolledby thekingandwereopenonly to thoseassociatedwithhim.ThoughtheelitequicklybecameliterateafterthePortugueseintroducedwriting,the kingmade no attempt to spread literacy to the greatmass of thepopulation.Nevertheless, though “miserable poverty” was widespread, the

Kongolese extractive institutions had their own impeccable logic: theymade a few people, those with political power, very rich. In thesixteenth century, the king of Kongo and the aristocracywere able toimport European luxury goods and were surrounded by servants andslaves.The roots of the economic institutions of Kongolese society flowed

from the distribution of political power in society and thus from thenatureofpoliticalinstitutions.Therewasnothingtostopthekingfromtaking people’s possessions or bodies, other than the threat of revolt.Thoughthisthreatwasreal,itwasnotenoughtomakepeopleortheirwealthsecure.Thepolitical institutionsofKongowere trulyabsolutist,makingthekingandtheelitesubjecttoessentiallynoconstraints,anditgavenosaytothecitizensinthewaytheirsocietywasorganized.Of course, it is not difficult to see that the political institutions of

Kongocontrastsharplywithinclusivepoliticalinstitutionswherepoweris constrained and broadly distributed. The absolutist institutions ofKongowerekeptinplacebythearmy.Thekinghadastandingarmyoffivethousandtroopsinthemid-seventeenthcentury,withacoreoffivehundredmusketeers—aformidableforceforitstime.Whythekingandthe aristocracy so eagerly adopted European firearms is thus easy tounderstand.Therewasnochanceofsustainedeconomicgrowthunderthissetof

economic institutions and even incentives for generating temporarygrowthwerehighlylimited.Reformingeconomicinstitutionstoimproveindividual property rights would have made the Kongolese society atlarge more prosperous. But it is unlikely that the elite would havebenefited from this wider prosperity. First, such reforms would havemade the elite economic losers, by undermining the wealth that theslave trade and slave plantations brought them. Second, such reformswouldhavebeenpossibleonlyifthepoliticalpowerofthekingandtheelitewerecurtailed.Forinstance,ifthekingcontinuedtocommandhis

five hundredmusketeers, who would have believed an announcementthat slavery had been abolished? What would have stopped the kingfromchanginghismind lateron?Theonly realguaranteewouldhavebeen a change in political institutions so that citizens gained somecountervailing political power, giving them some say over taxation orwhatthemusketeersdid.Butinthiscaseitisdubiousthatsustainingtheconsumptionandlifestyleofthekingandtheelitewouldhavebeenhighon their list of priorities. In this scenario, changes that would havecreated better economic institutions in society would have made thekingandaristocracypoliticalaswellaseconomiclosers.The interaction of economic and political institutions five hundred

years ago is still relevant for understanding why the modern state ofCongoisstillmiserablypoortoday.TheadventofEuropeanruleinthisarea, and deeper into the basin of theRiver Congo at the time of the“scrambleforAfrica”inthelatenineteenthcentury,ledtoaninsecurityof human and property rights even more egregious than that whichcharacterized the precolonial Kongo. In addition, it reproduced thepattern of extractive institutions and political absolutism thatempoweredandenrichedafewattheexpenseofthemasses,thoughthefewnowwereBelgiancolonialists,mostnotablyKingLeopoldII.When Congo became independent in 1960, the same pattern of

economic institutions, incentives, and performance reproduced itself.TheseCongoleseextractiveeconomic institutionswereagain supportedby highly extractive political institutions. The situation was worsenedbecauseEuropeancolonialismcreatedapolity,Congo,madeupofmanydifferentprecolonialstatesandsocietiesthatthenationalstate,runfromKinshasa, had little control over. Though President Mobutu used thestate to enrich himself and his cronies—for example, through theZairianizationprogramof1973,whichinvolvedthemassexpropriationof foreign economic interests—he presided over a noncentralized statewith little authority over much of the country, and had to appeal toforeign assistance to stop the provinces of Katanga and Kasai fromsecedinginthe1960s.Thislackofpoliticalcentralization,almosttothepointof total collapseof the state, isa feature thatCongo shareswithmuchofsub-SaharanAfrica.ThemodernDemocraticRepublicofCongo remainspoorbecause its

citizens still lack the economic institutions that create the basic

incentives thatmakeasocietyprosperous. It isnotgeography,culture,ortheignoranceofitscitizensorpoliticiansthatkeeptheCongopoor,butitsextractiveeconomicinstitutions.Thesearestillinplaceafterallthese centuries because political power continues to be narrowlyconcentratedinthehandsofanelitewhohavelittleincentivetoenforcesecurepropertyrightsforthepeople,toprovidethebasicpublicservicesthat would improve the quality of life, or to encourage economicprogress.Rather, their interestsare toextract incomeandsustain theirpower.Theyhavenotusedthispowertobuildacentralizedstate,fortodo so would create the same problems of opposition and politicalchallenges that promoting economic growth would. Moreover, as inmuch of the rest of sub-Saharan Africa, infighting triggered by rivalgroupsattemptingtotakecontrolofextractiveinstitutionsdestroyedanytendencyforstatecentralizationthatmighthaveexisted.ThehistoryoftheKingdomofKongo,andthemorerecenthistoryof

the Congo, vividly illustrates how political institutions determineeconomic institutions and, through these, the economic incentives andthe scope for economic growth. It also illustrates the symbioticrelationshipbetweenpoliticalabsolutismandeconomicinstitutionsthatempowerandenrichafewattheexpenseofmany.

GROWTHUNDEREXTRACTIVEPOLITICALINSTITUTIONS

Congo today is an extreme example, with lawlessness and highlyinsecurepropertyrights.However,inmostcasessuchextremismwouldnot serve the interest of the elite, since itwould destroy all economicincentivesandgeneratefewresourcestobeextracted.Thecentralthesisofthisbookisthateconomicgrowthandprosperityareassociatedwithinclusiveeconomicandpoliticalinstitutions,whileextractiveinstitutionstypically lead to stagnation and poverty. But this implies neither thatextractiveinstitutionscannevergenerategrowthnorthatallextractiveinstitutionsarecreatedequal.There are two distinct but complementary ways in which growth

underextractivepoliticalinstitutionscanemerge.First,evenifeconomicinstitutions are extractive, growth is possible when elites can directlyallocate resources to high-productivity activities that they themselves

control. A prominent example of this type of growth under extractiveinstitutions was the Caribbean Islands between the sixteenth andeighteenthcenturies.Mostpeoplewereslaves,workingundergruesomeconditions in plantations, living barely above subsistence level. Manydied frommalnutrition and exhaustion. In Barbados, Cuba, Haiti, andJamaica in the seventeenthandeighteenthcenturies,a smallminority,theplanterelite,controlledallpoliticalpowerandownedalltheassets,including all the slaves.While themajority had no rights, the planterelite’s property and assets were well protected. Despite the extractiveeconomic institutions that savagely exploited the majority of thepopulation, these islands were among the richest places in the world,because they could produce sugar and sell it in world markets. Theeconomyoftheislandsstagnatedonlywhentherewasaneedtoshifttonew economic activities, which threatened both the incomes and thepoliticalpoweroftheplanterelite.Anotherexampleistheeconomicgrowthandindustrializationofthe

Soviet Union from the first Five-Year Plan in 1928 until the 1970s.Politicalandeconomic institutionswerehighlyextractive,andmarketswere heavily constrained. Nevertheless, the Soviet Union was able toachieve rapid economic growth because it could use the power of thestate to move resources from agriculture, where they were veryinefficientlyused,intoindustry.Thesecondtypeofgrowthunderextractivepoliticalinstitutionsarises

whentheinstitutionspermitthedevelopmentofsomewhat,evenifnotcompletely, inclusive economic institutions. Many societies withextractive political institutions will shy away from inclusive economicinstitutions because of fear of creative destruction. But the degree towhichtheelitemanagetomonopolizepowervariesacrosssocieties. Insome,thepositionoftheelitecouldbesufficientlysecurethattheymaypermit somemoves toward inclusive economic institutions when theyare fairly certain that this will not threaten their political power.Alternatively, the historical situation could be such as to endow anextractive political regime with rather inclusive economic institutions,whichtheydecidenottoblock.Theseprovidethesecondwayinwhichgrowthcantakeplaceunderextractivepoliticalinstitutions.The rapid industrialization of SouthKorea underGeneral Park is an

example.Parkcametopowerviaamilitarycoupin1961,buthedidso

inasocietyheavilysupportedbytheUnitedStatesandwithaneconomywhere economic institutions were essentially inclusive. Though Park’sregime was authoritarian, it felt secure enough to promote economicgrowth, and in fact did so very actively—perhaps partly because theregimewas not directly supported by extractive economic institutions.DifferentlyfromtheSovietUnionandmostothercasesofgrowthunderextractiveinstitutions,SouthKoreatransitionedfromextractivepoliticalinstitutions toward inclusive political institutions in the 1980s. Thissuccessfultransitionwasduetoaconfluenceoffactors.By the 1970s, economic institutions in South Korea had become

sufficiently inclusive that they reducedoneof the strong rationales forextractive political institutions—the economic elite had little to gainfrom their own or the military’s dominance of politics. The relativeequalityof incomeinSouthKoreaalsomeantthattheelitehadlesstofear from pluralism and democracy. The key influence of the UnitedStates,particularlygiven the threat fromNorthKorea,alsomeant thatthe strong democracy movement that challenged the militarydictatorship could not be repressed for long. Though General Park’sassassination in 1979 was followed by another military coup, led byChun Doo-hwan, Chun’s chosen successor, Roh Tae-woo, initiated aprocessofpoliticalreformsthatledtotheconsolidationofapluralisticdemocracyafter1992.Ofcourse,notransitionofthissorttookplaceintheSovietUnion. Inconsequence,Sovietgrowthranoutofsteam,andtheeconomybegantocollapseinthe1980sandthentotallyfellapartinthe1990s.Chinese economicgrowth todayalsohas several commonalitieswith

boththeSovietandSouthKoreanexperiences.WhiletheearlystagesofChinese growth were spearheaded by radical market reforms in theagricultural sector, reforms in the industrial sector have been moremuted. Even today, the state and the Communist Party play a centralrole in deciding which sectors and which companies will receiveadditionalcapitalandwillexpand—intheprocess,makingandbreakingfortunes.AsintheSovietUnioninitsheyday,Chinaisgrowingrapidly,butthisisstillgrowthunderextractiveinstitutions,underthecontrolofthestate,withlittlesignofatransitiontoinclusivepoliticalinstitutions.The fact that Chinese economic institutions are still far from fullyinclusivealsosuggeststhataSouthKorean–styletransitionislesslikely,

thoughofcoursenotimpossible.It isworthnoting thatpoliticalcentralization iskey tobothways in

whichgrowthunderextractivepolitical institutionscanoccur.Withoutsome degree of political centralization, the planter elite in Barbados,Cuba, Haiti, and Jamaica would not have been able to keep law andorder and defend their own assets and property. Without significantpolitical centralization and a firm grip on political power, neither theSouth Korean military elites nor the Chinese Communist Party wouldhave felt secure enough to manufacture significant economic reformsandstillmanagetoclingtopower.Andwithoutsuchcentralization,thestate in the Soviet Union or China could not have been able tocoordinate economic activity to channel resources toward highproductivity areas. A major dividing line between extractive politicalinstitutions is therefore their degree of political centralization. Thosewithout it, suchasmany in sub-SaharanAfrica,will find itdifficult toachieveevenlimitedgrowth.Even though extractive institutions can generate some growth, they

willusuallynotgeneratesustainedeconomicgrowth,andcertainlynotthe type of growth that is accompanied by creative destruction.Whenboth political and economic institutions are extractive, the incentiveswillnotbethereforcreativedestructionandtechnologicalchange.Forawhile the state may be able to create rapid economic growth byallocating resources andpeopleby fiat, but this process is intrinsicallylimited.When the limits are hit, growth stops, as it did in the SovietUnion in the 1970s. Even when the Soviets achieved rapid economicgrowth, therewas little technological change inmost of the economy,thoughbypouringmassiveresourcesintothemilitarytheywereabletodevelopmilitary technologiesandevenpullaheadof theUnitedStatesinthespaceandnuclearraceforashortwhile.Butthisgrowthwithoutcreative destruction andwithout broad-based technological innovationwasnotsustainableandcametoanabruptend.In addition, the arrangements that support economic growth under

extractive political institutions are, by their nature, fragile—they cancollapseorcanbeeasilydestroyedbytheinfightingthattheextractiveinstitutions themselves generate. In fact, extractive political andeconomic institutions create a general tendency for infighting, becausethey lead to the concentration ofwealth and power in the hands of a

narrowelite.Ifanothergroupcanoverwhelmandoutmaneuverthiseliteandtakecontrolofthestate,theywillbetheonesenjoyingthiswealthandpower.Consequently,asourdiscussionof thecollapseof the laterRoman Empire and the Maya cities will illustrate (this page and thispage), fighting tocontrol theall-powerful state isalways latent,and itwillperiodicallyintensifyandbringtheundoingoftheseregimes,asitturnsintocivilwarandsometimesintototalbreakdownandcollapseofthe state. One implication of this is that even if a society underextractive institutions initially achieves some degree of statecentralization, itwill not last. In fact, the infighting to take control ofextractive institutions often leads to civil wars and widespreadlawlessness,enshriningapersistentabsenceofstatecentralizationasinmany nations in sub-Saharan Africa and some in Latin America andSouthAsia.Finally,whengrowthcomesunderextractivepoliticalinstitutionsbut

whereeconomicinstitutionshaveinclusiveaspects,astheydidinSouthKorea, there is always the danger that economic institutions becomemoreextractiveandgrowthstops.Thosecontrollingpoliticalpowerwilleventually find it more beneficial to use their power to limitcompetition,toincreasetheirshareofthepie,oreventostealandlootfromothersratherthansupporteconomicprogress.Thedistributionandabilitytoexercisepowerwillultimatelyunderminetheveryfoundationsofeconomicprosperity,unlesspoliticalinstitutionsaretransformedfromextractivetoinclusive.

4.

SMALLDIFFERENCESANDCRITICALJUNCTURES:THEWEIGHTOFHISTORY

THEWORLDTHEPLAGUECREATED

IN1346THEBUBONICplague,theBlackDeath,reachedtheportcityofTanaatthemouthoftheRiverDonontheBlackSea.Transmittedbyfleaslivingon rats, theplaguewasbrought fromChinaby traders travelingalongthe Silk Road, the great trans-Asian commercial artery. Thanks toGenoese traders, theratsweresoonspreading the fleasand theplaguefromTana to theentireMediterranean.Byearly1347, theplaguehadreachedConstantinople.Inthespringof1348,itwasspreadingthroughFranceandNorthAfricaandupthebootofItaly.Theplaguewipedoutabouthalfof thepopulationofanyareaithit. Itsarrival intheItaliancityofFlorencewaswitnessed firsthandby the ItalianwriterGiovanniBoccaccio.Helaterrecalled:

Inthefaceofitsonrush,allthewisdomandingenuityofmanwere unavailing … the plague began, in a terrifying andextraordinarymanner,tomakeitsdisastrouseffectsapparent.ItdidnottaketheformithadassumedintheEast,whereifanyone bled from the nose it was an obvious portent ofcertaindeath.Onthecontrary, itsearliestsymptomwastheappearanceofcertainswellingsinthegroinorarmpit,someofwhichwereegg-shapedwhilstotherswereroughlythesizeofacommonapple…Lateronthesymptomsofthediseasechanged, andmanypeoplebegan to finddarkblotches andbruises on their arms, thighs and other parts of theirbodies … Against these maladies … All the advice of

physiciansandallthepowerofmedicinewereprofitlessandunavailing…Andinmostcasesdeathoccurredwithinthreedays from the appearance of the symptoms we havedescribed.

People inEnglandknew theplaguewas coming theirwayandwerewell aware of impending doom. Inmid-August 1348, King Edward IIIasked the Archbishop of Canterbury to organize prayers, and manybishops wrote letters for priests to read out in church to help peoplecopewithwhatwasabouttohitthem.RalphofShrewsbury,BishopofBath,wrotetohispriests:

AlmightyGodusesthunder,lightening[sic],andotherblowswhich issue from his throne to scourge the sons whom hewishes to redeem. Accordingly, since a catastrophicpestilence from the East has arrived in a neighboringkingdom, it is to be verymuch feared that, unlesswe praydevoutlyandincessantly,asimilarpestilencewillstretchitspoisonous branches into this realm, and strike down andconsumetheinhabitants.ThereforewemustallcomebeforethepresenceoftheLordinconfession,recitingpsalms.

Itdidn’tdoanygood.TheplaguehitandquicklywipedoutabouthalftheEnglishpopulation.Suchcatastrophescanhaveahugeeffectontheinstitutions of society. Perhaps understandably, scores of people wentmad. Boccaccio noted that “somemaintained that an infallibleway ofwardingoffthisappallingevilwastodrinkheavily,enjoylifetothefull,goroundsingingandmerrymaking,gratifyallone’scravingswheneverthe opportunity offered, and shrug the thing off as an enormousjoke…andthisexplainswhythosewomenwhorecoveredwerepossiblyless chaste in the period that followed.” Yet the plague also had asocially, economically, and politically transformative impact onmedievalEuropeansocieties.At the turnof the fourteenthcentury,Europehada feudalorder,anorganization of society that first emerged inWestern Europe after thecollapse of the Roman Empire. It was based on a hierarchicalrelationship between the king and the lords beneath him, with the

peasantsatthebottom.Thekingownedthelandandhegrantedittothelordsinexchangeformilitaryservices.Thelordsthenallocatedlandtopeasants, in exchange for which peasants had to perform extensiveunpaid laborandwere subject tomany fines and taxes.Peasants,whobecauseoftheir“servile”statuswerethuscalledserfs,weretiedtotheland, unable to move elsewhere without the permission of their lord,whowasnotjustthelandlord,butalsothejudge,jury,andpoliceforce.Itwasahighlyextractivesystem,withwealthflowingupwardfromthemanypeasantstothefewlords.The massive scarcity of labor created by the plague shook thefoundationsofthefeudalorder.Itencouragedpeasantstodemandthatthingschange.AtEynshamAbbey,forexample,thepeasantsdemandedthatmanyofthefinesandunpaidlaborbereduced.Theygotwhattheywanted,andtheirnewcontractbeganwiththeassertion“Atthetimeofthemortalityorpestilence,whichoccurredin1349,scarcelytwotenantsremained in the manor, and they expressed their intention of leavingunless Brother Nicholas of Upton, then abbot and lord of the manor,madeanewagreementwiththem.”Hedid.WhathappenedatEynshamhappenedeverywhere.Peasantsstartedtofreethemselvesfromcompulsorylaborservicesandmanyobligationstotheirlords.Wagesstartedtorise.Thegovernmenttriedtoputastoptothisand,in1351,passedtheStatuteofLaborers,whichcommenced:

Because a great part of the people and especially of theworkmenandservantshasnowdiedinthatpestilence,some,seeing the straights of the masters and the scarcity ofservants, are not willing to serve unless they receiveexcessivewages…We,consideringthegraveinconvenienceswhichmightcomefromthelackespeciallyofploughmenandsuchlabourers,have…seenfittoordain:thateverymanandwomanofourkingdomofEngland…shallbeboundtoservehimwhohasseenfitsotoseekafterhim;andheshalltakeonly thewages liveries,meedorsalarywhich, in theplaceswherehesoughttoserve,wereaccustomedtobepaidinthetwentiethyearofourreignofEngland[KingEdwardIIIcametothethroneonJanuary25,1327,sothereferencehereisto1347]orthefiveorsixcommonyearsnextpreceding.

The statute in effect tried to fixwages at the levels paid before theBlack Death. Particularly concerning for the English elite was“enticement,” theattemptbyone lord toattract the scarcepeasantsofanother. The solution was tomake prison the punishment for leavingemploymentwithoutpermissionoftheemployer:

And if a reaperormower,orotherworkmanor servant, ofwhateverstandingorconditionhebe,whoisretainedintheserviceofanyone,dodepartfromthesaidservicebeforetheend of the term agreed, without permission or reasonablecause,heshallundergothepenaltyofimprisonment,andletno one…moreover, pay or permit to be paid to any onemore wages, livery, meed or salary than was customary ashasbeensaid.

The attempt by the English state to stop the changes of institutionsand wages that came in the wake of the Black Death didn’t work. In1381thePeasants’Revoltbrokeout,andtherebels,undertheleadershipof Wat Tyler, even captured most of London. Though they wereultimately defeated, and Tyler was executed, there were no moreattempts to enforce the Statute of Laborers. Feudal labor servicesdwindledaway,aninclusivelabormarketbegantoemergeinEngland,andwagesrose.The plague seems to have hitmost of theworld, and everywhere a

similar fraction of the population perished. Thus the demographicimpact in Eastern Europe was the same as in England and WesternEurope. The social and economic forces at play were also the same.Labor was scarce and people demanded greater freedoms. But in theEast, a more powerful contradictory logic was at work. Fewer peoplemeanthigherwagesinaninclusivelabormarket.Butthisgavelordsagreater incentive to keep the labormarket extractive and thepeasantsservile.InEnglandthismotivationhadbeeninplay,too,asreflectedintheStatuteofLaborers.Butworkershadsufficientpowerthat theygottheirway.NotsoinEasternEurope.Aftertheplague,Easternlandlordsstartedtotakeoverlargetractsoflandandexpandtheirholdings,whichwerealreadylargerthanthose inWesternEurope.Townswereweakerandlesspopulous,andratherthanbecomingfreer,workersbegantosee

theiralreadyexistingfreedomsencroachedon.Theeffectsbecameespeciallyclearafter1500,whenWesternEuropebegan to demand the agricultural goods, such as wheat, rye, andlivestock,producedintheEast.EightypercentoftheimportsofryeintoAmsterdam came from the Elbe, Vistula, andOder river valleys. Soonhalf of the Netherlands’ booming trade was with Eastern Europe. AsWesterndemandexpanded,Easternlandlordsratcheteduptheircontrolover the labor force to expand their supply. It was to be called theSecondSerfdom,distinctandmoreintensethanitsoriginalformoftheearlyMiddleAges.Lordsincreasedthetaxestheyleviedontheirtenants’ownplotsandtookhalfofthegrossoutput.InKorczyn,Poland,allworkforthelordin1533waspaid.Butby1600nearlyhalfwasunpaidforcedlabor.In1500,workersinMecklenberg,ineasternGermany,owedonlyafewdays’unpaidlaborservicesayear.By1550itwasonedayaweek,andby1600,threedaysperweek.Workers’childrenhadtoworkforthelord for free for several years. In Hungary, landlords took completecontrolofthelandin1514,legislatingonedayaweekofunpaidlaborservicesforeachworker.In1550thiswasraisedtotwodaysperweek.Bytheendofthecentury,itwasthreedays.Serfssubjecttotheserulesmadeup90percentoftheruralpopulationbythistime.Though in 1346 there were few differences between Western andEasternEuropeintermsofpoliticalandeconomicinstitutions,by1600theywereworldsapart. IntheWest,workerswerefreeof feudaldues,fines, and regulations and were becoming a key part of a boomingmarket economy. In the East, they were also involved in such aneconomy,butascoercedserfsgrowingthe foodandagriculturalgoodsdemanded in theWest. Itwasamarketeconomy,butnotan inclusiveone.Thisinstitutionaldivergencewastheresultofasituationwherethedifferencesbetweentheseareasinitiallyseemedverysmall:intheEast,lordswere a little better organized; they had slightlymore rights andmore consolidated landholdings. Towns were weaker and smaller,peasantslessorganized.Inthegrandschemeofhistory,theseweresmalldifferences.Yet these small differences between theEast and theWestbecameveryconsequentialforthelivesoftheirpopulationsandforthefuture path of institutional development when the feudal order wasshakenupbytheBlackDeath.The Black Death is a vivid example of a critical juncture, a major

event or confluence of factors disrupting the existing economic orpoliticalbalance insociety.Acritical juncture isadouble-edgedswordthatcancauseasharpturninthetrajectoryofanation.Ontheonehanditcanopenthewayforbreakingthecycleofextractiveinstitutionsandenablemoreinclusiveonestoemerge,asinEngland.Oritcanintensifytheemergenceofextractiveinstitutions,aswasthecasewiththeSecondSerfdominEasternEurope.Understanding how history and critical junctures shape the path of

economicandpolitical institutionsenablesustohaveamorecompletetheory of the origins of differences in poverty and prosperity. Inaddition,itenablesustoaccountforthelayofthelandtodayandwhysome nations make the transition to inclusive economic and politicalinstitutionswhileothersdonot.

THEMAKINGOFINCLUSIVEINSTITUTIONS

Englandwasuniqueamongnationswhen itmade thebreakthrough tosustainedeconomicgrowthintheseventeenthcentury.Majoreconomicchangeswereprecededbyapoliticalrevolutionthatbroughtadistinctset of economic and political institutions, much more inclusive thanthose of any previous society. These institutionswould have profoundimplications not only for economic incentives and prosperity, but alsoforwhowouldreapthebenefitsofprosperity.Theywerebasednotonconsensus but, rather, were the result of intense conflict as differentgroups competed for power, contesting the authority of others andattemptingtostructureinstitutionsintheirownfavor.Theculminationof the institutional strugglesof thesixteenthandseventeenthcenturieswere two landmark events: the English Civil War between 1642 and1651,andparticularlytheGloriousRevolutionof1688.The Glorious Revolution limited the power of the king and the

executive,andrelocatedtoParliamentthepowertodetermineeconomicinstitutions. At the same time, it opened up the political system to abroad cross section of society, who were able to exert considerableinfluence over the way the state functioned. The Glorious Revolutionwasthefoundationforcreatingapluralisticsociety,anditbuiltonandaccelerated a process of political centralization. It created the world’s

firstsetofinclusivepoliticalinstitutions.As a consequence, economic institutions also started becomingmore

inclusive. Neither slavery nor the severe economic restrictions of thefeudal medieval period, such as serfdom, existed in England at thebeginning of the seventeenth century. Nevertheless, there were manyrestrictions on economic activities people could engage in. Both thedomestic and international economywere choked bymonopolies. Thestate engaged in arbitrary taxation andmanipulated the legal system.Most landwas caught in archaic formsofproperty rights thatmade itimpossibletosellandriskytoinvestin.ThischangedaftertheGloriousRevolution.Thegovernmentadopted

a set of economic institutions that provided incentives for investment,trade,and innovation. It steadfastlyenforcedpropertyrights, includingpatents granting property rights for ideas, thereby providing a majorstimulus to innovation. It protected law and order. Historicallyunprecedented was the application of English law to all citizens.Arbitrary taxation ceased, and monopolies were abolished almostcompletely. The English state aggressively promoted mercantileactivities and worked to promote domestic industry, not only byremoving barriers to the expansion of industrial activity but also bylendingthefullpoweroftheEnglishnavytodefendmercantileinterests.By rationalizing property rights, it facilitated the construction ofinfrastructure,particularlyroads,canals,andlaterrailways,thatwouldprovetobecrucialforindustrialgrowth.These foundations decisively changed incentives for people and

impelled the engines of prosperity, paving the way for the IndustrialRevolution. First and foremost, the Industrial Revolution depended onmajor technological advances exploiting the knowledge base that hadaccumulatedinEuropeduringthepastcenturies.Itwasaradicalbreakfrom the past,made possible by scientific inquiry and the talents of anumber of unique individuals. The full force of this revolution camefromthemarketthatcreatedprofitableopportunitiesfortechnologiestobe developed and applied. Itwas the inclusive nature ofmarkets thatallowedpeopletoallocatetheirtalentstotheright linesofbusiness. Italsoreliedoneducationandskills,foritwastherelativelyhighlevelsofeducation, at least by the standards of the time, that enabled theemergenceofentrepreneurswiththevisiontoemploynewtechnologies

fortheirbusinessesandtofindworkerswiththeskillstousethem.It is not a coincidence that the Industrial Revolution started inEngland a few decades following the Glorious Revolution. The greatinventors such as JamesWatt (perfecter of the steam engine),RichardTrevithick(thebuilderofthefirststeamlocomotive),RichardArkwright(theinventorofthespinningframe),andIsambardKingdomBrunel(thecreator of several revolutionary steamships) were able to take up theeconomic opportunities generated by their ideas, were confident thattheir property rights would be respected, and had access to marketswheretheirinnovationscouldbeprofitablysoldandused.In1775,justafterhehadthepatentrenewedonhissteamengine,whichhecalledhis“Fireengine,”JamesWattwrotetohisfather:

DearFather,AfteraseriesofvariousandviolentOppositionsIhaveatlastgotanActofParliamentvestingthepropertyofmynewFireengines in me andmy Assigns, throughout Great Britain &theplantations for twenty fiveyears tocome,which Ihopewillbeverybeneficialtome,asthereisalreadyconsiderabledemandforthem.

Thisletterrevealstwothings.First,Wattwasmotivatedbythemarketopportunities he anticipated, by the “considerable demand” in GreatBritain and its plantations, the English overseas colonies. Second, itshowshowhewasabletoinfluenceParliamenttogetwhathewantedsinceitwasresponsivetotheappealsofindividualsandinnovators.The technological advances, the drive of businesses to expand andinvest,andtheefficientuseofskillsandtalentwereallmadepossiblebythe inclusive economic institutions that England developed. These inturnwerefoundedonherinclusivepoliticalinstitutions.Englanddevelopedtheseinclusivepoliticalinstitutionsbecauseoftwofactors. First were political institutions, including a centralized state,thatenabledhertotakethenextradical—infact,unprecedented—steptowardinclusive institutionswiththeonsetof theGloriousRevolution.While this factordistinguishedEnglandfrommuchof theworld, itdidnotsignificantlydifferentiateitfromWesternEuropeancountriessuchasFrance and Spain. More important was the second factor. The events

leading up to the Glorious Revolution forged a broad and powerfulcoalitionabletoplacedurableconstraintsonthepowerofthemonarchyandtheexecutive,whichwereforcedtobeopentothedemandsofthiscoalition. This laid the foundations for pluralistic political institutions,whichthenenabledthedevelopmentofeconomicinstitutionsthatwouldunderpinthefirstIndustrialRevolution.

SMALLDIFFERENCESTHATMATTER

World inequality dramatically increased with the British, or English,IndustrialRevolutionbecauseonlysomepartsoftheworldadoptedtheinnovationsandnewtechnologiesthatmensuchasArkwrightandWatt,and the many who followed, developed. The response of differentnations to this wave of technologies, which determined whether theywould languish in poverty or achieve sustained economic growth,waslargely shapedby thedifferenthistoricalpathsof their institutions.Bythe middle of the eighteenth century, there were already notabledifferencesinpoliticalandeconomicinstitutionsaroundtheworld.Butwheredidthesedifferencescomefrom?English political institutions were on their way to much greaterpluralismby1688,comparedwiththoseinFranceandSpain,butifwego back in time one hundred years, to 1588, the differences shrink toalmost nothing. All three countries were ruled by relatively absolutistmonarchs: Elizabeth I in England, Philip II in Spain, and Henry II inFrance. All were battling with assemblies of citizens—such as theParliament in England, theCortes in Spain, and theEstates-General inFrance—that were demanding more rights and control over themonarchy. These assemblies all had somewhat different powers andscopes.Forinstance,theEnglishParliamentandtheSpanishCorteshadpower over taxation, while the Estates-General did not. In Spain thismattered little, because after 1492 the Spanish Crown had a vastAmericanempireandbenefitedmassivelyfromthegoldandsilverfoundthere. In England the situation was different. Elizabeth I was far lessfinanciallyindependent,soshehadtobegParliamentformoretaxes.Inexchange, Parliament demanded concessions, in particular restrictionson the right of Elizabeth to create monopolies. It was a conflict

Parliament gradually won. In Spain the Cortes lost a similar conflict.Trade wasn’t just monopolized; it was monopolized by the Spanishmonarchy.Thesedistinctions,whichinitiallyappearedsmall,startedtomattera

great deal in the seventeenth century. Though the Americas had beendiscoveredby1492andVascodaGamahadreachedIndiabyroundingtheCape ofGoodHope, at the southern tip ofAfrica, in 1498, itwasonlyafter1600thatahugeexpansionofworldtrade,particularlyintheAtlantic, started to takeplace. In1585the firstEnglishcolonizationofNorth America began at Roanoke, in what is now North Carolina. In1600 the English East India Company was formed. In 1602 it wasfollowedbytheDutchequivalent.In1607thecolonyofJamestownwasfounded by the Virginia Company. By the 1620s the Caribbean wasbeing colonized, with Barbados occupied in 1627. France was alsoexpandingintheAtlantic, foundingQuebecCity in1608asthecapitalof New France in what is now Canada. The consequences of thiseconomicexpansionforinstitutionswereverydifferentforEnglandthanforSpainandFrancebecauseofsmallinitialdifferences.ElizabethIandhersuccessorscouldnotmonopolizethetradewiththe

Americas. Other European monarchs could. So while in England,Atlantictradeandcolonizationstartedcreatingalargegroupofwealthytraderswith few links to theCrown, thiswasnot the case inSpainorFrance. The English traders resented royal control and demandedchangesinpoliticalinstitutionsandtherestrictionofroyalprerogatives.They played a critical role in the English Civil War and the GloriousRevolution. Similar conflicts took place everywhere. French kings, forexample, faced the Fronde Rebellion between 1648 and 1652. ThedifferencewasthatinEnglanditwasfarmorelikelythattheopponentsto absolutismwould prevail because theywere relativelywealthy andmorenumerousthantheopponentstoabsolutisminSpainandFrance.The divergent paths of English, French, and Spanish societies in the

seventeenth century illustrate the importance of the interplay of smallinstitutionaldifferenceswithcriticaljunctures.Duringcriticaljunctures,amajor event or confluence of factors disrupts the existingbalance ofpoliticaloreconomicpower inanation.Thesecanaffectonlyasinglecountry,suchasthedeathofChairmanMaoZedongin1976,whichatfirst created a critical juncture only for Communist China. Often,

however, critical junctures affect a whole set of societies, in the waythat,forexample,colonizationandthendecolonizationaffectedmostoftheglobe.Such critical junctures are important because there are formidable

barriers against gradual improvements, resulting from the synergybetween extractive political and economic institutions and the supportthey give each other. The persistence of this feedback loop creates avicious circle. Thosewhobenefit from the status quo arewealthy andwell organized, and can effectively fightmajor changes that will takeawaytheireconomicprivilegesandpoliticalpower.Onceacriticaljuncturehappens,thesmalldifferencesthatmatterare

the initial institutional differences that put in motion very differentresponses. This is the reason why the relatively small institutionaldifferencesinEngland,France,andSpainledtofundamentallydifferentdevelopmentpaths.ThepathsresultedfromthecriticaljuncturecreatedbytheeconomicopportunitiespresentedtoEuropeansbyAtlantictrade.Even if small institutional differences matter greatly during critical

junctures,notallinstitutionaldifferencesaresmall,andnaturally,largerinstitutional differences lead to even more divergent patterns duringsuchjunctures.WhiletheinstitutionaldifferencesbetweenEnglandandFranceweresmallin1588,thedifferencesbetweenWesternandEasternEuropeweremuchgreater.IntheWest,strongcentralizedstatessuchasEngland, France, and Spain had latent constitutional institutions(Parliament, the Estates-General, and the Cortes). There were alsounderlying similarities in economic institutions, such as the lack ofserfdom.Eastern Europe was a different matter. The kingdom of Poland-

Lithuania, for example,was ruledbyanelite class called theSzlachta,whoweresopowerfultheyhadevenintroducedelectionsforkings.Thiswasnot absolute ruleas inFranceunderLouisXIV, theSunKing,butabsolutismofanelite,extractivepolitical institutionsall thesame.TheSzlachtaruledoveramostlyruralsocietydominatedbyserfs,whohadno freedom ofmovement or economic opportunities. Farther east, theRussian emperor Peter theGreatwas also consolidating an absolutismfarmoreintenseandextractivethanevenLouisXIVcouldmanage.Map8 provides one simple way of seeing the extent of the divergencebetweenWesternandEasternEuropeatthebeginningofthenineteenth

century. It plots whether or not a country still had serfdom in 1800.Countries that appear dark did; those that are light did not. EasternEuropeisdark;WesternEuropeislight.Yet the institutions of Western Europe had not always been so

different from those in the East. They began, as we saw earlier, todiverge in the fourteenth century when the Black Death hit in 1346.ThereweresmalldifferencesbetweenpoliticalandeconomicinstitutionsinWesternandEasternEurope.EnglandandHungarywereevenruledby members of the same family, the Angevins. The more importantinstitutionaldifferencesthatemergedaftertheBlackDeaththencreatedthebackgrounduponwhichthemoresignificantdivergencebetweentheEast and theWestwould play out during the seventeenth, eighteenth,andnineteenthcenturies.Butwheredothesmallinstitutionaldifferencesthatstartthisprocess

of divergence arise in the first place? Why did Eastern Europe havedifferent political and economic institutions than the West in thefourteenthcentury?WhywasthebalanceofpowerbetweenCrownandParliamentdifferentinEnglandthaninFranceandSpain?Aswewillseein the next chapter, even societies that are far less complex than ourmodern society create political and economic institutions that havepowerful effects on the lives of their members. This is true even forhunter-gatherers, aswe know from surviving societies such as the SanpeopleofmodernBotswana,whodonotfarmorevenliveinpermanentsettlements.No two societies create the same institutions; theywillhavedistinct

customs, different systems of property rights, and different ways ofdividing a killed animal or loot stolen from another group. Somewillrecognizetheauthorityofelders,otherswillnot;somewillachievesomedegreeofpolitical centralizationearlyon,butnotothers.Societiesareconstantly subject toeconomicandpolitical conflict that is resolved indifferent ways because of specific historical differences, the role ofindividuals,orjustrandomfactors.These differences are often small to start with, but they cumulate,

creatingaprocessofinstitutionaldrift.Justastwoisolatedpopulationsoforganismswilldriftapartslowlyinaprocessofgeneticdrift,becauserandomgeneticmutationscumulate,twootherwisesimilarsocietieswillalso slowly drift apart institutionally. Though, just like genetic drift,

institutionaldrifthasnopredeterminedpathanddoesnotevenneedtobe cumulative; over centuries it can lead to perceptible, sometimesimportant differences. The differences created by institutional driftbecome especially consequential, because they influence how societyreacts tochanges ineconomicorpoliticalcircumstancesduringcriticaljunctures.

The richly divergent patterns of economic development around theworldhingeontheinterplayofcriticaljuncturesandinstitutionaldrift.Existing political and economic institutions—sometimes shaped by alongprocessofinstitutionaldriftandsometimesresultingfromdivergentresponsestopriorcriticaljunctures—createtheanviluponwhichfuturechangewillbeforged.TheBlackDeathandtheexpansionofworldtradeafter1600werebothmajorcritical junctures forEuropeanpowersandinteractedwithdifferentinitialinstitutionstocreateamajordivergence.

Because in 1346 in Western Europe peasants had more power andautonomy than theydid inEasternEurope, theBlackDeath led to thedissolutionoffeudalismintheWestandtheSecondSerfdomintheEast.Because Eastern and Western Europe had started to diverge in thefourteenthcentury,theneweconomicopportunitiesoftheseventeenth,eighteenth, and nineteenth centuries would also have fundamentallydifferent implications for these different parts of Europe. Because in1600thegripoftheCrownwasweakerinEnglandthaninFranceandSpain,Atlantictradeopenedthewaytothecreationofnewinstitutionswithgreaterpluralism inEngland,while strengthening theFrenchandSpanishmonarchs.

THECONTINGENTPATHOFHISTORY

Theoutcomesof theeventsduringcritical juncturesareshapedby theweight of history, as existing economic andpolitical institutions shapethe balance of power and delineate what is politically feasible. Theoutcome,however,isnothistoricallypredeterminedbutcontingent.Theexactpathofinstitutionaldevelopmentduringtheseperiodsdependsonwhichoneoftheopposingforceswillsucceed,whichgroupswillbeabletoformeffectivecoalitions,andwhichleaderswillbeabletostructureeventstotheiradvantage.Theroleofcontingencycanbe illustratedby theoriginsof inclusive

politicalinstitutionsinEngland.Notonlywastherenothingpreordainedin thevictoryof thegroupsvying for limiting thepowerof theCrownandformorepluralisticinstitutionsintheGloriousRevolutionof1688,but the entire path leading up to this political revolution was at themercy of contingent events. The victory of the winning groups wasinexorablylinkedtothecritical juncturecreatedbytheriseofAtlantictradethatenrichedandemboldenedmerchantsopposingtheCrown.Butacenturyearlier itwas far fromobvious thatEnglandwouldhaveanyability todominatetheseas,colonizemanypartsoftheCaribbeanandNorth America, or capture so much of the lucrative trade with theAmericas and the East. Neither Elizabeth I nor other Tudormonarchsbeforeherhadbuiltapowerful,unifiednavy.TheEnglishnavyreliedonprivateersandindependentmerchantshipsandwasmuchlesspowerful

thantheSpanish fleet.Theprofitsof theAtlanticnonethelessattractedthese privateers, challenging the Spanish monopoly of the ocean. In1588 the Spanish decided to put an end to these challenges to theirmonopoly,aswellastoEnglishmeddlingintheSpanishNetherlands,atthetimefightingagainstSpainforindependence.The Spanish monarch Philip II sent a powerful fleet, the Armada,commanded by the Duke of Medina Sidonia. It appeared a foregoneconclusion to many that the Spanish would conclusively defeat theEnglish,solidifytheirmonopolyoftheAtlantic,andprobablyoverthrowElizabeth I, perhaps ultimately gaining control of the British Isles. Yetsomethingverydifferenttranspired.BadweatherandstrategicmistakesbySidonia,whohadbeenputinchargeatthelastminuteafteramoreexperienced commander died, made the Spanish Armada lose theiradvantage.Againstallodds, theEnglishdestroyedmuchof thefleetoftheirmorepowerfulopponents.TheAtlanticseaswerenowopentotheEnglish on more equal terms. Without this unlikely victory for theEnglish,theeventsthatwouldcreatethetransformativecriticaljunctureandspawnthedistinctivelypluralisticpoliticalinstitutionsofpost-1688Englandwouldneverhavegotmoving.Map9showsthetrailofSpanishshipwrecksastheArmadawaschasedrightaroundtheBritishIsles.Of course, nobody in 1588 could foresee the consequences of thefortunateEnglishvictory.Fewprobablyunderstoodatthetimethatthiswouldcreateacriticaljunctureleadinguptoamajorpoliticalrevolutionacenturylater.Thereshouldbenopresumptionthatanycriticaljuncturewillleadtoa successful political revolution or to change for the better.History isfull of examples of revolutions and radical movements replacing onetyrannywith another, in a pattern that theGerman sociologist RobertMichelsdubbedtheironlawofoligarchy,aparticularlyperniciousformoftheviciouscircle.TheendofcolonialisminthedecadesfollowingtheSecondWorldWarcreatedcritical junctures formany formercolonies.However, in most cases in sub-Saharan Africa and many in Asia, thepostindependence governments simply took a page out of RobertMichels’s book and repeated and intensified the abuses of theirpredecessors, often severely narrowing the distribution of politicalpower, dismantling constraints, and undermining the already meagerincentives that economic institutions provided for investment and

economicprogress.Itwasonlyinafewcases,societiessuchasBotswana(seethispage), thatcritical junctureswereusedto launchaprocessofpoliticalandeconomicchangethatpavedthewayforeconomicgrowth.

Critical juncturescanalsoresult inmajorchangetowardratherthanaway from extractive institutions. Inclusive institutions, even thoughtheyhavetheirownfeedbackloop,thevirtuouscircle,canalsoreversecourse and become gradually more extractive because of challengesduring critical junctures—and whether this happens is, again,contingent. The Venetian Republic, aswewill see in chapter 6,mademajorstridestowardinclusivepoliticalandeconomicinstitutionsinthemedievalperiod.Butwhilesuchinstitutionsbecamegraduallystrongerin England after the Glorious Revolution of 1688, in Venice theyultimatelytransformedthemselvesintoextractiveinstitutionsunderthecontrolofanarrowelitethatmonopolizedbotheconomicopportunitiesandpoliticalpower.

UNDERSTANDINGTHELAYOFTHELAND

Theemergenceofamarketeconomybasedoninclusiveinstitutionsandsustained economic growth in eighteenth-century England sent ripplesallaroundtheworld,notleastbecauseitallowedEnglandtocolonizealargepartofit.ButiftheinfluenceofEnglisheconomicgrowthcertainlyspread around the globe, the economic and political institutions thatcreated it did not automatically do so. The diffusion of the IndustrialRevolutionhaddifferenteffectsontheworld inthesamewaythat theBlackDeathhaddifferenteffectsonWesternandEasternEurope,andinthesamewaythattheexpansionofAtlantictradehaddifferenteffectsinEnglandandSpain. Itwas the institutions inplace indifferentpartsoftheworldthatdeterminedtheimpact,andtheseinstitutionswereindeeddifferent—small differences had been amplified over time by priorcritical junctures. These institutional differences and their implicationshave tended to persist to the present due to the vicious and virtuouscircles, albeit imperfectly, and are the key to understanding both howworld inequalityemergedandthenatureof the layof the landaroundus.SomepartsoftheworlddevelopedinstitutionsthatwereveryclosetothoseinEngland,thoughbyaverydifferentroute.ThiswasparticularlytrueofsomeEuropean“settlercolonies”suchasAustralia,Canada,andthe United States, though their institutions were just forming as the

IndustrialRevolutionwasgettingunderway.Aswesawinchapter1,aprocess startingwith the foundationof the Jamestown colony in1607andculminating in theWarof Independenceand theenactmentof theU.S. Constitution shares many of the same characteristics as the longstruggleinEnglandofParliamentagainstthemonarchy,foritalsoledtoa centralized state with pluralistic political institutions. The IndustrialRevolutionthenspreadrapidlytosuchcountries.WesternEurope,experiencingmanyof the samehistoricalprocesses,had institutions similar to England at the time of the IndustrialRevolution. There were small but consequential differences betweenEnglandandtherest,whichiswhytheIndustrialRevolutionhappenedinEnglandandnotFrance.Thisrevolutionthencreatedanentirelynewsituation and considerably different sets of challenges to Europeanregimes,whichinturnspawnedanewsetofconflictsculminatingintheFrenchRevolution.TheFrenchRevolutionwasanothercriticaljuncturethat led the institutions ofWestern Europe to converge with those ofEngland,whileEasternEuropedivergedfurther.The rest of the world followed different institutional trajectories.European colonization set the stage for institutional divergence in theAmericas,whereincontrasttotheinclusiveinstitutionsdevelopedintheUnited States and Canada extractive ones emerged in Latin America,which explains the patterns of inequalitywe see in theAmericas. Theextractive political and economic institutions of the SpanishconquistadorsinLatinAmericahaveendured,condemningmuchoftheregiontopoverty.ArgentinaandChilehave,however,faredbetterthanmostothercountries in theregion.Theyhadfewindigenouspeopleormineral riches andwere “neglected”while the Spanish focused on thelands occupied by the Aztec, Maya, and Incan civilizations. Notcoincidentally, thepoorestpartofArgentina is thenorthwest, theonlysectionofthecountryintegratedintotheSpanishcolonialeconomy.Itspersistentpoverty,thelegacyofextractiveinstitutions,issimilartothatcreatedbythePotosímitainBoliviaandPeru(thispage–thispage).Africawasthepartoftheworldwiththeinstitutionsleastabletotakeadvantage of the opportunities made available by the IndustrialRevolution. For at least the last one thousand years, outside of smallpocketsandduringlimitedperiodsoftime,Africahaslaggedbehindtherest of the world in terms of technology, political development, and

prosperity. It is the part of theworldwhere centralized states formedverylateandverytenuously.Wheretheydidform,theywerelikelyashighlyabsolutistastheKongoandoftenshortlived,usuallycollapsing.AfricasharesthistrajectoryoflackofstatecentralizationwithcountriessuchasAfghanistan,Haiti,andNepal,whichhavealsofailedtoimposeorder over their territories and create anything resembling stability toachieveevenamodicumofeconomicprogress.Thoughlocatedinverydifferentpartsoftheworld,Afghanistan,Haiti,andNepalhavemuchincommoninstitutionallywithmostnationsinsub-SaharanAfrica,andarethussomeofthepoorestcountriesintheworldtoday.How African institutions evolved into their present-day extractive

form again illustrates the process of institutional drift punctuated bycritical junctures, but this time often with highly perverse outcomes,particularlyduringtheexpansionoftheAtlanticslavetrade.TherewereneweconomicopportunitiesfortheKingdomofKongowhenEuropeantraders arrived. The long-distance trade that transformed Europe alsotransformed the Kingdom of Kongo, but again, initial institutionaldifferences mattered. Kongolese absolutism transmogrified fromcompletely dominating society, with extractive economic institutionsthat merely captured all the agricultural output of its citizens, toenslaving people en masse and selling them to the Portuguese inexchangeforgunsandluxurygoodsfortheKongoleseelite.The initialdifferencesbetweenEnglandandKongomeant thatwhile

newlong-distancetradeopportunitiescreatedacriticaljuncturetowardpluralisticpoliticalinstitutionsintheformer,theyalsoextinguishedanyhopeofabsolutismbeingdefeatedintheKongo. InmuchofAfrica thesubstantial profits to be had from slaving led not only to itsintensificationandevenmoreinsecurepropertyrightsforthepeoplebutalsotointensewarfareandthedestructionofmanyexistinginstitutions;within a few centuries, any process of state centralization was totallyreversed,andmanyoftheAfricanstateshadlargelycollapsed.Thoughsomenew,andsometimespowerful,statesdidformtoexploittheslavetrade,theywerebasedonwarfareandplunder.Thecriticaljunctureofthe discovery of the Americas may have helped England developinclusive institutions but it made institutions in Africa even moreextractive.Thoughtheslavetrademostlyendedafter1807,subsequentEuropean

colonialismnotonlythrewintoreversenascenteconomicmodernizationinpartsofsouthernandwesternAfricabutalsocutoffanypossibilityofindigenous institutional reform. Thismeant that even outside of areassuch as Congo, Madagascar, Namibia, and Tanzania, the areas whereplunder,mass disruption, and evenwhole-scalemurderwere the rule,therewaslittlechanceforAfricatochangeitsinstitutionalpath.Even worse, the structures of colonial rule left Africa with a more

complexandperniciousinstitutionallegacyinthe1960sthanatthestartof the colonial period. The development of the political and economicinstitutions inmanyAfricancoloniesmeant thatrather thancreatingacritical juncture for improvements in their institutions, independencecreatedanopening forunscrupulous leaders to takeoverand intensifythe extraction that European colonialists presided over. The politicalincentives these structures created led to a style of politics thatreproduced the historical patterns of insecure and inefficient propertyrights under states with strong absolutist tendencies but nonethelesslackinganycentralizedauthorityovertheirterritories.The Industrial Revolution has still not spread toAfrica because that

continenthasexperiencedalongviciouscircleofthepersistenceandre-creation of extractive political and economic institutions. Botswana isthe exception. As wewill see (this page–this page), in the nineteenthcentury,KingKhama,thegrandfatherofBotswana’sfirstprimeministerat independence, Seretse Khama, initiated institutional changes tomodernize the political and economic institutions of his tribe. Quiteuniquely,thesechangeswerenotdestroyedinthecolonialperiod,partlyas a consequence of Khama’s and other chiefs’ clever challenges tocolonial authority. Their interplay with the critical juncture thatindependence from colonial rule created laid the foundations forBotswana’seconomicandpoliticalsuccess.Itwasanothercaseofsmallhistoricaldifferencesmattering.There is a tendency to see historical events as the inevitable

consequencesofdeep-rooted forces.Whileweplacegreat emphasisonhowthehistoryofeconomicandpoliticalinstitutionscreatesviciousandvirtuous circles, contingency, aswehaveemphasized in the contextofthedevelopmentofEnglishinstitutions,canalwaysbeafactor.SeretseKhama, studying in England in the 1940s, fell in love with RuthWilliams, a white woman. As a result, the racist apartheid regime in

South Africa persuaded the English government to ban him from theprotectorate,thencalledBechuanaland(whoseadministrationwasundertheHighCommissionerofSouthAfrica), andhe resignedhiskingship.Whenhe returned to lead theanticolonial struggle,hedid sowith theintentionnotofentrenchingthe traditional institutionsbutofadaptingthem to the modern world. Khama was an extraordinary man,uninterested inpersonalwealth anddedicated tobuildinghis country.Most other African countries have not been so fortunate. Both thingsmattered, the historical development of institutions in Botswana andcontingentfactorsthatledthesetobebuiltonratherthanoverthrownordistortedastheywereelsewhereinAfrica.

IN THE NINETEENTH CENTURY,absolutismnot sodifferent fromthat inAfricaorEastern Europe was blocking the path of industrialization in much ofAsia.InChina,thestatewasstronglyabsolutist,andindependentcities,merchants, and industrialists were either nonexistent or much weakerpolitically.Chinawasamajornavalpowerandheavilyinvolvedinlong-distance trade centuries before theEuropeans. But it had turned awayfromtheoceansjustatthewrongtime,whenMingemperorsdecidedinthe late fourteenth and early fifteenth centuries that increased long-distancetradeandthecreativedestructionthatitmightbringwouldbelikelytothreatentheirrule.In India, institutional drift worked differently and led to the

developmentofauniquelyrigidhereditarycastesystemthatlimitedthefunctioning of markets and the allocation of labor across occupationsmuchmore severely than the feudal order inmedieval Europe. It alsounderpinnedanotherstrongformofabsolutismundertheMughalrulers.Most European countries had similar systems in the Middle Ages.Modern Anglo-Saxon surnames such as Baker, Cooper, and Smith aredirectdescendantsofhereditaryoccupationalcategories.Bakersbaked,coopers made barrels, and smiths forged metals. But these categorieswere never as rigid as Indian caste distinctions and gradually becamemeaningless as predictors of a person’s occupation. Though Indianmerchants did trade throughout the IndianOcean, and amajor textileindustry developed, the caste system and Mughal absolutism wereserious impediments to the development of inclusive economic

institutions in India. By the nineteenth century, things were even lesshospitable for industrializationas IndiabecameanextractivecolonyoftheEnglish.Chinawasnever formallycolonizedbyaEuropeanpower,but after the English successfully defeated the Chinese in the OpiumWarsbetween1839and1842,andthenagainbetween1856and1860,China had to sign a series of humiliating treaties and allow Europeanexportstoenter.AsChina,India,andothersfailedtotakeadvantageofcommercialandindustrialopportunities,Asia,exceptforJapan, laggedbehindasWesternEuropewasforgingahead.

THE COURSE OF institutional development that Japan charted in thenineteenth century again illustrates the interaction between criticaljuncturesandsmalldifferencescreatedbyinstitutionaldrift.Japan,likeChina, was under absolutist rule. The Tokugawa family took over in1600 and ruled over a feudal system that also banned internationaltrade. Japan, too, faced a critical juncture created by Westernintervention as four U.S. warships, commanded by Matthew C. Perry,enteredEdoBay in July1853,demanding trade concessions similar tothoseEngland obtained from theChinese in theOpiumWars. But thiscritical juncture played out very differently in Japan. Despite theirproximity and frequent interactions, by the nineteenth century ChinaandJapanhadalreadydriftedapartinstitutionally.While Tokugawa rule in Japanwas absolutist and extractive, it had

only a tenuous hold on the leaders of the othermajor feudal domainsand was susceptible to challenge. Even though there were peasantrebellions and civil strife, absolutism in China was stronger, and theoppositionlessorganizedandautonomous.Therewerenoequivalentsofthe leaders of the other domains in China who could challenge theabsolutistruleoftheemperorandtraceanalternativeinstitutionalpath.This institutional difference, in many ways small relative to thedifferences separating China and Japan from Western Europe, haddecisiveconsequencesduringthecriticaljuncturecreatedbytheforcefularrival of theEnglish andAmericans.China continued in its absolutistpath after the Opium Wars, while the U.S. threat cemented theoppositiontoTokugawaruleinJapanandledtoapoliticalrevolution,the Meiji Restoration, as we will see in chapter 10. This Japanese

political revolution enabled more inclusive political institutions andmuch more inclusive economic institutions to develop, and laid thefoundations for subsequent rapid Japanese growth, while Chinalanguishedunderabsolutism.HowJapanreactedtothethreatposedbyU.S.warships,bystartinga

processoffundamentalinstitutionaltransformation,helpsusunderstandanother aspect of the lay of the land around us: transitions fromstagnation to rapid growth. South Korea, Taiwan, and finally Chinaachieved breakneck rates of economic growth since the SecondWorldWarthroughapathsimilartotheonethatJapantook.Ineachofthesecases, growth was preceded by historic changes in the countries’economic institutions—thoughnotalways in theirpolitical institutions,astheChinesecasehighlights.Thelogicofhowepisodesofrapidgrowthcometoanabruptendand

arereversedisalsorelated.Inthesamewaythatdecisivestepstowardinclusive economic institutions can ignite rapid economic growth, asharp turn away from inclusive institutions can lead to economicstagnation. But more often, collapses of rapid growth, such as inArgentina or the Soviet Union, are a consequence of growth underextractive institutions coming to an end. As we have seen, this canhappeneitherbecauseofinfightingoverthespoilsofextraction,leadingtothecollapseoftheregime,orbecausetheinherentlackofinnovationand creative destruction under extractive institutions puts a limit onsustained growth. How the Soviets ran hard into these limits will bediscussedingreaterdetailinthenextchapter.

IFTHEPOLITICALandeconomicinstitutionsofLatinAmericaoverthepastfivehundredyearswereshapedbySpanishcolonialism,thoseoftheMiddleEastwereshapedbyOttomancolonialism.In1453theOttomansunderSultan Mehmet II captured Constantinople, making it their capital.Duringtherestofthecentury,theOttomansconqueredlargepartsoftheBalkansandmostoftherestofTurkey.Inthefirsthalfofthesixteenthcentury, Ottoman rule spread throughout the Middle East and NorthAfrica. By 1566, at the death of Sultan Süleyman I, known as theMagnificent, their empire stretched from Tunisia in the East, throughEgypt,allthewaytoMeccaintheArabianPeninsula,andontowhatis

now modern Iraq. The Ottoman state was absolutist, with the sultanaccountable to few and sharing power with none. The economicinstitutionstheOttomansimposedwerehighlyextractive.Therewasnoprivate property in land, which all formally belonged to the state.Taxationof landandagricultural output, togetherwith loot fromwar,was the main source of government revenues. However, the Ottomanstate did not dominate theMiddle East in the sameway that it coulddominateitsheartlandinAnatoliaoreventotheextentthattheSpanishstate dominated Latin American society. The Ottoman state wascontinuously challenged by Bedouins and other tribal powers in theArabianPeninsula.Itlackednotonlytheabilitytoimposeastableorderin much of the Middle East but also the administrative capacity tocollecttaxes.Soit“farmed”themouttoindividuals,sellingofftherighttootherstocollecttaxesinwhateverwaytheycould.Thesetaxfarmersbecame autonomous and powerful. Rates of taxation in the MiddleEastern territories were very high, varying between one-half or two-thirdsofwhatfarmersproduced.Muchofthisrevenuewaskeptbythetaxfarmers.BecausetheOttomanstatefailedtoestablishastableorderin these areas, property rights were far from secure, and there was agreat deal of lawlessness and banditry as armed groups vied for localcontrol.InPalestine,forexample,thesituationwassodirethatstartingin the late sixteenth century, peasants left the most fertile land andmoved up to mountainous areas, which gave them greater protectionagainstbanditry.Extractive economic institutions in the urban areas of the Ottoman

Empire were no less stifling. Commerce was under state control, andoccupations were strictly regulated by guilds and monopolies. Theconsequence was that at the time of the Industrial Revolution theeconomic institutions of the Middle East were extractive. The regionstagnatedeconomically.By the 1840s, the Ottomans were trying to reform institutions—for

example, by reversing tax farming and getting locally autonomousgroupsundercontrol.ButabsolutismpersisteduntiltheFirstWorldWar,and reform efforts were thwarted by the usual fear of creativedestruction and the anxiety among elite groups that they would loseeconomically or politically. While Ottoman reformers talked ofintroducing private property rights to land in order to increase

agriculturalproductivity, the statusquopersistedbecauseof thedesireforpoliticalcontrolandtaxation.OttomancolonizationwasfollowedbyEuropean colonization after 1918. When European control ended, thesame dynamics we have seen in sub-Saharan Africa took hold, withextractivecolonialinstitutionstakenoverbyindependentelites.Insomecases,suchasthemonarchyofJordan,theseelitesweredirectcreationsof thecolonialpowers,but this, too,happened frequently inAfrica,aswe will see. Middle Eastern countries without oil today have incomelevelssimilartopoorLatinAmericannations.Theydidnotsufferfromsuch immiserizing forces as the slave trade, and they benefited for alongerperiodfromflowsoftechnologyfromEurope.IntheMiddleAges,theMiddleEast itselfwasalsoa relativelyadvancedpartof theworldeconomically.SotodayitisnotaspoorasAfrica,butthemajorityofitspeoplestillliveinpoverty.

WE HAVE SEEN that neither geographic- nor cultural- nor ignorance-basedtheoriesarehelpfulforexplainingthelayofthelandaroundus.Theydonot provide a satisfactory account for theprominent patterns ofworldinequality:thefactthattheprocessofeconomicdivergencestartedwiththe Industrial Revolution in England during the eighteenth andnineteenth centuries and then spread to Western Europe and toEuropean settler colonies; the persistent divergence between differentparts of the Americas; the poverty of Africa or the Middle East; thedivergence between Eastern and Western Europe; and the transitionsfrom stagnation to growth and the sometimes abrupt end to growthspurts.Ourinstitutionaltheorydoes.In the remainingchapters,wewilldiscuss ingreaterdetailhow this

institutionaltheoryworksandillustratethewiderangeofphenomenaitcanaccountfor.TheserangefromtheoriginsoftheNeolithicRevolutionto the collapse of several civilizations, either because of the intrinsiclimitstogrowthunderextractiveinstitutionsorbecauseoflimitedstepstowardinclusivenessbeingreversed.We will see how and why decisive steps toward inclusive political

institutionswere takenduring theGloriousRevolution inEngland.Wewilllookmorespecificallyatthefollowing:

• How inclusive institutions emerged from the interplay of thecritical juncture created by Atlantic trade and the nature ofpreexistingEnglishinstitutions.

•HowtheseinstitutionspersistedandbecamestrengthenedtolaythefoundationsfortheIndustrialRevolution,thanksinparttothevirtuouscircleandinparttofortunateturnsofcontingency.

• How many regimes reigning over absolutist and extractiveinstitutions steadfastly resisted the spreadofnew technologiesunleashedbytheIndustrialRevolution.

• How Europeans themselves stamped out the possibility ofeconomic growth in many parts of the world that theyconquered.

• How the vicious circle and the iron law of oligarchy havecreated a powerful tendency for extractive institutions topersist, and thus the lands where the Industrial Revolutionoriginallydidnotspreadremainrelativelypoor.

•WhytheIndustrialRevolutionandothernewtechnologieshavenot spread and are unlikely to spread to places around theworld todaywhereaminimumdegreeofcentralizationof thestatehasn’tbeenachieved.

Our discussion will also show that certain areas that managed totransform institutions in amore inclusive direction, such as France orJapan, or that prevented the establishment of extractive institutions,suchastheUnitedStatesorAustralia,weremorereceptivetothespreadoftheIndustrialRevolutionandpulledaheadoftherest.AsinEngland,this was not always a smooth process, and along the way, manychallengestoinclusiveinstitutionswereovercome,sometimesbecauseofthedynamicsofthevirtuouscircle,sometimesthankstothecontingentpathofhistory.Finally,wewillalsodiscusshowthefailureofnationstodayisheavily

influenced by their institutional histories, how much policy advice isinformedbyincorrecthypothesesandispotentiallymisleading,andhownations are still able to seize critical junctures and break themold toreformtheirinstitutionsandembarkuponapathtogreaterprosperity.

5.

“I’VESEENTHEFUTURE,ANDITWORKS”:GROWTHUNDEREXTRACTIVEINSTITUTIONS

I’VESEENTHEFUTURE

INSTITUTIONALDIFFERENCESPLAY thecriticalrole inexplainingeconomicgrowththroughout the ages. But if most societies in history are based onextractive political and economic institutions, does this imply thatgrowthnevertakesplace?Obviouslynot.Extractiveinstitutions,bytheirvery logic, must create wealth so that it can be extracted. A rulermonopolizing political power and in control of a centralized state canintroduce some degree of law and order and a system of rules, andstimulateeconomicactivity.Butgrowthunderextractiveinstitutionsdiffersinnaturefromgrowth

brought forth by inclusive institutions. Most important, it will be notsustainedgrowththatrequires technologicalchange,butrathergrowthbased on existing technologies. The economic trajectory of the SovietUnionprovidesavivid illustrationofhowtheauthorityand incentivesprovided by the state can spearhead rapid economic growth underextractiveinstitutionsandhowthistypeofgrowthultimatelycomestoanendandcollapses.

THE FIRSTWORLDWAR had ended and the victorious and the vanquishedpowersmetinthegreatpalaceofVersailles,outsideParis,todecideonthe parameters of the peace. Prominent among the attendees wasWoodrow Wilson, president of the United States. Noticeable by itsabsencewasanyrepresentationfromRussia.Theoldtsaristregimehadbeen overthrown by the Bolsheviks inOctober 1917. A civilwar then

raged between theReds (the Bolsheviks) and theWhites. The English,French,andAmericans sentanexpeditionary force to fightagainst theBolsheviks.Amissionledbyayoungdiplomat,WilliamBullitt,andtheveteran intellectualand journalistLincolnSteffenswassent toMoscowtomeetwithLenintotrytounderstandtheintentionsoftheBolsheviksandhowtocometotermswiththem.Steffenshadmadehisnameasaniconoclast, amuckraker journalistwhohadpersistentlydenounced theevils of capitalism in the United States. He had been in Russia at thetimeof therevolution.Hispresencewas intendedtomake themissionlookcredibleandnottoohostile.Themissionreturnedwiththeoutlinesof an offer from Lenin about what it would take for peace with thenewlycreatedSovietUnion.SteffenswasbowledoverbywhathesawasthegreatpotentialoftheSovietregime.“Soviet Russia,” he recalled in his 1931 autobiography, “was arevolutionarygovernmentwithanevolutionaryplan.Theirplanwasnottoendevilssuchaspovertyandriches,graft,privilege,tyranny,andwarbydirectaction,buttoseekoutandremovetheircauses.Theyhadsetupadictatorship, supportedbyasmall, trainedminority, tomakeandmaintain for a few generations a scientific rearrangement of economicforces which would result in economic democracy first and politicaldemocracylast.”WhenSteffensreturnedfromhisdiplomaticmissionhewenttoseehisold friend the sculptor Jo Davidson and found himmaking a portraitbustof thewealthy financierBernardBaruch. “Soyou’vebeenover inRussia,”Baruchremarked.Steffensanswered,“Ihavebeenoverintothefuture,anditworks.”Hewouldperfectthisadageintoaformthatwentdowninhistory:“I’veseenthefuture,anditworks.”Rightupuntiltheearly1980s,manyWesternerswerestillseeingthefuture in the Soviet Union, and they kept on believing that it wasworking.Inasenseitwas,oratleastitdidforatime.Leninhaddiedin1924, and by 1927 Joseph Stalin had consolidated his grip on thecountry. He purged his opponents and launched a drive to rapidlyindustrialize the country. He did it via energizing the State PlanningCommittee,Gosplan,whichhadbeen founded in 1921.Gosplanwrotethe first Five-YearPlan,which ranbetween1928and1933.Economicgrowth Stalin style was simple: develop industry by governmentcommand and obtain the necessary resources for this by taxing

agriculture at very high rates. The communist state did not have aneffective tax system, so instead Stalin “collectivized” agriculture. Thisprocessentailedtheabolitionofprivatepropertyrightstolandandtheherdingofallpeople in thecountryside intogiantcollective farmsrunby the Communist Party. Thismade it much easier for Stalin to grabagriculturaloutputanduseit tofeedall thepeoplewhowerebuildingandmanning thenew factories.The consequencesof this for the ruralfolkwerecalamitous.Thecollectivefarmscompletelylackedincentivesforpeopletoworkhard,soproductionfellsharply.Somuchofwhatwasproducedwasextractedthattherewasnotenoughtoeat.Peoplebeganto starve to death. In the end, probably six million people died offamine, while hundreds of thousands of others were murdered orbanishedtoSiberiaduringtheforciblecollectivization.Neither the newly created industry nor the collectivized farmswereeconomicallyefficientinthesensethattheymadethebestuseofwhatresources the Soviet Union possessed. It sounds like a recipe foreconomicdisasterandstagnation,ifnotoutrightcollapse.ButtheSovietUnion grew rapidly. The reason for this is not difficult to understand.Allowingpeopletomaketheirowndecisionsviamarketsisthebestwayforasocietytoefficientlyuseitsresources.Whenthestateoranarrowelitecontrolsalltheseresourcesinstead,neithertherightincentiveswillbe created nor will there be an efficient allocation of the skills andtalents of people. But in some instances the productivity of labor andcapitalmaybesomuchhigherinonesectororactivity,suchasheavyindustry in the Soviet Union, that even a top-down process underextractive institutions that allocates resources toward that sector cangenerate growth. As we saw in chapter 3, extractive institutions inCaribbean islands such as Barbados, Cuba, Haiti, and Jamaica couldgenerate relatively high levels of incomes because they allocatedresources to theproductionof sugar,acommoditycovetedworldwide.The production of sugar based on gangs of slaves was certainly not“efficient,” and there was no technological change or creativedestruction in these societies, but this did not prevent them fromachieving some amount of growth under extractive institutions. ThesituationwassimilarintheSovietUnion,withindustryplayingtheroleof sugar in the Caribbean. Industrial growth in the Soviet Union wasfurther facilitated because its technology was so backward relative to

whatwasavailableinEuropeandtheUnitedStates,solargegainscouldbe reapedby reallocating resources to the industrial sector, even if allthiswasdoneinefficientlyandbyforce.Before 1928most Russians lived in the countryside. The technology

used by peasants was primitive, and there were few incentives to beproductive. Indeed, the last vestiges of Russian feudalism wereeradicatedonlyshortlybeforetheFirstWorldWar.Therewasthushugeunrealized economic potential from reallocating this labor fromagriculturetoindustry.Stalinistindustrializationwasonebrutalwayofunlocking this potential. By fiat, Stalinmoved these very poorly usedresources into industry, where they could be employed moreproductively, even if industry itself was very inefficiently organizedrelative towhat couldhavebeen achieved. In fact, between1928 and1960nationalincomegrewat6percentayear,probablythemostrapidspurtofeconomicgrowthinhistoryupuntilthen.Thisquickeconomicgrowth was not created by technological change, but by reallocatinglaborandbycapitalaccumulationthroughthecreationofnewtoolsandfactories.GrowthwassorapidthatittookingenerationsofWesterners,notjust

LincolnSteffens.IttookintheCentralIntelligenceAgencyoftheUnitedStates. It even took in the Soviet Union’s own leaders, such as NikitaKhrushchev,whofamouslyboastedinaspeechtoWesterndiplomatsin1956 that “we will bury you [theWest].” As late as 1977, a leadingacademic textbook by an English economist argued that Soviet-styleeconomiesweresuperiortocapitalistonesintermsofeconomicgrowth,providing full employment and price stability and even in producingpeoplewithaltruisticmotivation.PooroldWesterncapitalismdidbetteronly at providing political freedom. Indeed, the most widely useduniversity textbook in economics, written by Nobel Prize–winner PaulSamuelson,repeatedlypredictedthecomingeconomicdominanceoftheSoviet Union. In the 1961 edition, Samuelson predicted that Sovietnational income would overtake that of the United States possibly by1984,butprobablyby1997.Inthe1980editiontherewaslittlechangeintheanalysis,thoughthetwodatesweredelayedto2002and2012.Though the policies of Stalin and subsequent Soviet leaders could

produce rapid economic growth, they could not do so in a sustainedway. By the 1970s, economic growth had all but stopped. The most

importantlessonisthatextractiveinstitutionscannotgeneratesustainedtechnological change for two reasons: the lack of economic incentivesand resistanceby the elites. In addition, once all the very inefficientlyused resources had been reallocated to industry, there were feweconomic gains to be had by fiat. Then the Soviet system hit aroadblock, with lack of innovation and poor economic incentivespreventinganyfurtherprogress.TheonlyareainwhichtheSovietsdidmanage to sustain some innovation was through enormous efforts inmilitaryandaerospacetechnology.Asaresulttheymanagedtoputthefirstdog,Leika,andthefirstman,YuriGagarin,inspace.TheyalsolefttheworldtheAK-47asoneoftheirlegacies.Gosplanwasthesupposedlyall-powerfulplanningagencyinchargeofthe centralplanningof theSoviet economy.Oneof thebenefitsof thesequence of five-year plans written and administered by Gosplan wassupposed to have been the long time horizon necessary for rationalinvestment and innovation. In reality,what got implemented in Sovietindustryhadlittletodowiththefive-yearplans,whichwerefrequentlyrevised and rewritten or simply ignored. The development of industrytookplaceon thebasisof commandsbyStalinand thePolitburo,whochanged their minds frequently and often completely revised theirpreviousdecisions.Allplanswerelabeled“draft”or“preliminary.”Onlyonecopyofaplanlabeled“final”—thatforlightindustryin1939—hasever come to light. Stalin himself said in 1937 that “only bureaucratscan think that planningwork endswith the creation of the plan. Thecreationoftheplanisjustthebeginning.Therealdirectionoftheplandevelopsonly after theputting together of theplan.” Stalinwanted tomaximizehisdiscretiontorewardpeopleorgroupswhowerepoliticallyloyal,andpunishthosewhowerenot.AsforGosplan,itsmainrolewastoprovideStalinwithinformationsohecouldbettermonitorhisfriendsandenemies.Itactuallytriedtoavoidmakingdecisions.Ifyoumadeadecision that turnedoutbadly, youmight get shot.Better to avoid allresponsibility.Anexampleofwhatcouldhappenifyoutookyourjobtooseriously,rather than successfully second-guessing what the Communist Partywanted, isprovidedby theSovietcensusof1937.As thereturnscamein, it became clear that they would show a population of about 162million,farlessthanthe180millionStalinhadanticipatedandindeed

belowthefigureof168millionthatStalinhimselfannouncedin1934.The1937censuswas the firstconductedsince1926,andtherefore thefirstonethatfollowedthemassfaminesandpurgesoftheearly1930s.Theaccuratepopulationnumbersreflectedthis.Stalin’sresponsewastohave those who organized the census arrested and sent to Siberia orshot.He ordered another census,which took place in 1939. This timetheorganizersgot itright; theyfoundthat thepopulationwasactually171million.Stalin understood that in the Soviet economy, people had few

incentives to work hard. A natural response would have been tointroduce such incentives, and sometimes he did—for example, bydirecting food supplies to areas where productivity had fallen—toreward improvements.Moreover, as early as 1931 he gave up on theidea of creating “socialistmen andwomen”whowouldworkwithoutmonetary incentives. In a famous speech he criticized “equalitymongering,”andthereafternotonlydiddifferentjobsgetpaiddifferentwages but also a bonus system was introduced. It is instructive tounderstand how this worked. Typically a firm under central planninghadtomeetanoutputtargetsetundertheplan,thoughsuchplanswereoften renegotiated and changed. From the 1930s, workers were paidbonusesiftheoutputlevelswereattained.Thesecouldbequitehigh—for instance, as much as 37 percent of the wage for management orsenior engineers. But paying such bonuses created all sorts ofdisincentivestotechnologicalchange.Foronething, innovation,whichtookresourcesawayfromcurrentproduction, riskedtheoutput targetsnot being met and the bonuses not being paid. For another, outputtargetswereusuallybasedonpreviousproductionlevels.Thiscreatedahugeincentivenevertoexpandoutput,sincethisonlymeanthavingtoproducemoreinthefuture,sincefuturetargetswouldbe“ratchetedup.”Underachievementwasalwaysthebestwaytomeettargetsandgetthebonus. The fact that bonuses were paid monthly also kept everyonefocused on the present, while innovation is about making sacrificestodayinordertohavemoretomorrow.Even when bonuses and incentives were effective in changing

behavior, theyoftencreatedotherproblems.Centralplanningwas justnot good at replacing what the great eighteenth-century economistAdamSmith called the “invisible hand” of themarket.When the plan

was formulated in tons of steel sheet, the sheet wasmade too heavy.When itwas formulated in terms of area of steel sheet, the sheetwasmade too thin.When the plan for chandelierswasmade in tons, theyweresoheavy,theycouldhardlyhangfromceilings.By the 1940s, the leaders of the Soviet Union, even if not their

admirersintheWest,werewellawareoftheseperverseincentives.TheSoviet leaders acted as if theywere due to technical problems,whichcould be fixed. For example, they moved away from paying bonusesbasedonoutputtargetstoallowingfirmstosetasideportionsofprofitsto pay bonuses. But a “profit motive” was no more encouraging toinnovationthanonebasedonoutputtargets.Thesystemofpricesusedtocalculateprofitswasalmostcompletelyunconnected to thevalueofnew innovationsor technology.Unlike inamarket economy,prices inthe Soviet Union were set by the government, and thus bore littlerelation tovalue.Tomorespecificallycreate incentives for innovation,the Soviet Union introduced explicit innovation bonuses in 1946. Asearly as 1918, the principle had been recognized that an innovatorshouldreceivemonetaryrewardsforhisinnovation,buttherewardssetwere small and unrelated to the value of the new technology. Thischangedonlyin1956,whenitwasstipulatedthatthebonusshouldbeproportional to the productivity of the innovation. However, sinceproductivity was calculated in terms of economic benefits measuredusing the existing system of prices, this was again not much of anincentive to innovate.One could fillmanypageswith examplesof theperverse incentives these schemesgenerated.Forexample,because thesizeoftheinnovationbonusfundwaslimitedbythewagebillofafirm,this immediately reduced the incentive to produce or adopt anyinnovationthatmighthaveeconomizedonlabor.Focusingonthedifferentrulesandbonusschemestendstomaskthe

inherent problems of the system. As long as political authority andpower rested with the Communist Party, it was impossible tofundamentallychangethebasicincentivesthatpeoplefaced,bonusesornobonuses.Sinceits inception,theCommunistPartyhadusednotjustcarrots but also sticks, big sticks, to get its way. Productivity in theeconomywasnodifferent.Awholesetoflawscreatedcriminaloffensesfor workers who were perceived to be shirking. In June 1940, forexample, a law made absenteeism, defined as any twenty minutes

unauthorizedabsenceorevenidlingonthejob,acriminaloffensethatcouldbepunishedbysixmonths’hardlaboranda25percentcutinpay.Allsortsofsimilarpunishmentswereintroduced,andwereimplementedwithastonishingfrequency.Between1940and1955,36millionpeople,about one-third of the adult population, were found guilty of suchoffenses.Ofthese,15millionweresenttoprisonand250,000wereshot.In any year, there would be 1 million adults in prison for laborviolations;thisisnottomentionthe2.5millionpeopleStalinexiledtothe gulags of Siberia. Still, it didn’t work. Though you can movesomeone toa factory,youcannot forcepeople to thinkandhavegoodideas by threatening to shoot them. Coercion like this might havegeneratedahighoutputof sugar inBarbadosor Jamaica,but it couldnot compensate for the lack of incentives in a modern industrialeconomy.Thefactthattrulyeffectiveincentivescouldnotbeintroducedinthecentrally planned economy was not due to technical mistakes in thedesign of the bonus schemes. Itwas intrinsic to thewholemethod bywhich extractive growth had been achieved. It had been done bygovernment command, which could solve some basic economicproblems. But stimulating sustained economic growth required thatindividualsusetheirtalentandideas,andthiscouldneverbedonewitha Soviet-style economic system. The rulers of the Soviet Union wouldhavehadtoabandonextractiveeconomicinstitutions,butsuchamovewould have jeopardized their political power. Indeed, when MikhailGorbachev started tomoveaway fromextractive economic institutionsafter1987,thepoweroftheCommunistPartycrumbled,andwithit,theSovietUnion.

THESOVIETUNIONwasabletogeneraterapidgrowthevenunderextractiveinstitutionsbecausetheBolsheviksbuiltapowerfulcentralizedstateandused it toallocate resources toward industry.Butas inall instancesofgrowth under extractive institutions, this experience did not featuretechnologicalchangeandwasnotsustained.Growth first sloweddownand then totallycollapsed.Thoughephemeral, this typeofgrowthstillillustrateshowextractiveinstitutionscanstimulateeconomicactivity.Throughout history most societies have been ruled by extractive

institutions, and those that have managed to impose some extent oforderoverthecountrieshavebeenabletogeneratesomelimitedgrowth—even if none of these extractive societies have managed to achievesustainedgrowth.Infact,someofthemajorturningpointsinhistoryarecharacterized by institutional innovations that cemented extractiveinstitutionsandincreasedtheauthorityofonegrouptoimposelawandorderandbenefitfromextraction.Intherestofthischapter,wewillfirstdiscussthenatureofinstitutionalinnovationsthatestablishsomedegreeof state centralization and enable growth under extractive institutions.We shall then show how these ideas help us understand theNeolithicRevolution, the momentous transition to agriculture, which underpinsmany aspects of our current civilization. We will conclude byillustrating,withtheexampleoftheMayacity-states,howgrowthunderextractiveinstitutionsislimitednotonlybecauseoflackoftechnologicalprogressbutalsobecauseitwillencourageinfightingfromrivalgroupswishingtotakecontrolofthestateandtheextractionitgenerates.

ONTHEBANKSOFTHEKASAI

One of the great tributaries of theRiver Congo is the Kasai. Rising inAngola,itheadsnorthandmergeswiththeCongonortheastofKinshasa,the capital of themodern Democratic Republic of Congo. Though theDemocratic Republic of Congo is poor compared with the rest of theworld,therehavealwaysbeensignificantdifferencesintheprosperityofvariousgroupswithinCongo.TheKasaiistheboundarybetweentwoofthese.SoonafterpassingintoCongoalongthewesternbank,you’llfindtheLelepeople;ontheeasternbankaretheBushong(Map6,thispage).On the faceof it there ought tobe fewdifferencesbetween these twogroups with regard to their prosperity. They are separated only by ariver, which either can cross by boat. The two different tribes have acommonorigin and related languages. In addition,manyof the thingstheybuildaresimilarinstyle,includingtheirhouses,clothes,andcrafts.Yet when the anthropologist Mary Douglas and the historian JanVansina studied these groups in the 1950s, they discovered somestartling differences between them. As Douglas put it: “The Lele arepoor,whiletheBushongarerich…EverythingthattheLelehaveorcan

do,theBushonghavemoreandcandobetter.”Simpleexplanationsforthisinequalityareeasytocomeby.Onedifference,reminiscentofthatbetweenplacesinPeruthatwereorwerenotsubjecttothePotosímita,isthattheLeleproducedforsubsistencewhiletheBushongproducedforexchange in themarket.Douglas andVansina alsonoted that the Leleusedinferiortechnology.Forinstance,theydidnotusenetsforhunting,eventhoughthesegreatlyimproveproductivity.Douglasargued,“[T]heabsenceofnetsisconsistentwithageneralLeletendencynottoinvesttimeandlaborinlong-termequipment.”Therewerealsoimportantdistinctionsinagriculturaltechnologiesand

organization. The Bushong practiced a sophisticated form of mixedfarming where five crops were planted in succession in a two-yearsystemof rotation.Theygrewyams, sweetpotatoes,manioc (cassava),andbeansandgatheredtwoandsometimesthreemaizeharvestsayear.The Lele had no such system and managed to reap only one annualharvestofmaize.Therewerealsostrikingdifferences in lawandorder.TheLelewere

dispersed into fortified villages, which were constantly in conflict.Anyone traveling between two or even venturing into the forest tocollect food was liable to be attacked or kidnapped. In the Bushongcountry,thisrarely,ifever,happened.What lay behind these differences in the patterns of production,

agricultural technology,andprevalenceoforder?Obviously itwasnotgeographythatinducedtheLeletouseinferiorhuntingandagriculturaltechnology.Itwascertainlynotignorance,becausetheyknewaboutthetoolsusedbytheBushong.Analternativeexplanationmightbeculture;could itbe that theLelehadaculture thatdidnotencourage themtoinvestinhuntingnetsandsturdierandbetter-builthouses?Butthisdoesnotseemtohavebeentrue,either.AswiththepeopleofKongo,theLelewere very interested in purchasing guns, and Douglas even remarkedthat “their eager purchase of firearms… shows their culture does notrestrictthemtoinferiortechniqueswhenthesedonotrequirelong-termcollaboration and effort.” So neither a cultural aversion to technologynor ignorancenorgeographydoesagoodjobofexplainingthegreaterprosperityoftheBushongrelativetotheLele.The reason for differences between these two peoples lies in the

differentpoliticalinstitutionsthatemergedinthelandsoftheBushong

andtheLele.WenotedearlierthattheLelelivedinfortifiedvillagesthatwere not part of a unified political structure. It was different on theothersideoftheKasai.Around1620apoliticalrevolutiontookplaceledbyamancalledShyaam,whoforgedtheKubaKingdom,whichwesawonMap6,withtheBushongatitsheartandwithhimselfasking.Priortothisperiod,therewereprobablyfewdifferencesbetweentheBushongand the Lele; the differences emerged as a consequence of the wayShyaamreorganizedsocietytotheeastoftheriver.Hebuiltastateandapyramidofpoliticalinstitutions.Thesewerenotjustsignificantlymorecentralized than what came before but also involved highly elaboratestructures. Shyaam and his successors created a bureaucracy to raisetaxesandalegalsystemandpoliceforcetoadministerthelaw.Leaderswerecheckedbycouncils,whichtheyhadtoconsultwithbeforemakingdecisions.Therewas even trial by jury, an apparentlyunique event insub-Saharan Africa prior to European colonialism. Nevertheless, thecentralized state thatShyaamconstructedwasa toolof extractionandhighly absolutist.Nobodyvoted forhim, and statepolicywasdictatedfromthetop,notbypopularparticipation.Thispolitical revolution introducingstatecentralizationand lawand

order in the Kuba country in turn led to an economic revolution.Agriculture was reorganized and new technologies were adopted toincrease productivity. The crops that had previously been the stapleswere replaced by new, higher-yield ones from the Americas (inparticular,maize,cassava,andchilipeppers).Theintensemixed-farmingcyclewasintroducedatthistime,andtheamountoffoodproducedpercapita doubled. To adopt these crops and reorganize the agriculturalcycle,morehandswereneededinthefields.Sotheageofmarriagewasloweredtotwenty,whichbroughtmenintotheagriculturallaborforceatayoungerage.ThecontrastwiththeLeleisstark.Theirmentendedtomarry at thirty-five and only thenworked in the fields.Until then,theydedicatedtheirlivestofightingandraiding.The connection between the political and economic revolution was

simple. King Shyaam and thosewho supported himwanted to extracttaxes andwealth from theKuba,whohad to produce a surplus abovewhat they consumed themselves. While Shyaam and his men did notintroduce inclusive institutions to the eastern bank of the Kasai, someamountofeconomicprosperityisintrinsictoextractiveinstitutionsthat

achieve somedegreeof state centralizationand impose lawandorder.Encouragingeconomicactivitywasofcourse in the interestofShyaamandhismen,asotherwisetherewouldhavebeennothingtoextract.JustlikeStalin,Shyaamcreatedbycommandasetofinstitutionsthatwouldgenerate thewealthnecessary tosupport this system.Compared to theutter absence of law and order that reigned on the other bank of theKasai,thisgeneratedsignificanteconomicprosperity—evenifmuchofitwas likely extracted by Shyaam and his elites. But it was necessarilylimited.JustasintheSovietUnion,therewasnocreativedestructioninthe Kuba Kingdom and no technological innovation after this initialchange. This situation was more or less unaltered by the time thekingdomwas first encountered byBelgian colonial officials in the latenineteenthcentury.

KINGSHYAAM’S ACHIEVEMENT illustrates how some limited degree of economicsuccess can be achieved through extractive institutions. Creating suchgrowth requires a centralized state. To centralize the state, a politicalrevolutionisoftennecessary.OnceShyaamcreatedthisstate,hecoulduse its power to reorganize the economy and boost agriculturalproductivity,whichhecouldthentax.Why was it that the Bushong, and not the Lele, had a political

revolution?Couldn’t the Lele havehad their ownKing Shyaam?WhatShyaam accomplished was an institutional innovation not tied in anydeterministic way to geography, culture, or ignorance. The Lele couldhavehadsucharevolutionandsimilarlytransformedtheirinstitutions,but theydidn’t.Perhaps this is for reasons thatwedonotunderstand,becauseofourlimitedknowledgeoftheirsocietytoday.Mostlikelyitisbecauseof thecontingentnatureofhistory.ThesamecontingencywasprobablyatworkwhensomeofthesocietiesintheMiddleEasttwelvethousand years ago embarked upon an even more radical set ofinstitutional innovations leading to settled societies and then to thedomesticationofplantsandanimals,aswediscussnext.

THELONGSUMMER

About 15,000 BC, the Ice Age came to an end as the Earth’s climatewarmedup.EvidencefromtheGreenlandicecoressuggeststhataveragetemperaturesrosebyasmuchasfifteendegreesCelsiusinashortspanof time.Thiswarmingseems tohavecoincidedwithrapid increases inhuman populations as the global warming led to expanding animalpopulationsandmuchgreateravailabilityofwildplantsandfoods.Thisprocess was put into rapid reverse at about 14,000 BC, by a period ofcooling known as the Younger Dryas, but after 9600 BC, globaltemperaturesroseagain,bysevendegreesCelsiusinlessthanadecade,andhavesincestayedhigh.ArchaeologistBrianFagancallsittheLongSummer. The warming-up of the climate was a huge critical juncturethat formed thebackground to theNeolithicRevolution,wherehumansocieties made the transition to sedentary life, farming, and herding.ThisandtherestofsubsequenthumanhistoryhaveplayedoutbaskinginthisLongSummer.There is a fundamentaldifferencebetween farmingandherdingand

hunting-gathering. The former is based on the domestication of plantandanimalspecies,withactiveinterventionintheirlifecyclestochangegeneticstomakethosespeciesmoreusefultohumans.Domesticationisatechnologicalchangethatenableshumanstoproducealotmorefoodfromtheavailableplantsandanimals.Thedomesticationofmaize, forexample,beganwhenhumansgatheredteosinte,thewildcropthatwasmaize’sancestor.Teosintecobsareverysmall,barelyafewcentimeterslong. They are dwarfed by a cob of modernmaize. Yet gradually, byselectingthelargerearsofteosinte,andplantswhoseearsdidnotbreakbutstayedonthestalktobeharvested,humanscreatedmodernmaize,acropthatprovidesfarmorenourishmentfromthesamepieceofland.The earliest evidence of farming, herding, and the domestication of

plantsandanimalscomes from theMiddleEast, inparticular from thearea known as the Hilly Flanks, which stretches from the south ofmodern-dayIsrael,upthroughPalestineandthewestbankoftheRiverJordan, via Syria and into southeastern Turkey, northern Iraq, andwesternIran.Around9500BCthefirstdomesticplants,emmerandtwo-rowbarley,werefoundinJerichoonthewestbankoftheRiverJordaninPalestine;andemmer,peas,andlentils,atTellAswad, farthernorthin Syria. Both were sites of the so-called Natufian culture and both

supported large villages; the village of Jericho had a population ofpossiblyfivehundredpeoplebythistime.Why did the first farming villages happen here and not elsewhere?

WhywasittheNatufians,andnototherpeoples,whodomesticatedpeasandlentils?Weretheyluckyandjusthappenedtobelivingwherethereweremany potential candidates for domestication?While this is true,many other peoplewere living among these species, but they did notdomesticatethem.Aswesawinchapter2inMaps4and5,researchbygeneticists and archaeologists to pin down the distribution of thewildancestorsofmoderndomesticatedanimalsandplantsrevealsthatmanyoftheseancestorswerespreadoververylargeareas,millionsofsquarekilometers. The wild ancestors of domesticated animal species werespread throughout Eurasia. Though the Hilly Flanks were particularlywell endowed in terms of wild crop species, even they were very farfrom unique. It was not that the Natufians lived in an area uniquelyendowedwithwildspeciesthatmadethemspecial.Itwasthattheyweresedentarybeforetheystarteddomesticatingplantsoranimals.Onepieceofevidencecomesfromgazelleteeth,whicharecomposedofcementum,a bony connective tissue that grows in layers. During the spring andsummer, when cementum’s growth is most rapid, the layers are adifferentcolorfromthelayersthatforminthewinter.Bytakingaslicethroughatoothyoucanseethecolorofthelastlayercreatedbeforethegazelledied.Usingthistechnique,youcandetermineifthegazellewaskilledinsummerorwinter.AtNatufiansites,onefindsgazelleskilledinallseasons,suggestingyear-roundresidence.ThevillageofAbuHureyra,on the river Euphrates, is one of the most intensively researchedNatufian settlements. For almost forty years archaeologists haveexamined the layers of the village, which provides one of the bestdocumentedexamplesofsedentarylifebeforeandafterthetransitiontofarming. The settlement probably began around 9500 BC, and theinhabitants continued their hunter-gatherer lifestyle for another fivehundred years before switching to agriculture. Archaeologists estimatethat the population of the village prior to farming was between onehundredandthreehundred.You can think of all sorts of reasons why a society might find it

advantageoustobecomesedentary.Movingaboutiscostly;childrenandoldpeoplehavetobecarried,anditisimpossibletostorefoodforlean

times when you are on the move. Moreover, tools such as grindingstonesandsickleswereusefulforprocessingwildfoods,butareheavytocarry.Thereisevidencethatevenmobilehunter-gatherersstoredfoodinselect locations such as caves.One attractionofmaize is that it storesvery well, and this is a key reason why it became so intensivelycultivatedthroughouttheAmericas.Theabilitytodealmoreeffectivelywithstorageandaccumulatefoodstocksmusthavebeenakeyincentiveforadoptingasedentarywayoflife.While it might be collectively desirable to become sedentary, thisdoesn’tmeanthatitwillnecessarilyhappen.Amobilegroupofhunter-gatherers would have to agree to do this, or someone would have toforce them. Some archaeologists have suggested that increasingpopulationdensityanddeclininglivingstandardswerekeyfactorsintheemergenceofsedentarylife,forcingmobilepeopletostayinoneplace.Yet the density of Natufian sites is no greater than that of previousgroups,sotheredoesnotappeartobeevidenceofincreasingpopulationdensity. Skeletal and dental evidence does not suggest deterioratinghealth, either. For instance, food shortage tends to create thin lines inpeople’stoothenamel,aconditioncalledhypoplasia.TheselinesareinfactlessprevalentinNatufianpeoplethaninlaterfarmingpeople.More important is that while sedentary life had pluses, it also hadminuses. Conflict resolution was probably much harder for sedentarygroups, since disagreements could be resolved less easily by people orgroupsmerelymovingaway.Oncepeoplehadbuiltpermanentbuildingsandhadmore assets than they could carry,moving awaywas amuchless attractive option. So villages needed more effective ways ofresolving conflict and more elaborate notions of property. Decisionswould have to bemade aboutwho had access towhich piece of landclose to thevillage,orwhogot topick fruit fromwhichstandof treesandfishinwhichpartofthestream.Ruleshadtobedeveloped,andtheinstitutionsthatmadeandenforcedruleshadtobeelaborated.Inorderforsedentarylifetoemerge,itthereforeseemsplausiblethathunter-gathererswouldhavehad tobe forced to settledown, and thiswould have to have been preceded by an institutional innovationconcentrating power in the hands of a group that would become thepoliticalelite, enforceproperty rights,maintainorder,andalsobenefitfromtheirstatusbyextractingresourcesfromtherestofsociety.Infact,

apoliticalrevolutionsimilartothatinitiatedbyKingShyaam,evenifona smaller scale, is likely to have been the breakthrough that led tosedentarylife.The archaeological evidence indeed suggests that the Natufiansdeveloped a complex society characterized by hierarchy, order, andinequality—beginnings of what we would recognize as extractiveinstitutions—a long time before they became farmers. One compellingpieceofevidenceforsuchhierarchyandinequalitycomesfromNatufiangraves. Some people were buried with large amounts of obsidian anddentaliumshells,whichcamefromtheMediterraneancoastnearMountCarmel. Other types of ornamentation include necklaces, garters, andbracelets,whichweremadeoutof canine teethanddeerphalangesaswell as shells. Other people were buried without any of these things.Shellsandalsoobsidianweretraded,andcontrolofthistradewasquitelikelyasourceofpoweraccumulationandinequality.FurtherevidenceofeconomicandpoliticalinequalitycomesfromtheNatufiansiteofAinMallaha, just north of the Sea of Galilee. Amid a group of about fiftyround huts and many pits, clearly used for storage, there is a large,intensively plastered building close to a cleared central place. Thisbuildingwasalmostcertainlythehouseofachief.Amongtheburialsatthesite,somearemuchmoreelaborate,andthereisalsoevidenceofaskull cult, possibly indicating ancestor worship. Such cults arewidespreadinNatufiansites,particularlyJericho.Thepreponderanceofevidence fromNatufiansitessuggests that thesewereprobablyalreadysocieties with elaborate institutions determining inheritance of elitestatus.Theyengagedintradewithdistantplacesandhadnascentformsofreligionandpoliticalhierarchies.Theemergenceofpoliticalelitesmostlikelycreatedthetransitionfirstto sedentary life and then to farming. As the Natufian sites show,sedentary life did not necessarily mean farming and herding. Peoplecouldsettledownbutstillmake their livingbyhuntingandgathering.Afterall,theLongSummermadewildcropsmorebountiful,andhuntingandgatheringwaslikelytohavebeenmoreattractive.Mostpeoplemayhavebeenquite satisfiedwith a subsistence life basedonhunting andgathering that did not require a lot of effort. Even technologicalinnovationdoesn’tnecessarilyleadtoincreasedagriculturalproduction.In fact, it is known that a major technological innovation, the

introductionof the steelaxeamong thegroupofAustralianAboriginalpeoplesknownasYirYoront,lednottomoreintenseproductionbuttomore sleeping, because it allowed subsistence requirements to bemetmoreeasily,withlittleincentivetoworkformore.The traditional, geography-based explanation for the NeolithicRevolution—the centerpiece of Jared Diamond’s argument, which wediscussed in chapter 2—is that it was driven by the fortuitousavailability of many plant and animal species that could easily bedomesticated. This made farming and herding attractive and inducedsedentary life. After societies became sedentary and started farming,they began to develop political hierarchy, religion, and significantlymorecomplex institutions.Thoughwidelyaccepted, theevidence fromthe Natufians suggests that this traditional explanation puts the cartbeforethehorse.Institutionalchangesoccurredinsocietiesquiteawhilebeforetheymadethetransitiontofarmingandwereprobablythecauseboth of the move to sedentarism, which reinforced the institutionalchanges, and subsequently of theNeolithic Revolution. This pattern issuggestednotonlybytheevidence fromtheHillyFlanks,which is theareamostintensivelystudied,butalsobythepreponderanceofevidencefromtheAmericas,sub-SaharanAfrica,andEastAsia.Certainly the transition to farming led to greater agriculturalproductivity and enabled a significant expansion of population. Forinstance, in sites such as Jericho and Abu Hureyra, one sees that theearly farming village was much larger than the prefarming one. Ingeneral,villagesgrewbybetweentwoandsixtimeswhenthetransitiontook place. Moreover, many of the consequences that people havetraditionally arguedashaving flowed from this transitionundoubtedlyhappened.Therewasgreateroccupationalspecializationandmorerapidtechnologicalprogress,andprobablythedevelopmentofmorecomplexand possibly less egalitarian political institutions. But whether thishappenedinaparticularplacewasnotdeterminedbytheavailabilityofplantandanimalspecies.Instead,itwasaconsequenceofthesociety’shaving experienced the types of institutional, social, and politicalinnovationsthatwouldhaveallowedsedentarylifeandthenfarmingtoemerge.ThoughtheLongSummerandthepresenceofcropandanimalspeciesallowed this to happen, it did not determine where or when exactly,

after the climate had warmed up, it would happen. Rather, this wasdeterminedby the interactionofa critical juncture, theLongSummer,withsmallbut important institutionaldifferencesthatmattered.Astheclimate warmed up, some societies, such as the Natufians, developedelementsofcentralizedinstitutionsandhierarchy,thoughthesewereona very small scale relative to those of modern nation-states. Like theBushongunderShyaam, societies reorganized to takeadvantageof thegreateropportunitiescreatedbytheglutofwildplantsandanimals,anditwasnodoubt thepoliticaleliteswhowere themainbeneficiariesofthesenewopportunitiesandofthepoliticalcentralizationprocess.Otherplaces that had only slightly different institutions did not permit theirpolitical elites to take similar advantage of this juncture and laggedbehindtheprocessofpoliticalcentralizationandthecreationofsettled,agricultural, and more complex societies. This paved the way to asubsequent divergence of exactly the type we have seen before. Oncethesedifferencesemerged,theyspreadtosomeplacesbutnottoothers.Forexample, farmingspreadintoEuropefromtheMiddleEaststartingaround6500BC,mostlyasaconsequenceofthemigrationoffarmers.InEurope,institutionsdriftedawayfrompartsoftheworld,suchasAfrica,where initial institutionshadbeendifferentandwhere the innovationsset inmotion by the Long Summer in theMiddle East happened onlymuchlater,andeventheninadifferentform.

THE INSTITUTIONAL INNOVATIONS of the Natufians, though they did most likelyunderpin the Neolithic Revolution, did not leave a simple legacy inworldhistoryanddidnot leadinexorablytothelong-runprosperityoftheir homelands in modern Israel, Palestine, and Syria. Syria andPalestine are relatively poor parts of the modern world, and theprosperity of Israel was largely imported by the settlement of Jewishpeople after the SecondWorldWar and their high levels of educationand easy access to advanced technologies. The early growth of theNatufians did not become sustained for the same reason that Sovietgrowthfizzledout.Thoughhighlysignificant,evenrevolutionaryforitstime, this was growth under extractive institutions. For the Natufiansocietyitwasalsolikelythatthistypeofgrowthcreateddeepconflictsoverwhowouldcontrolinstitutionsandtheextractiontheyenabled.For

every elite benefiting from extraction there is a non-elite who wouldlovetoreplacehim.Sometimesinfightingsimplyreplacesoneelitewithanother.Sometimesitdestroysthewholeextractivesociety,unleashinga process of state and societal collapse, as the spectacular civilizationthat Maya city-states built more than one thousand years agoexperienced.

THEUNSTABLEEXTRACTION

Farmingemerged independently in severalplacesaround theworld. InwhatisnowmodernMexico,societiesformedthatestablishedstatesandsettlements,andtransitionedtoagriculture.AswiththeNatufiansintheMiddleEast, theyalsoachieved somedegreeof economicgrowth.TheMayacity-statesintheareaofsouthernMexico,Belize,Guatemala,andWesternHonduras in fact built a fairly sophisticated civilizationundertheir own brand of extractive institutions. The Maya experienceillustratesnotonlythepossibilityofgrowthunderextractiveinstitutionsbutalsoanother fundamental limit to this typeofgrowth: thepoliticalinstabilitythatemergesandultimatelyleadstocollapseofbothsocietyandstateasdifferentgroupsandpeoplefighttobecometheextractors.Maya cities first began to develop around 500 BC. These early cities

eventuallyfailed,sometimeinthefirstcenturyAD.Anewpoliticalmodelthen emerged, creating the foundation for the Classic Era, between AD250and900.ThisperiodmarkedthefullfloweringofMayacultureandcivilization.Butthismoresophisticatedcivilizationwouldalsocollapsein the course of the next six hundred years. By the time the Spanishconquistadors arrived in the early sixteenth century, the great templesand palaces of suchMaya sites as Tikal, Palenque, and Calakmul hadreceded into the forest, not to be rediscovered until the nineteenthcentury.TheMayacitiesneverunifiedintoanempire,thoughsomecitieswere

subservient to others, and they often appear to have cooperated,particularlyinwarfare.Themainconnectionbetweentheregion’scity-states,fiftyofwhichwecanrecognizebytheirownglyphs,isthattheirpeople spoke around thirty-one different but closely related Mayanlanguages.TheMayasdevelopedawritingsystem,andthereareatleast

fifteenthousandremaininginscriptionsdescribingmanyaspectsofelitelife, culture, and religion. They also had a sophisticated calendar forrecording dates known as the Long Count. It was verymuch like ourowncalendarinthatitcountedtheunfoldingofyearsfromafixeddateand was used by all Maya cities. The Long Count began in 3114 BC,thoughwe do not knowwhat significance theMayas attached to thisdate,which longprecedestheemergenceofanythingresemblingMayasociety.TheMayaswereskilledbuilderswhoindependentlyinventedcement.

Their buildings and their inscriptions provide vital information on thetrajectories of the Maya cities, as they often recorded events datedaccording to the Long Count. Looking across all the Maya cities,archaeologists can thus count how many buildings were finished inparticular years. Around AD 500 there are few dated monuments. Forexample,theLongCountdatecorrespondingtoAD514recordedjustten.Therewasthenasteadyincrease,reachingtwentybyAD672and fortyby the middle of the eighth century. After this the number of datedmonumentscollapses.Bytheninthcentury, it isdownto tenperyear,and by the tenth century, to zero. These dated inscriptions give us aclear picture of the expansion of Maya cities and their subsequentcontractionfromthelateeighthcentury.Thisanalysisofdatescanbecomplementedbyexaminingthelistsof

kings theMayas recorded.At theMaya cityofCopán,now inwesternHonduras, there is a famous monument known as Altar Q. Altar Qrecords the names of all the kings, starting from the founder of thedynasty K’inich Yax K’uk’ Mo’, or “King Green-Sun First QuetzalMacaw,”namedafternotjustthesunbutalsotwooftheexoticbirdsoftheCentralAmerican forestwhose feathersweregreatlyvaluedby theMayas.K’inichYaxK’uk’Mo’cametopowerinCopáninAD426,whichweknow from theLongCountdateonAltarQ.He foundedadynastythat would reign for four hundred years. Some of K’inich Yax’ssuccessors had equally graphic names. The thirteenth ruler’s glyphtranslates as “18 Rabbit,”whowas followed by “SmokeMonkey” andthen“SmokeShell,”whodied in AD763.The lastnameon thealtar isKingYaxPasajChanYoaat,or“FirstDawnedSkyLighteningGod,”whowasthesixteenthrulerofthislineandassumedthethroneatthedeath

of SmokeShell.Afterhimweknowofonlyonemoreking,UkitTook(“Patron of Flint”), from a fragment of an altar. After Yax Pasaj, thebuildings and inscriptions stopped, and it seems that the dynasty wasshortlyoverthrown.UkitTookwasprobablynoteventherealclaimanttothethronebutapretender.There is a final way of looking at this evidence at Copán, one

developedby thearchaeologistsAnnCorinneFreter,NancyGonlin,andDavidWebster.TheseresearchersmappedtheriseandfallofCopánbyexaminingthespreadofthesettlementintheCopánValleyoveraperiodof850years,fromAD400toAD1250,usingatechniquecalledobsidianhydration,whichcalculatesthewatercontentofobsidianonthedateitwas mined. Once mined, the water content falls at a known rate,allowing archaeologists to calculate the date a piece of obsidian wasmined.Freter,Gonlin,andWebsterwerethenabletomapwherepiecesofdatedobsidianwerefoundintheCopánValleyandtracehowthecityexpandedandthencontracted.Sinceitispossibletomakeareasonableguessaboutthenumberofhousesandbuildingsinaparticulararea,thetotalpopulationofthecitycanbeestimated.IntheperiodAD400–449,thepopulationwasnegligible,estimatedataboutsixhundredpeople.Itrosesteadilytoapeakoftwenty-eightthousandinAD750–799.Thoughthis does not appear large by contemporary urban standards, it wasmassiveforthatperiod;thesenumbersimplythatinthisperiod,CopánhadalargerpopulationthanLondonorParis.OtherMayacities,suchasTikal and Calakmul, were undoubtedly much larger. In line with theevidencefromtheLongCountdates,AD800wasthepopulationpeakforCopán. After this it began to decline, and by AD 900 it had fallen toaroundfifteenthousandpeople.Fromtherethefallcontinued,andbyAD1200 the population had returned towhat itwas eight hundred yearspreviously.ThebasisfortheeconomicdevelopmentoftheMayaClassicalErawas

the same as that for the Bushong and the Natufians: the creation ofextractive institutions with some degree of state centralization. Theseinstitutionshadseveralkeyelements.AroundAD100,inthecityofTikalinGuatemala,thereemergedanewtypeofdynastickingdom.Arulingclassbasedontheajaw(lordorruler)tookrootwithakingcalledthek’uhulajaw(divinelord)and,underneathhim,ahierarchyofaristocrats.

Thedivinelordorganizedthesocietywiththecooperationoftheseelitesandalsocommunicatedwiththegods.Asfarasweknow,thisnewsetofpoliticalinstitutionsdidnotallowforanysortofpopularparticipation,butitdidbringstability.Thek’uhulajawraisedtributefromfarmersandorganized labor to build the greatmonuments, and the coalescence ofthese institutions created the basis for an impressive economicexpansion. The Maya’s economy was based on extensive occupationalspecialization,withskilledpotters,weavers,woodworkers,andtoolandornamentmakers.Theyalsotradedobsidian,jaguarpelts,marineshells,cacao,salt,andfeathersamongthemselvesandotherpolitiesoverlongdistancesinMexico.Theyprobablyhadmoney,too,andliketheAztecs,usedcacaobeansforcurrency.ThewayinwhichtheMayaClassicalErawasfoundedonthecreation

of extractive political institutions was very similar to the situationamongtheBushong,withYaxEhb’XookatTikalplayingarolesimilartothatofKingShyaam.Thenewpoliticalinstitutionsledtoasignificantincrease ineconomicprosperity,muchofwhichwas thenextractedbythe new elite based around the k’uhul ajaw. Once this system hadconsolidated, by around AD 300, there was little further technologicalchange,however.Thoughthereissomeevidenceofimprovedirrigationand water management techniques, agricultural technology wasrudimentary and appears not to have changed. Building and artistictechniquesbecamemuchmoresophisticatedovertime,butintotaltherewaslittleinnovation.There was no creative destruction. But there were other forms of

destructionasthewealththattheextractiveinstitutionscreatedforthek’uhulajawandtheMayaeliteledtoconstantwarfare,whichworsenedovertime.ThesequenceofconflictsisrecordedintheMayainscriptions,withspecialglyphsindicatingthatawartookplaceataparticulardateintheLongCount.TheplanetVenuswasthecelestialpatronofwar,andthe Mayas regarded some phases of the planet’s orbit as particularlyauspiciousforwagingwar.Theglyphthatindicatedwarfare,knownas“starwars”byarchaeologists, showsa star showering theearthwithaliquidthatcouldbewaterorblood.Theinscriptionsalsorevealpatternsofallianceandcompetition.Therewerelongcontestsforpowerbetweenthe larger states, such as Tikal, Calakmul, Copán, and Palenque, andthese subjugated smaller states into a vassal status. Evidence for this

comes from glyphsmarking royal accessions. During this period, theystart indicating that the smaller states were now being dominated byanother,outsideruler.Map 10 (this page) shows the main Maya cities and the various

patternsofcontactbetweenthemasreconstructedbythearchaeologistsNikolaiGrubeandSimonMartin.ThesepatternsindicatethatthoughthelargecitiessuchasCalakmul,DosPilas,PiedrasNegras,andYaxchilanhadextensivediplomaticcontacts,somewereoftendominatedbyothersandtheyalsofoughteachother.The overwhelming fact about theMaya collapse is that it coincides

withtheoverthrowofthepoliticalmodelbasedonthek’uhulajaw.WesawinCopánthatafterYaxPasaj’sdeathinAD810therewerenomorekings. At around this time the royal palaceswere abandoned. TwentymilestothenorthofCopán,inthecityofQuiriguá,thelastking,JadeSky, ascended to the throne between AD 795 and 800. The last datedmonument is from AD 810 by the LongCount, the same year that YaxPasaj died. The city was abandoned soon after. Throughout theMayaareathestoryisthesame;thepoliticalinstitutionsthathadprovidedthecontextfortheexpansionoftrade,agriculture,andpopulationvanished.Royalcourtsdidnotfunction,monumentsandtempleswerenotcarved,andpalaceswereemptied.Aspoliticalandsocialinstitutionsunraveled,reversingtheprocessofstatecentralization,theeconomycontractedandthepopulationfell.In somecases themajorcenterscollapsed fromwidespreadviolence.

The Petexbatun region of Guatemala—where the great temples weresubsequently pulled down and the stone used to build extensivedefensive walls—provides one vivid example. As we’ll see in the nextchapter, it was very similar to what happened in the later RomanEmpire.Later,eveninplacessuchasCopán,wheretherearefewersignsofviolenceat thetimeof thecollapse,manymonumentsweredefacedor destroyed. In some places the elite remained even after the initialoverthrow of the k’uhul ajaw. In Copán there is evidence of the elitecontinuingtoerectnewbuildingsforatleastanothertwohundredyearsbeforetheyalsodisappeared.Elsewhereelitesseemtohavegoneatthesametimeasthedivinelord.

Existing archaeological evidence does not allow us to reach adefinitiveconclusionaboutwhy thek’uhulajaw and elites surroundinghim were overthrown and the institutions that had created the MayaClassical Era collapsed. We know this took place in the context ofintensified inter-city warfare, and it seems likely that opposition andrebellionwithinthecities,perhapsledbydifferentfactionsoftheelite,overthrewtheinstitution.Though the extractive institutions that the Mayas created produced

sufficient wealth for the cities to flourish and the elite to becomewealthy and generate great art andmonumental buildings, the systemwasnotstable.Theextractiveinstitutionsuponwhichthisnarroweliteruledcreatedextensive inequality,andthusthepotential for infightingbetween those who could benefit from the wealth extracted from thepeople. This conflict ultimately led to the undoing of the Mayacivilization.

WHATGOESWRONG?

Extractive institutions are so common in history because they have apowerful logic: theycangenerate some limitedprosperitywhileat thesametimedistributingitintothehandsofasmallelite.Forthisgrowthtohappen, theremustbepolitical centralization.Once this is inplace,the state—or theelite controlling the state—typicallyhas incentives toinvestandgeneratewealth,encourageotherstoinvestsothatthestatecanextractresourcesfromthem,andevenmimicsomeoftheprocessesthatwouldnormallybesetinmotionbyinclusiveeconomicinstitutionsand markets. In the Caribbean plantation economies, extractiveinstitutions took the formof the eliteusing coercion to force slaves toproducesugar.IntheSovietUnion,theytooktheformoftheCommunistPartyreallocatingresourcesfromagriculturetoindustryandstructuringsomesortofincentivesformanagersandworkers.Aswehaveseen,suchincentiveswereunderminedbythenatureofthesystem.The potential for creating extractive growth gives an impetus to

political centralization and is the reason why King Shyaamwished tocreatetheKubaKingdom,andlikelyaccountsforwhytheNatufiansintheMiddleEastsetupaprimitiveformoflawandorder,hierarchy,andextractive institutions that would ultimately lead to the NeolithicRevolution.Similarprocessesalso likelyunderpinnedtheemergenceofsettled societies and the transition to agriculture in the Americas, andcan be seen in the sophisticated civilization that the Mayas built onfoundationslaidbyhighlyextractiveinstitutionscoercingmanyforthebenefitoftheirnarrowelites.The growth generated by extractive institutions is very different in

naturefromgrowthcreatedunderinclusiveinstitutions,however.Mostimportant, it is not sustainable. By their very nature, extractiveinstitutionsdonotfostercreativedestructionandgenerateatbestonlyalimited amount of technological progress. The growth they engenderthus lasts for only so long. The Soviet experience gives a vividillustration of this limit. Soviet Russia generated rapid growth as itcaughtuprapidlywithsomeoftheadvancedtechnologiesintheworld,and resources were allocated out of the highly inefficient agriculturalsector and into industry. But ultimately the incentives faced in everysector, from agriculture to industry, could not stimulate technological

progress. This took place in only a few pocketswhere resourceswerebeingpouredandwhereinnovationwasstronglyrewardedbecauseofitsrole in thecompetitionwith theWest.Sovietgrowth,howeverrapid itwas,wasboundtoberelativelyshortlived,anditwasalreadyrunningoutofsteambythe1970s.Lackofcreativedestructionandinnovationisnottheonlyreasonwhy

there are severe limits to growth under extractive institutions. ThehistoryoftheMayacity-statesillustratesamoreominousand,alas,morecommon end, again implied by the internal logic of extractiveinstitutions. As these institutions create significant gains for the elite,therewillbestrongincentivesforotherstofighttoreplacethecurrentelite. Infighting and instability are thus inherent features of extractiveinstitutions,andtheynotonlycreatefurtherinefficienciesbutalsooftenreverseanypoliticalcentralization,sometimesevenleadingtothetotalbreakdownof lawandorderanddescent intochaos,as theMayacity-statesexperiencedfollowingtheirrelativesuccessduringtheirClassicalEra.Though inherently limited, growth under extractive institutionsmay

nonethelessappearspectacularwhenit’sinmotion.ManyintheSovietUnionandmanymore in theWesternworldwereawestruckbySovietgrowthinthe1920s,’30s,’40s,’50s,’60s,andevenaslateasthe’70s,inthe same way that they are mesmerized by the breakneck pace ofeconomicgrowthinChinatoday.Butaswewilldiscussingreaterdetailinchapter15,Chinaundertheruleof theCommunistParty isanotherexampleofsocietyexperiencinggrowthunderextractiveinstitutionsandissimilarlyunlikelytogeneratesustainedgrowthunless itundergoesafundamental political transformation toward inclusive politicalinstitutions.

6.

DRIFTINGAPART

HOWVENICEBECAMEAMUSEUM

THE GROUP OF ISLANDS that formVenice lie at the farnorthof theAdriaticSea. In theMiddle Ages, Venice was possibly the richest place in theworld, with the most advanced set of inclusive economic institutionsunderpinned by nascent political inclusiveness. It gained itsindependenceinAD810,atwhatturnedouttobeafortuitoustime.TheeconomyofEuropewas recovering from thedecline ithad sufferedasthe Roman Empire collapsed, and kings such as Charlemagne werereconstitutingstrongcentralpoliticalpower.Thisledtostability,greatersecurity, and an expansion of trade, which Venice was in a uniquepositiontotakeadvantageof.Itwasanationofseafarers,placedrightinthemiddleoftheMediterranean.FromtheEastcamespices,Byzantine-manufactured goods, and slaves. Venice became rich. By 1050, whenVenicehadalreadybeenexpandingeconomicallyforatleastacentury,it had apopulationof 45,000people.This increasedbymore than50percent,to70,000,by1200.By1330thepopulationhadagainincreasedbyanother50percent,to110,000;VenicewasthenasbigasParis,andprobablythreetimesthesizeofLondon.One of the key bases for the economic expansion of Venice was a

series of contractual innovations making economic institutions muchmoreinclusive.Themostfamouswasthecommenda,arudimentarytypeof jointstockcompany,whichformedonlyforthedurationofasingletradingmission.Acommenda involved twopartners, a “sedentary”onewhostayedinVeniceandonewhotraveled.Thesedentarypartnerputcapital into the venture, while the traveling partner accompanied thecargo. Typically, the sedentary partner put in the lion’s share of the

capital.Youngentrepreneurswhodidnothavewealththemselvescouldthengetintothetradingbusinessbytravelingwiththemerchandise.Itwasakeychannelofupwardsocialmobility.Any losses in thevoyageweresharedaccordingtotheamountofcapitalthepartnershadputin.Ifthevoyagemademoney,profitswerebasedontwotypesofcommendacontracts. If thecommendawasunilateral, thenthesedentarymerchantprovided 100 percent of the capital and received 75 percent of theprofits.Ifitwasbilateral,thesedentarymerchantprovided67percentofthe capital and received 50 percent of the profits. Studying officialdocuments, one sees how powerful a force the commenda was infosteringupwardsocialmobility:thesedocumentsarefullofnewnames,people who had previously not been among the Venetian elite. Ingovernment documents of AD 960, 971, and 982, the number of newnamescomprise69percent,81percent,and65percent,respectively,ofthoserecorded.Thiseconomicinclusivenessandtheriseofnewfamiliesthroughtradeforced thepolitical system tobecomeevenmoreopen.Thedoge,whogovernedVenice,wasselectedforlifebytheGeneralAssembly.Thoughageneralgatheringofallcitizens,inpracticetheGeneralAssemblywasdominatedbyacoregroupofpowerful families.Though thedogewasverypowerful,hispowerwasgraduallyreducedovertimebychangesinpolitical institutions. After 1032 the doge was elected along with anewlycreatedDucalCouncil,whosejobwasalsotoensurethatthedogedid not acquire absolute power. The first doge hemmed in by thiscouncil, Domenico Flabianico, was a wealthy silk merchant from afamilythathadnotpreviouslyheldhighoffice.Thisinstitutionalchangewas followed by a huge expansion of Venetian mercantile and navalpower. In 1082 Venice was granted extensive trade privileges inConstantinople,andaVenetianQuarterwascreatedinthatcity.Itsoonhoused ten thousand Venetians. Here we see inclusive economic andpoliticalinstitutionsbeginningtoworkintandem.Theeconomic expansionofVenice,which createdmorepressure forpolitical change, exploded after the changes in political and economicinstitutions that followed the murder of the doge in 1171. The firstimportantinnovationwasthecreationofaGreatCouncil,whichwastobe theultimate sourceofpoliticalpower inVenice fromthispointon.ThecouncilwasmadeupofofficeholdersoftheVenetianstate,suchas

judges, and was dominated by aristocrats. In addition to theseofficeholders,eachyearahundrednewmemberswerenominatedtothecouncilbyanominatingcommitteewhosefourmemberswerechosenbylot from the existing council. The council also subsequently chose themembers for two subcouncils, the Senate and the Council of Forty,whichhadvariouslegislativeandexecutivetasks.TheGreatCouncilalsochosetheDucalCouncil,whichwasexpandedfromtwotosixmembers.Thesecond innovationwas thecreationofyetanothercouncil, chosenby theGreatCouncil by lot, tonominate thedoge.Though the choicehadtoberatifiedby theGeneralAssembly, since theynominatedonlyoneperson,thiseffectivelygavethechoiceofdogetothecouncil.Thethirdinnovationwasthatanewdogehadtoswearanoathofofficethatcircumscribedducalpower.Overtimetheseconstraintswerecontinuallyexpandedso thatsubsequentdogeshadtoobeymagistrates, thenhaveall their decisions approved by the Ducal Council. The Ducal Councilalso tookon the roleofensuring that thedogeobeyedalldecisionsoftheGreatCouncil.These political reforms led to a further series of institutionalinnovations: in law, the creation of independentmagistrates, courts, acourtofappeals,andnewprivatecontractandbankruptcy laws.Thesenew Venetian economic institutions allowed the creation of new legalbusiness forms and new types of contracts. There was rapid financialinnovation, andwe see thebeginnings ofmodernbanking around thistime in Venice. The dynamic moving Venice toward fully inclusiveinstitutionslookedunstoppable.Buttherewasatensioninallthis.EconomicgrowthsupportedbytheinclusiveVenetianinstitutionswasaccompaniedbycreativedestruction.Each new wave of enterprising young men who became rich via thecommenda or other similar economic institutions tended to reduce theprofitsandeconomicsuccessofestablishedelites.Andtheydidnotjustreduce their profits; they also challenged their political power. Thustherewas always a temptation, if they couldget awaywith it, for theexistingelites sitting in theGreatCouncil to closedown the system tothesenewpeople.At the Great Council’s inception, membership was determined eachyear. Aswe saw, at the end of the year, four electorswere randomlychosen to nominate a hundred members for the next year, who were

automaticallyselected.OnOctober3,1286,aproposalwasmadetotheGreatCouncilthattherulesbeamendedsothatnominationshadtobeconfirmed by a majority in the Council of Forty, which was tightlycontrolledbyelitefamilies.Thiswouldhavegiventhiselitevetopowerovernewnominationstothecouncil,somethingtheypreviouslyhadnothad.Theproposalwasdefeated.OnOctober5,1286,anotherproposalwas put forth; this time it passed. From then on there was to beautomatic confirmationof aperson ifhis fathers andgrandfathershadserved on the council. Otherwise, confirmation was required by theDucalCouncil.OnOctober 17 another change in the ruleswaspassedstipulatingthatanappointmenttotheGreatCouncilmustbeapprovedbytheCouncilofForty,thedoge,andtheDucalCouncil.The debates and constitutional amendments of 1286 presaged La

Serrata(“TheClosure”)ofVenice.InFebruary1297,itwasdecidedthatif you had been a member of the Great Council in the previous fouryears, you received automatic nomination and approval. NewnominationsnowhadtobeapprovedbytheCouncilofForty,butwithonlytwelvevotes.AfterSeptember11,1298,currentmembersandtheirfamilies no longer needed confirmation. The Great Council was noweffectivelysealedtooutsiders,andtheinitialincumbentshadbecomeahereditary aristocracy. The seal on this came in 1315, with the Librod’Oro, or “Gold Book,” which was an official registry of the Venetiannobility.Those outside this nascent nobility did not let their powers erode

without a struggle. Political tensions mounted steadily in Venicebetween 1297 and 1315. The Great Council partially responded bymakingitselfbigger.Inanattempttoco-optitsmostvocalopponents,itgrew from 450 to 1,500. This expansion was complemented byrepression.Apoliceforcewasintroducedforthefirsttimein1310,andtherewasasteadygrowthindomesticcoercion,undoubtedlyasawayofsolidifyingthenewpoliticalorder.HavingimplementedapoliticalSerrata,theGreatCouncilthenmoved

to adopt an economic Serrata. The switch toward extractive politicalinstitutions was now being followed by a move toward extractiveeconomicinstitutions.Mostimportant,theybannedtheuseofcommendacontracts, one of the great institutional innovations that had madeVenice rich.This shouldn’t be a surprise: the commenda benefited new

merchants, and now the established elite was trying to exclude them.This was just one step toward more extractive economic institutions.Anotherstepcamewhen,starting in1314, theVenetianstatebegantotakeoverandnationalize trade. Itorganized stategalleys toengage intradeand,from1324on,begantochargeindividualshighlevelsoftaxesif they wanted to engage in trade. Long-distance trade became thepreserveofthenobility.ThiswasthebeginningoftheendofVenetianprosperity. With the main lines of business monopolized by theincreasinglynarrowelite, thedeclinewasunderway.Veniceappearedtohavebeenonthebrinkofbecomingtheworld’sfirstinclusivesociety,but it fell to a coup. Political and economic institutions becamemoreextractive, andVenicebegan to experience economicdecline.By1500thepopulationhadshrunktoonehundredthousand.Between1650and1800,whenthepopulationofEuroperapidlyexpanded, thatofVenicecontracted.Today the only economy Venice has, apart from a bit of fishing, istourism. Instead of pioneering trade routes and economic institutions,Venetiansmakepizzaandicecreamandblowcoloredglassforhordesofforeigners.The tourists come to see thepre-SerratawondersofVenice,suchas theDoge’sPalaceand the lionsofSt.Mark’sCathedral,whichwere looted from Byzantium when Venice ruled the Mediterranean.Venicewentfromeconomicpowerhousetomuseum.

IN THIS CHAPTER we focus on the historical development of institutions indifferent parts of theworld and explainwhy they evolved in differentways. We saw in chapter 4 how the institutions of Western Europediverged from those inEasternEuropeand thenhow thoseofEnglanddiverged from those in the rest of Western Europe. This was aconsequence of small institutional differences, mostly resulting frominstitutional drift interacting with critical junctures. It might then betemptingtothinkthattheseinstitutionaldifferencesarethetipofadeephistorical iceberg where under the waterline we find English andEuropean institutions inexorably drifting away from those elsewhere,basedonhistoricaleventsdatingbackmillennia.Therest,astheysay,ishistory.Except that it isn’t, for two reasons. First, moves toward inclusive

institutions, as our account of Venice shows, can be reversed. Venicebecame prosperous. But its political and economic institutions wereoverthrown,andthatprosperitywentintoreverse.TodayVeniceisrichonlybecausepeoplewhomaketheirincomeelsewherechoosetospenditthereadmiringthegloryofitspast.Thefactthatinclusiveinstitutionscangointoreverseshowsthatthereisnosimplecumulativeprocessofinstitutionalimprovement.Second, small institutionaldifferences thatplayacrucial roleduring

criticaljuncturesarebytheirnatureephemeral.Becausetheyaresmall,theycanbereversed,thencanreemergeandbereversedagain.Wewillseeinthischapterthat,incontrastwithwhatonewouldexpectfromthegeographyorculturetheories,England,wherethedecisivesteptowardinclusiveinstitutionswouldtakeplaceintheseventeenthcentury,wasabackwater,notonlyinthemillenniafollowingtheNeolithicRevolutionin the Middle East but also at the beginning of the Middle Ages,followingthefallof theWesternRomanEmpire.TheBritishIslesweremarginal to the Roman Empire, certainly of less importance thancontinentalWesternEurope,NorthAfrica, theBalkans,Constantinople,or theMiddleEast.When theWesternRomanEmpire collapsed in thefifth century AD, Britain suffered the most complete decline. But thepolitical revolutions that would ultimately bring the IndustrialRevolution would take place not in Italy, Turkey, or even westerncontinentalEurope,butintheBritishIsles.InunderstandingthepathtoEngland’s IndustrialRevolutionandthe

countries that followed it, Rome’s legacy is nonetheless important forseveral reasons. First, Rome, like Venice, underwent major earlyinstitutional innovations.As inVenice,Rome’s initialeconomicsuccesswas based on inclusive institutions—at least by the standards of theirtime.AsinVenice,theseinstitutionsbecamedecidedlymoreextractiveover time.WithRome, thiswasaconsequenceof thechange fromtheRepublic (510 BC–49 BC) to the Empire (49 BC–AD 476). Even thoughduring the Republican period Rome built an impressive empire, andlong-distance trade and transport flourished, much of the Romaneconomy was based on extraction. The transition from republic toempireincreasedextractionandultimatelyledtothekindofinfighting,instability,andcollapsethatwesawwiththeMayacity-states.

Second and more important, we will see that Western Europe’ssubsequent institutional development, though it was not a directinheritanceofRome,wasaconsequenceofcritical junctures thatwerecommon across the region in thewake of the collapse of theWesternRomanEmpire.Thesecriticaljunctureshadlittleparallelinotherpartsoftheworld,suchasAfrica,Asia,ortheAmericas,thoughwewillalsoshowviathehistoryofEthiopiathatwhenotherplacesdidexperiencesimilar critical junctures, they sometimes reacted in ways that wereremarkably similar. Roman decline led to feudalism, which, as a by-product, caused slavery to wither away, brought into existence citiesthatwere outside the sphere of influence ofmonarchs and aristocrats,andintheprocesscreatedasetofinstitutionswherethepoliticalpowersof rulers were weakened. It was upon this feudal foundation that theBlack Death would create havoc and further strengthen independentcities and peasants at the expense of monarchs, aristocrats, and largelandowners.Anditwasonthiscanvasthattheopportunitiescreatedbythe Atlantic trade would play out. Many parts of the world did notundergothesechanges,andinconsequencedriftedapart.

ROMANVIRTUES…

RomanplebeiantribuneTiberiusGracchuswasclubbedtodeathin133BC by Roman senators and his bodywas thrown unceremoniously intotheTiber.Hismurdererswerearistocrats likeTiberiushimself,andtheassassinationwasmastermindedbyhis cousinPubliusCorneliusScipioNasica.TiberiusGracchushadan impeccablearistocraticpedigreeasadescendant of some of the more illustrious leaders of the RomanRepublic, including Lucius Aemilius Paullus, hero of the Illyrian andSecond Punic wars, and Scipio Africanus, the general who defeatedHannibalintheSecondPunicWar.Whyhadthepowerfulsenatorsofhisday,evenhiscousin,turnedagainsthim?Theanswer tellsusmuchabout the tensions in theRomanRepublic

and the causes of its subsequent decline.What pitted Tiberius againstthesepowerful senatorswashiswillingness to standagainst them inacrucial question of the day: the allocation of land and the rights ofplebeians,commonRomancitizens.

By the time of Tiberius Gracchus, Rome was a well-establishedrepublic. Its political institutions and the virtues of Roman citizen-soldiers—ascapturedbyJacques-LouisDavid’sfamouspaintingOathoftheHoratii,whichshowsthesonsswearingtotheirfathersthattheywilldefend the Roman Republic to their death—are still seen by manyhistorians as the foundation of the republic’s success. Roman citizenscreated the republic by overthrowing their king, Lucius TarquiniusSuperbus, known as Tarquin the Proud, around 510 BC. The republiccleverlydesignedpolitical institutionswithmany inclusiveelements. Itwas governed by magistrates elected for a year. That the office ofmagistrate was elected, annually, and held by multiple people at thesametimereducedtheabilityofanyonepersontoconsolidateorexploithispower.Therepublic’s institutionscontainedasystemofchecksandbalancesthatdistributedpowerfairlywidely.Thiswassoevenifnotallcitizenshadequalrepresentation,asvotingwasindirect.TherewasalsoalargenumberofslavescrucialforproductioninmuchofItaly,makingupperhapsone-thirdof thepopulation.Slavesofcoursehadnorights,letalonepoliticalrepresentation.Allthesame,asinVenice,Romanpoliticalinstitutionshadpluralisticelements.Theplebeianshadtheirownassembly,whichcouldelecttheplebeiantribune,whohadthepowertovetoactionsbythemagistrates,callthePlebeianAssembly,andproposelegislation.Itwastheplebeianswho put TiberiusGracchus in power in 133 BC. Their power had beenforgedby“secession,”aformofstrikebyplebeians,particularlysoldiers,whowouldwithdraw toahilloutside thecityandrefuse tocooperatewiththemagistratesuntiltheircomplaintsweredealtwith.Thisthreatwas of course particularly important during a time of war. It wassupposedlyduring such a secession in the fifth century BC that citizensgainedtherighttoelecttheirtribuneandenactlawsthatwouldgoverntheircommunity.Theirpoliticalandlegalprotection,eveniflimitedbyour current standards, created economic opportunities for citizens andsome degree of inclusivity in economic institutions. As a result, tradethroughout the Mediterranean flourished under the Roman Republic.Archaeologicalevidencesuggeststhatwhilethemajorityofbothcitizensand slaves lived not much above subsistence level, many Romans,includingsomecommoncitizens,achievedhighincomes,withaccessto

publicservicessuchasacitysewagesystemandstreetlighting.Moreover,thereisevidencethattherewasalsosomeeconomicgrowthunder theRomanRepublic.Wecan track theeconomic fortunesof theRomansfromshipwrecks.TheempiretheRomansbuiltwasinasenseawebofportcities—fromAthens,Antioch,andAlexandriaintheeast;viaRome,Carthage, andCadiz; all theway to London in the farwest.AsRoman territories expanded, so did trade and shipping, which can betraced from shipwrecks found by archaeologists on the floor of theMediterranean. These wrecks can be dated in many ways. Often theshipscarriedamphoraefullofwineoroliveoil,beingtransportedfromItaly toGaul, or Spanish olive oil to be sold or distributed for free inRome. Amphorae, sealed vessels made of clay, often containedinformationonwhohadmadethemandwhen.JustneartheriverTiberinRomeisasmallhill,MonteTestaccio,alsoknownasMontedeiCocci(“Pottery Mountain”), made up of approximately fifty-three millionamphorae. When the amphorae were unloaded from ships, they werediscarded,overthecenturiescreatingahugehill.Othergoodson theshipsand theship itselfcansometimesbedatedusing radiocarbondating, a powerful techniqueusedby archaeologiststo date the age of organic remains. Plants create energy byphotosynthesis,which uses the energy from the sun to convert carbondioxide into sugars.As theydo this,plants incorporateaquantityofanaturallyoccurringradioisotope,carbon-14.Afterplantsdie,thecarbon-14 deteriorates due to radioactive decay. When archaeologists find ashipwreck, they candate the ship’swoodby comparing the remainingcarbon-14 fraction in it to that expected from atmospheric carbon-14.This gives an estimateofwhen the treewas cut down.Only about20shipwrecks have been dated to as long ago as 500 BC. These wereprobablynotRomanships,andcouldwellhavebeenCarthaginian, forexample.But then thenumberofRoman shipwrecks increases rapidly.AroundthetimeofthebirthofChrist,theyreachedapeakof180.Shipwrecks are a powerfulway of tracing the economic contours ofthe Roman Republic, and they do show evidence of some economicgrowth,buttheyhavetobekeptinperspective.Probablytwo-thirdsofthecontentsoftheshipswerethepropertyoftheRomanstate,taxesandtribute being brought back from the provinces to Rome, or grain andoliveoil fromNorthAfricatobehandedout freeto thecitizensof the

city. It is these fruits of extraction that mostly constructed MonteTestaccio.Anotherfascinatingwaytofindevidenceofeconomicgrowthisfrom

theGreenland IceCore Project. As snowflakes fall, they pick up smallquantities of pollution in the atmosphere, particularly themetals lead,silver,andcopper.Thesnowfreezesandpilesupontopofthesnowthatfellinpreviousyears.Thisprocesshasbeengoingonformillennia,andprovidesanunrivaledopportunityforscientiststounderstandtheextentof atmospheric pollution thousands of years ago. In 1990–1992 theGreenland Ice Core Project drilled down through 3,030 meters of icecovering about 250,000 years of human history. One of the majorfindings of this project, and others preceding it, was that therewas adistinct increase in atmospheric pollutants starting around 500 BC.Atmospheric quantities of lead, silver, and copper then increasedsteadily, reaching a peak in the first century AD. Remarkably, thisatmospheric quantity of lead is reached again only in the thirteenthcentury. These findings show how intense, comparedwith what camebefore and after, Roman mining was. This upsurge in mining clearlyindicateseconomicexpansion.But Roman growth was unsustainable, occurring under institutions

that were partially inclusive and partially extractive. Though Romancitizenshadpoliticalandeconomicrights, slaverywaswidespreadandvery extractive, and the elite, the senatorial class, dominated both theeconomyandpolitics.DespitethepresenceofthePlebeianAssemblyandplebeiantribute,forexample,realpowerrestedwiththeSenate,whosemembers came from the large landowners constituting the senatorialclass.AccordingtotheRomanhistorianLivy,theSenatewascreatedbyRome’s first king, Romulus, and consisted of one hundredmen. Theirdescendantsmade up the senatorial class, though new bloodwas alsoadded. The distribution of land was very unequal and most likelybecamemore so by the second century BC. Thiswas at the root of theproblemsthatTiberiusGracchusbroughttotheforeastribune.As its expansion throughout the Mediterranean continued, Rome

experienced an influx of great riches. But this bounty was capturedmostly by a few wealthy families of senatorial rank, and inequalitybetweenrichandpoorincreased.Senatorsowedtheirwealthnotonlyto

theircontrolofthelucrativeprovincesbutalsototheirverylargeestatesthroughout Italy. These estatesweremannedby gangs of slaves, oftencaptured in the wars that Rome fought. But where the land for theseestates came from was equally significant. Rome’s armies during theRepublic consisted of citizen-soldierswhowere small landowners, firstinRomeandlaterinotherpartsofItaly.Traditionallytheyfoughtinthearmy when necessary and then returned to their plots. As Romeexpanded and the campaigns got longer, this model ceased to work.Soldiers were away from their plots for years at a time, and manylandholdings fell into disuse. The soldiers’ families sometimes foundthemselves under mountains of debt and on the brink of starvation.Manyoftheplotswerethereforegraduallyabandoned,andabsorbedbytheestatesofthesenators.Asthesenatorialclassgotricherandricher,the largemassof landless citizensgathered inRome,oftenafterbeingdecommissionedfromthearmy.Withnolandtoreturnto,theysoughtworkinRome.BythelatesecondcenturyBC,thesituationhadreachedadangerous boiling point, both because the gap between rich and poorhadwidenedtounprecedentedlevelsandbecausetherewerehordesofdiscontented citizens in Rome ready to rebel in response to theseinjustices and turn against the Roman aristocracy. But political powerrestedwith the rich landowners of the senatorial class, whowere thebeneficiariesofthechangesthathadgoneonoverthelasttwocenturies.Mosthadnointentionofchangingthesystemthathadservedthemsowell.According to theRomanhistorianPlutarch,TiberiusGracchus,when

travelingthroughEtruria,aregioninwhatisnowcentralItaly,becameaware of the hardship that families of citizen-soldiers were suffering.Whetherbecauseofthisexperienceorbecauseofotherfrictionswiththepowerfulsenatorsofhistime,hewouldsoonembarkuponadaringplantochangelandallocationinItaly.Hestoodforplebeiantribunein133BC, then used his office to propose land reform: a commission wouldinvestigate whether public lands were being illegally occupied andwould redistribute land in excess of the legal limit of three hundredacres to landless Roman citizens. The three-hundred-acre limit was infact part of an old law, though ignored and not implemented forcenturies. Tiberius Gracchus’s proposal sent shockwaves through the

senatorialclass,whowereable toblock implementationofhis reformsfor a while. When Tiberius managed to use the power of the mobsupporting him to remove another tribunewho threatened to veto hislandreform,hisproposedcommissionwasfinallyfounded.TheSenate,though,preventedimplementationbystarvingthecommissionoffunds.Things came toaheadwhenTiberiusGracchus claimed forhis land

reform commission the funds left by the king of the Greek cityPergamumtotheRomanpeople.Healsoattemptedtostandfortribuneasecondtime,partlybecausehewasafraidofpersecutionbytheSenateafterhesteppeddown.ThisgavethesenatorsthepretexttochargethatTiberiuswastryingtodeclarehimselfking.Heandhissupporterswereattacked, andmanywere killed. TiberiusGracchus himselfwas one ofthe first to fall, though his death would not solve the problem, andothers would attempt to reform the distribution of land and otheraspectsofRomaneconomyandsociety.Manywouldmeetasimilarfate.TiberiusGracchus’s brotherGaius, for example,was alsomurdered bylandowners,afterhetookthemantlefromhisbrother.These tensions would surface again periodically during the next

century—forexample,leadingtothe“SocialWar”between91BCand87BC.Theaggressivedefenderof the senatorial interests,LuciusCorneliusSulla, not only viciously suppressed the demands for change but alsoseverely curtailed the powers of the plebeian tribune. The same issueswouldalsobeacentralfactorinthesupportthatJuliusCaesarreceivedfromthepeopleofRomeinhisfightagainsttheSenate.ThepoliticalinstitutionsformingthecoreoftheRomanRepublicwere

overthrownbyJuliusCaesar in49BCwhenhemovedhis legionacrosstheRubicon,theriverseparatingtheRomanprovincesofCisalpineGaulfromItaly.RomefelltoCaesar,andanothercivilwarbrokeout.ThoughCaesarwasvictorious,hewasmurderedbydisgruntledsenators,ledbyBrutus andCassius, in 44 BC. The RomanRepublicwould never be re-created. A new civil war broke out between Caesar’s supporters,particularly Mark Anthony and Octavian, and his foes. After Anthonyand Octavian won, they fought each other, until Octavian emergedtriumphantinthebattleofActiumin31BC.Bythefollowingyear,andfor the next forty-five years, Octavian, known after 28 BC as AugustusCaesar,ruledRomealone.AugustuscreatedtheRomanEmpire,though

hepreferredthetitleprincep,asortof“firstamongequals,”andcalledthe regime the Principate. Map 11 shows the Roman Empire at itsgreatest extent in 117 AD. It also includes the river Rubicon, whichCaesarsofatefullycrossed.It was this transition from republic to principate, and later naked

empire,thatlaidtheseedsofthedeclineofRome.Thepartiallyinclusivepolitical institutions, which had formed the basis for the economicsuccess, were gradually undermined. Even if the Roman Republiccreated a tilted playing field in favor of the senatorial class and otherwealthyRomans, itwasnotanabsolutist regimeandhadneverbeforeconcentratedsomuchpowerinoneposition.ThechangesunleashedbyAugustus, aswith theVenetianSerrata,were at first political but thenwould have significant economic consequences. As a result of thesechanges,bythefifthcenturyADtheWesternRomanEmpire,astheWestwas called after it split from the East, had declined economically andmilitarily,andwasonthebrinkofcollapse.

…ROMANVICES

Flavius Aetius was one of the larger-than-life characters of the lateRomanEmpire,hailedas “the lastof theRomans”byEdwardGibbon,authorofTheDeclineandFalloftheRomanEmpire.BetweenAD433and454, until he wasmurdered by the emperor Valentinian III, Aetius, ageneral,wasprobably themostpowerfulperson in theRomanEmpire.He shaped both domestic and foreign policy, and fought a series ofcrucial battles against the barbarians, and also other Romans in civil

wars.Hewasuniqueamongpowerfulgenerals fighting incivilwars innot seeking the emperorship himself. Since the end of the secondcentury, civil war had become a fact of life in the Roman Empire.BetweenthedeathofMarcusAureliusinAD180untilthecollapseoftheWesternRomanEmpireinAD476,therewashardlyadecadethatdidnotseeacivilwarorapalacecoupagainstanemperor.Fewemperorsdiedofnaturalcausesorinbattle.Mostweremurderedbyusurpersortheirowntroops.Aetius’scareerillustratesthechangesfromRomanRepublicandearlyEmpire to the late Roman Empire. Not only did his involvement inincessant civil wars and his power in every aspect of the empire’sbusiness contrast with the much more limited power of generals andsenatorsduringearlierperiods,butitalsohighlightshowthefortunesofRomanschangedradicallyintheinterveningcenturiesinotherways.BythelateRomanEmpire,theso-calledbarbarianswhowereinitiallydominatedand incorporated intoRomanarmiesorusedas slavesnowdominatedmanypartsoftheempire.Asayoungman,Aetiushadbeenheldhostagebybarbarians,firstbytheGothsunderAlaricandthenbytheHuns.Romanrelationswith thesebarbariansare indicativeofhowthings had changed since the Republic. Alaric was both a ferociousenemyandanally,somuchsothatin405hewasappointedoneofthesenior-most generals of the Roman army. The arrangement wastemporary, however. By 408, Alaric was fighting against the Romans,invadingItalyandsackingRome.The Huns were also both powerful foes and frequent allies of theRomans. Though they, too, held Aetius hostage, they later foughtalongsidehiminacivilwar.ButtheHunsdidnotstaylongononeside,andunderAttilatheyfoughtamajorbattleagainsttheRomansin451,justacross theRhine.This timedefendingtheRomansweretheGoths,underTheodoric.AllofthisdidnotstopRomanelitesfromtryingtoappeasebarbariancommanders, often not to protect Roman territories but to gain theupperhandininternalpowerstruggles.Forexample,theVandals,undertheir king, Geiseric, ravaged large parts of the Iberian Peninsula andthen conquered the Roman bread baskets in North Africa from 429onward.TheRomanresponse to thiswas toofferGeiseric theemperor

Valentinian III’s child daughter as a bride. Geiseric was at the timemarriedtothedaughterofoneoftheleadersoftheGoths,butthisdoesnot seem to have stopped him. He annulled his marriage under thepretextthathiswifewastryingtomurderhimandsentherbacktoherfamily aftermutilating her by cutting off both her ears and her nose.Fortunatelyforthebride-to-be,becauseofheryoungageshewaskeptinItalyandneverconsummatedhermarriagetoGeiseric.Latershewouldmarryanotherpowerfulgeneral,PetroniusMaximus,themastermindofthemurderofAetiusbytheemperorValentinianIII,whowouldhimselfshortly be murdered in a plot hatched by Maximus. Maximus laterdeclaredhimselfemperor,buthisreignwouldbeveryshort,endedbyhis death during the major offensive by the Vandals under GeisericagainstItaly,whichsawRomefallandsavagelyplundered.

BY THE EARLY fifthcentury, thebarbarianswere literallyat thegate.Somehistorians argue that it was a consequence of the more formidableopponentstheRomansfacedduringthelateEmpire.Butthesuccessofthe Goths, Huns, and Vandals against Rome was a symptom, not thecause, of Rome’s decline. During the Republic, Rome had dealt withmuch more organized and threatening opponents, such as theCarthaginians.ThedeclineofRomehadcausesverysimilartothoseofthe Maya city-states. Rome’s increasingly extractive political andeconomic institutions generated its demise because they causedinfightingandcivilwar.The origins of the decline go back at least to Augustus’s seizure ofpower, which set in motion changes that made political institutionsmuchmore extractive. These included changes in the structure of thearmy,whichmadesecessionimpossible,thusremovingacrucialelementthatensuredpoliticalrepresentationforcommonRomans.TheemperorTiberius, who followed Augustus in AD 14, abolished the PlebeianAssemblyandtransferreditspowerstotheSenate.Insteadofapoliticalvoice, Roman citizens now had free handouts of wheat and,subsequently, olive oil, wine, and pork, andwere kept entertained bycircuses and gladiatorial contests. With Augustus’s reforms, emperorsbegantorelynotsomuchonthearmymadeupofcitizen-soldiers,butonthePraetorianGuard,theelitegroupofprofessionalsoldierscreated

by Augustus. The Guard itself would soon become an importantindependent broker ofwhowould become emperor, often throughnotpeacefulmeansbutcivilwarsandintrigue.Augustusalsostrengthenedthe aristocracy against common Roman citizens, and the growinginequalitythathadunderpinnedtheconflictbetweenTiberiusGracchusandthearistocratscontinued,perhapsevenstrengthened.TheaccumulationofpoweratthecentermadethepropertyrightsofcommonRomanslesssecure.Statelandsalsoexpandedwiththeempireasaconsequenceofconfiscation,andgrewtoasmuchashalfofthelandin many parts of the empire. Property rights became particularlyunstable because of the concentration of power in the hands of theemperor and his entourage. In a pattern not too different from whathappened in the Maya city-states, infighting to take control of thispowerful position increased. Civil wars became a regular occurrence,even before the chaotic fifth century, when the barbarians ruledsupreme. For example, Septimius Severus seized power from DidiusJulianus,whohadmadehimselfemperorafterthemurderofPertinaxinAD 193. Severus, the third emperor in the so-called Year of the FiveEmperors, then waged war against his rival claimants, the generalsPescenniusNiger andClodiusAlbinus,whowere finallydefeated inAD194 and 197, respectively. Severus confiscated all the property of hislosingopponents in the ensuing civilwar. Though able rulers, such asTrajan(AD98to117),Hadrian,andMarcusAureliusinthenextcentury,could stanch decline, they could not, or did not want to, address thefundamental institutional problems. None of these men proposedabandoning the empire or re-creating effective political institutionsalong the lines of the Roman Republic. Marcus Aurelius, for all hissuccesses, was followed by his son Commodus, who was more likeCaligulaorNerothanhisfather.The rising instability was evident from the layout and location oftownsandcitiesintheempire.BythethirdcenturyADeverysizeablecityin the empire had a defensive wall. In many cases monuments wereplunderedforstone,whichwasusedinfortifications.InGaulbeforetheRomans had arrived in 125 BC, it was usual to build settlements onhilltops,sincetheseweremoreeasilydefended.Withthe initialarrivalof Rome, settlementsmoved down to the plains. In the third century,

thistrendwasreversed.Alongwithmountingpoliticalinstabilitycamechangesinsocietythatmoved economic institutions toward greater extraction. Thoughcitizenship was expanded to the extent that by AD 212 nearly all theinhabitants of the empire were citizens, this change went along withchangesinstatusbetweencitizens.Anysensethattheremighthavebeenof equality before the law deteriorated. For example, by the reign ofHadrian(AD117to138),therewerecleardifferencesinthetypesoflawsapplied todifferentcategoriesofRomancitizen.Justas important, therole of citizenswas completely different from how it had been in thedays of the Roman Republic, when they were able to exercise somepoweroverpolitical andeconomicdecisions through theassemblies inRome.Slaveryremainedaconstant throughoutRome, thoughthere is somecontroversy over whether the fraction of slaves in the populationactually declined over the centuries. Equally important, as the empiredeveloped,more andmore agriculturalworkerswere reduced to semi-servilestatusandtiedtotheland.Thestatusoftheseservile“coloni” isextensivelydiscussedinlegaldocumentssuchastheCodexTheodosianusand Codex Justinianus, and probably originated during the reign ofDiocletian(AD284to305).Therightsof landlordsoverthecoloniwereprogressively increased. The emperor Constantine in 332 allowedlandlordstochainacolonuswhomtheysuspectedwastryingtoescape,and from AD 365, coloni were not allowed to sell their own propertywithouttheirlandlord’spermission.JustaswecanuseshipwrecksandtheGreenlandicecorestotracktheeconomic expansion of Rome during earlier periods,we can use themalsototraceitsdecline.ByAD500thepeakof180shipswasreducedto20.AsRomedeclined,Mediterraneantradecollapsed,andsomescholarshave even argued that it did not return to its Roman height until thenineteenthcentury.TheGreenlandicetellsasimilarstory.TheRomansused silver for coins, and leadhadmanyuses, including forpipes andtableware. After peaking in the first century AD, the deposits of lead,silver,andcopperintheicecoresdeclined.Theexperienceof economicgrowthduring theRomanRepublicwasimpressive, as were other examples of growth under extractive

institutions,suchastheSovietUnion.Butthatgrowthwaslimitedandwasnot sustained, evenwhen it is taken into account that it occurredunder partially inclusive institutions. Growth was based on relativelyhighagriculturalproductivity,significanttributefromtheprovinces,andlong-distance trade, but it was not underpinned by technologicalprogress or creative destruction. The Romans inherited some basictechnologies, iron tools and weapons, literacy, plow agriculture, andbuilding techniques. Early on in the Republic, they created others:cement masonry, pumps, and the water wheel. But thereafter,technologywasstagnantthroughouttheperiodoftheRomanEmpire.Inshipping,forinstance,therewaslittlechangeinshipdesignorrigging,andtheRomansneverdevelopedthesternrudder,insteadsteeringshipswithoars.Waterwheelsspreadveryslowly,sothatwaterpowerneverrevolutionized the Roman economy. Even such great achievements asaqueductsandcitysewersusedexistingtechnology,thoughtheRomansperfectedit.Therecouldbesomeeconomicgrowthwithoutinnovation,relying on existing technology, but it was growth without creativedestruction.Anditdidnotlast.Aspropertyrightsbecamemoreinsecureandtheeconomicrightsofcitizensfollowedthedeclineoftheirpoliticalrights,economicgrowthlikewisedeclined.A remarkable thing about new technologies in the Roman period is

that their creation and spread seem to have been driven by the state.Thisisgoodnews,untilthegovernmentdecidesthatitisnotinterestedintechnologicaldevelopment—anall-too-commonoccurrenceduetothefear of creative destruction. The great Roman writer Pliny the Elderrelatesthefollowingstory.Duringthereignof theemperorTiberius,aman invented unbreakable glass andwent to the emperor anticipatingthathewouldget agreat reward.Hedemonstratedhis invention, andTiberiusaskedhim ifhehad toldanyoneelseabout it.When themanrepliedno,Tiberiushadthemandraggedawayandkilled,“lestgoldbereducedtothevalueofmud.”Therearetwointerestingthingsaboutthisstory. First, theman went to Tiberius in the first place for a reward,ratherthansettinghimselfupinbusinessandmakingaprofitbysellingtheglass.This shows the roleof theRomangovernment incontrollingtechnology. Second, Tiberius was happy to destroy the innovationbecauseof theadverseeconomiceffects itwouldhavehad.This is thefearoftheeconomiceffectsofcreativedestruction.

ThereisalsodirectevidencefromtheperiodoftheEmpireofthefearofthepoliticalconsequencesofcreativedestruction.Suetoniustellshowthe emperor Vespasian, who ruled between AD 69 and 79, wasapproached by a man who had invented a device for transportingcolumns to theCapitol, the citadelofRome,at a relatively small cost.Columnswerelarge,heavy,andverydifficulttotransport.MovingthemtoRome from themineswhere theyweremade involved the labor ofthousandsofpeople,atgreatexpensetothegovernment.Vespasiandidnot kill theman, but he also refused to use the innovation, declaring,“Howwillitbepossibleformetofeedthepopulace?”Againaninventorcame to thegovernment.Perhaps thiswasmorenatural thanwith theunbreakableglass,astheRomangovernmentwasmostheavilyinvolvedwith column mining and transportation. Again the innovation wasturneddownbecauseofthethreatofcreativedestruction,notsomuchbecauseofitseconomicimpact,butbecauseoffearofpoliticalcreativedestruction. Vespasian was concerned that unless he kept the peoplehappy and under control it would be politically destabilizing. TheRomanplebeianshadtobekeptbusyandpliant,soitwasgoodtohavejobs to give them, such asmoving columns about. This complementedthebreadandcircuses,whichwerealsodispensed for free tokeep thepopulation content. It is perhaps telling that both of these examplescamesoonafterthecollapseoftheRepublic.TheRomanemperorshadfar more power to block change than the Roman rulers during theRepublic.Anotherimportantreasonforthelackoftechnologicalinnovationwas

the prevalence of slavery. As the territories Romans controlledexpanded,vastnumberswereenslaved,oftenbeingbroughtbacktoItalytoworkonlargeestates.Manycitizens inRomedidnotneedtowork:theylivedoffthehandoutsfromthegovernment.Wherewasinnovationtocomefrom?Wehavearguedthatinnovationcomesfromnewpeoplewithnewideas,developingnewsolutionstooldproblems.InRomethepeople doing the producing were slaves and, later, semi-servile coloniwithfewincentivestoinnovate,sinceitwastheirmasters,notthey,whostoodtobenefitfromanyinnovation.Aswewillseemanytimesinthisbook, economiesbasedon the repressionof laborand systems suchasslaveryandserfdomarenotoriouslynoninnovative.Thisistruefromtheancientworldtothemodernera.IntheUnitedStates,forexample,the

northernstatestookpartintheIndustrialRevolution,nottheSouth.Ofcourse slavery and serfdom created hugewealth for thosewho ownedthe slaves and controlled the serfs, but it did not create technologicalinnovationorprosperityforsociety.

NOONEWRITESFROMVINDOLANDA

ByAD43theRomanemperorClaudiushadconqueredEngland,butnotScotland. A last, futile attempt was made by the Roman governorAgricola,who gave up and, in AD 85, built a series of forts to protectEngland’s northern border. One of the biggest of these was atVindolanda,thirty-fivemileswestofNewcastleanddepictedonMap11at the far northwest of the Roman Empire. Later, Vindolanda wasincorporated into the eighty-five-mile defensive wall that the emperorHadrianconstructed,butinAD103,whenaRomancenturion,Candidus,wasstationedthere,itwasanisolatedfort.CandiduswasengagedwithhisfriendOctaviusinsupplyingtheRomangarrisonandreceivedareplyfromOctaviustoaletterhehadsent:

OctaviustohisbrotherCandidus,greetings.IhaveseveraltimeswrittentoyouthatIhaveboughtaboutfive thousandmodiiof earsofgrain,onaccountofwhich Ineed cash. Unless you send me some cash, at least fivehundred denarii, the result will be that I shall lose what Ihavelaidoutasadeposit,aboutthreehundreddenarii,andIshall be embarrassed. So, I ask you, sendme some cash assoon as possible. The hides which you write are atCataractonium—write that they be given to me and thewagonaboutwhichyouwrite.IwouldhavealreadybeentocollectthemexceptthatIdidnotcaretoinjuretheanimalswhile the roads are bad. See with Tertius about the 8½denariiwhichhe received fromFatalis.Hehasnot creditedthemtomyaccount.MakesurethatyousendmecashsothatI may have ears of grain on the threshing-floor. GreetSpectatusandFirmus.Farewell.

The correspondencebetweenCandidus andOctavius illustrates somesignificant facets of the economic prosperity of Roman England: Itreveals an advanced monetary economy with financial services. Itreveals the presence of constructed roads, even if sometimes in badcondition. Itreveals thepresenceofa fiscalsystemthatraisedtaxestopay Candidus’s wages. Most obviously it reveals that both men wereliterate and were able to take advantage of a postal service of sorts.Roman England also benefited from the mass manufacture of high-qualitypottery,particularlyinOxfordshire;urbancenterswithbathsandpublic buildings; and house construction techniques using mortar andtilesforroofs.Bythefourthcentury,allwereindecline,andafterAD411theRoman

EmpiregaveuponEngland.Troopswerewithdrawn;thoseleftwerenotpaid,andastheRomanstatecrumbled,administratorswereexpelledbythe local population. By AD 450 all these trappings of economicprosperity were gone. Money vanished from circulation. Urban areaswere abandoned, and buildings stripped of stone. The roads wereovergrownwithweeds. The only type of pottery fabricatedwas crudeandhandmade,notmanufactured.Peopleforgothowtousemortar,andliteracydeclined substantially.Roofsweremadeofbranches,not tiles.NobodywrotefromVindolandaanymore.AfterAD411,Englandexperiencedaneconomiccollapseandbecamea

poorbackwater—andnot for the first time. In thepreviouschapterwesaw how the Neolithic Revolution started in the Middle East around9500BC.WhiletheinhabitantsofJerichoandAbuHureyrawerelivinginsmall townsandfarming, the inhabitantsofEnglandwerestillhuntingandgathering, andwoulddo so forat least another5,500years.Eventhen the English didn’t invent farming or herding; thesewere broughtfrom the outside by migrants who had been spreading across Europefrom the Middle East for thousands of years. As the inhabitants ofEngland caught up with thesemajor innovations, those in theMiddleEastwereinventingcities,writing,andpottery.By3500BC, largecitiessuchasUrukandUremergedinMesopotamia,modernIraq.Urukmayhave had a population of fourteen thousand in 3500 BC, and fortythousand soon afterward. The potter’s wheel was invented inMesopotamiaataboutthesametimeaswaswheeledtransportation.The

Egyptian capital of Memphis emerged as a large city soon thereafter.Writing appeared independently in both regions. While the Egyptianswere building the great pyramids of Giza around 2500 BC, the Englishconstructed their most famous ancient monument, the stone circle atStonehenge.NotbadbyEnglishstandards,butnotevenlargeenoughtohave housed one of the ceremonial boats buried at the foot of KingKhufu’spyramid.Englandcontinuedto lagbehindandtoborrowfromtheMiddleEastandtherestofEuropeuptoandincludingtheRomanperiod.Despite suchan inauspicioushistory, itwas inEngland that the first

trulyinclusivesocietyemergedandwheretheIndustrialRevolutiongotunder way.We argued earlier (this page–this page) that this was theresult of a seriesof interactionsbetween small institutionaldifferencesandcritical junctures—forexample, theBlackDeathand thediscoveryof the Americas. English divergence had historical roots, but the viewfrom Vindolanda suggests that these roots were not that deep andcertainly not historically predetermined. Theywere not planted in theNeolithicRevolution,orevenduringthecenturiesofRomanhegemony.By AD 450, at the start of what historians used to call the Dark Ages,Englandhadslippedbackintopovertyandpoliticalchaos.TherewouldbenoeffectivecentralizedstateinEnglandforhundredsofyears.

DIVERGINGPATHS

TheriseofinclusiveinstitutionsandthesubsequentindustrialgrowthinEngland did not follow as a direct legacy of Roman (or earlier)institutions.Thisdoesnotmeanthatnothingsignificanthappenedwiththe fallof theWesternRomanEmpire,amajoreventaffectingmostofEurope. Since different parts of Europe shared the same criticaljunctures,theirinstitutionswoulddriftinasimilarfashion,perhapsinadistinctivelyEuropeanway.ThefalloftheRomanEmpirewasacrucialpart of these common critical junctures. This European path contrastswith paths in other parts of the world, including sub-Saharan Africa,Asia,andtheAmericas,whichdevelopeddifferentlypartlybecausetheydidnotfacethesamecriticaljunctures.RomanEnglandcollapsedwithabang.ThiswaslesstrueinItaly,or

RomanGaul(modernFrance),orevenNorthAfrica,wheremanyoftheold institutions lived on in some form. Yet there is no doubt that thechange from the dominance of a single Roman state to a plethora ofstates run by Franks, Visigoths, Ostrogoths, Vandals, and Burgundianswassignificant.Thepowerofthesestateswasfarweaker,andtheywerebuffetedbyalongseriesofincursionsfromtheirperipheries.Fromthenorth came the Vikings and Danes in their longboats. From the eastcametheHunnichorsemen.Finally,theemergenceofIslamasareligionandpoliticalforceinthecenturyafterthedeathofMohammedinAD632ledtothecreationofnewIslamicstatesinmostoftheByzantineEmpire,NorthAfrica,andSpain.ThesecommonprocessesrockedEurope,andintheirwakeaparticulartypeofsociety,commonlyreferredtoasfeudal,emerged.Feudalsocietywasdecentralizedbecausestrongcentralstateshad atrophied, even if some rulers such as Charlemagne attempted toreconstructthem.Feudal institutions,whichreliedonunfree,coerced labor (theserfs),

wereobviouslyextractive,andtheyformedthebasisforalongperiodofextractiveandslowgrowthinEuropeduringtheMiddleAges.Buttheyalsowereconsequentialforlaterdevelopments.Forinstance,duringthereduction of the rural population to the status of serfs, slaverydisappeared fromEurope. At a timewhen itwas possible for elites toreducetheentireruralpopulationtoserfdom,itdidnotseemnecessaryto have a separate class of slaves as every previous society had had.Feudalism also created a power vacuum in which independent citiesspecializing in production and trade could flourish. But when thebalanceofpowerchangedaftertheBlackDeath,andserfdombegantocrumble in Western Europe, the stage was set for a much morepluralisticsocietywithoutthepresenceofanyslaves.Thecriticaljuncturesthatgaverisetofeudalsocietyweredistinct,but

theywerenotcompletelyrestrictedtoEurope.ArelevantcomparisoniswiththemodernAfricancountryofEthiopia,whichdevelopedfromtheKingdomofAksum,foundedinthenorthofthecountryaround400BC.AksumwasarelativelydevelopedkingdomforitstimeandengagedininternationaltradewithIndia,Arabia,Greece,andtheRomanEmpire.Itwas in many ways comparable to the Eastern Roman Empire in thisperiod.Itusedmoney,builtmonumentalpublicbuildingsandroads,and

had very similar technology, for example, in agriculture and shipping.There are also interesting ideological parallels between Aksum andRome. In AD 312, the Roman emperor Constantine converted toChristianity,asdidKingEzanaofAksumaboutthesametime.Map12shows the location of the historical state of Aksum in modern-dayEthiopiaandEritrea,withoutpostsacross theRedSea inSaudiArabiaandYemen.Just as Rome declined, so did Aksum, and its historical decline

followedapatternclosetothatoftheWesternRomanEmpire.TheroleplayedbytheHunsandVandalsinthedeclineofRomewastakenbytheArabs, who, in the seventh century, expanded into the Red Sea anddown theArabianPeninsula.Aksum lost its colonies inArabia and itstrade routes.This precipitated economicdecline:money stoppedbeingcoined,theurbanpopulationfell,andtherewasarefocusingofthestateinto the interior of the country and up into the highlands of modernEthiopia.

In Europe, feudal institutions emerged following the collapse ofcentralstateauthority.ThesamethinghappenedinEthiopia,basedonasystemcalledgult,whichinvolvedagrantof landbytheemperor.Theinstitution is mentioned in thirteenth-century manuscripts, though itmay have originated much earlier. The term gult is derived from anAmharicwordmeaning“heassignedafief.”Itsignifiedthatinexchange

for the land, the gult holder had to provide services to the emperor,particularlymilitaryones.Inturn,thegultholderhadtherighttoextracttributefromthosewhofarmedthe land.Avarietyofhistoricalsourcessuggest thatgult holders extractedbetweenone-half and three-quartersof theagriculturaloutputofpeasants.This systemwasan independentdevelopment with notable similarities to European feudalism, butprobably evenmore extractive.At the height of feudalism in England,serfsfacedlessonerousextractionandlostabouthalfoftheiroutputtotheirlordsinoneformoranother.ButEthiopiawasnotrepresentativeofAfrica.Elsewhere,slaverywas

not replaced by serfdom; African slavery and the institutions thatsupporteditweretocontinueformanymorecenturies.EvenEthiopia’sultimate path would be very different. After the seventh century,Ethiopia remained isolated in the mountains of East Africa from theprocessesthatsubsequentlyinfluencedtheinstitutionalpathofEurope,suchastheemergenceofindependentcities,thenascentconstraintsonmonarchsandtheexpansionofAtlantictradeafterthediscoveryoftheAmericas.Inconsequence,itsversionofabsolutistinstitutionsremainedlargely unchallenged. The African continent would later interact in avery different capacity with Europe and Asia. East Africa became amajorsupplierofslavestotheArabworld,andWestandCentralAfricawouldbedrawnintotheworldeconomyduringtheEuropeanexpansionassociated with the Atlantic trade as suppliers of slaves. How theAtlantic trade led to sharply divergent paths betweenWestern EuropeandAfrica is yet another example of institutional divergence resultingfromtheinteractionbetweencriticaljuncturesandexistinginstitutionaldifferences. While in England the profits of the slave trade helped toenrich those who opposed absolutism, in Africa they helped to createandstrengthenabsolutism.Farther away from Europe, the processes of institutional drift were

obviouslyevenfreertogotheirownway.IntheAmericas,forexample,whichhadbeencutofffromEuropearound15,000BCbythemeltingofthe ice that linked Alaska to Russia, there were similar institutionalinnovations as those of the Natufians, leading to sedentary life,hierarchy, and inequality—in short, extractive institutions. These tookplace first inMexico and in Andean Peru and Bolivia, and led to theAmericanNeolithicRevolution,withthedomesticationofmaize.Itwas

in theseplaces thatearly formsofextractivegrowth tookplace,aswehave seen in the Maya city-states. But in the same way that bigbreakthroughs toward inclusive institutions and industrial growth inEuropedidnotcomeinplaceswheretheRomanworldhadthestrongesthold,inclusiveinstitutionsintheAmericasdidnotdevelopinthelandsoftheseearlycivilizations.Infact,aswesawinchapter1,thesedenselysettled civilizations interacted in a perverse way with Europeancolonialismtocreatea“reversaloffortune,”makingtheplacesthatwerepreviouslyrelativelywealthyintheAmericasrelativelypoor.TodayitistheUnitedStatesandCanada,whichwerethenfarbehindthecomplexcivilizationsinMexico,Peru,andBolivia,thataremuchricherthantherestoftheAmericas.

CONSEQUENCESOFEARLYGROWTH

ThelongperiodbetweentheNeolithicRevolution,whichstartedin9500BC,andtheBritishIndustrialRevolutionofthelateeighteenthcenturyislitteredwithspurtsofeconomicgrowth.Thesespurtsweretriggeredbyinstitutional innovations that ultimately faltered. In Ancient Rome theinstitutions of the Republic, which created some degree of economicvitalityandallowedfortheconstructionofamassiveempire,unraveledafterthecoupofJuliusCaesarandtheconstructionoftheempireunderAugustus.IttookcenturiesfortheRomanEmpirefinallytovanish,andthedeclinewasdrawnout;butoncetherelativelyinclusiverepublicaninstitutionsgaveway to themoreextractive institutionsof theempire,economicregressbecameallbutinevitable.The Venetian dynamics were similar. The economic prosperity ofVenicewasforgedbyinstitutionsthathadimportantinclusiveelements,butthesewereunderminedwhentheexistingeliteclosedthesystemtonew entrants and even banned the economic institutions that hadcreatedtheprosperityoftherepublic.However notable the experience of Rome, it was not Rome’sinheritance that led directly to the rise of inclusive institutions inEnglandandtotheBritishIndustrialRevolution.Historicalfactorsshapehow institutions develop, but this is not a simple, predetermined,cumulativeprocess.RomeandVeniceillustratehowearlystepstoward

inclusivitywerereversed.TheeconomicandinstitutionallandscapethatRomecreatedthroughoutEuropeandtheMiddleEastdidnotinexorablyleadtothemorefirmlyrootedinclusiveinstitutionsoflatercenturies.Infact,thesewouldemergefirstandmoststronglyinEngland,wheretheRoman hold was weakest and where it disappeared most decisively,almost without a trace, during the fifth century AD. Instead, as wediscussed inchapter4,historyplays amajor role through institutionaldriftthatcreatesinstitutionaldifferences,albeitsometimessmall,whichthen get amplified when they interact with critical junctures. It isbecausethesedifferencesareoftensmallthattheycanbereversedeasilyandarenotnecessarilytheconsequenceofasimplecumulativeprocess.Of course,Romehad long-lastingeffectsonEurope.Roman lawandinstitutionsinfluencedthelawsandinstitutionsthatthekingdomsofthebarbarianssetupafterthecollapseoftheWesternRomanEmpire.Itwasalso Rome’s fall that created the decentralized political landscape thatdeveloped into the feudal order. The disappearance of slavery and theemergenceof independentcitieswere long,drawnout (and,ofcourse,historicallycontingent)by-productsofthisprocess.Thesewouldbecomeparticularly consequential when the Black Death shook feudal societydeeply.OutoftheashesoftheBlackDeathemergedstrongertownsandcities, and a peasantry no longer tied to the land and newly free offeudalobligations.Itwaspreciselythesecriticaljuncturesunleashedbythe fall of the Roman Empire that led to a strong institutional driftaffecting all of Europe in a way that has no parallel in sub-SaharanAfrica,Asia,ortheAmericas.Bythesixteenthcentury,Europewasinstitutionallyverydistinctfromsub-SaharanAfricaandtheAmericas.Thoughnotmuchricherthanthemost spectacular Asian civilizations in India or China, Europe differedfrom these polities in some key ways. For example, it had developedrepresentative institutionsofa sortunseen there.Thesewere toplayacriticalroleinthedevelopmentofinclusiveinstitutions.Aswewillseein the next two chapters, small institutional differences would be theonesthatwouldreallymatterwithinEurope;andthesefavoredEngland,because it was there that the feudal order had made way mostcomprehensively for commercially minded farmers and independenturban centerswheremerchants and industrialists could flourish.Thesegroupswere already demandingmore secure property rights, different

economic institutions, and political voice from their monarchs. Thiswholeprocesswouldcometoaheadintheseventeenthcentury.

7.

THETURNINGPOINT

TROUBLEWITHSTOCKINGS

IN 1583 WILLIAM LEE returned from his studies at the University ofCambridgetobecomethelocalpriestinCalverton,England.ElizabethI(1558–1603)hadrecentlyissuedarulingthatherpeopleshouldalwayswearaknittedcap.Leerecordedthat“knittersweretheonlymeansofproducingsuchgarmentsbutittooksolongtofinishthearticle.Ibeganto think. I watched my mother and my sisters sitting in the eveningtwilightplyingtheirneedles.Ifgarmentsweremadebytwoneedlesandonelineofthread,whynotseveralneedlestotakeupthethread.”Thismomentous thoughtwas thebeginningof themechanizationof

textile production. Lee became obsessed with making a machine thatwouldfreepeoplefromendlesshand-knitting.Herecalled,“MydutiestoChurchandfamilyIbegantoneglect.Theideaofmymachineandthecreatingofitateintomyheartandbrain.”Finally,in1589,his“stockingframe”knittingmachinewasready.He

traveledtoLondonwithexcitementtoseekaninterviewwithElizabethIto show her how useful the machine would be and to ask her for apatentthatwouldstopotherpeoplefromcopyingthedesign.Herentedabuildingtosetthemachineupand,withthehelpofhislocalmemberof Parliament Richard Parkyns, met Henry Carey, Lord Hundson, amember of the Queen’s Privy Council. Carey arranged for QueenElizabeth to come see themachine, but her reaction was devastating.SherefusedtograntLeeapatent,insteadobserving,“Thouaimesthigh,Master Lee. Consider thou what the invention could do to my poorsubjects. It would assuredly bring to them ruin by depriving them ofemployment,thusmakingthembeggars.”Crushed,LeemovedtoFrance

totryhisluckthere;whenhefailedthere,too,hereturnedtoEngland,whereheaskedJamesI(1603–1625),Elizabeth’ssuccessor,forapatent.JamesIalsorefused,onthesamegroundsasElizabeth.Bothfearedthatthe mechanization of stocking production would be politicallydestabilizing.Itwouldthrowpeopleoutofwork,createunemploymentandpolitical instability, and threaten royal power. The stocking framewasaninnovationthatpromisedhugeproductivityincreases,butitalsopromisedcreativedestruction.

THEREACTION TOLEE’Sbrilliant invention illustratesakey ideaof thisbook.The fear of creative destruction is themain reasonwhy therewas nosustained increase in living standards between the Neolithic andIndustrial revolutions.Technological innovationmakeshumansocietiesprosperous,butalso involves thereplacementof theoldwith thenew,and the destruction of the economic privileges and political power ofcertain people. For sustained economic growth we need newtechnologies,newwaysofdoing things, andmoreoften thannot theywillcomefromnewcomerssuchasLee.Itmaymakesocietyprosperous,but the process of creative destruction that it initiates threatens thelivelihoodof thosewhoworkwithold technologies, suchas thehand-knitters who would have found themselves unemployed by Lee’stechnology. More important, major innovations such as Lee’s stockingframe machine also threaten to reshape political power. Ultimately itwasnotconcernaboutthefateofthosewhomightbecomeunemployedasaresultofLee’smachinethat ledElizabethIandJamesI toopposehis patent; itwas their fear that theywould become political losers—their concern that those displaced by the invention would createpolitical instabilityand threaten theirownpower.Aswe sawwith theLuddites (this page–this page), it is often possible to bypass theresistance of workers such as hand-knitters. But the elite, especiallywhentheirpoliticalpoweristhreatened,formamoreformidablebarrierto innovation. The fact that they have much to lose from creativedestructionmeans not only that theywill not be the ones introducingnewinnovationsbutalsothattheywilloftenresistandtrytostopsuchinnovations.Thussocietyneedsnewcomerstointroducethemostradicalinnovations, and these newcomers and the creative destruction they

wreakmustoftenovercomeseveralsourcesofresistance,includingthatfrompowerfulrulersandelites.Priortoseventeenth-centuryEngland,extractiveinstitutionswerethenorm throughout history. They have at times been able to generateeconomic growth, as shown in the last two chapters, especially whenthey’vecontained inclusiveelements, as inVeniceandRome.But theydidnotpermitcreativedestruction.Thegrowththeygeneratedwasnotsustained, and came to an end because of the absence of newinnovations, because of political infighting generated by the desire tobenefitfromextraction,orbecausethenascentinclusiveelementswereconclusivelyreversed,asinVenice.The life expectancy of a resident of the Natufian village of AbuHureyrawasprobablynotthatmuchdifferentfromthatofacitizenofAncientRome.ThelifeexpectancyofatypicalRomanwasfairlysimilartothatofanaverageinhabitantofEnglandintheseventeenthcentury.Intermsofincomes,in301ADtheRomanemperorDiocletianissuedtheEdict on Maximum Prices, which set out a schedule of wages thatvarioustypesofworkerswouldbepaid.Wedon’tknowexactlyhowwellDiocletian’s wages and prices were enforced, but when the economichistorianRobertAllenusedhisedicttocalculatethelivingstandardsofatypicalunskilledworker,hefoundthemtobealmostexactlythesameas those of an unskilled worker in seventeenth-century Italy. Farthernorth, in England,wageswere higher and increasing, and thingswerechanging.Howthiscametobeisthetopicofthischapter.

EVER-PRESENTPOLITICALCONFLICT

Conflict over institutions and the distribution of resources has beenpervasive throughout history. We saw, for example, how politicalconflictshapedtheevolutionofAncientRomeandVenice,whereitwasultimatelyresolvedinfavoroftheelites,whowereabletoincreasetheirholdonpower.English history is also full of conflict between themonarchy and itssubjects, between different factions fighting for power, and betweenelites and citizens. The outcome, though, has not always been tostrengthenthepowerofthosewhoheldit.In1215thebarons,thelayer

oftheelitebeneaththeking,stooduptoKingJohnandmadehimsigntheMagnaCarta (“theGreatCharter”)atRunnymede (seeMap9, thispage).Thisdocumentenactedsomebasicprinciplesthatweresignificantchallenges to the authority of the king.Most important, it establishedthatthekinghadtoconsultwiththebaronsinordertoraisetaxes.Themostcontentiousclausewasnumber61,whichstated that“thebaronsshallchooseanytwenty-fivebaronsoftherealmtheywish,whowithalltheirmightaretoobserve,maintainandcausetobeobservedthepeaceandlibertieswhichwehavegrantedandconfirmedtothembythisourpresentcharter.” Inessence, thebaronscreatedacouncil tomakesurethatthekingimplementedthecharter,andifhedidn’t,thesetwenty-fivebaronshadtherighttoseizecastles,lands,andpossessions“…until,intheir judgement, amends have been made.” King John didn’t like theMagnaCarta, and as soon as thebaronsdispersed, he got thepope toannulit.Butboththepoliticalpowerofthebaronsandtheinfluenceofthe Magna Carta remained. England had taken its first hesitant steptowardpluralism.Conflict over political institutions continued, and the power of the

monarchy was further constrained by the first elected Parliament in1265.UnlikethePlebeianAssemblyinRomeortheelectedlegislaturesof today, its members had originally been feudal nobles, andsubsequentlywereknightsand thewealthiest aristocratsof thenation.Despite consisting of elites, the English Parliament developed twodistinguishingcharacteristics.First,itrepresentednotonlyelitescloselyallied to the king but also a broad set of interests, including minoraristocrats involved in different walks of life, such as commerce andindustry, and later the “gentry,” a new class of commercial andupwardlymobilefarmers.ThustheParliamentempoweredaquitebroadsectionofsociety—especiallybythestandardsofthetime.Second,andlargely as a result of the first characteristic, many members ofParliament were consistently opposed to the monarchy’s attempts toincrease its power and would become the mainstay of those fightingagainstthemonarchyintheEnglishCivilWarandthenintheGloriousRevolution.The Magna Carta and the first elected Parliament notwithstanding,

political conflict continued over the powers of themonarchy andwhowastobeking.Thisintra-eliteconflictendedwiththeWaroftheRoses,

alongduelbetweentheHousesofLancasterandYork,twofamilieswithcontenders to be king. The winners were the Lancastrians, whosecandidateforking,HenryTudor,becameHenryVIIin1485.Twoother interrelatedprocesses tookplace.The firstwas increasingpoliticalcentralization,putintomotionbytheTudors.After1485HenryVIIdisarmed thearistocracy, ineffectdemilitarizing themand therebymassivelyexpandingthepowerofthecentralstate.Hisson,HenryVIII,then implemented through his chief minister, Thomas Cromwell, arevolutioningovernment.Inthe1530s,Cromwellintroducedanascentbureaucratic state. Instead of the government being just the privatehousehold of the king, it could become a separate set of enduringinstitutions. This was complemented by Henry VIII’s break with theRoman Catholic Church and the “Dissolution of the Monasteries,” inwhich Henry expropriated all the Church lands. The removal of thepoweroftheChurchwaspartofmakingthestatemorecentralized.Thiscentralizationofstateinstitutionsmeantthatforthefirsttime,inclusivepoliticalinstitutionsbecamepossible.ThisprocessinitiatedbyHenryVIIandHenryVIIInotonlycentralizedstateinstitutionsbutalsoincreasedthe demand for broader-based political representation. The process ofpoliticalcentralizationcanactuallyleadtoaformofabsolutism,asthekingandhisassociatescancrushotherpowerfulgroupsinsociety.Thisis indeedoneof thereasonswhytherewillbeoppositionagainst statecentralization, aswe saw in chapter 3.However, in opposition to thisforce, the centralization of state institutions can alsomobilize demandfor anascent formofpluralism, as it did inTudorEngland.When thebaronsandlocalelitesrecognizethatpoliticalpowerwillbeincreasinglymore centralized and that this process is hard to stop, theywillmakedemandstohaveasayinhowthiscentralizedpowerisused.InEnglandduring the late fifteenth and sixteenth centuries, this meant greaterefforts by these groups to have Parliament as a counterweight againsttheCrownandtopartiallycontrolthewaythestatefunctioned.ThustheTudor project not only initiated political centralization, one pillar ofinclusive institutions, but also indirectly contributed to pluralism, theotherpillarofinclusiveinstitutions.Thesedevelopments inpolitical institutionstookplaceinthecontextofothermajorchanges in thenatureofsociety.Particularlysignificantwas thewideningofpolitical conflictwhichwasbroadening the setof

groups with the ability to make demands on the monarchy and thepolitical elites. The Peasants’ Revolt of 1381 (this page) was pivotal,afterwhichtheEnglishelitewererockedbyalongsequenceofpopularinsurrections. Political powerwas being redistributed not simply fromthe king to the lords, but also from the elite to the people. Thesechanges, togetherwith the increasing constraints on the king’s power,madetheemergenceofabroadcoalitionopposedtoabsolutismpossibleandthuslaidthefoundationsforpluralisticpoliticalinstitutions.Thoughcontested, thepoliticalandeconomic institutions theTudors

inherited and sustained were clearly extractive. In 1603 Elizabeth I,Henry VIII’s daughter who had acceded to the throne of England in1553,diedwithoutchildren,andtheTudorswerereplacedbytheStuartdynasty.ThefirstStuartking,JamesI,inheritednotonlytheinstitutionsbuttheconflictsoverthem.Hedesiredtobeanabsolutistruler.Thoughthe state had become more centralized and social change wasredistributing power in society, political institutions were not yetpluralistic.Intheeconomy,extractiveinstitutionsmanifestedthemselvesnot just in the opposition to Lee’s invention, but in the form ofmonopolies,monopolies, andmoremonopolies. In1601a list of thesewasreadoutinParliament,withonememberironicallyasking,“Isnotbreadthere?”By1621thereweresevenhundredofthem.AstheEnglishhistorianChristopherHillputit,amanlived

inahousebuiltwithmonopolybricks,withwindows…ofmonopoly glass; heated by monopoly coal (in Irelandmonopoly timber), burning in a grate made of monopolyiron…Hewashedhimself inmonopolysoap,hisclothes inmonopoly starch. He dressed in monopoly lace, monopolylinen,monopolyleather,monopolygoldthread…Hisclotheswere held up by monopoly belts, monopoly buttons,monopolypins.Theyweredyedwithmonopolydyes.Heatemonopolybutter,monopolycurrants,monopolyredherrings,monopoly salmon, and monopoly lobsters. His food wasseasoned with monopoly salt, monopoly pepper, monopolyvinegar … He wrote with monopoly pens, on monopolywriting paper; read (through monopoly spectacles, by thelightofmonopolycandles)monopolyprintedbooks.

These monopolies, and many more, gave individuals or groups thesole right to control theproductionofmanygoods.They impeded thetypeofallocationoftalent,whichissocrucialtoeconomicprosperity.BothJamesIandhissonandsuccessorCharlesIaspiredtostrengthen

the monarchy, reduce the influence of Parliament, and establishabsolutist institutions similar to those being constructed in Spain andFrance to further their and the elite’s control of the economy,makinginstitutions more extractive. The conflict between James I andParliamentcametoaheadinthe1620s.CentralinthisconflictwasthecontroloftradebothoverseasandwithintheBritishIsles.TheCrown’sability to grantmonopolieswas a key source of revenue for the state,and was used frequently as a way of granting exclusive rights tosupporters of the king. Not surprisingly, this extractive institutionblocking entry and inhibiting the functioning of the market was alsohighly damaging to economic activity and to the interests of manymembersofParliament.In1623Parliamentscoredanotablevictorybymanaging topass theStatuteofMonopolies,whichprohibitedJames Ifromcreatingnewdomesticmonopolies.Hewouldstillbeabletograntmonopolies on international trade, however, since the authority ofParliamentdidnotextendto internationalaffairs.Existingmonopolies,internationalorotherwise,stooduntouched.Parliamentdidnot sit regularlyandhad tobecalled into sessionby

theking.Theconvention thatemergedafter theMagnaCartawas thatthekingwasrequiredtoconveneParliamenttogetassentfornewtaxes.Charles Icameto the throne in1625,declined tocallParliamentafter1629,andintensifiedJamesI’seffortstobuildamoresolidlyabsolutistregime.Heinducedforcedloans,meaningthatpeoplehadto“lend”himmoney, and he unilaterally changed the terms of loans and refused torepayhisdebts.Hecreatedand soldmonopolies in theonedimensionthattheStatuteofMonopolieshadlefttohim:overseastradingventures.Healsounderminedtheindependenceofthejudiciaryandattemptedtointervenetoinfluencetheoutcomeoflegalcases.Heleviedmanyfinesandcharges,themostcontentiousofwhichwas“shipmoney”—in1634taxingthecoastalcountiestopayforthesupportoftheRoyalNavyand,in 1635, extending the levy to the inland counties. Ship money wasleviedeachyearuntil1640.Charles’s increasingly absolutist behavior and extractive policies

created resentment and resistance throughout the country. In 1640 hefacedconflictwithScotlandand,withoutenoughmoneytoputaproperarmyintothefield,wasforcedtocallParliamenttoaskformoretaxes.The so-called Short Parliament sat for only three weeks. Theparliamentarianswho came toLondon refused to talk about taxes, butairedmanygrievances,untilCharlesdismissedthem.TheScotsrealizedthatCharlesdidnothavethesupportofthenationandinvadedEngland,occupying the city ofNewcastle. Charles opened negotiations, and theScots demanded that Parliament be involved. This induced Charles tocall what then became known as the Long Parliament, because itcontinued to sit until 1648, refusing to dissolve even when Charlesdemandeditdoso.In1642theCivilWarbrokeoutbetweenCharlesandParliament,eventhoughthereweremanyinParliamentwhosidedwiththeCrown.Thepattern of conflicts reflected the struggle over economic and politicalinstitutions.Parliamentwantedanendtoabsolutistpoliticalinstitutions;the king wanted them strengthened. These conflicts were rooted ineconomics.Many supported theCrownbecause theyhadbeengrantedlucrativemonopolies. For example, the localmonopolies controlled bythe rich and powerful merchants of Shrewsbury and Oswestry wereprotectedby theCrown fromcompetitionbyLondonmerchants.Thesemerchants sided with Charles I. On the other side, the metallurgicalindustry had flourished around Birmingham because monopolies wereweakthereandnewcomerstotheindustrydidnothavetoserveaseven-yearapprenticeship,astheydidinotherpartsofthecountry.DuringtheCivil War, they made swords and produced volunteers for theparliamentaryside.Similarly,thelackofguildregulationinthecountyof Lancashire allowed for the development before 1640 of the “NewDraperies,”anewstyleoflightercloth.Theareawheretheproductionof these cloths was concentrated was the only part of Lancashire tosupportParliament.Under the leadership of Oliver Cromwell, the Parliamentarians—knownastheRoundheadsafterthestyleinwhichtheirhairwascropped—defeated the royalists, known as Cavaliers. Charles was tried andexecutedin1649.Hisdefeatandtheabolitionofthemonarchydidnot,however,resultininclusiveinstitutions.Instead,monarchywasreplacedbythedictatorshipofOliverCromwell.FollowingCromwell’sdeath,the

monarchywasrestoredin1660andclawedbackmanyoftheprivilegesthathadbeenstrippedfromitin1649.Charles’sson,CharlesII,thensetabout the same program of creating absolutism in England. TheseattemptswereonlyintensifiedbyhisbrotherJamesII,whoascendedtothe throne after Charles’s death in 1685. In 1688 James’s attempt toreestablish absolutism created another crisis and another civil war.Parliament this timewasmoreunitedandorganized.They invited theDutch Statholder, William of Orange, and his wife, Mary, James’sProtestantdaughter,toreplaceJames.Williamwouldbringanarmyandclaim the throne, to rule not as an absolutist monarch but under aconstitutional monarchy forged by Parliament. Two months afterWilliam’s landing in theBritish Isles atBrixham inDevon (seeMap9,thispage),James’sarmydisintegratedandhefledtoFrance.

THEGLORIOUSREVOLUTION

After victory in the Glorious Revolution, Parliament and Williamnegotiated a new constitution. The changes were foreshadowed byWilliam’s “Declaration,”made shortly prior tohis invasion.Theywerefurtherenshrined in theDeclarationofRights,producedbyParliamentinFebruary1689.TheDeclarationwasreadouttoWilliamatthesamesessionwherehewasofferedthecrown.InmanywaystheDeclaration,whichwouldbecalledtheBillofRightsafter itssigning into law,wasvague. Crucially, however, it did establish some central constitutionalprinciples. It determined the succession to the throne, anddid so in away that departed significantly from the then-received hereditaryprinciples.IfParliamentcouldremoveamonarchandreplacehimwithonemore to their likingonce, thenwhynotagain?TheDeclarationofRights also asserted that the monarch could not suspend or dispensewith laws, and it reiterated the illegality of taxation withoutparliamentary consent. In addition, it stated that there could be nostanding army in England without parliamentary consent. Vaguenessentered into such clauses as number 8,which stated, “The election ofmembersofParliamentoughttobefree,”butdidnotspecifyhow“free”wastobedetermined.Evenvaguerwasclause13,whosemainpointwasthatParliamentsought tobeheld frequently. Sincewhenandwhether

Parliament would be held had been such a contentious issue for theentire century, onemight have expectedmuchmore specificity in thisclause.Nevertheless,thereasonforthisvaguewordingisclear.Clauseshavetobeenforced.DuringthereignofCharlesII,aTriennialActhadbeen in place that asserted that Parliaments had to be called at leastonce every three years. ButCharles ignored it, andnothinghappened,because there was no method of enforcing it. After 1688, Parliamentcouldhavetriedtointroduceamethodforenforcingthisclause,asthebarons had donewith their council after King John signed theMagnaCarta.Theydidnotdosobecausetheydidnotneedto.Thiswasbecauseauthorityanddecision-makingpowerswitchedtoParliamentafter1688.Evenwithoutspecificconstitutional rulesor laws,Williamsimplygaveuponmanyofthepracticesofpreviouskings.Hestoppedinterferinginlegal decisions and gave up previous “rights,” such as getting thecustoms revenues for life. Taken together, these changes in politicalinstitutions represented the triumph of Parliament over the king, andthustheendofabsolutisminEnglandandsubsequentlyGreatBritain—asEnglandandScotlandwereunitedbytheActofUnionin1707.Fromthen on Parliamentwas firmly in control of state policy. Thismade ahugedifference,becausetheinterestsofParliamentwereverydifferentfrom thoseof theStuart kings. Sincemanyof those inParliamenthadimportantinvestmentsintradeandindustry,theyhadastrongstakeinenforcing property rights. The Stuarts had frequently infringed onpropertyrights;nowtheywouldbeupheld.Moreover,whentheStuartscontrolled how the government spent money, Parliament opposedgreater taxes andbalkedat strengthening thepowerof the state.Nowthat Parliament itself controlled spending, it was happy to raise taxesandspendthemoneyonactivitiesthatitdeemedvaluable.Chiefamongthem was the strengthening of the navy, which would protect theoverseasmercantileinterestsofmanyofthemembersofParliament.Even more important than the interest of parliamentarians was the

emergingpluralistic natureof political institutions.TheEnglishpeoplenowhadaccesstoParliament,andthepolicyandeconomicinstitutionsmadeinParliament,inawaytheyneverhadwhenpolicywasdrivenbytheking.Thiswaspartially,ofcourse,becausemembersofParliamentwereelected.ButsinceEnglandwasfarfrombeingademocracyinthisperiod, this access provided only a modest amount of responsiveness.

Amongitsmanyinequitieswasthatlessthan2percentofthepopulationcouldvoteintheeighteenthcentury,andthesehadtobemen.Thecitieswhere the Industrial Revolution took place, Birmingham, Leeds,Manchester, and Sheffield, had no independent representation inParliament. Instead, rural areaswereoverrepresented. Just as bad, therighttovoteintheruralareas,the“counties,”wasbasedonownershipof land, andmany urban areas, the “boroughs,” were controlled by asmall elitewhodidnot allow thenew industrialists to voteor run foroffice. In the borough of Buckingham, for instance, thirteen burgesseshad the exclusive right to vote. On top of this therewere the “rottenboroughs,”whichhadhistoricallyhadtherighttovotebuthad“rottedaway,”eitherbecausetheirpopulationhadmovedover timeor, in thecaseonDunwichon theeastcoastofEngland,hadactually fallen intotheoceanasaresultofcoastalerosion.Ineachoftheserottenboroughs,asmallnumberofvoterselectedtwomembersofParliament.OldSarumhadsevenvoters,Dunwichthirty-two,andeachelectedtwomembersofParliament.ButtherewereotherwaystoinfluenceParliamentandthuseconomic

institutions.Themostimportantwasviapetitioning,andthiswasmuchmoresignificantthanthelimitedextentofdemocracyfortheemergenceof pluralism after the Glorious Revolution. Anybody could petitionParliament,andpetitiontheydid.Significantly,whenpeoplepetitioned,Parliamentlistened.Itisthismorethananythingthatreflectsthedefeatof absolutism, the empowerment of a fairly broad segment of society,andtheriseofpluralisminEnglandafter1688.Thefranticpetitioningactivity shows that it was indeed such a broad group in society, farbeyond thosesittingorevenbeingrepresented inParliament, thathadthepowertoinfluencethewaythestateworked.Andtheyusedit.The case of monopolies best illustrates this. We saw above how

monopolieswereat theheartofextractiveeconomic institutions intheseventeenthcentury.Theycameunderattackin1623withtheStatuteofMonopolies, andwere a serious bone of contentionduring theEnglishCivilWar.TheLongParliament abolished all thedomesticmonopoliesthatsoimpingedonpeople’slives.ThoughCharlesIIandJamesIIcouldnot bring these back, they managed to maintain the ability to grantoverseas monopolies. One was the Royal African Company, whosemonopolycharterwasissuedbyCharlesIIin1660.Thiscompanyhelda

monopoly on the lucrative African slave trade, and its governor andmajor shareholderwasCharles’sbrotherJames, soon tobecomeJamesII. After 1688 the Company lost not just its governor, but its mainsupporter. James had assiduously protected the monopoly of thecompanyagainst“interlopers,”theindependenttraderswhotriedtobuyslaves inWest Africa and sell them in the Americas. This was a veryprofitable trade, and the Royal African Company faced a lot ofchallenges,sinceallotherEnglishtradeintheAtlanticwasfree.In1689the Company seized the cargo of an interloper, one Nightingale.Nightingale sued the Company for illegal seizure of goods, and ChiefJusticeHolt ruled that theCompany’s seizurewas unlawful because itwas exercising a monopoly right created by royal prerogative. Holtreasonedthatmonopolyprivilegescouldbecreatedonlybystatute,andthishadtobedonebyParliament.SoHoltpushedallfuturemonopolies,not just of the Royal Africa Company, into the hands of Parliament.Before1688JamesIIwouldquicklyhaveremovedanyjudgewhomadesucharuling.After1688thingsweredifferent.Parliamentnowhadtodecidewhattodowiththemonopoly,andthe

petitions began to fly. One hundred and thirty-five came frominterlopers demanding free access to trade in theAtlantic. Though theRoyalAfricanCompanyresponded inkind, it couldnothope tomatchthe number or scope of the petitions demanding its demise. Theinterlopers succeeded in framing their opposition in terms not just ofnarrowself-interest,butofnational interest,which indeed itwas.Asaresult, only 5 of the 135 petitions were signed by the interlopersthemselves,and73oftheinterlopers’petitionscamefromtheprovincesoutsideLondon,asagainst8fortheCompany.Fromthecolonies,wherepetitioningwasalsoallowed, the interlopersgathered27petitions, theCompany11.Theinterlopersalsogatheredfarmoresignaturesfortheirpetitions, in total 8,000, as opposed to 2,500 for the Company. Thestruggle continued until 1698, when the Royal African Companymonopolywasabolished.Along with this new locus for the determination of economic

institutions and the new responsiveness after 1688, parliamentariansstarted making a series of key changes in economic institutions andgovernmentpolicythatwouldultimatelypavethewayfortheIndustrialRevolution.PropertyrightserodedundertheStuartswerestrengthened.

Parliament began a process of reform in economic institutions topromotemanufacturing,ratherthantaxingandimpedingit.The“hearthtax”—anannualtaxforeachfireplaceorstove,whichfellmostheavilyon manufacturers, who were bitterly opposed to it—was abolished in1689, soon after William and Mary ascended the throne. Instead oftaxinghearths,Parliamentmovedtostarttaxingland.Redistributing the tax burden was not the only pro-manufacturing

policythatParliamentsupported.Awholeseriesofactsandlegislationsthatwould expand themarket and the profitability of woolen textileswas passed. This all made political sense, since many of theparliamentarians who opposed James were heavily invested in thesenascent manufacturing enterprises. Parliament also passed legislationthat allowed for a complete reorganization of property rights in land,permitting the consolidationandeliminationofmanyarchaic formsofpropertyanduserrights.Another priority of Parliamentwas reforming finance. Though there

hadbeenanexpansionofbankingandfinanceintheperiodleadingupto the Glorious Revolution, this process was further cemented by thecreation of the Bank of England in 1694, as a source of funds forindustry.ItwasanotherdirectconsequenceoftheGloriousRevolution.ThefoundationoftheBankofEnglandpavedthewayforamuchmoreextensive “financial revolution,” which led to a great expansion offinancialmarkets and banking. By the early eighteenth century, loanswould be available to everyone who could put up the necessarycollateral. The records of a relatively small bank, C. Hoare’s & Co. inLondon, which have survived intact from the period 1702–1724,illustratethispoint.Thoughthebankdidlendmoneytoaristocratsandlords, fully two-thirds of the biggest borrowers fromHoare’s over thisperiod were not from the privileged social classes. Instead they weremerchantsandbusinessmen,includingoneJohnSmith,amanwiththenameoftheeponymousaverageEnglishman,whowasloaned£2,600bythebankduringtheperiod1715–1719.SofarwehaveemphasizedhowtheGloriousRevolutiontransformed

English political institutions, making them more pluralistic, and alsostartedlayingthefoundationsforinclusiveeconomicinstitutions.Thereis one more significant change in institutions that emerged from theGlorious Revolution: Parliament continued the process of political

centralization that was initiated by the Tudors. It was not just thatconstraints increased, or that the state regulated the economy in adifferentway,orthattheEnglishstatespentmoneyondifferentthings;but also the capability and capacity of the state increased in alldirections. This again illustrates the linkages between politicalcentralizationandpluralism:Parliamenthadopposedmaking the statemoreeffectiveandbetter resourcedprior to1688because it couldnotcontrolit.After1688itwasadifferentstory.Thestatestartedexpanding,withexpendituressoonreachingaround

10percentofnationalincome.Thiswasunderpinnedbyanexpansionofthetaxbase,particularlywithrespecttotheexcisetax,whichwasleviedontheproductionofa longlistofdomesticallyproducedcommodities.Thiswasavery large statebudget for theperiod, and is in fact largerthanwhatweseetodayinmanypartsoftheworld.ThestatebudgetsinColombia, forexample, reached this relative sizeonly in the1980s. Inmany parts of sub-Saharan Africa—for example, in Sierra Leone—thestatebudgeteventodaywouldbefarsmallerrelativetothesizeoftheeconomywithoutthelargeinflowsofforeignaid.Buttheexpansionofthesizeofthestateisonlypartoftheprocessof

political centralization. More important than this was the qualitativewaythestatefunctionedandthewaythosewhocontrolleditandthosewho worked in it behaved. The construction of state institutions inEngland reached back into the Middle Ages, but as we’ve seen (thispage), steps toward political centralization and the development ofmodern administrationwere decisively taken byHenry VII andHenryVIII.Yetthestatewasstillfarfromthemodernformthatwouldemergeafter 1688. For example, many appointees were made on politicalgrounds, not because ofmerit or talent, and the state still had a verylimitedcapacitytoraisetaxes.After1688Parliamentbegan to improve theability to raise revenue

through taxation, a development well illustrated by the excise taxbureaucracy, which expanded rapidly from 1,211 people in 1690 to4,800 by 1780. Excise tax inspectors were stationed throughout thecountry,supervisedbycollectorswhoengagedintoursofinspectiontomeasureandchecktheamountofbread,beer,andothergoodssubjectto the excise tax. The extent of this operation is illustrated by thereconstructionoftheexciseroundsofSupervisorGeorgeCowperthwaite

by the historian John Brewer. Between June 12 and July 5, 1710,SupervisorCowperthwaitetraveled290milesintheRichmonddistrictofYorkshire.Duringthisperiodhevisited263victualers,71maltsters,20chandlers, and one common brewer. In all, he took 81 differentmeasurements of production and checked the work of 9 differentexcisemenwhoworkedforhim.Eightyears laterwefindhimworkingjust as hard, but now in theWakefield district, in a different part ofYorkshire.InWakefield,hetraveledmorethannineteenmilesadayonaverage andworked six days aweek, normally inspecting four or fivepremises.Onhisdayoff,Sunday,hemadeuphisbooks,sowehaveacompleterecordofhisactivities.Indeed,theexcisetaxsystemhadveryelaboraterecordkeeping.Officerskept threedifferent typesof records,all ofwhichwere supposed tomatch one another, and any tamperingwiththeserecordswasaseriousoffense.Thisremarkablelevelofstatesupervision of society exceeds what the governments of most poorcountries can achieve today, and this in 1710.Also significantly, after1688 the state began to rely more on talent and less on politicalappointees,anddevelopedapowerfulinfrastructuretorunthecountry.

THEINDUSTRIALREVOLUTION

TheIndustrialRevolutionwasmanifestedineveryaspectoftheEnglisheconomy.Thereweremajorimprovementsintransportation,metallurgy,and steampower. But themost significant area of innovationwas themechanizationoftextileproductionandthedevelopmentoffactoriestoproduce these manufactured textiles. This dynamic process wasunleashed by the institutional changes that flowed from the GloriousRevolution. This was not just about the abolition of domesticmonopolies,whichhadbeenachievedby1640,oraboutdifferenttaxesor access to finance. It was about a fundamental reorganization ofeconomicinstitutionsinfavorofinnovatorsandentrepreneurs,basedontheemergenceofmoresecureandefficientpropertyrights.Improvements in the security and efficiency of property rights, forexample,playedacentralroleinthe“transportationrevolution,”pavingtheway for the IndustrialRevolution. Investment in canals and roads,the so-called turnpikes, massively increased after 1688. These

investments,byreducingthecostsoftransportation,helpedtocreateanimportant prerequisite for the Industrial Revolution. Prior to 1688,investmentinsuchinfrastructurehadbeenimpededbyarbitraryactsbythe Stuart kings. The change in the situation after 1688 is vividlyillustratedbythecaseoftheriverSalwerpe,inWorcestershire,England.In1662ParliamentpassedanacttoencourageinvestmenttomaketheSalwerpenavigable,andtheBaldwynfamilyinvested£6,000tothisend.Inreturntheygottherighttochargepeoplefornavigationontheriver.In 1693 a bill was introduced to Parliament to transfer the rights tochargefornavigationtotheEarlofShrewsburyandLordCoventry.ThisactwaschallengedbySirTimothyBaldwyn,whoimmediatelysubmittedapetitiontoParliamentclaimingthat theproposedbillwasessentiallyexpropriatinghisfather,whohadalreadyheavilyinvestedintheriverinanticipationofthechargeshecouldthenlevy.Baldwynarguedthat“thenewacttendstomakevoidthesaidact,andtotakeawayalltheworksandmaterialsdoneinpursuancethereof.”Reallocationofrightssuchasthis was exactly the sort of thing done by Stuart monarchs. Baldwynnoted,“[I]tisofdangerousconsequencetotakeawayanyperson’sright,purchased under an act of Parliament, without their consent.” In theevent, the new act failed, and Baldwyn’s rightswere upheld. Propertyrightsweremuchmoresecureafter1688,partlybecausesecuringthemwas consistent with the interests of Parliament and partly becausepluralistic institutions could be influenced by petitioning.We see herethatafter1688thepoliticalsystembecamesignificantlymorepluralisticandcreatedarelativelylevelplayingfieldwithinEngland.Underlying the transportation revolution and, more generally, thereorganization of land that took place in the eighteenth century wereparliamentaryactsthatchangedthenatureofpropertyownership.Until1688 therewaseven the legal fiction thatall the land inEnglandwasultimately owned by the Crown, a direct legacy from the feudalorganization of society. Many pieces of land were encumbered bynumerous archaic forms of property rights and many cross-cuttingclaims.Muchlandwasheldinso-calledequitableestates,whichmeantthatthelandownercouldnotmortgage,lease,orselltheland.Commonlandcouldoftenbeusedonlyfortraditionaluses.Therewereenormousimpediments to using land in ways that would be economicallydesirable.Parliamentbegantochangethis,allowinggroupsofpeopleto

petition Parliament to simplify and reorganize property rights,alterations that were subsequently embodied into hundreds of acts ofParliament.This reorganization of economic institutions alsomanifested itself inthe emergence of an agenda to protect domestic textile productionagainst foreign imports. Not surprisingly, parliamentarians and theirconstituents were not opposed to all entry barriers and monopolies.Those that would increase their own market and profits would bewelcome. However, crucially, the pluralistic political institutions—thefact that Parliament represented, empowered, and listened to a broadsegment of society—meant that these entry barriers would not chokeotherindustrialistsorcompletelyshutoutnewcomers,astheSerratadidin Venice (this page–this page). The powerful woolen manufacturerssoonmadethisdiscovery.In 1688 some of the most significant imports into England weretextiles from India, calicoes andmuslins, which comprised about one-quarter of all textile imports. Also important were silks from China.Calicoes and silks were imported by the East India Company, whichpriorto1688enjoyedagovernment-sanctionedmonopolyoverthetradewithAsia.But themonopoly and thepolitical powerof theEast IndiaCompanywassustainedthroughheavybribestoJamesII.After1688thecompanywasinavulnerablepositionandsoonunderattack.Thistookthe formofan intensewarofpetitionswith tradershoping to trade intheFarEastandIndiademandingthatParliamentsanctioncompetitionfor the East India Company, while the company responded withcounterpetitionsandofferstolendParliamentmoney.Thecompanylost,and a new East India Company to compete with it was founded. Buttextile producers did not just want more competition in the trade toIndia.Theywanted importsofcheap Indian textiles (calicoes) taxedoreven banned. These producers faced strong competition from thesecheap Indian imports. At this point the most important domesticmanufacturers produced woolen textiles, but the producers of cottoncloths were becoming both more important economically and morepowerfulpolitically.Thewool industrymountedattempts toprotect itself as earlyas the1660s. Itpromotedthe“SumptuaryLaws,”which,amongother things,prohibitedthewearingoflightercloth.ItalsolobbiedParliamenttopass

legislationin1666and1678thatwouldmakeitillegalforsomeonetobe buried in anything other than a woolen shroud. Both measuresprotectedthemarketforwoolengoodsandreducedthecompetitionthatEnglishmanufacturers facedfromAsia.Nevertheless, inthisperiodtheEastIndiaCompanywastoostrongtorestrictimportsofAsiantextiles.The tide changed after 1688. Between 1696 and 1698, woolenmanufacturers from East Anglia and theWest Country alliedwith silkweavers fromLondon,Canterbury,and theLevantCompany to restrictimports.The silk importers from theLevant, even if theyhad recentlylosttheirmonopoly,wishedtoexcludeAsiansilkstocreateanicheforsilksfromtheOttomanEmpire.ThiscoalitionstartedtopresentbillstoParliament to place restrictions on the wearing of Asian cottons andsilks,andalsorestrictionsonthedyeingandprintingofAsiantextilesinEngland.Inresponse,in1701,Parliamentfinallypassed“anActforthemoreeffectual imployingthepoor,by incouragingthemanufacturesofthis kingdom.” From September 1701, it decreed: “All wrought silks,bengals and stuffs, mixed with silk of herba, of the manufacture ofPersia, China, or East-India, all Calicoes painted, dyed, printed, orstainedthere,whichareorshallbeimportedintothiskingdom,shallnotbeworn.”ItwasnowillegaltowearAsiansilksandcalicoesinEngland.ButitwasstillpossibletoimportthemforreexporttoEuropeorelsewhere,inparticular to theAmerican colonies.Moreover, plain calicoes could beimported and finished in England, andmuslinswere exempt from theban. After a long struggle, these loopholes, as the domestic woolentextilemanufacturers viewed them,were closed by the Calicoe Act of1721:“AfterDecember25,1722,itshallnotbelawfulforanypersonorpersonswhatsoever touseorwear inGreatBritain, inanygarmentorapparel whatsoever, any printed, painted, stained or dyed Calicoe.”ThoughthisactremovedcompetitionfromAsia forEnglishwoolens, itstillleftanactivedomesticcottonandlinenindustrycompetingagainstthewoolens: cotton and linenweremixed to produce a popular clothcalled fustian. Having excluded Asian competition, the wool industrynow turned to clamp down on linen. Linen was primarily made inScotlandandIreland,whichgavesomescopetoanEnglishcoalitiontodemandthosecountries’exclusionfromEnglishmarkets.However,therewere limits to the power of the woolen manufacturers. Their new

attempts encountered strong opposition from fustian producers in theburgeoning industrial centers ofManchester, Lancaster, and Liverpool.The pluralistic political institutions implied that all these differentgroups now had access to the policy process in Parliament via votingand, more important, petitioning. Though the petitions flew from thepensofbothsides,amassingsignaturesforandagainst,theoutcomeofthisconflictwasavictoryforthenewinterestsagainstthoseofthewoolindustry. TheManchester Act of 1736 agreed that “great quantities ofstuffsmadefromlinenyarnandcottonwoolhaveforseveralyearspastbeen manufactured, and have been printed and painted within thiskingdomofGreatBritain.”Itthenwentontoassertthat“nothinginthesaid recitedAct [of1721] shall extendorbeconstrued toprohibit thewearingorusinginapparel,householdstuff,furnitureorotherwise,anysortofstuffmadeoutoflinenyarnandcottonwool,manufacturedandprinted or painted with any colour or colours within the kingdom ofGreatBritain.”TheManchester Actwas a significant victory for the nascent cotton

manufacturers.But its historical and economic significancewas in factmuchgreater.First,itdemonstratedthelimitsofentrybarriersthatthepluralisticpolitical institutionsofparliamentaryEnglandwouldpermit.Second, over the next half century, technological innovations in themanufactureofcottonclothwouldplayacentral role in the IndustrialRevolution and fundamentally transform society by introducing thefactorysystem.After 1688, though domestically a level playing field emerged,

internationally Parliament strove to tilt it. This was evident not onlyfrom the Calicoe Acts but also from the Navigation Acts, the first ofwhichwaspassedin1651,andtheyremainedinforcewithalternationsforthenext twohundredyears.Theaimof theseactswas to facilitateEngland’s monopolization of international trade—though crucially thiswasmonopolizationnotbythestatebutbytheprivatesector.ThebasicprinciplewasthatEnglishtradeshouldbecarriedinEnglishships.Theacts made it illegal for foreign ships to transport goods from outsideEuropetoEnglandoritscolonies,anditwassimilarlyillegalforthird-partycountries’shipstoshipgoodsfromacountryelsewhereinEuropeto England. This advantage for English traders and manufacturersnaturally increased their profits and may have further encouraged

innovationinthesenewandhighlyprofitableactivities.By 1760 the combination of all these factors—improved and new

propertyrights,improvedinfrastructure,achangedfiscalregime,greateraccesstofinance,andaggressiveprotectionoftradersandmanufacturers—wasbeginningtohaveaneffect.Afterthisdate,therewasajumpinthe number of patented inventions, and the great flowering oftechnological change that was to be at the heart of the IndustrialRevolutionbegantobeevident.Innovationstookplaceonmanyfronts,reflectingtheimprovedinstitutionalenvironment.Onecrucialareawaspower,mostfamouslythetransformationsintheuseofthesteamenginethatwerearesultofJamesWatt’sideasinthe1760s.Watt’s initial breakthrough was to introduce a separate condensing

chamberforthesteamsothatthecylinderthathousedthepistoncouldbekeptcontinuallyhot,insteadofhavingtobewarmedupandcooleddown. He subsequently developed many other ideas, including muchmore efficient methods of converting the motion of the steam engineintousefulpower,notablyhis“sunandplanets”gearsystem.Inalltheseareas technological innovations built on earlierwork by others. In thecontext of the steam engine, this included early work by Englishinventor Thomas Newcomen and also by Dionysius Papin, a Frenchphysicistandinventor.The story of Papin’s invention is another example of how, under

extractive institutions, the threat of creative destruction impededtechnologicalchange.Papindevelopedadesignfora“steamdigester”in1679,andin1690heextendedthisintoapistonengine.In1705heusedthisrudimentaryenginetobuildtheworld’sfirststeamboat.PapinwasbythistimeaprofessorofmathematicsattheUniversityofMarburg,intheGermanstateofKassel.HedecidedtosteamtheboatdowntheriverFuldatotheriverWeser.Anyboatmakingthistripwasforcedtostopatthe cityofMünden.At that time, river trafficon theFuldaandWeserwas themonopolyofaguildofboatmen.Papinmusthavesensed thatthere might be trouble. His friend and mentor, the famous GermanphysicistGottfried Leibniz,wrote to the Elector of Kassel, the head ofstate, petitioning that Papin should be allowed to “… passunmolested…”throughKassel.YetLeibniz’spetitionwasrebuffedandhe received thecurtanswer that “theElectoralCouncillorshave foundseriousobstaclesinthewayofgrantingtheabovepetition,and,without

giving their reasons,havedirectedme to informyouof theirdecision,and that in consequence the request is not granted by his ElectoralHighness.” Undeterred, Papin decided to make the journey anyway.WhenhissteamerarrivedatMünden,theboatmen’sguildfirst triedtoget a local judge to impound the ship, but was unsuccessful. Theboatmen then set upon Papin’s boat and smashed it and the steamengine topieces.Papindiedapauperandwasburied inanunmarkedgrave. In Tudor or Stuart England, Papinmight have received similarhostile treatment, but this all changed after 1688. Indeed, Papin wasintendingtosailhisboattoLondonbeforeitwasdestroyed.Inmetallurgy, key contributions weremade in the 1780s by Henry

Cort,whointroducednewtechniquesfordealingwithimpuritiesiniron,allowing for amuch better qualitywrought iron to be produced. Thiswascritical forthemanufactureofmachineparts,nails,andtools.Theproduction of vast quantities of wrought iron using Cort’s techniqueswasfacilitatedbytheinnovationsofAbrahamDarbyandhissons,whopioneeredtheuseofcoaltosmeltironbeginningin1709.Thisprocesswas enhanced in 1762 by the adaptation, by John Smeaton, of waterpowertooperateblowingcylindersinmakingcoke.Afterthis,charcoalvanishedfromtheproductionofiron,tobereplacedbycoal,whichwasmuchcheaperandmorereadilyavailable.Eventhoughinnovationisobviouslycumulative,therewasadistinct

accelerationinthemiddleoftheeighteenthcentury.Innoplacewasthismorevisiblethanintextileproduction.Themostbasicoperationintheproductionoftextilesisspinning,whichinvolvestakingplantoranimalfibers,suchascottonorwool,andtwistingthemtogethertoformyarn.This yarn is then woven to make up textiles. One of the greattechnological innovations of the medieval period was the spinningwheel,which replaced hand spinning. This invention appeared around1280 in Europe, probably disseminating from the Middle East. Themethods of spinning did not change until the eighteenth century.Significantinnovationsbeganin1738,whenLewisPaulpatentedanewmethodofspinningusingrollerstoreplacehumanhandstodrawoutthefibersbeingspun.Themachinedidnotworkwell,however,anditwasthe innovationsofRichardArkwright andJamesHargreaves that trulyrevolutionizedspinning.In 1769 Arkwright, one of the dominant figures of the Industrial

Revolution,patentedhis“waterframe,”whichwasahugeimprovementoverLewis’smachine.HeformedapartnershipwithJedediahStruttandSamuelNeed,whowerehosierymanufacturers. In1771theybuiltoneof the world’s first factories, at Cromford. The new machines werepowered by water, but Arkwright later made the crucial transition tosteampower.By1774his firmemployed sixhundredworkers,andheexpanded aggressively, eventually setting up factories in Manchester,Matlock, Bath, and New Lanark in Scotland. Arkwright’s innovationswerecomplementedbyHargreaves’s invention in1764of the spinningjenny,whichwas furtherdevelopedbySamuelCrompton in1779 intothe“mule,”andlaterbyRichardRobertsintothe“self-actingmule.”Theeffects of these innovations were truly revolutionary: earlier in thecentury, it took 50,000 hours for hand spinners to spin one hundredpoundsofcotton.Arkwright’swaterframecoulddoitin300hours,andtheself-actingmulein135.Alongwiththemechanizationofspinningcamethemechanizationof

weaving.Animportantfirststepwastheinventionoftheflyingshuttleby John Kay in 1733. Though it initially simply increased theproductivity of hand weavers, its most enduring impact would be inopeningthewaytomechanizedweaving.Buildingontheflyingshuttle,EdmundCartwrightintroducedthepowerloomin1785,afirststepinaseriesofinnovationsthatwouldleadtomachinesreplacingmanualskillsinweavingastheywerealsodoinginspinning.TheEnglishtextileindustrynotonlywasthedrivingforcebehindthe

Industrial Revolution but also revolutionized the world economy.Englishexports,ledbycottontextiles,doubledbetween1780and1800.Itwas thegrowth in this sector thatpulledahead thewholeeconomy.The combination of technological and organizational innovationprovides the model for economic progress that transformed theeconomiesoftheworldthatbecamerich.New people with new ideas were crucial to this transformation.

Consider innovation in transportation. In England there were severalwavesofsuchinnovations:firstcanals,thenroads,andfinallyrailways.Ineachofthesewavestheinnovatorswerenewmen.CanalsstartedtodevelopinEnglandafter1770,andby1810theyhadlinkedupmanyofthe most important manufacturing areas. As the Industrial Revolutionunfolded, canals played an important role in reducing transportation

costsformovingaroundthebulkynewfinishedindustrialgoods,suchascotton textiles, and the inputs that went into them, particularly rawcotton and coal for the steam engines. Early innovators in buildingcanals were men such as James Brindley, who was employed by theDuke of Bridgewater to build the Bridgewater Canal, which ended uplinking the key industrial city ofManchester to the port of Liverpool.Born in ruralDerbyshire,Brindleywas amillwright byprofession.Hisreputation for finding creative solutions to engineering problems cameto the attention of the duke. He had no previous experience withtransportation problems, which also was true of other great canalengineerssuchasThomasTelford,whostartedlifeasastonemason,orJohnSmeaton,aninstrumentmakerandengineer.Just as the great canal engineers had no previous connection to

transportation, neither did the great road and railway engineers. JohnMcAdam,who invented tarmac around1816,was the second sonof aminoraristocrat.ThefirststeamtrainwasbuiltbyRichardTrevithickin1804. Trevithick’s father was involved in mining in Cornwall, andRichardenteredthesamebusinessatanearlyage,becomingfascinatedbysteamenginesusedforpumpingoutthemines.Moresignificantwerethe innovationsofGeorgeStephenson, the sonof illiterateparentsandthe inventorof the famous train “TheRocket,”whobeganworkas anenginemanatacoalmine.Newmenalsodrove the critical cotton textile industry. Someof the

pioneers of this new industry were people who had previously beenheavily involved in the production and trade of woolen cloths. JohnFoster,forexample,employedsevenhundredhandloomweaversinthewoolen industry at the time he switched to cotton and opened BlackDykeMillsin1835.ButmensuchasFosterwereaminority.Onlyaboutone-fifth of the leading industrialists at this time had previously beeninvolvedinanythinglikemanufacturingactivities.Thisisnotsurprising.For one, the cotton industry developed in new towns in the north ofEngland.Factorieswereacompletelynewwayoforganizingproduction.The woolen industry had been organized in a very different way, by“putting out” materials to individuals in their homes, who spun andwoveontheirown.Mostofthoseinthewoolenindustrywerethereforeillequippedtoswitchtocotton,asFosterdid.Newcomerswereneededtodevelopandusethenewtechnologies.Therapidexpansionofcotton

decimatedthewoolindustry—creativedestructioninaction.Creativedestruction redistributesnot simply incomeandwealth,but

also political power, as William Lee learned when he found theauthorities so unreceptive to his invention because they feared itspolitical consequences. As the industrial economy expanded inManchester andBirmingham, thenew factoryowners andmiddle-classgroups that emerged around them began to protest theirdisenfranchisement and the government policies opposed to theirinterests.Theirprimecandidatewas theCornLaws,whichbanned theimport of “corn”—all grains and cereals, but principallywheat—if theprice got too low, thus ensuring that the profits of large landownerswere kept high. This policy was very good for big landowners whoproduced wheat, but bad for manufacturers, because they had to payhigherwagestocompensateforthehighpriceofbread.Withworkersconcentratedintonewfactoriesandindustrialcenters,it

becameeasiertoorganizeandriot.Bythe1820s,thepoliticalexclusionof the new manufacturers and manufacturing centers was becominguntenable.OnAugust16,1819,ameetingtoprotestthepoliticalsystemandthepoliciesofthegovernmentwasplannedtobeheldinSt.Peter’sFields, Manchester. The organizer was Joseph Johnson, a local brushmanufacturer and one of the founders of the radical newspaper theManchester Observer. Other organizers included John Knight, a cottonmanufacturer and reformer, and John Thacker Saxton, editor of theManchesterObserver. Sixty thousand protestors gathered,many holdingbanners such as “No Corn Laws,” “Universal Suffrage,” and “Vote byBallot”(meaningvotingshouldtakeplacesecretly,notopenly,asitdidin1819). The authoritieswere verynervous about themeeting, and aforce of six hundred cavalry of the Fifteenth Hussars had beenassembled.Asthespeechesbegan,alocalmagistratedecidedtoissueawarrant for the arrest of the speakers. As police tried to enforce thewarrant,theymetwiththeoppositionofthecrowd,andfightingbrokeout.AtthispointtheHussarschargedthecrowd.Withinafewchaoticminutes,elevenpeopleweredeadandprobably sixhundredwounded.TheManchesterObservercalleditthePeterlooMassacre.Butgiventhechanges thathadalreadytakenplace ineconomicand

politicalinstitutions,long-runrepressionwasnotasolutioninEngland.ThePeterlooMassacrewouldremainanisolatedincident.Followingthe

riot, thepolitical institutions inEnglandgavewaytothepressure,andthe destabilizing threat ofmuchwider social unrest, particularly afterthe1830revolutioninFranceagainstCharlesX,whohadtriedtorestoretheabsolutismdestroyedbytheFrenchRevolutionof1789.In1832thegovernment passed the First Reform Act. It enfranchised Birmingham,Leeds,Manchester, andSheffield, andbroadened thebaseof voting sothatmanufacturerscouldberepresentedinParliament.Theconsequentshift inpoliticalpowermovedpolicy in thedirection favoredby thesenewlyrepresentedinterests;in1846theymanagedtogetthehatedCornLaws repealed, demonstrating again that creative destruction meant aredistribution not just of income, but also of political power. Andnaturally, changes in the distribution of political power in timewouldleadtoafurtherredistributionofincome.It was the inclusive nature of English institutions that allowed this

process to take place. Those who suffered from and feared creativedestructionwerenolongerabletostopit.

WHYINENGLAND?

TheIndustrialRevolutionstartedandmadeitsbiggeststridesinEnglandbecause of her uniquely inclusive economic institutions. These in turnwere built on foundations laid by the inclusive political institutionsbrought about by the Glorious Revolution. It was the GloriousRevolutionthatstrengthenedandrationalizedpropertyrights,improvedfinancial markets, undermined state-sanctioned monopolies in foreigntrade,andremovedthebarrierstotheexpansionofindustry.ItwastheGloriousRevolutionthatmadethepoliticalsystemopenandresponsiveto the economic needs and aspirations of society. These inclusiveeconomicinstitutionsgavemenoftalentandvisionsuchasJamesWattthe opportunity and incentive to develop their skills and ideas andinfluence the system in ways that benefited them and the nation.Naturally these men, once they had become successful, had the sameurges as anyother person.Theywanted to block others fromenteringtheirbusinessesandcompetingagainst themand feared theprocessofcreative destruction thatmight put them out of business, as they hadpreviously bankrupted others. But after 1688 this became harder to

accomplish.In1775RichardArkwrighttookoutanencompassingpatentthat he hoped would give him a monopoly on the rapidly expandingcotton spinning industry in the future. He could not get the courts toenforceit.Why did this unique process start in England and why in the

seventeenth century? Why did England develop pluralistic politicalinstitutions and break away from extractive institutions? As we haveseen, thepolitical developments leadingup to theGloriousRevolutionwere shapedby several interlinkedprocesses.Centralwas thepoliticalconflict between absolutism and its opponents. The outcome of thisconflict not only put a stop to the attempts to create a renewed andstronger absolutism in England, but also empowered those wishing tofundamentally change the institutions of society. The opponents ofabsolutism did not simply attempt to build a different type ofabsolutism. This was not simply the House of Lancaster defeating theHouseofYorkintheWaroftheRoses.Instead,theGloriousRevolutioninvolved the emergence of a new regime based on constitutional ruleandpluralism.This outcomewas a consequence of the drift in English institutions

and the way they interacted with critical junctures. We saw in thepreviouschapterhowfeudalinstitutionswerecreatedinWesternEuropeafter the collapse of the Western Roman Empire. Feudalism spreadthroughoutmost of Europe,West and East. But as chapter 4 showed,WesternandEasternEuropebegan todiverge radically after theBlackDeath. Small differences in political and economic institutions meantthatintheWestthebalanceofpowerledtoinstitutionalimprovement;in the East, to institutional deterioration. But thiswas not a path thatwould necessarily and inexorably lead to inclusive institutions. Manymore crucial turns would have to be taken on the way. Though theMagna Carta had attempted to establish some basic institutionalfoundations for constitutional rule, many other parts of Europe, evenEasternEurope,sawsimilarstruggleswithsimilardocuments.Yet,afterthe Black Death, Western Europe significantly drifted away from theEast.Documents suchas theMagnaCarta started tohavemorebite intheWest.IntheEast,theycametomeanlittle.InEngland,evenbeforetheconflictsof theseventeenthcentury, thenormwasestablished thatthekingcouldnotraisenewtaxeswithouttheconsentofParliament.No

lessimportantwastheslow,incrementaldriftofpowerawayfromelitestocitizensmoregenerally,asexemplifiedbythepoliticalmobilizationofruralcommunities,seeninEnglandwithsuchmomentsasthePeasants’Revoltof1381.Thisdriftofinstitutionsnowinteractedwithanothercriticaljuncture

causedbythemassiveexpansionoftradeintotheAtlantic.Aswesawinchapter4,onecrucialwayinwhichthis influencedfuture institutionaldynamics depended on whether or not the Crown was able tomonopolize this trade. In England the somewhat greater power ofParliamentmeantthattheTudorandStuartmonarchscouldnotdoso.This created a new class of merchants and businessmen, whoaggressivelyopposedtheplantocreateabsolutisminEngland.By1686in London, for example, there were 702 merchants exporting to theCaribbeanand1,283 importing.NorthAmericahad691exportingand626 importing merchants. They employed warehousemen, sailors,captains, dockworkers, clerks—all of whom broadly shared theirinterests.Othervibrantports,suchasBristol,Liverpool,andPortsmouth,were similarly full of such merchants. These new men wanted anddemanded different economic institutions, and as they got wealthierthrough trade, they became more powerful. The same forces were atwork in France, Spain, and Portugal. But there the kings were muchmoreable to control tradeand its profits.The typeofnewgroup thatwas to transform England did emerge in those countries, but wasconsiderablysmallerandweaker.When theLongParliament satand theCivilWarbrokeout in1642,

these merchants primarily sided with the parliamentary cause. In the1670stheywereheavilyinvolvedintheformationoftheWhigParty,toopposeStuartabsolutism,andin1688theywouldbepivotalindeposingJames II. So the expanding trade opportunities presented by theAmericas, themass entry of Englishmerchants into this trade and theeconomic development of the colonies, and the fortunes theymade inthe process, tipped the balance of power in the struggle between themonarchyandthoseopposedtoabsolutism.Perhapsmost critically, the emergence and empowerment of diverse

interests—ranging from the gentry, a class of commercial farmers thathademergedintheTudorperiod,todifferenttypesofmanufacturerstoAtlantictraders—meantthatthecoalitionagainstStuartabsolutismwas

not only strong but also broad. This coalition was strengthened evenmorebytheformationoftheWhigPartyinthe1670s,whichprovidedan organization to further its interests. Its empowerment was whatunderpinned pluralism following the Glorious Revolution. If all thosefighting against the Stuarts had the same interests and the samebackground, the overthrow of the Stuart monarchy would have beenmuchmore likely to be a replay of theHouse of Lancaster versus theHouseofYork,pittingonegroupagainstanothernarrowsetofinterests,andultimatelyreplacingandre-creatingthesameoradifferentformofextractive institutions. A broad coalition meant that there would begreater demands for the creation of pluralist political institutions.Withoutsomesortofpluralism,therewouldbeadangerthatoneofthediverseinterestswouldusurppowerattheexpenseoftherest.Thefactthat Parliament after 1688 represented such a broad coalition was acrucialfactorinmakingmembersofParliamentlistentopetitions,evenwhentheycamefrompeopleoutsideofParliamentandevenfromthosewithoutavote.Thiswasacrucialfactorinpreventingattemptsbyonegrouptocreateamonopolyattheexpenseoftherest,aswoolintereststriedtodobeforetheManchesterAct.TheGloriousRevolutionwasamomentouseventpreciselybecauseitwasledbyanemboldenedbroadcoalitionandfurtherempoweredthiscoalition, which managed to forge a constitutional regime withconstraints on the power of both the executive and, equally crucially,any one of its members. It was, for example, these constraints thatpreventedthewoolmanufacturersfrombeingabletocrushthepotentialcompetitionfromthecottonandfustianmanufacturers.Thusthisbroadcoalitionwasessentialinthelead-uptoastrongParliamentafter1688,butitalsomeantthattherewerecheckswithinParliamentagainstanysingle groupbecoming toopowerful andabusing its power. Itwas thecritical factor in the emergence of pluralistic political institutions. Theempowermentofsuchabroadcoalitionalsoplayedanimportantroleinthe persistence and strengthening of these inclusive economic andpoliticalinstitutions,aswewillseeinchapter11.Still none of this made a truly pluralistic regime inevitable, and itsemergencewasinpartaconsequenceofthecontingentpathofhistory.Acoalitionthatwasnottoodifferentwasabletoemergevictoriousfromthe English Civil War against the Stuarts, but this only led to Oliver

Cromwell’s dictatorship. The strength of this coalition was also noguarantee that absolutism would be defeated. James II could havedefeatedWilliamofOrange.Thepathofmajorinstitutionalchangewas,asusual,nolesscontingentthantheoutcomeofotherpoliticalconflicts.Thiswassoevenifthespecificpathofinstitutionaldriftthatcreatedthebroad coalition opposed to absolutism and the critical juncture ofAtlantic trading opportunities stacked the cards against the Stuarts. Inthisinstance,therefore,contingencyandabroadcoalitionweredecidingfactors underpinning the emergence of pluralism and inclusiveinstitutions.

8.

NOTONOURTURF:BARRIERSTODEVELOPMENT

NOPRINTINGALLOWED

IN 1445 IN THE GERMAN city of Mainz, Johannes Gutenberg unveiled aninnovation with profound consequences for subsequent economichistory:aprintingpressbasedonmovabletype.Untilthen,bookseitherhadtobehand-copiedbyscribes,averyslowandlaboriousprocess,orthey were block-printed with specific pieces of wood cut for printingeachpage.Bookswere fewandfarbetween,andveryexpensive.AfterGutenberg’sinvention,thingsbegantochange.Bookswereprintedandbecamemore readily available.Without this innovation,mass literacyandeducationwouldhavebeenimpossible.InWesternEurope, the importanceof theprintingpresswasquickly

recognized.In1460therewasalreadyaprintingpressacrosstheborder,in Strasbourg, France. By the late 1460s the technology had spreadthroughout Italy, with presses in Rome and Venice, soon followed byFlorence, Milan, and Turin. By 1476 William Caxton had set up aprintingpress inLondon,andtwoyears later therewasone inOxford.Duringthesameperiod,printingspreadthroughouttheLowCountries,into Spain, and even into Eastern Europe, with a press opening inBudapestin1473andinCracowayearlater.Noteveryonesawprintingasadesirableinnovation.Asearlyas1485

the Ottoman sultan Bayezid II issued an edict that Muslims wereexpressly forbidden from printing in Arabic. This rule was furtherreinforcedbySultanSelimIin1515.Itwasnotuntil1727thatthefirstprintingpresswasallowedintheOttomanlands.ThenSultanAhmedIIIissued a decree granting İbrahim Müteferrika permission to set up apress. Even this belated step was hedged with restraints. Though the

decreenoted“thefortunatedaythisWesterntechniquewillbeunveiledlike a bride andwill not again be hidden,”Müteferrika’s printingwasgoingtobecloselymonitored.Thedecreestated:

sothattheprintedbookswillbefreefromprintingmistakes,the wise, respected and meritorious religious scholarsspecializing in Islamic Law, the excellent Kadi of Istanbul,Mevlana İshak, and Selaniki’s Kadi, Mevlana Sahib, andGalata’sKadi,MevlanaAsad,maytheirmeritsbe increased,and from the illustrious religious orders, the pillar of therighteous religious scholars, the Sheykh of the Kasim PaşaMevlevihane,MevlanaMusa,mayhiswisdomandknowledgeincrease,willoverseetheproofreading.

Müteferrikawasallowed to setupaprintingpress,butwhateverheprintedhadtobevettedbyapanelofthreereligiousandlegalscholars,the Kadis. Maybe the wisdom and knowledge of the Kadis, likeeverybody else’s, would have increased much faster had the printingpress beenmore readily available. But that was not to be, even afterMüteferrikawasgivenpermissiontosetuphispress.Not surprisingly Müteferrika printed few books in the end, onlyseventeen between 1729,when the press began to operate, and 1743,whenhestoppedworking.Hisfamilytriedtocontinuethetradition,buttheymanagedtoprintonlyanothersevenbooksbythetimetheyfinallygaveupin1797.OutsideofthecoreoftheOttomanEmpireinTurkey,printing lagged even further behind. In Egypt, for instance, the firstprintingpresswassetuponlyin1798,byFrenchmenwhowerepartofthe abortive attempt by Napoleon Bonaparte to capture the country.Until well into the second half of the nineteenth century, bookproduction in the Ottoman Empire was still primarily undertaken byscribes hand-copying existing books. In the early eighteenth century,therewerereputedtobeeightythousandsuchscribesactiveinIstanbul.Thisoppositiontotheprintingpresshadtheobviousconsequencesforliteracy,education,andeconomicsuccess.In1800probablyonly2to3percentof the citizensof theOttomanEmpirewere literate, comparedwith 60 percent of adult males and 40 percent of adult females inEngland. In the Netherlands and Germany, literacy rates were even

higher. The Ottoman lands lagged far behind the European countrieswiththelowesteducationalattainmentinthisperiod,suchasPortugal,whereprobablyonlyaround20percentofadultscouldreadandwrite.Given the highly absolutist and extractive Ottoman institutions, thesultan’s hostility to the printing press is easy to understand. Booksspreadideasandmakethepopulationmuchhardertocontrol.Someoftheseideasmaybevaluablenewwaystoincreaseeconomicgrowth,butothersmaybesubversiveandchallengetheexistingpoliticalandsocialstatusquo.Booksalsoundermine thepowerof thosewhocontroloralknowledge,sincetheymakethatknowledgereadilyavailabletoanyonewho can master literacy. This threatened to undermine the existingstatus quo, where knowledge was controlled by elites. The Ottomansultansand religious establishment feared the creativedestruction thatwouldresult.Theirsolutionwastoforbidprinting.

THE INDUSTRIAL REVOLUTION created a critical juncture that affected almostevery country. Some nations, such as England, not only allowed, butactivelyencouraged,commerce,industrialization,andentrepreneurship,andgrewrapidly.Many,suchastheOttomanEmpire,China,andotherabsolutistregimes,laggedbehindastheyblockedorattheveryleastdidnothing to encourage the spread of industry. Political and economicinstitutions shaped the response to technological innovation, creatingonce again the familiar pattern of interaction between existinginstitutions and critical junctures leading to divergence in institutionsandeconomicoutcomes.TheOttomanEmpireremainedabsolutistuntilitcollapsedattheendof the First World War, and was thus able to successfully oppose orimpede innovations such as the printing press and the creativedestruction that would have resulted. The reason that the economicchanges that took place in England did not happen in the OttomanEmpireisthenaturalconnectionbetweenextractive,absolutistpoliticalinstitutions and extractive economic institutions. Absolutism is ruleunconstrained by law or the wishes of others, though in realityabsolutists rule with the support of some small group or elite. Innineteenth-centuryRussia, forexample, the tsarswereabsolutist rulerssupported by a nobility that represented about 1 percent of the total

population. This narrow group organized political institutions toperpetuate their power. There was no Parliament or politicalrepresentationofothergroups inRussian societyuntil1905,when thetsarcreatedtheDuma,thoughhequicklyunderminedwhatfewpowershehadgiventoit.Unsurprisingly,economicinstitutionswereextractive,organizedtomakethetsarandnobilityaswealthyaspossible.Thebasisof this,asofmanyextractiveeconomic systems,wasamass systemoflaborcoercionandcontrol,intheparticularlyperniciousformofRussianserfdom.Absolutism was not the only type of political institution preventing

industrialization. Though absolutist regimes were not pluralistic andfearedcreativedestruction,manyhadcentralizedstates,oratleaststatesthatwerecentralizedenoughtoimposebansoninnovationssuchastheprinting press. Even today, countries such as Afghanistan, Haiti, andNepal have national states that lack political centralization. In sub-SaharanAfricathesituationisevenworse.Aswearguedearlier,withouta centralized state to provide order and enforce rules and propertyrights, inclusive institutions could not emerge. We will see in thischapterthatinmanypartsofsub-SaharanAfrica(forexample,SomaliaandsouthernSudan)amajorbarriertoindustrializationwasthelackofanyformofpoliticalcentralization.Withoutthesenaturalprerequisites,industrializationhadnochanceofgettingofftheground.Absolutism and a lack of, or weak, political centralization are two

differentbarrierstothespreadofindustry.Buttheyarealsoconnected;both are kept in place by fear of creative destruction and because theprocess of political centralization often creates a tendency towardabsolutism.Resistancetopoliticalcentralizationismotivatedbyreasonssimilar to resistance to inclusive political institutions: fear of losingpoliticalpower,thistimetothenewlycentralizingstateandthosewhocontrol it.Wesawin thepreviouschapterhowtheprocessofpoliticalcentralizationundertheTudormonarchyinEnglandincreaseddemandsforvoiceandrepresentationbydifferentlocalelitesinnationalpoliticalinstitutionsasawayofstavingoffthislossofpoliticalpower.AstrongerParliamentwascreated,ultimatelyenablingtheemergenceof inclusivepoliticalinstitutions.Butinmanyothercases,justtheoppositetakesplace,andtheprocess

of political centralization also ushers in an era of greater absolutism.

ThisisillustratedbytheoriginsofRussianabsolutism,whichwasforgedbyPeter theGreat between1682 andhis death in 1725. Peter built anew capital at Saint Petersburg, stripping away power from the oldaristocracy, theBoyars, in order to create amodernbureaucratic stateandmodern army.He even abolished the BoyarDuma that hadmadehimtsar.Peter introducedtheTableofRanks,acompletelynewsocialhierarchywhose essencewas service to the tsar. He also took controlover the Church, just asHenryVIII didwhen centralizing the state inEngland.With this process of political centralization, Peterwas takingpowerawayfromothersandredirectingittowardhimself.Hismilitaryreforms led the traditional royal guards, the Streltsy, to rebel. Theirrevoltwasfollowedbyothers,suchastheBashkirsinCentralAsiaandtheBulavinRebellion.Nonesucceeded.Though Peter the Great’s project of political centralization was asuccess and the opposition was overcome, the type of forces thatopposedstatecentralization,suchas theStreltsy,whosawtheirpowerbeingchallenged,wonoutinmanypartsoftheworld,andtheresultinglackof state centralizationmeant thepersistenceofadifferent typeofextractivepoliticalinstitutions.Inthischapter,wewillseehowduringthecriticaljuncturecreatedbythe Industrial Revolution,many nationsmissed the boat and failed totake advantage of the spread of industry. Either they had absolutistpoliticalandextractiveeconomicinstitutions,asintheOttomanEmpire,ortheylackedpoliticalcentralization,asinSomalia.

ASMALLDIFFERENCETHATMATTERED

AbsolutismcrumbledinEnglandduringtheseventeenthcenturybutgotstrongerinSpain.TheSpanishequivalentoftheEnglishParliament,theCortes,existedinnameonly.Spainwasforgedin1492withthemergerof the kingdoms of Castile and Aragon via the marriage of QueenIsabella and King Ferdinand. That date coincidedwith the end of theReconquest,thelongprocessofoustingtheArabswhohadoccupiedthesouth of Spain, and built the great cities of Granada, Cordova, andSeville, since the eighth century. The last Arab state on the IberianPeninsula,Granada,felltoSpainatthesametimeChristopherColumbus

arrived in the Americas and started claiming lands for Queen IsabellaandKingFerdinand,whohadfundedhisvoyage.The merger of the crowns of Castile and Aragon and subsequent

dynastic marriages and inheritances created a European superstate.Isabelladied in1504,andherdaughterJoannawascrownedqueenofCastile.JoannawasmarriedtoPhilipoftheHouseofHabsburg,thesonof the emperor of the Holy Roman Empire, Maximilian I. In 1516Charles,JoannaandPhilip’s son,wascrownedCharles IofCastileandAragon. When his father died, Charles inherited the Netherlands andFranche-Comté, which he added to his territories in Iberia and theAmericas. In1519,whenMaximilian I died,Charles also inherited theHabsburgterritories inGermanyandbecameEmperorCharlesVoftheHolyRomanEmpire.WhathadbeenamergeroftwoSpanishkingdomsin 1492 became amulticontinental empire, andCharles continued theprojectofstrengtheningtheabsolutiststatethatIsabellaandFerdinandhadbegun.TheefforttobuildandconsolidateabsolutisminSpainwasmassively

aided by the discovery of preciousmetals in the Americas. Silver hadalreadybeendiscoveredinlargequantitiesinGuanajuato,inMexico,bythe 1520s, and soon thereafter in Zacatecas, Mexico. The conquest ofPeruafter1532createdevenmorewealthforthemonarchy.Thiscameintheformofashare,the“royalfifth,” inanylootfromconquestandalso from mines. As we saw in chapter 1, a mountain of silver wasdiscoveredinPotosíbythe1540s,pouringmorewealthintothecoffersoftheSpanishking.AtthetimeofthemergerofCastileandAragon,Spainwasamongthe

most economically successful parts of Europe. After its absolutistpolitical system solidified, it went into relative and then, after 1600,absolute economic decline. Almost the first acts of Isabella andFerdinandafter theReconquestwastheexpropriationof theJews.Theapproximately two hundred thousand Jews in Spain were given fourmonthstoleave.Theyhadtoselloffalltheirlandandassetsatverylowpricesandwerenotallowedtotakeanygoldorsilveroutofthecountry.A similar human tragedywas played out just over one hundred yearslater. Between 1609 and 1614, Philip III expelled the Moriscos, thedescendants of the citizens of the former Arab states in the south ofSpain.JustaswiththeJews,theMoriscoshadtoleavewithonlywhat

they could carry and were not allowed to take with them any gold,silver,orotherpreciousmetals.Property rights were insecure in other dimensions under Habsburg

rule in Spain. Philip II,who succeeded his father, Charles V, in 1556,defaulted on his debts in 1557 and again in 1560, ruining the FuggerandWelser banking families. The role of theGermanbanking familieswasthenassumedbyGenoesebankingfamilies,whowereinturnruinedby subsequent Spanish defaults during the reign of the Habsburgs in1575,1596,1607,1627,1647,1652,1660,and1662.JustascrucialastheinstabilityofpropertyrightsinabsolutistSpain

wastheimpactofabsolutismontheeconomicinstitutionsoftradeandthe development of the Spanish colonial empire. As we saw in thepreviouschapter, theeconomic successofEnglandwasbasedon rapidmercantile expansion. Though, compared with Spain and Portugal,England was a latecomer to Atlantic trade, she allowed for relativelybroad-based participation in trading and colonial opportunities. Whatfilled the Crown’s coffers in Spain enriched the newly emergingmerchant class inEngland. Itwas thismerchant class thatwould formthebasisofearlyEnglandeconomicdynamismandbecomethebulwarkoftheanti-absolutistpoliticalcoalition.In Spain these processes that led to economic progress and

institutional change did not take place. After the Americas had beendiscovered, Isabella and Ferdinand organized trade between their newcoloniesandSpainviaaguildofmerchantsinSeville.Thesemerchantscontrolledalltradeandmadesurethatthemonarchygotitsshareofthewealth of the Americas. There was no free trade with any of thecolonies, and each year a large flotilla of shipswould return from theAmericas bringing precious metals and valuable goods to Seville. Thenarrow, monopolized base of this trade meant that no broad class ofmerchants could emerge via trading opportunities with the colonies.Even tradewithin theAmericaswasheavily regulated. For example, amerchantinacolonysuchasNewSpain,roughlymodernMexico,couldnot trade directly with anyone in New Granada, modern Colombia.These restrictions on trade within the Spanish Empire reduced itseconomic prosperity and also, indirectly, the potential benefits thatSpain could have gained by trading with another, more prosperousempire.Nevertheless,theywereattractivebecausetheyguaranteedthat

thesilverandgoldwouldkeepflowingtoSpain.The extractive economic institutions of Spainwere a direct result ofthe construction of absolutism and the different path, compared withEngland,takenbypoliticalinstitutions.BoththeKingdomofCastileandtheKingdomofAragonhadtheirCortes,aparliamentrepresentingthedifferent groups, or “estates,” of the kingdom. As with the EnglishParliament, the Castilian Cortes needed to be summoned to assent tonew taxes. Nevertheless, the Cortes in Castile and Aragon primarilyrepresentedthemajorcities,ratherthanboththeurbanandruralareas,as the English Parliament did. By the fifteenth century, it representedonly eighteen cities, eachofwhom sent twodeputies. In consequence,the Cortes did not represent as broad a set of groups as the EnglishParliament did, and it never developed as a nexus of diverse interestsvyingtoplaceconstraintsonabsolutism.Itcouldnotlegislate,andeventhe scope of its powers with respect to taxation was limited. This allmade it easier for the Spanishmonarchy to sideline the Cortes in theprocess of consolidating its own absolutism. Even with silver comingfromtheAmericas,CharlesVandPhilipIIrequiredever-increasingtaxrevenues to finance a series of expensive wars. In 1520 Charles Vdecided to present the Cortes with demands for increased taxation.Urban elites used the moment to call for much wider change in theCortes and its powers. This opposition turned violent and quicklybecameknownastheComuneroRebellion.Charleswasabletocrushtherebellionwithloyaltroops.Throughouttherestofthesixteenthcentury,though,therewasacontinuousbattleastheCrowntriedtowrestawayfromtheCorteswhatrightstolevynewtaxesandincreaseoldonesthatithad.Though thisbattleebbedand flowed, itwasultimatelywonbythemonarchy.After1664theCortesdidnotmeetagainuntil itwouldbereconstructedduringtheNapoleonicinvasionsalmost150yearslater.InEnglandthedefeatofabsolutismin1688lednotonlytopluralisticpoliticalinstitutionsbutalsotothefurtherdevelopmentofamuchmoreeffectivecentralizedstate.InSpaintheoppositehappenedasabsolutismtriumphed.ThoughthemonarchyemasculatedtheCortesandremovedanypotentialconstraintsonitsbehavior,itbecameincreasinglydifficultto raise taxes, even when attempted by direct negotiations withindividualcities.WhiletheEnglishstatewascreatingamodern,efficienttax bureaucracy, the Spanish state was again moving in the opposite

direction.Themonarchywasnotonly failing tocreatesecurepropertyrightsforentrepreneursandmonopolizingtrade,butitwasalsosellingoffices, often making them hereditary, indulging in tax farming, andevensellingimmunityfromjustice.The consequences of these extractive political and economicinstitutions in Spainwerepredictable.During the seventeenth century,while Englandwasmoving toward commercial growth and then rapidindustrialization, Spain was tailspinning toward widespread economicdecline.Atthestartofthecentury,oneinfivepeopleinSpainwaslivingin urban areas. By the end, this figure had halved to one in ten, in aprocess thatcorrespondedto increasing impoverishmentof theSpanishpopulation.Spanishincomesfell,whileEnglandgrewrich.ThepersistenceandthestrengtheningofabsolutisminSpain,whileitwasbeinguprootedinEngland,isanotherexampleofsmalldifferencesmattering during critical junctures. The small differences were in thestrengthsandnatureof representative institutions; the critical juncturewas thediscoveryof theAmericas.The interactionof these sentSpainoff on a very different institutional path from England. The relativelyinclusive economic institutions that resulted in England createdunprecedented economic dynamism, culminating in the IndustrialRevolution,while industrializationdidnot standachance inSpain.Bythetimeindustrialtechnologywasspreadinginmanypartsoftheworld,theSpanish economyhaddeclined somuch that therewasnot evenaneed for the Crown or the land-owning elites in Spain to blockindustrialization.

FEAROFINDUSTRY

WithoutthechangesinpoliticalinstitutionsandpoliticalpowersimilartothosethatemergedinEnglandafter1688,therewaslittlechanceforabsolutist countries to benefit from the innovations and newtechnologiesoftheIndustrialRevolution.InSpain,forexample,thelackof secure property rights and the widespread economic declinemeantthat people simply did not have the incentive to make the necessaryinvestments and sacrifices. In Russia and Austria-Hungary, it wasn’tsimply the neglect andmismanagement of the elites and the insidious

economic slide under extractive institutions that preventedindustrialization; instead, the rulers actively blocked any attempt tointroducethesetechnologiesandbasicinvestmentsininfrastructuresuchasrailroadsthatcouldhaveactedastheirconduits.At the timeof the IndustrialRevolution, in theeighteenthandearly

nineteenth centuries, the political map of Europe was quite differentfrom how it is today. The Holy Roman Empire, a patchwork quilt ofmore than four hundred polities, most of which would eventuallycoalesceintoGermany,occupiedmostofCentralEurope.TheHouseofHabsburgwasstillamajorpoliticalforce,anditsempire,knownastheHabsburg or Austro-Hungarian Empire, spread over a vast area ofaround250,000squaremiles,evenif itnolongerincludedSpain,afterthe Bourbons had taken over the Spanish throne in 1700. In terms ofpopulation, itwas the third-largeststate inEuropeandcomprisedone-seventhof thepopulationofEurope. Inthe lateeighteenthcenturytheHabsburg lands included, in the west, what is today Belgium, thenknownastheAustrianNetherlands.Thelargestpart,however,wasthecontiguousblockoflandsbasedaroundAustriaandHungary,includingtheCzechRepublicandSlovakiatothenorth,andSlovenia,Croatia,andlarge parts of Italy and Serbia to the south. To the east it alsoincorporatedmuchofwhatistodayRomaniaandPoland.MerchantsintheHabsburgdomainsweremuchlessimportantthanin

England, and serfdomprevailed in the lands inEasternEurope.Aswesawinchapter4,HungaryandPolandwereattheheartoftheSecondSerfdom of Eastern Europe. The Habsburgs, unlike the Stuarts, weresuccessful insustainingstronglyabsolutistrule.Francis I,whoruledasthe last emperorof theHolyRomanEmpire, between1792and1806,and then emperor of Austria-Hungary until his death in 1835, was aconsummate absolutist. He did not recognize any limitations on hispowerand,aboveall,hewishedtopreservethepoliticalstatusquo.Hisbasic strategy was opposing change, any sort of change. In 1821 hemadethisclearinaspeech,characteristicofHabsburgrulers,hegavetotheteachersataschoolinLaibach,asserting,“Idonotneedsavants,butgood,honestcitizens.Yourtaskistobringyoungmenuptobethis.HewhoservesmemustteachwhatIorderhim.Ifanyonecan’tdothis,orcomeswithnewideas,hecango,orIwillremovehim.”The empress Maria Theresa, who reigned between 1740 and 1780,

frequently responded to suggestions about how to improve or changeinstitutionsbyremarking.“Leaveeverythingas it is.”Nevertheless,sheandhersonJosephII,whowasemperorbetween1780and1790,wereresponsibleforanattempttoconstructamorepowerfulcentralstateandmoreeffectiveadministrativesystem.Yettheydidthisinthecontextofapoliticalsystemwithnorealconstraintsontheiractionsandwithfewelements of pluralism. There was no national parliament that wouldexert even a modicum of control on the monarch, only a system ofregional estates and diets, which historically had some powers withrespect to taxation and military recruitment. There were even fewercontrolsonwhat theAustro-HungarianHabsburgs coulddo than therewere on Spanish monarchs, and political power was narrowlyconcentrated.As Habsburg absolutism strengthened in the eighteenth century, the

power of all non-monarchical institutions weakened further. When adeputationofcitizensfromtheAustrianprovinceoftheTyrolpetitionedFrancis for a constitution, he responded, “So, you want aconstitution! … Now look, I don’t care for it, I will give you aconstitutionbutyoumustknowthatthesoldiersobeyme,andIwillnotaskyoutwiceifIneedmoney…InanycaseIadviseyoutobecarefulwhat you are going to say.” Given this response, the Tyrolese leadersreplied, “If thou thinkest thus, it is better to have no constitution,” towhichFrancisanswered,“Thatisalsomyopinion.”FrancisdissolvedtheStateCouncil thatMariaTheresahadusedasa

forumforconsultationwithherministers.Fromthenontherewouldbeno consultation or public discussion of the Crown’s decisions. Franciscreated a police state and ruthlessly censored anything that could beregardedasmildlyradical.HisphilosophyofrulewascharacterizedbyCountHartig,along-standingaide,asthe“unabatedmaintenanceofthesovereign’sauthority,andadenialofallclaimsonthepartofthepeopletoaparticipationinthatauthority.”HewashelpedinallthisbyPrincevonMetternich,appointedashisforeignministerin1809.Metternich’spowerandinfluenceactuallyoutlastedthatofFrancis,andheremainedforeignministerforalmostfortyyears.AtthecenterofHabsburgeconomicinstitutionsstoodthefeudalorder

and serfdom.As onemoved eastwithin the empire, feudalismbecamemore intense, a reflection of the more general gradient in economic

institutionswesawinchapter4,asonemovedfromWesterntoEasternEurope. Labormobilitywas highly circumscribed, and emigrationwasillegal.WhentheEnglishphilanthropistRobertOwentriedtoconvincethe Austrian government to adopt some social reforms in order toamelioratetheconditionsofpoorpeople,oneofMetternich’sassistants,Friedrich von Gentz, replied, “We do not desire at all that the greatmasses shall become well off and independent … How could weotherwiseruleoverthem?”Inadditiontoserfdom,whichcompletelyblockedtheemergenceofa

labormarketandremovedtheeconomicincentivesorinitiativefromthemass of the rural population, Habsburg absolutism thrived onmonopolies and other restrictions on trade. The urban economy wasdominatedbyguilds,whichrestrictedentryintoprofessions.Until1775there were internal tariffs within Austria itself and in Hungary until1784. There were very high tariffs on imported goods, with manyexplicitprohibitionsontheimportandexportofgoods.The suppression ofmarkets and the creation of extractive economic

institutionsareofcoursequitecharacteristicofabsolutism,butFranciswent further. It was not simply that extractive economic institutionsremoved the incentive for individuals to innovate or adopt newtechnology.Wesawinchapter2howintheKingdomofKongoattemptsto promote the use of plowswere unsuccessful because people lackedany incentive,given theextractivenatureof theeconomic institutions.ThekingofKongorealizedthatifhecouldinducepeopletouseplows,agricultural productivity would be higher, generating more wealth,which he could benefit from. This is a potential incentive for allgovernments, even absolutist ones. The problem in Kongo was thatpeopleunderstoodthatwhatevertheyproducedcouldbeconfiscatedbyanabsolutistmonarch,andthereforetheyhadnoincentivetoinvestorusebettertechnology.IntheHabsburglands,Francisdidnotencouragehis citizens to adopt better technology; on the contrary, he actuallyopposed it, and blocked the dissemination of technologies that peoplewouldhavebeenotherwisewillingtoadoptwiththeexistingeconomicinstitutions.Oppositiontoinnovationwasmanifestedintwoways.First,FrancisI

was opposed to thedevelopment of industry. Industry led to factories,and factorieswould concentrate poorworkers in cities, particularly in

thecapitalcityofVienna.Thoseworkersmightthenbecomesupportersfor opponents of absolutism. His policies were aimed at locking intoplacethetraditionalelitesandthepoliticalandeconomicstatusquo.Hewanted to keep society primarily agrarian. The best way to do this,Francisbelieved,wastostopthefactoriesbeingbuiltinthefirstplace.Thishediddirectly—forinstance,in1802,banningthecreationofnewfactoriesinVienna.Insteadofencouragingtheimportationandadoptionofnewmachinery,thebasisofindustrialization,hebannedituntil1811.Second,heopposedtheconstructionofrailways,oneofthekeynew

technologies that camewith the IndustrialRevolution.Whenaplan tobuildanorthernrailwaywasputbeforeFrancisI,hereplied,“No,no,Iwillhavenothingtodowithit,lesttherevolutionmightcomeintothecountry.”Sincethegovernmentwouldnotgrantaconcessiontobuildasteam

railway, the first railway built in the empire had to use horse-drawncarriages.Theline,whichranbetweenthecityofLinz,ontheDanube,to theBohemiancityofBudweis,on theMoldauRiver,wasbuiltwithgradientsandcorners,whichmeantthatitwasimpossiblesubsequentlyto convert it to steamengines. So it continuedwithhorsepoweruntilthe 1860s. The economic potential for railway development in theempire had been sensed early by the banker Salomon Rothschild, therepresentativeinViennaofthegreatbankingfamily.Salomon’sbrotherNathan, who was based in England, was very impressed by GeorgeStephenson’s engine “The Rocket” and the potential for steamlocomotion. He contacted his brother to encourage him to look foropportunities todeveloprailways inAustria,sincehebelievedthat thefamily could make large profits by financing railway development.Nathanagreed,buttheschemewentnowherebecauseEmperorFrancisagainsimplysaidno.TheoppositiontoindustryandsteamrailwaysstemmedfromFrancis’s

concern about the creative destruction that accompanied thedevelopment of amodern economy.Hismain prioritieswere ensuringthe stability of the extractive institutions over which he ruled andprotecting the advantages of the traditional eliteswho supported him.Not only was there little to gain from industrialization, which wouldunderminethefeudalorderbyattractinglaborfromthecountrysidetothe cities, but Francis also recognized the threat thatmajor economic

changeswouldposetohispoliticalpower.Asaconsequence,heblockedindustry and economic progress, locking in economic backwardness,which manifested itself in many ways. For instance, as late as 1883,when 90 percent ofworld iron outputwas produced using coal,morethanhalfof theoutput in theHabsburg territories stillusedmuch lessefficientcharcoal.Similarly,rightuptotheFirstWorldWar,whentheempire collapsed, textileweavingwas never fullymechanized but stillundertakenbyhand.Austria-Hungary was not alone in fearing industry. Farther east,

Russia had an equally absolutist set of political institutions, forged byPetertheGreat,aswesawearlierinthischapter.LikeAustria-Hungary,Russia’seconomicinstitutionswerehighlyextractive,basedonserfdom,keepingatleasthalfofthepopulationtiedtotheland.Serfshadtoworkfornothingthreedaysaweekonthelandsoftheirlords.Theycouldnotmove,theylackedfreedomofoccupation,andtheycouldbesoldatwillby their lord toanother lord.The radicalphilosopherPeterKropotkin,oneof the foundersofmodernanarchism, left avividdepictionof theway serfdom worked during the reign of Tsar Nicholas I, who ruledRussiafrom1825until1855.Herecalledfromhischildhood

storiesofmenandwomentornfromtheirfamiliesandtheirvillagesandsold,lostingambling,orexchangedforacoupleof hunting dogs, and transported to some remote part ofRussia… of children taken from their parents and sold tocruelordissolutemasters;offlogging“inthestables,”whichoccurred every day with unheard of cruelty; of a girl whofoundheronlysalvationindrowningherself;ofanoldmanwhohadgrowngrey-hairedinhismaster’sserviceandatlasthangedhimselfunderhismaster’swindow;andofrevoltsofserfs, which were suppressed by Nicholas I’s generals byflogging to death each tenth or fifth man taken out of theranks, andby layingwaste thevillage…As to thepovertywhichIsawduringourjourneysincertainvillages,especiallyin those which belonged to the imperial family, no wordswould be adequate to describe the misery to readers whohavenotseenit.

Exactly as in Austria-Hungary, absolutism didn’t just create a set ofeconomic institutions that impededtheprosperityof thesociety.Therewasasimilarfearofcreativedestructionandafearofindustryandtherailways.At theheartof thisduring the reignofNicholas IwasCountEgorKankrin,who servedas financeministerbetween1823and1844andplayedakeyrole inopposing thechanges insocietynecessary forpromotingeconomicprosperity.Kankrin’spolicieswereaimedatstrengtheningthetraditionalpoliticalpillarsoftheregime,particularlythelandedaristocracy,andkeepingthesocietyruralandagrarian.Uponbecomingministeroffinance,Kankrinquickly opposed and reversed a proposal by the previous financeminister, Gurev, to develop a government-owned Commercial Bank tolendtoindustry.Instead,KankrinreopenedtheStateLoanBank,whichhadbeenclosedduring theNapoleonicWars.Thisbankwasoriginallycreatedtolendtolargelandownersatsubsidizedrates,apolicyKankrinapproved of. The loans required the applicants to put up serfs as“security,”orcollateral, so thatonly feudal landownerscouldget suchloans.To finance theStateLoanBank,Kankrin transferredassets fromtheCommercialBank,killingtwobirdswithonestone:therewouldnowbelittlemoneyleftforindustry.Kankrin’sattitudeswereprescientlyshapedbythefearthateconomicchangewouldbringpoliticalchange,andsowerethoseofTsarNicholas.Nicholas’s assumption of power in December 1825 had been almostaborted by an attempted coup by military officers, the so-calledDecembrists, who had a radical program of social change. NicholaswrotetoGrandDukeMikhail:“RevolutionisonRussia’sdoorstep,butIswearthatitwillnotpenetratethecountrywhilethereisbreathinmybody.”Nicholas feared the social changes that creating amodern economywould bring. As he put it in a speech he made to a meeting ofmanufacturersatanindustrialexhibitinMoscow:

boththestateandmanufacturersmustturntheirattentiontoasubject,withoutwhichtheveryfactorieswouldbecomeanevilratherthanablessing;thisisthecareoftheworkerswhoincrease in number annually. They need energetic andpaternal supervisionof theirmorals;without it thismassof

peoplewillgraduallybecorruptedandeventuallyturnintoaclassasmiserableastheyaredangerousfortheirmasters.

Just as with Francis I, Nicholas feared that the creative destructionunleashed by a modern industrial economy would undermine thepolitical status quo in Russia. Urged on by Nicholas, Kankrin tookspecific steps to slow the potential for industry. He banned severalindustrial exhibitions, which had previously been held periodically toshowcasenewtechnologyandfacilitatetechnologyadoption.In1848Europewasrockedbyaseriesofrevolutionaryoutbursts. Inresponse,A.A.Zakrevskii,themilitarygovernorofMoscow,whowasincharge of maintaining public order, wrote to Nicholas: “For thepreservationofcalmandprosperity,whichatpresent timeonlyRussiaenjoys, thegovernmentmustnotpermit thegatheringofhomelessanddissolutepeople,whowilleasilyjoineverymovement,destroyingsocialor private peace.” His advicewas brought before Nicholas’sministers,andin1849anewlawwasenactedthatputseverelimitsonthenumberof factoriesthatcouldbeopenedinanypartofMoscow.Itspecificallyforbadetheopeningofanynewcottonorwoolenspinningmillsandironfoundries.Otherindustries,suchasweavinganddyeing,hadtopetitionthemilitarygovernor if theywanted toopennew factories.Eventuallycottonspinningwasexplicitlybanned.Thelawwasintendedtostopanyfurtherconcentrationofpotentiallyrebelliousworkersinthecity.Oppositiontorailwaysaccompaniedoppositiontoindustry,exactlyasinAustria-Hungary.Before1842 therewasonlyonerailway inRussia.This was the Tsarskoe Selo Railway, which ran seventeen miles fromSaint Petersburg to the imperial residencies of Tsarskoe Selo andPavlovsk. Just as Kankrin opposed industry, he saw no reason topromote railways, which he argued would bring a socially dangerousmobility, noting that “railways do not always result from naturalnecessity, but are more an object of artificial need or luxury. Theyencourage unnecessary travel from place to place, which is entirelytypicalofourtime.”Kankrinturneddownnumerousbidstobuildrailways,anditwasonlyin 1851 that a line was built linking Moscow and Saint Petersburg.Kankrin’s policy was continued by Count Kleinmichel, whowasmadeheadofthemainadministrationofTransportandPublicBuildings.This

institution became the main arbiter of railway construction, andKleinmicheluseditasaplatformtodiscouragetheirconstruction.After1849heevenusedhispowertocensordiscussioninthenewspapersofrailwaydevelopment.

Map13(opposite)showstheconsequencesofthislogic.WhileBritainandmost ofnorthwestEuropewas crisscrossedwith railways in1870,very few penetrated the vast territory of Russia. The policy againstrailways was only reversed after Russia’s conclusive defeat by British,French,andOttomanforcesintheCrimeanWar,1853–1856,whenthebackwardness of its transportation network was understood to be aserious liability for Russian security. There was also little railwaydevelopment in Austria-Hungary outside of Austria and the westernpartsoftheempire,thoughthe1848Revolutionshadbroughtchangetotheseterritories,particularlytheabolitionofserfdom.

NOSHIPPINGALLOWED

Absolutism reigned not just in much of Europe but also in Asia, andsimilarlypreventedindustrializationduringthecriticaljuncturecreatedbytheIndustrialRevolution.TheMingandQingdynastiesofChinaandtheabsolutismoftheOttomanEmpireillustratethispattern.UndertheSong dynasty, between 960 and 1279, China led the world in manytechnological innovations. The Chinese invented clocks, the compass,gunpowder, paper and paper money, porcelain, and blast furnaces tomake cast iron before Europe did. They independently developedspinning wheels and waterpower at more or less the same time thatthese emerged at the other end of Eurasia. In consequence, in 1500standardsoflivingwereprobablyatleastashighinChinaastheywerein Europe. For centuries China also had a centralized state with ameritocraticallyrecruitedcivilservice.YetChinawasabsolutist,andthegrowthundertheSongdynastywasunder extractive institutions. Therewas no political representation forgroups other than the monarchy in society, nothing resembling aParliament or a Cortes. Merchants always had a precarious status inChina,andthegreatinventionsoftheSongwerenotspurredbymarketincentivesbutwerebrought intoexistenceunder theauspices,oreventhe orders, of the government. Little of this was commercialized. Thegrip of the state tightened during the Ming and Qing dynasties thatfollowedtheSong.Attherootofallthiswastheusuallogicofextractiveinstitutions. As most rulers presiding over extractive institutions, theabsolutist emperors of China opposed change, sought stability, and inessencefearedcreativedestruction.This is best illustrated by the history of international trade. As wehaveseen,thediscoveryoftheAmericasandthewayinternationaltradewas organized played a key role in the political conflicts andinstitutional changes of early modern Europe. In China, while privatemerchants were commonly involved in trade within the country, thestate monopolized overseas trade. When the Ming dynasty came topowerin1368,itwasEmperorHongwuwhofirstruled,forthirtyyears.Hongwu was concerned that overseas trade would be politically andsocially destabilizing and he allowed international trade to take placeonly if it were organized by the government and only if it involvedtribute giving, and not commercial activity. Hongwu even executedhundreds of people accused of trying to turn tribute missions into

commercial ventures. Between 1377 and 1397, no oceangoing tributemissionswereallowed.HebannedprivateindividualsfromtradingwithforeignersandwouldnotallowChinesetosailoverseas.In1402EmperorYonglecametothethroneandinitiatedoneof the

most famous periods of Chinese history by restarting government-sponsoredforeigntradeonabigscale.YonglesponsoredAdmiralZhengHetoundertakesixhugemissionstoSoutheastandSouthAsia,Arabia,andAfrica.TheChineseknewabouttheseplacesfromalonghistoryoftrading 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 forcarrying freshwater, others for supplies, and others for troops. YetEmperorYongleputatemporarystoponthemissionsafterthesixthonein1422.Thiswasmadepermanentbyhissuccessor,Hongxi,whoruledfrom 1424 to 1425. Hongxi’s premature death brought to the throneEmperorXuande,whoatfirstallowedZhengHeafinalmission,in1433.Butafterthis,alloverseastradewasbanned.By1436theconstructionofseagoingshipswasevenmadeillegal.Thebanonoverseastradewasnotlifteduntil1567.These events, though only the tip of the extractive iceberg that

prevented many economic activities deemed to be potentiallydestabilizing,weretohaveafundamental impactonChineseeconomicdevelopment. Just at the time when international trade and thediscovery of the Americas were fundamentally transforming theinstitutions of England, China was cutting itself off from this criticaljunctureandturninginward.Thisinwardturndidnotendin1567.TheMingdynastywasoverrunin1644bytheJurchenpeople,theManchusofinnerAsia,whocreatedtheQingdynasty.Aperiodofintensepoliticalinstability then ensued. The Qings engaged in mass expropriation ofpropertyandassets.Inthe1690s,T’angChen,aretiredChinesescholarandfailedmerchant,wrote:

More than fiftyyearshavepassed since the foundingof theCh’ing [Qing] dynasty, and the empire grows poorer eachday. Farmers are destitute, artisans are destitute,merchantsaredestitute, andofficials too aredestitute.Grain is cheap,yetitishardtoeatone’sfill.Clothischeap,yetitishardto

cover one’s skin. Boatloads of goods travel from onemarketplace to another, but the cargoes must be sold at aloss.Officialsuponleavingtheirpostsdiscovertheyhavenowherewithal to support their households. Indeed the fouroccupationsareallimpoverished.

In1661 theemperorKangxiordered thatallpeople livingalong thecoast fromVietnam toChekiang—essentially the entire southern coast,once the most commercially active part of China—should moveseventeenmilesinland.Thecoastwaspatrolledbytroopstoenforcethemeasure,anduntil1693therewasabanonshippingeverywhereonthecoast. This ban was periodically reimposed in the eighteenth century,effectively stunting the emergence of Chinese overseas trade. Thoughsomediddevelop, fewwerewilling to investwhen the emperor couldsuddenlychangehismindandbantrade,making investments inships,equipment,andtradingrelationsworthlessorevenworse.ThereasoningoftheMingandQingstatesforopposinginternational

trade is by now familiar: the fear of creative destruction. The leaders’primary aimwas political stability. International tradewas potentiallydestabilizingasmerchantswereenrichedandemboldened,astheywereinEnglandduringtheeraofAtlanticexpansion.Thiswasnotjustwhatthe rulers believed during the Ming and Qing dynasties, but also theattitudeof therulersof theSongdynasty,even if theywerewilling tosponsor technological innovations and permit greater commercialfreedom, provided that thiswas under their control. Things gotworseunder the Ming and Qing dynasties as the control of the state oneconomicactivitytightenedandoverseastradewasbanned.Therewerecertainly markets and trade in Ming and Qing China, and thegovernment taxed thedomesticeconomyquite lightly.However, itdidlittle to support innovation, and it exchanged the development ofmercantile or industrial prosperity for political stability. Theconsequence of all this absolutist control of the economy waspredictable: the Chinese economy was stagnant throughout thenineteenth and early twentieth centuries while other economies wereindustrializing.BythetimeMaosetuphiscommunistregimein1949,Chinahadbecomeoneofthepoorestcountriesintheworld.

THEABSOLUTISMOFPRESTERJOHN

Absolutism as a set of political institutions and the economicconsequencesthatflowedfromitwerenotrestrictedtoEuropeandAsia.ItwaspresentinAfrica,forexample,withtheKingdomofKongo,aswesawinchapter2.AnevenmoredurableexampleofAfricanabsolutismisEthiopia,orAbyssinia,whoserootswecameacrossinchapter6,whenwe discussed the emergence of feudalism after the decline of Aksum.Abyssinian absolutism was even more long-lived than its Europeancounterparts, because it was faced with very different challenges andcriticaljunctures.After the conversionof theAksumite kingEzana toChristianity, the

EthiopiansremainedChristian,andby the fourteenthcentury theyhadbecomethefocusofthemythofKingPresterJohn.PresterJohnwasaChristiankingwhohadbeencutofffromEuropebytheriseofIslamintheMiddleEast.InitiallyhiskingdomwasthoughttobelocatedinIndia.However, as European knowledge of India increased, people realizedthat thiswas not true. The king of Ethiopia, sincehewas aChristian,thenbecameanaturaltargetforthemyth.EthiopiankingsinfacttriedhardtoforgeallianceswithEuropeanmonarchsagainstArabinvasions,sendingdiplomaticmissionstoEuropefromatleast1300onward,evenpersuadingthePortuguesekingtosendsoldiers.Thesesoldiers,alongwithdiplomats,Jesuits,andtravelerswishingto

meet Prester John, left many accounts of Ethiopia. Some of the mostinterestingfromaneconomicpointofviewarebyFranciscoÁlvares,achaplain accompanying a Portuguese diplomatic mission, who was inEthiopia from1520 to 1527. In addition, there are accounts by JesuitManoel de Almeida, who lived in Ethiopia from 1624, and by JohnBruce,atravelerwhowasinthecountrybetween1768and1773.Thewritings of these people give a rich account of political and economicinstitutionsatthetimeinEthiopiaandleavenodoubtthatEthiopiawasaperfect specimenofabsolutism.Therewerenopluralistic institutionsof any kind, nor any checks and constraints on the power of theemperor,whoclaimedtherighttoruleonthebasisofsupposeddescentfromthelegendaryKingSolomonandtheQueenofSheba.Theconsequenceofabsolutismwasgreatinsecurityofpropertyrights

driven by the political strategy of the emperor. Bruce, for example,

notedthat

all the land is the king’s; he gives it to whom he pleasesduringpleasure,andresumesitwhenitishiswill.Assoonashedies thewhole land in thekingdom is at thedisposalofthe Crown; and not only so, but, by death of the presentowner, his possessions however long enjoyed, revert to theking,anddonotfalltotheeldestson.

Álvares claimed therewould bemuchmore “fruit and tillage if thegreatmendidnot ill-treat thepeople.”Alameida’s accountofhow thesocietyworkedisveryconsistent.Heobserved:

It is so usual for the emperor to exchange, alter and takeaway the lands each man holds every two or three years,sometimeseveryyearandevenmanytimesinthecourseofayear,thatitcausesnosurprise.Oftenonemanplowsthesoil,anothersowsitandanotherreaps.Henceitarisesthatthereisnoonewhotakescareof the landheenjoys; there isnotevenanyone toplant a treebecauseheknows thathewhoplantsitveryrarelygathersthefruit.Fortheking,however,itisusefulthattheyshouldbesodependentuponhim.

Thesedescriptionssuggestmajorsimilaritiesbetweenthepoliticalandeconomic structures of Ethiopia and those of European absolutism,though they also make it clear that absolutism was more intense inEthiopia,andeconomic institutionsevenmoreextractive.Moreover,aswe emphasized in chapter 6, Ethiopia was not subject to the samecritical junctures that helped undermine the absolutist regime inEngland. It was cut off from many of the processes that shaped themodernworld. Even if this had not been the case, the intensity of itsabsolutismwouldprobablyhave led theabsolutism to strengthenevenmore.Forexample,asinSpain,internationaltradeinEthiopia,includingthe lucrative slave trade,wascontrolledby themonarch.Ethiopiawasnot completely isolated: Europeans did search for Prester John, and itdidhavetofightwarsagainstsurroundingIslamicpolities.Nevertheless,the historian Edward Gibbon noted with some accuracy that

“encompassed on all sides by the enemies of their religion, theAethiopianssleptnearathousandyears,forgetfuloftheworldbywhomtheywereforgotten.”As the European colonization of Africa began in the nineteenth

century,EthiopiawasanindependentkingdomunderRas(Duke)Kassa,whowascrownedEmperorTewodrosIIin1855.Tewodrosembarkedonamodernization of the state, creating amore centralized bureaucracyand judiciary, and a military capable of controlling the country andpossibly fighting the Europeans. He placed military governors,responsibleforcollectingtaxesandremittingthemtohim,inchargeofalltheprovinces.HisnegotiationswithEuropeanpowersweredifficult,and in exasperation he imprisoned the English consul. In 1868 theEnglishsentanexpeditionaryforce,whichsackedhiscapital.Tewodroscommittedsuicide.All the same, Tewodros’s reconstructed government did manage to

pulloffoneofthegreatanticolonialtriumphsofthenineteenthcentury,against the Italians. In 1889 the throne went to Menelik II, who wasimmediately faced with the interest of Italy in establishing a colonythere. In 1885 the German chancellor Bismarck had convened aconferenceinBerlinwheretheEuropeanpowershatchedthe“ScrambleforAfrica”—thatis,theydecidedhowtodivideupAfricaintodifferentspheresofinterest.Attheconference,ItalysecureditsrightstocoloniesinEritrea,alongthecoastofEthiopia,andSomalia.Ethiopia,thoughnotrepresentedattheconference,somehowmanagedtosurviveintact.ButtheItaliansstillkeptdesigns,andin1896theymarchedanarmysouthfrom Eritrea. Menelik’s response was similar to that of a Europeanmedievalking;heformedanarmybygettingthenobilitytocalluptheirarmedmen.Thisapproachcouldnotputanarmyinthefieldforlong,butitcouldputahugeonetogetherforashorttime.Thisshorttimewasjust enough to defeat the Italians, whose fifteen thousand men wereoverwhelmedbyMenelik’sonehundredthousandintheBattleofAdowain 1896. It was themost seriousmilitary defeat a precolonial AfricancountrywasabletoinflictonaEuropeanpower,andsecuredEthiopia’sindependenceforanotherfortyyears.The lastemperorofEthiopia,RasTafari,wascrownedHaileSelassie

in1930.HaileSelassieruleduntilhewasoverthrownbyasecondItalianinvasion,whichbeganin1935,buthereturnedfromexilewiththehelp

oftheEnglishin1941.Hethenruleduntilhewasoverthrownina1974coup by theDerg, “the Committee,” a group ofMarxist army officers,whothenproceededtofurtherimpoverishandravagethecountry.ThebasicextractiveeconomicinstitutionsoftheabsolutistEthiopianempire,suchasgult(this page), and the feudalism created after the decline ofAksum,lasteduntiltheywereabolishedafterthe1974revolution.Today Ethiopia is one of the poorest countries in the world. The

incomeofanaverageEthiopianisaboutone-fortieththatofanaveragecitizen of England. Most people live in rural areas and practicesubsistenceagriculture.Theylackcleanwater,electricity,andaccesstoproper schools or health care. Life expectancy is about fifty-five yearsandonlyone-thirdofadultsareliterate.AcomparisonbetweenEnglandandEthiopiaspansworldinequality.ThereasonEthiopiaiswhereit istoday is that, unlike in England, in Ethiopia absolutismpersisted untilthe recentpast.With absolutismcameextractive economic institutionsandpoverty for themassofEthiopians, thoughofcourse theemperorsandnobilitybenefitedhugely.Butthemostenduringimplicationoftheabsolutism was that Ethiopian society failed to take advantage ofindustrializationopportunitiesduringthenineteenthandearlytwentiethcenturies,underpinningtheabjectpovertyofitscitizenstoday.

THECHILDRENOFSAMAALE

Absolutist political institutions around the world impededindustrialization either indirectly, in the way they organized theeconomy, or directly, aswe have seen inAustria-Hungary andRussia.But absolutismwas not the only barrier to the emergence of inclusiveeconomic institutions. At the dawn of the nineteenth century, manypartsoftheworld,especiallyinAfrica,lackedastatethatcouldprovideeven a minimal degree of law and order, which is a prerequisite forhaving amodern economy. Therewas not the equivalent of Peter theGreat inRussia starting theprocessofpolitical centralizationand thenforging Russian absolutism, let alone that of the Tudors in Englandcentralizing the statewithout fullydestroying—or,moreappropriately,without fully being able to destroy—the Parliament and otherconstraints on their power. Without some degree of political

centralization,even if theelitesof theseAfricanpolitieshadwishedtogreet industrializationwithopenarms,therewouldn’thavebeenmuchtheycouldhavedone.Somalia, situated in the Horn of Africa, illustrates the devastating

effects of lack of political centralization. Somalia has been dominatedhistoricallybypeopleorganizedintosixclanfamilies.Thefourlargestofthese,theDir,Darod,Isaq,andHawiye,alltracetheirancestrybacktoamythicalancestor,Samaale.Theseclanfamiliesoriginatedinthenorthof Somalia and gradually spread south and east, and are even todayprimarilypastoralpeoplewhomigratewiththeirflocksofgoats,sheep,and camels. In the south, the Digil and the Rahanweyn, sedentaryagriculturalists,makeupthelasttwooftheclanfamilies.TheterritoriesoftheseclansaredepictedonMap12.Somalis identify firstwith their clan family,but thesearevery large

andcontainmanysubgroups.Firstamongtheseareclansthattracetheirdescentbacktooneofthelargerclanfamilies.Moresignificantarethegroupings within clans called diya-paying groups, which consist ofcloselyrelatedkinspeoplewhopayandcollectdiya,or“bloodwealth,”compensationagainstthemurderofoneoftheirmembers.Somaliclansanddiya-paying groupswerehistorically locked in to almost continualconflict over the scarce resources at their disposal, particularly watersources and good grazing land for their animals. They also constantlyraided the herds of neighboring clans anddiya-paying groups. Thoughclanshadleaderscalledsultans,andalsoelders,thesepeoplehadnorealpower. Political power was very widely dispersed, with every Somaliadultmanbeingabletohavehissayondecisionsthatmightaffecttheclanorgroup.Thiswasachievedthroughaninformalcouncilmadeupof all adultmales. Therewas nowritten law, no police, and no legalsystem to speak of, except that Sharia law was used as a frameworkwithinwhich informal lawswereembedded.These informal laws foradiya-payinggroupwouldbeencodedinwhatwascalledaheer,abodyof explicitly formulated obligations, rights, and duties the groupdemanded others obey in their interactions with the group. With theadvent of colonial rule, these heers began to be written down. Forexample,theHassanUgaaslineageformedadiya-payinggroupofaboutfifteenhundredmenandwasasubclanoftheDirclanfamilyinBritishSomaliland.OnMarch 8, 1950, theirheerwas recorded by the British

districtcommissioner,thefirstthreeclausesofwhichread

1.Whenamanof theHassanUgaas ismurderedbyanexternalgrouptwentycamelsofhisbloodwealth(100)willbetakenbyhisnextofkinandtheremainingeightycamelssharedamongstalltheHassanUgaas.

2. Ifamanof theHassanUgaas iswoundedbyanoutsiderandhis injuries are valued at thirty-three-and-a-third camels, tencamels must be given to him and the remained to his jiffo-group(asub-groupofthediyagroup).

3.HomicideamongstmembersoftheHassanUgaasissubjecttocompensation at the rate of thirty-three-and-a-third camels,payable only to the deceased’s next of kin. If the culprit isunabletopayallorpart,hewillbeassistedbyhislineage.

The heavy focus of the heer on killing and wounding reflects thealmostconstantstateofwarfarebetweendiya-payinggroupsandclans.Central to thiswasbloodwealthandblood feuding.Acrimeagainstaparticularpersonwasacrimeagainstthewholediya-payinggroup,andnecessitatedcollectivecompensation,bloodwealth.Ifsuchbloodwealthwasnotpaid, thediya-payinggroupof thepersonwhohadcommittedthe crime faced the collective retribution of the victim.Whenmoderntransportation reached Somalia, blood wealth was extended to peoplewhowerekilledorinjuredinmotoraccidents.TheHassanUgaas’sheerdidn’t refer only to murder; clause 6 was “If one man of the HassanUgaas insults another at a Hassan Ugaas council he shall pay 150shillingstotheoffendedparty.”In early 1955, the flocks of two clans, the Habar Tol Ja’lo and the

Habar Yuunis, were grazing close to each other in the region ofDomberelly.AmanfromtheYuuniswaswoundedafteradisputewithamember of the Tol Ja’lo over camel herding. The Yuunis clanimmediately retaliated, attacking the Tol Ja’lo clan and killing aman.Thisdeath led, following the codeofbloodwealth, to theYuunis clanoffering compensation to the Tol Ja’lo clan, which was accepted. Thebloodwealthwastobehandedover inperson,asusual intheformofcamels. At the handing-over ceremony, one of the Tol Ja’lo killed a

memberof theYuunis,mistakinghimforamemberof thediya-payinggroupofthemurderer.This ledtoall-outwarfare,andwithinthenextforty-eight hours thirteen Yuunis and twenty-six Tol Ja’lo had beenkilled.Warfarecontinuedforanotheryearbeforeeldersfrombothclans,brought together by the English colonial administration, managed tobroker a deal (the exchange of bloodwealth) that satisfied both sidesandwaspaidoverthenextthreeyears.Thepayingofbloodwealthtookplaceintheshadowofthethreatof

forceandfeuding,andevenwhenitwaspaid,itdidnotnecessarilystopconflict.Usuallyconflictdieddownandthenflaredupagain.Political powerwas thuswidely dispersed in Somali society, almost

pluralistically.Butwithouttheauthorityofacentralizedstatetoenforceorder, let alone property rights, this led not to inclusive institutions.Nobody respected the authority of another, and nobody, including theBritish colonial state when it eventually arrived, was able to imposeorder.ThelackofpoliticalcentralizationmadeitimpossibleforSomaliato benefit from the Industrial Revolution. In such a climate it wouldhave been unimaginable to invest in or adopt the new technologiesemanating fromBritain, or indeed to create the types of organizationsnecessarytodoso.ThecomplexpoliticsofSomaliahadevenmoresubtleimplicationsfor

economic progress. We mentioned earlier some of the greattechnological puzzles of African history. Prior to the expansion ofcolonialruleinthelatenineteenthcentury,Africansocietiesdidnotusewheeled transportation or plow agriculture and few had writing.Ethiopiadid,aswehaveseen.TheSomalisalsohadawrittenscript,butunlike the Ethiopians, they did not use it. We have already seeninstancesofthisinAfricanhistory.Africansocietiesmaynothaveusedwheelsorplows,buttheycertainlyknewaboutthem.InthecaseoftheKingdomofKongo,aswehaveseen,thiswasfundamentallyduetothefact that the economic institutions created no incentives for people toadoptthesetechnologies.Couldthesameissuesarisewiththeadoptionofwriting?WecangetsomesenseofthisfromtheKingdomofTaqali,situatedto

the northwest of Somalia, in the Nuba Hills of southern Sudan. TheKingdomofTaqaliwasformedinthelateeighteenthcenturybyabandofwarriorsledbyamancalledIsma’il,anditstayedindependentuntil

amalgamated into the British Empire in 1884. The Taqali kings andpeoplehadaccess towriting inArabic,but itwasnotused—exceptbythekings,forexternalcommunicationwithotherpolitiesanddiplomaticcorrespondence. At first this situation seems very puzzling. ThetraditionalaccountoftheoriginofwritinginMesopotamiaisthatitwasdevelopedbystatesinordertorecordinformation,controlpeople,andlevytaxes.Wasn’ttheTaqalistateinterestedinthis?ThesequestionswereinvestigatedbythehistorianJanetEwaldinthelate1970sasshetriedtoreconstructthehistoryoftheTaqalistate.Partofthestoryisthatthecitizensresistedtheuseofwritingbecausetheyfearedthatitwouldbeusedtocontrolresources,suchasvaluableland,byallowingthestatetoclaimownership.Theyalsofearedthatitwouldleadtomoresystematictaxation.ThedynastythatIsma’ilstarteddidnotgel into a powerful state. Even if it hadwanted to, the statewas notstrongenoughtoimposeitswillovertheobjectionsofthecitizens.Butthere were other, more subtle factors at work. Various elites alsoopposedpolitical centralization, forexample,preferringoral towritteninteraction with citizens, because this allowed them maximumdiscretion.Writtenlawsororderscouldnotbetakenbackordeniedandwerehardertochange;theysetbenchmarksthatgoverningelitesmightwant to reverse. So neither the ruled nor the rulers of Taqali saw theintroductionofwriting tobe to theiradvantage.Theruled fearedhowthe rulerswould use it, and the rulers themselves saw the absence ofwritingasaidingtheirquiteprecariousgriponpower.ItwasthepoliticsofTaqali thatkeptwriting frombeing introduced.Though theSomalishadevenlessofawell-definedelitecomparedwiththeTaqalikingdom,it is quite plausible that the same forces inhibited their use ofwritingandtheiradoptionofotherbasictechnologies.The Somali case shows the consequences of the lack of politicalcentralization for economic growth. The historical literature does notrecord instances of attempts to create such centralization in Somalia.However, it is clear why this would have been very difficult. Topolitically centralize would have meant that some clans would havebeen subject to the control of others. But they rejected any suchdominance, and the surrender of their power that this would haveentailed; thebalanceofmilitarypower in the societywould alsohavemadeitdifficulttocreatesuchcentralizedinstitutions.Infact,itislikely

that any group or clan attempting to centralize powerwould not onlyhave faced stiff resistance but would have lost its existing power andprivileges.Asa consequenceof this lackofpolitical centralizationandthe impliedabsenceofeven themostbasic securityofproperty rights,Somali society never generated incentives to invest in productivity-enhancing technologies. As the process of industrialization was underway in other parts of theworld in the nineteenth and early twentiethcenturies, Somalis were feuding and fending for their lives, and theireconomicbackwardnessbecamemoreingrained.

ENDURINGBACKWARDNESS

The IndustrialRevolution created a transformative critical juncture forthe whole world during the nineteenth century and beyond: thosesocieties that allowed and incentivized their citizens to invest in newtechnologiescouldgrowrapidly.Butmanyaroundtheworldfailedtodoso—orexplicitlychosenottodoso.Nationsunderthegripofextractivepolitical and economic institutions did not generate such incentives.Spain and Ethiopia provide examples where the absolutist control ofpolitical institutions and the implied extractive economic institutionschoked economic incentives long before the dawn of the nineteenthcentury. The outcome was similar in other absolutist regimes—forexample, in Austria-Hungary, Russia, the Ottoman Empire, and China,thoughinthesecasestherulers,becauseoffearofcreativedestruction,notonlyneglectedtoencourageeconomicprogressbutalsotookexplicitsteps to block the spread of industry and the introduction of newtechnologiesthatwouldbringindustrialization.Absolutismisnottheonlyformofextractivepoliticalinstitutionsandwas not the only factor preventing industrialization. Inclusive politicaland economic institutions necessitate some degree of politicalcentralization so that the state can enforce law and order, upholdproperty rights, and encourage economic activity when necessary byinvesting in public services. Yet even today, many nations, such asAfghanistan,Haiti, Nepal, and Somalia, have states that are unable tomaintain themost rudimentary order, and economic incentives are allbut destroyed. The case of Somalia illustrates how the process of

industrializationalsopassedbysuchsocieties.Politicalcentralizationisresisted for the same reason that absolutist regimes resist change: theoftenwell-placed fear that changewill reallocate political power fromthose that dominate today to new individuals and groups. Thus, asabsolutismblocksmovestowardpluralismandeconomicchange,sodothetraditionalelitesandclansdominatingthesceneinsocietieswithoutstate centralization. As a consequence, societies that still lacked suchcentralization in the eighteenth and nineteenth centuries wereparticularlydisadvantagedintheageofindustry.Whilethevarietyofextractiveinstitutionsrangingfromabsolutismtostateswithlittlecentralizationfailedtotakeadvantageofthespreadofindustry, the critical juncture of the Industrial Revolution had verydifferenteffectsinotherpartsoftheworld.Aswewillseeinchapter10,societies that had already taken steps toward inclusive political andeconomicinstitutions,suchastheUnitedStatesandAustralia,andthosewhere absolutism was more seriously challenged, such as France andJapan,tookadvantageoftheseneweconomicopportunitiesandstarteda process of rapid economic growth. As such, the usual pattern ofinteraction between a critical juncture and existing institutionaldifferences leading to further institutional and economic divergenceplayedoutagaininthenineteenthcentury,andthistimewithanevenbiggerbangandmorefundamentaleffectsontheprosperityandpovertyofnations.

Northofthefence:Nogales,ArizonaJimWest/imagebroker.net/Photolibrary

Southofthefence:Nogales,SonoraJimWest/agefotostock/Photolibrary

Consequencesofalevelplayingfield:ThomasEdison’s1880patentforthelightbulbRecordsofthePatentandTrademarkOffice;RecordGroup241;NationalArchives

Economiclosersfromcreativedestruction:machine-breakingLudditesinearly-nineteenth-centuryBritainMaryEvansPictureLibrary/TomMorgan

ConsequencesofacompletelackofpoliticalcentralizationinSomaliaREUTERS/MohamedGuled/Landov

SuccessivebeneficiariesofextractiveinstitutionsinCongo:

KingofKongo©CORBISKingLeopoldIITheGrangerCollection,NY

Joseph-DésiréMobutu©RichardMelloul/Sygma/CORBIS

LaurentKabila©Reuters/CORBIS

TheGloriousRevolution:WilliamIIIofOrangeisreadtheBillofRightsbeforebeingofferedthecrownofEnglandbyparliamentAfterEdgarMelvilleWard/TheBridgemanArt

Library/GettyImages

Thebubonicplagueofthefourteenthcenturycreatesacriticaljuncture(TheTriumphofDeathpaintingoftheBlackDeathbyBruegheltheElder)TheGrangerCollection,NY

Beneficiaryofinstitutionalinnovation:theKingofKubaEliotElisofon/Time&LifePictures/Getty

Theemergenceofhierarchyandinequalitybeforefarming:thegravegoodsoftheNatufianelitehttp://en.wikipedia.org/wiki/File:Natufian-Burial-ElWad.jpg

Extractivegrowth:SovietGulaglaborbuildstheWhiteSeacanalSOVFOTO

Britainfallsfarbehind:theruinsoftheRomanempireatVindolandaCourtesyoftheVindolandaTrustandAdamStanford

Innovation,essenceofinclusiveeconomicgrowth:JamesWatt’ssteamengineTheGrangerCollection,NY

Organizationalchange,aconsequenceofinclusiveinstitutions:thefactoryofRichardArkwrightatCromfordTheGrangerCollection,NY

Fruitsofunsustainableextractivegrowth:ZhengHe’sshipalongsideColumbus’sSantaMariaGregoryA.Harlin/NationalGeographicStock

Bird’s-eyeviewofthedualeconomyinSouthAfrica:povertyinTranskei,prosperityinNatalRogerdelaHarpe/AfricaImagery

ConsequencesoftheIndustrialRevolution:thestormingoftheBastilleBridgeman-Giraudon/ArtResource,NY

Challengestoinclusiveinstitutions:theStandardOilCompanyLibraryofCongressPrintsandPhotographsDivisionWashington,D.C.

Noncreativedestruction:abandonedHastingrailwaystationonthewaytoBoinSierraLeone©MattStephenson:www.itsayshere.org

Extractiveinstitutionstoday:childrenworkinginanUzbekcottonfieldEnvironmentalJusticeFoundation,www.ejfoundation.org

Breakingamold:threeTswanachiefsontheirwaytoLondonPhotographbyWilloughby,courtesyofBotswanaNationalArchives&RecordsServices

Breakinganothermold:RosaParkschallengesextractiveinstitutionsintheU.S.southTheGrangerCollection,NY

Extractiveinstitutionsdevourtheirchildren:theChineseCulturalRevolutionvs.“degenerateintellectuals”WengRulan,1967,IISHCollection,InternationalInstituteofSocialHistory

(Amsterdam)

9.

REVERSINGDEVELOPMENT

SPICEANDGENOCIDE

THEMOLUCCANARCHIPELAGOinmodernIndonesiaismadeupofthreegroupsof islands. In the early seventeenth century, the northern Moluccashoused the independent kingdoms of Tidore, Ternate, and Bacan. ThemiddleMoluccas were home to the island kingdom of Ambon. In thesouth were the Banda Islands, a small archipelago that was not yetpoliticallyunified.Thoughtheyseemremotetoustoday,theMoluccaswere thencentral toworld tradeas theonlyproducersof thevaluablespicescloves,mace,andnutmeg.Ofthese,nutmegandmacegrewonlyintheBandaIslands.Inhabitantsoftheseislandsproducedandexportedtheserarespices inexchangeforfoodandmanufacturedgoodscomingfromthe islandofJava, fromtheentrepôtofMelakaontheMalaysianPeninsula,andfromIndia,China,andArabia.The first contact the inhabitants had with Europeans was in the

sixteenth century, with Portuguese mariners who came to buy spices.BeforethenspiceshadtobeshippedthroughtheMiddleEast,viatraderoutes controlled by the Ottoman Empire. Europeans searched for apassagearoundAfricaoracrosstheAtlantictogaindirectaccesstotheSpiceIslandsandthespicetrade.TheCapeofGoodHopewasroundedby the Portuguese mariner Bartolomeu Dias in 1488, and India wasreachedviathesameroutebyVascodaGamain1498.Forthefirsttimethe Europeans now had their own independent route to the SpiceIslands.ThePortugueseimmediatelysetaboutthetaskoftryingtocontrolthe

tradeinspices.TheycapturedMelakain1511.Strategicallysituatedonthe western side of theMalaysian Peninsula, merchants from all over

SoutheastAsiacametheretoselltheirspicestoothermerchants,Indian,Chinese, and Arabs, who then shipped them to the West. As thePortuguesetravelerToméPiresputitin1515:“ThetradeandcommercebetweenthedifferentnationsforathousandleaguesoneveryhandmustcometoMelaka…WhoeverislordofMelakahashishandsatthethroatofVenice.”With Melaka in their hands, the Portuguese systematically tried togainamonopolyofthevaluablespicetrade.Theyfailed.Theopponentstheyfacedwerenotnegligible.Betweenthefourteenthandsixteenthcenturies,therewasagreatdealofeconomicdevelopmentin 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 ashardwoods.

These states had absolutist forms of government similar to those inEuropeinthesameperiod.Thedevelopmentofpoliticalinstitutionswas

spurredbysimilarprocesses,includingtechnologicalchangeinmethodsof warfare and international trade. State institutions became morecentralized, with a king at the center claiming absolute power. Likeabsolutist rulers in Europe, Southeast Asian kings relied heavily onrevenues from trade, both engaging in it themselves and grantingmonopolies to local and foreign elites. As in absolutist Europe, thisgenerated some economic growth but was a far-from-ideal set ofeconomic institutions for economic prosperity, with significant entrybarriers and insecure property rights for most. But the process ofcommercializationwasunderwayevenasthePortugueseweretryingtoestablishtheirdominanceintheIndianOcean.The presence of Europeans swelled and had a much greater impactwith the arrival of the Dutch. The Dutch quickly realized thatmonopolizingthesupplyofthevaluablespicesoftheMoluccaswouldbemuchmore profitable than competing against local or other Europeantraders.In1600theypersuadedtherulerofAmbontosignanexclusiveagreement thatgave themthemonopolyon theclove trade inAmbon.WiththefoundingoftheDutchEastIndiaCompanyin1602,theDutchattempts to capture the entire spice trade and eliminate theircompetitors, by hook or by crook, took a turn for the better for theDutch and for the worse for Southeast Asia. The Dutch East IndiaCompanywas the secondEuropean joint stockcompany, following theEnglishEastIndiaCompany,majorlandmarksinthedevelopmentofthemodern corporation, which would subsequently play a major role inEuropeanindustrialgrowth.Itwasalsothesecondcompanythathaditsownarmyandthepowertowagewarandcolonizeforeignlands.Withthe military power of the company now brought to bear, the Dutchproceeded to eliminate all potential interlopers to enforce their treatywith the ruler of Ambon. They captured a key fort held by thePortuguese in 1605 and forcibly removed all other traders. They thenexpandedtothenorthernMoluccas,forcingtherulersofTidore,Ternate,and Bacan to agree that no cloves could be grown or traded in theirterritories.ThetreatytheyimposedonTernateevenallowedtheDutchtocomeanddestroyanyclovetreestheyfoundthere.Ambon was ruled in a manner similar to much of Europe and theAmericas during that time.The citizens ofAmbonowed tribute to theruler and were subject to forced labor. The Dutch took over and

intensifiedthesesystemstoextractmorelaborandmoreclovesfromtheisland.PriortothearrivaloftheDutch,extendedfamiliespaidtributeincloves to the Ambonese elite. The Dutch now stipulated that eachhouseholdwastiedtothesoilandshouldcultivateacertainnumberofclovetrees.HouseholdswerealsoobligatedtodeliverforcedlabortotheDutch.TheDutchalsotookcontroloftheBandaIslands,intendingthistime

tomonopolizemaceandnutmeg.ButtheBandaIslandswereorganizedvery differently from Ambon. They were made up of many smallautonomouscity-states,andtherewasnohierarchicalsocialorpoliticalstructure.Thesesmallstates,inrealitynomorethansmalltowns,wererunbyvillagemeetingsofcitizens.TherewasnocentralauthoritywhomtheDutchcouldcoerceintosigningamonopolytreatyandnosystemoftributethattheycouldtakeovertocapturetheentiresupplyofnutmegand mace. At first this meant that the Dutch had to compete withEnglish,Portuguese,Indian,andChinesemerchants,losingthespicestotheircompetitorswhentheydidnotpayhighprices.Theirinitialplansof setting up a monopoly of mace and nutmeg dashed, the DutchgovernorofBatavia,JanPieterszoonCoen,cameupwithanalternativeplan. Coen founded Batavia, on the island of Java, as the Dutch EastIndiaCompany’snewcapitalin1618.In1621hesailedtoBandawithafleet and proceeded to massacre almost the entire population of theislands, probably about fifteen thousandpeople.All their leaderswereexecutedalongwiththerest,andonlyafewwereleftalive,enoughtopreserve the know-how necessary for mace and nutmeg production.After this genocide was complete, Coen then proceeded to create thepolitical and economic structure necessary for his plan: a plantationsociety. The islands were divided into sixty-eight parcels, which weregiventosixty-eightDutchmen,mostlyformerandcurrentemployeesofthe Dutch East India Company. These new plantation owners weretaughthow toproduce the spicesby the few survivingBandanese andcould buy slaves from the East India Company to populate the now-empty islands and to produce spices, whichwould have to be sold atfixedpricesbacktothecompany.The extractive institutions created by theDutch in the Spice Islands

hadthedesiredeffects,though,inBandathiswasatthecostoffifteenthousandinnocentlivesandtheestablishmentofasetofeconomicand

political institutions that would condemn the islands tounderdevelopment. By the end of the seventeenth century, the Dutchhadreduced theworld supplyof these spicesbyabout60percentandthepriceofnutmeghaddoubled.TheDutch spread the strategy theyperfected in theMoluccas to theentireregion,withprofoundimplicationsfortheeconomicandpoliticalinstitutionsoftherestofSoutheastAsia.Thelongcommercialexpansionof several states in the area thathad started in the fourteenth centurywent into reverse. Even the politieswhichwere not directly colonizedand crushed by the Dutch East India Company turned inward andabandoned trade. The nascent economic and political change inSoutheastAsiawashaltedinitstracks.To avoid the threat of theDutchEast IndiaCompany, several statesabandonedproducingcrops forexportandceasedcommercialactivity.AutarkywassaferthanfacingtheDutch.In1620thestateofBanten,ontheislandofJava,cutdownitspeppertreesinthehopethatthiswouldinduce theDutch to leave it inpeace.WhenaDutchmerchant visitedMaguindanao, in the southern Philippines, in 1686, he was told,“Nutmegandclovescanbegrownhere,justasinMalaku.TheyarenottherenowbecausetheoldRajahadallofthemruinedbeforehisdeath.HewasafraidtheDutchCompanywouldcometofightwiththemaboutit.”What a trader heard about the ruler ofMaguindanao in 1699wassimilar:“Hehadforbiddenthecontinuedplantingofpeppersothathecould not thereby get involved in war whether with the [Dutch]companyorwithotherpotentates.”Therewasde-urbanizationandevenpopulationdecline.In1635theBurmesemovedtheircapitalfromPegu,onthecoast,toAva,farinlanduptheIrrawaddyRiver.Wedonotknowwhatthepathofeconomicandpoliticaldevelopmentof Southeast Asian states would have been without Dutch aggression.Theymayhavedevelopedtheirownbrandofabsolutism,theymayhaveremained in the same state they were in at the end of the sixteenthcentury, or they may have continued their commercialization bygradually adoptingmore andmore inclusive institutions.But as in theMoluccas,Dutchcolonialismfundamentallychangedtheireconomicandpolitical development. The people in Southeast Asia stopped trading,turned inward,andbecamemoreabsolutist. In thenext twocenturies,theywouldbeinnopositiontotakeadvantageoftheinnovationsthat

would spring up in the Industrial Revolution. And ultimately theirretreat fromtradewouldnotsavethemfromEuropeans;bytheendofthe eighteenth century, nearly all were part of European colonialempires.

WE SAW IN CHAPTER 7howEuropeanexpansion into theAtlantic fueled therise of inclusive institutions in Britain. But as illustrated by theexperienceof theMoluccasunder theDutch, this expansion sowed theseeds of underdevelopment in many diverse corners of the world byimposing,orfurtherstrengtheningexisting,extractiveinstitutions.Theseeitherdirectlyorindirectlydestroyednascentcommercialandindustrialactivity throughout the globe or they perpetuated institutions thatstoppedindustrialization.Asaresult,asindustrializationwasspreadingin somepartsof theworld,places thatwerepartofEuropeancolonialempiresstoodnochanceofbenefitingfromthesenewtechnologies.

THEALL-TOO-USUALINSTITUTION

InSoutheastAsia thespreadofEuropeannavalandcommercialpowerin the early modern period curtailed a promising period of economicexpansionandinstitutionalchange.InthesameperiodastheDutchEastIndia Company was expanding, a very different sort of trade wasintensifyinginAfrica:theslavetrade.In the United States, southern slavery was often referred to as the

“peculiar institution.” But historically, as the great classical scholarMoses Finlay pointed out, slavery was anything but peculiar, it waspresent in almost every society. Itwas, aswe saw earlier, endemic inAncientRomeandinAfrica,longasourceofslavesforEurope,thoughnottheonlyone.IntheRomanperiodslavescamefromSlavicpeoplesaroundtheBlack

Sea,fromtheMiddleEast,andalsofromNorthernEurope.Butby1400,Europeanshadstoppedenslavingeachother.Africa,however,aswesawinchapter6,didnotundergothetransitionfromslaverytoserfdomasdid medieval Europe. Before the early modern period, there was avibrant slave trade in East Africa, and large numbers of slaves were

transported across the Sahara to theArabian Peninsula.Moreover, thelargemedievalWest African states ofMali, Ghana, and Songhaimadeheavy use of slaves in the government, the army, and agriculture,adopting organizational models from the Muslim North African stateswithwhomtheytraded.It was the development of the sugar plantation colonies of the

Caribbean beginning in the early seventeenth century that led to adramatic escalation of the international slave trade and to anunprecedentedincreaseintheimportanceofslaverywithinAfricaitself.Inthesixteenthcentury,probablyabout300,000slavesweretradedinthe Atlantic. They came mostly from Central Africa, with heavyinvolvementofKongoandthePortuguesebasedfarthersouthinLuanda,now the capital of Angola. During this time, the trans-Saharan slavetrade was still larger, with probably about 550,000 Africans movingnorthasslaves.Intheseventeenthcentury,thesituationreversed.About1,350,000AfricansweresoldasslavesintheAtlantictrade,themajoritynow being shipped to the Americas. The numbers involved in theSaharan trade were relatively unchanged. The eighteenth century sawanother dramatic increase, with about 6,000,000 slaves being shippedacross the Atlantic andmaybe 700,000 across the Sahara. Adding thefigures up over periods and parts of Africa, well over 10,000,000Africanswereshippedoutofthecontinentasslaves.Map15 (thispage) gives some sense of the scale of the slave trade.

Usingmoderncountryboundaries,itdepictsestimatesofthecumulativeextentofslaverybetween1400and1900asapercentofpopulationin1400.Darkercolorsshowmoreintenseslavery.Forexample,inAngola,Benin, Ghana, and Togo, total cumulative slave exports amounted tomorethantheentirepopulationofthecountryin1400.ThesuddenappearanceofEuropeansallaroundthecoastofWestern

and Central Africa eager to buy slaves could not but have atransformative impact on African societies. Most slaves who wereshippedtotheAmericaswerewarcaptivessubsequentlytransportedtothecoast.The increase inwarfarewas fueledbyhuge importsofgunsand ammunition, which the Europeans exchanged for slaves. By 1730about180,000gunswerebeingimportedeveryyearjustalongtheWestAfricancoast,andbetween1750and theearlynineteenthcentury, theBritishalone soldbetween283,000and394,000gunsayear.Between

1750 and 1807, the British sold an extraordinary 22,000 tons ofgunpowder, making an average of about 384,000 kilograms annually,alongwith91,000kilogramsofleadperyear.Farthertothesouth,thetradewasjustasvigorous.OntheLoangocoast,northoftheKingdomofKongo,Europeanssoldabout50,000gunsayear.

All this warfare and conflict not only causedmajor loss of life andhumansufferingbutalsoputinmotionaparticularpathofinstitutionaldevelopment in Africa. Before the early modern era, African societieswerelesscentralizedpoliticallythanthoseofEurasia.Mostpolitiesweresmall scale, with tribal chiefs and perhaps kings controlling land andresources. Many, as we showed with Somalia, had no structure of

hierarchical political authority at all. The slave trade initiated twoadverse political processes. First, many polities initially became moreabsolutist,organizedaroundasingleobjective:toenslaveandsellothersto European slavers. Second, as a consequence but, paradoxically, inoppositiontothefirstprocess,warringandslavingultimatelydestroyedwhatever order and legitimate state authority existed in sub-SaharanAfrica.Apartfromwarfare,slaveswerealsokidnappedandcapturedbysmall-scale raiding. The law also became a tool of enslavement. Nomatterwhatcrimeyoucommitted,thepenaltywasslavery.TheEnglishmerchant Francis Moore observed the consequences of this along theSenegambiacoastofWestAfricainthe1730s:

Since this slave trade has been us’d, all punishments arechanged into slavery; there being an advantage on suchcondemnations,theystrainforcrimesveryhard,inordertogetthebenefitofsellingthecriminal.Notonlymurder,theftandadultery,arepunishedbyselling thecriminal forslave,buteverytriflingcaseispunishedinthesamemanner.

Institutions, even religious ones, became perverted by the desire tocaptureandsellslaves.OneexampleisthefamousoracleatArochukwa,in eastern Nigeria. The oracle was widely believed to speak for aprominent deity in the region respected by the major local ethnicgroups,theIjaw,theIbibio,andtheIgbo.Theoraclewasapproachedtosettledisputesandadjudicateondisagreements.PlaintiffswhotraveledtoArochukwa to face the oracle had to descend from the town into agorgeoftheCrossRiver,wheretheoraclewashousedinatallcave,thefrontofwhichwaslinedwithhumanskulls.Thepriestsoftheoracle,inleaguewiththeAroslaversandmerchants,woulddispensethedecisionof the oracle. Often this involved people being “swallowed” by theoracle, which actually meant that once they had passed through thecave,theywereledawaydowntheCrossRiverandtothewaitingshipsof the Europeans. This process in which all laws and customs weredistortedandbrokentocaptureslavesandmoreslaveshaddevastatingeffects onpolitical centralization, though in someplaces it did lead tothe rise of powerful states whose main raison d’être was raiding andslaving.TheKingdomofKongoitselfwasprobablythefirstAfricanstate

to experience a metamorphosis into a slaving state, until it wasdestroyedby civilwar.Other slaving states arosemost prominently inWest Africa and included Oyo in Nigeria, Dahomey in Benin, andsubsequentlyAsanteinGhana.The expansion of the state of Oyo in themiddle of the seventeenth

century,forexample,isdirectlyrelatedtotheincreaseofslaveexportson the coast. The state’s powerwas the result of amilitary revolutionthatinvolvedtheimportofhorsesfromthenorthandtheformationofapowerfulcavalrythatcoulddecimateopposingarmies.AsOyoexpandedsouthtowardthecoast,itcrushedtheinterveningpolitiesandsoldmanyof their inhabitants for slaves. In the period between 1690 and 1740,OyoestablisheditsmonopolyintheinteriorofwhatcametobeknownastheSlaveCoast.Itisestimatedthat80to90percentoftheslavessoldon the coast were the result of these conquests. A similar dramaticconnectionbetweenwarfareandslave supplycame fartherwest in theeighteenthcentury,ontheGoldCoast,theareathatisnowGhana.After1700thestateofAsanteexpandedfromtheinterior,inmuchthesameway as Oyo had previously. During the first half of the eighteenthcentury, this expansion triggered the so-called Akan Wars, as Asantedefeated one independent state after another. The last, Gyaman, wasconquered in1747.Thepreponderanceof the375,000 slavesexportedfrom the Gold Coast between 1700 and 1750 were captives taken inthesewars.Probablythemostobviousimpactofthismassiveextractionofhuman

beingswasdemographic.Itisdifficulttoknowwithanycertitudewhatthe population of Africa was before the modern period, but scholarshavemadevariousplausibleestimatesof the impactof the slave tradeon the population. The historian Patrick Manning estimates that thepopulationofthoseareasofWestandWest-CentralAfricathatprovidedslaves for exportwas around twenty-two to twenty-fivemillion in theearly eighteenth century. On the conservative assumption that duringthe eighteenth and early nineteenth centuries these areas would haveexperiencedarateofpopulationgrowthofabouthalfapercentayearwithout the slave trade,Manningestimated that thepopulationof thisregionin1850oughttohavebeenatleastforty-sixtofifty-threemillion.Infact,itwasaboutone-halfofthis.Thismassivedifferencewasnotonlyduetoabouteightmillionpeople

beingexportedas slaves fromthis regionbetween1700and1850,butthe millions likely killed by continual internal warfare aimed atcapturingslaves.SlaveryandtheslavetradeinAfricafurtherdisruptedfamilyandmarriagestructuresandmayalsohavereducedfertility.Beginning in the late eighteenth century, a strong movement to

abolish theslave tradebegantogainmomentuminBritain, ledby thecharismatic figure of William Wilberforce. After repeated failures, in1807 the abolitionists persuaded the British Parliament to pass a billmakingtheslavetradeillegal.TheUnitedStatesfollowedwithasimilarmeasurethenextyear.TheBritishgovernmentwentfurther,though:itactivelysoughttoimplementthismeasurebystationingnavalsquadronsintheAtlantictotrytostampouttheslavetrade.Thoughittooksometimeforthesemeasurestobetrulyeffective,anditwasnotuntil1834that slavery itselfwas abolished in theBritishEmpire, thedaysof theAtlanticslavetrade,byfarthelargestpartofthetrade,werenumbered.Thoughtheendoftheslavetradeafter1807didreducetheexternal

demand for slaves fromAfrica, thisdidnotmean that slavery’s impactonAfricansocietiesand institutionswouldmagicallymeltaway.ManyAfrican states had become organized around slaving, and the Britishputtinganendtothetradedidnotchangethisreality.Moreover,slaveryhad become much more prevalent within Africa itself. These factorswould ultimately shape the path of development in Africa not onlybeforebutalsoafter1807.Intheplaceofslaverycame“legitimatecommerce,”aphrasecoined

for the export from Africa of new commodities not tied to the slavetrade.Thesegoodsincludedpalmoilandkernels,peanuts,ivory,rubber,and gum arabic. As European and North American incomes expandedwiththespreadoftheIndustrialRevolution,demandformanyofthesetropicalproducts rose sharply.JustasAfricansocieties tookaggressiveadvantage of the economic opportunities presented by the slave trade,they did the same with legitimate commerce. But they did so in apeculiarcontext,oneinwhichslaverywasawayoflifebuttheexternaldemandforslaveshadsuddenlydriedup.Whatwerealltheseslavestodo now that they could not be sold to Europeans? The answer wassimple:theycouldbeprofitablyputtowork,undercoercion,inAfrica,producingthenewitemsoflegitimatecommerce.One of the best documented examples was in Asante, in modern

Ghana.Prior to1807, theAsanteEmpirehadbeenheavily involved inthecapturingandexportofslaves,bringingthemdowntothecoasttobesoldatthegreatslavingcastlesofCapeCoastandElmina.After1807,with this option closed off, the Asante political elite reorganized theireconomy.However,slavingandslaverydidnotend.Rather,slavesweresettledonlargeplantations,initiallyaroundthecapitalcityofKumase,but later spread throughout the empire (corresponding tomost of theinteriorofGhana).Theywereemployed in theproductionofgoldandkola nuts for export, but also grew large quantities of food and wereintensively used as porters, since Asante did not use wheeledtransportation.Farthereast,similaradaptationstookplace.InDahomey,for example, the king had large palm oil plantations near the coastalportsofWhydahandPortoNovo,allbasedonslavelabor.So the abolition of the slave trade, rather than making slavery in

Africa wither away, simply led to a redeployment of the slaves, whowere now used within Africa rather than in the Americas. Moreover,many of the political institutions the slave trade had wrought in theprevious two centuries were unaltered and patterns of behaviorpersisted.Forexample, inNigeriainthe1820sand ’30stheonce-greatOyoKingdomcollapsed.Itwasunderminedbycivilwarsandtheriseofthe Yoruba city-states, such as Illorin and Ibadan, that were directlyinvolvedintheslavetrade,toitssouth.Inthe1830s,thecapitalofOyowas sacked, and after that the Yoruba cities contested power withDahomey for regional dominance. They fought an almost continuousseriesofwarsinthefirsthalfofthecentury,whichgeneratedamassivesupplyofslaves.Alongwiththiswentthenormalroundsofkidnappingandcondemnationbyoraclesandsmaller-scaleraiding.KidnappingwassuchaprobleminsomepartsofNigeriathatparentswouldnotlettheirchildrenplayoutsideforfeartheywouldbetakenandsoldintoslavery.Asaresultslavery,ratherthancontracting,appearstohaveexpanded

inAfricathroughoutthenineteenthcentury.Thoughaccuratefiguresarehardtocomeby,anumberofexistingaccountswrittenbytravelersandmerchantsduringthistimesuggestthatintheWestAfricankingdomsofAsanteandDahomeyandintheYorubacity-stateswelloverhalfofthepopulation were slaves. More accurate data exist from early FrenchcolonialrecordsforthewesternSudan,alargeswathofwesternAfrica,stretchingfromSenegal,viaMaliandBurkinaFaso,toNigerandChad.

Inthisregion30percentofthepopulationwasenslavedin1900.Just as with the emergence of legitimate commerce, the advent of

formal colonization after the Scramble for Africa failed to destroyslaveryinAfrica.ThoughmuchofEuropeanpenetrationintoAfricawasjustifiedonthegroundsthatslaveryhadtobecombatedandabolished,the reality was different. In most parts of colonial Africa, slaverycontinuedwellintothetwentiethcentury.InSierraLeone,forexample,itwasonlyin1928thatslaverywasfinallyabolished,eventhoughthecapitalcityofFreetownwasoriginallyestablishedinthelateeighteenthcentury as a haven for slaves repatriated from the Americas. It thenbecame an important base for the British antislavery squadron and anew home for freed slaves rescued from slave ships captured by theBritishnavy.EvenwiththissymbolismslaverylingeredinSierraLeonefor130years.Liberia, justsouthofSierraLeone,waslikewisefoundedforfreedAmericanslaves inthe1840s.Yet there, too,slavery lingeredinto the twentieth century; as late as the 1960s, itwas estimated thatone-quarter of the labor force were coerced, living and working inconditionsclosetoslavery.Giventheextractiveeconomicandpoliticalinstitutionsbasedontheslavetrade,industrializationdidnotspreadtosub-Saharan Africa, which stagnated or even experienced economicretardation as other parts of the world were transforming theireconomies.

MAKINGADUALECONOMY

The “dual economy” paradigm, originally proposed in 1955 by SirArthurLewis,stillshapesthewaythatmostsocialscientiststhinkabouttheeconomicproblemsofless-developedcountries.AccordingtoLewis,manyless-developedorunderdevelopedeconomieshaveadualstructureand are divided into a modern sector and a traditional sector. Themodern sector, which corresponds to the more developed part of theeconomy,isassociatedwithurbanlife,modernindustry,andtheuseofadvanced technologies. The traditional sector is associated with rurallife, agriculture, and “backward” institutions and technologies.Backward agricultural institutions include the communal ownership ofland,whichimpliestheabsenceofprivatepropertyrightsonland.Labor

was used so inefficiently in the traditional sector, according to Lewis,that it couldbe reallocated to themodern sectorwithout reducing theamounttheruralsectorcouldproduce.ForgenerationsofdevelopmenteconomistsbuildingonLewis’s insights, the “problemofdevelopment”has come tomeanmoving people and resources out of the traditionalsector, agriculture and the countryside, and into the modern sector,industryandcities.In1979LewisreceivedtheNobelPrizeforhisworkoneconomicdevelopment.Lewis and development economists building on his work were

certainly right in identifying dual economies. SouthAfricawas one oftheclearestexamples, split intoa traditional sector thatwasbackwardandpoorandamodernonethatwasvibrantandprosperous.EventodaythedualeconomyLewisidentifiediseverywhereinSouthAfrica.Oneofthe most dramatic ways to see this is by driving across the borderbetweenthestateofKwaZulu-Natal,formerlyNatal,andthestateoftheTranskei.TheborderfollowstheGreatKeiRiver.Totheeastoftheriverin Natal, along the coast, are wealthy beachfront properties on wideexpanses of glorious sandy beaches. The interior is covered with lushgreen sugarcane plantations. The roads are beautiful; the whole areareeksofprosperity.Across the river, it is as if itwereadifferent timeandadifferentcountry.Thearea is largelydevastated.The land isnotgreen, but brown and heavily deforested. Instead of affluent modernhouses with running water, toilets, and all the modern conveniences,people live inmakeshift huts and cook on open fires. Life is certainlytraditional, far from themodern existence to the east of the river. Bynow you will not be surprised that these differences are linked withmajordifferencesineconomicinstitutionsbetweenthetwosidesoftheriver.To the east, in Natal, we have private property rights, functioning

legal systems, markets, commercial agriculture, and industry. To thewest, the Transkei had communal property in land and all-powerfultraditional chiefs until recently. Looked at through the lens of Lewis’stheory of dual economy, the contrast between the Transkei and Natalillustrates the problems of African development. In fact, we can gofurther, andnote that, historically, all ofAfricawas like theTranskei,poorwithpremodern economic institutions, backward technology, andrule by chiefs. According to this perspective, then, economic

development should simply be about ensuring that the TranskeieventuallyturnsintoNatal.This perspective hasmuch truth to it butmisses the entire logic ofhow the dual economy came into existence and its relationship to themoderneconomy.ThebackwardnessoftheTranskeiisnotjustahistoricremnant of the natural backwardness of Africa. The dual economybetweentheTranskeiandNatal is in factquiterecent,and isanythingbutnatural.ItwascreatedbytheSouthAfricanwhiteelitesinordertoproduce a reservoir of cheap labor for their businesses and reducecompetitionfromblackAfricans.Thedualeconomyisanotherexampleof underdevelopment created, not of underdevelopment as it naturallyemergedandpersistedovercenturies.SouthAfricaandBotswana,aswewillseelater,didavoidmostoftheadverse effects of the slave trade and the wars it wrought. SouthAfricans’ firstmajor interactionwith Europeans camewhen theDutchEast India Company founded a base in Table Bay, now the harbor ofCapeTown,in1652.AtthistimethewesternpartofSouthAfricawassparselysettled,mostlybyhunter-gathererscalledtheKhoikhoipeople.Farthereast,inwhatisnowtheCiskeiandTranskei,thereweredenselypopulated African societies specializing in agriculture. They did notinitiallyinteractheavilywiththenewcolonyoftheDutch,nordidtheybecome involved in slaving. The SouthAfrican coastwas far removedfrom slave markets, and the inhabitants of the Ciskei and Transkei,knownastheXhosa,werejustfarenoughinlandnottoattractanyone’sattention. As a consequence, these societies did not feel the brunt ofmanyoftheadversecurrentsthathitWestandCentralAfrica.The isolationof theseplaces changed in thenineteenth century. FortheEuropeanstherewassomethingveryattractiveabouttheclimateandthe disease environment of South Africa. Unlike West Africa, forexample, South Africa had a temperate climate that was free of thetropicaldiseasessuchasmalariaandyellowfeverthathadturnedmuchof Africa into the “white man’s graveyard” and prevented Europeansfromsettlingorevensettinguppermanentoutposts.SouthAfricawasamuchbetterprospectforEuropeansettlement.EuropeanexpansionintotheinteriorbegansoonaftertheBritishtookoverCapeTownfromtheDutch during the Napoleonic Wars. This precipitated a long series ofXhosa wars as the settlement frontier expanded further inland. The

penetrationintotheSouthAfricaninteriorwasintensifiedin1835,whentheremainingEuropeansofDutchdescent,whowouldbecomeknownasAfrikanersorBoers, started their famousmassmigrationknownas theGreatTrekawayfromtheBritishcontrolofthecoastandtheCapeTownarea.TheAfrikanerssubsequentlyfoundedtwoindependentstatesintheinteriorofAfrica,theOrangeFreeStateandtheTransvaal.The next stage in the development of South Africa came with thediscoveryofvastdiamondreservesinKimberlyin1867andofrichgoldminesinJohannesburgin1886.Thishugemineralwealthintheinteriorimmediately convinced the British to extend their control over all ofSouthAfrica.TheresistanceoftheOrangeFreeStateandtheTransvaalledtothefamousBoerWarsin1880–1881and1899–1902.Afterinitialunexpected defeat, the British managed to merge the Afrikaner stateswiththeCapeProvinceandNatal,tofoundtheUnionofSouthAfricain1910. Beyond the fighting between Afrikaners and the British, thedevelopment of the mining economy and the expansion of Europeansettlementhadotherimplicationsforthedevelopmentofthearea.Mostnotably,theygenerateddemandforfoodandotheragriculturalproductsand created new economic opportunities for native Africans both inagricultureandtrade.The Xhosa, in the Ciskei and Transkei, reacted quickly to theseeconomic opportunities, as the historian Colin Bundy documented. Asearlyas1832,evenbeforetheminingboom,aMoravianmissionaryintheTranskeiobserved theneweconomicdynamism in theseareasandnoted thedemand from theAfricans for thenew consumer goods thatthe spread of Europeans had begun to reveal to them. Hewrote, “Toobtain theseobjects, they look… to getmoneyby the labourof theirhands,andpurchaseclothes, spades,ploughs,wagonsandotherusefularticles.”The civil commissioner John Hemming’s description of his visit toFingoland in theCiskei in1876 is equally revealing.Hewrote thathewas

struckwiththeverygreatadvancementmadebytheFingoesin a fewyears…Wherever Iwent I found substantial hutsand brick or stone tenements. In many cases, substantialbrick houses had been erected… and fruit trees had been

planted;whereverastreamofwatercouldbemadeavailableithadbeenledoutandthesoilcultivatedasfarasitcouldbeirrigated;theslopesofthehillsandeventhesummitsofthemountains were cultivated wherever a plough could beintroduced.Theextentofthelandturnedoversurprisedme;Ihavenotseensuchalargeareaofcultivatedlandforyears.

Asinotherpartsofsub-SaharanAfrica,theuseoftheplowwasnewinagriculture,butwhengiventheopportunity,Africanfarmersseemedto have been quite ready to adopt the technology. They were alsopreparedtoinvestinwagonsandirrigationworks.As the agricultural economy developed, the rigid tribal institutionsstarted to giveway. There is a great deal of evidence that changes inpropertyrightstolandtookplace.In1879themagistrateinUmzimkuluofGriqualandEast,intheTranskei,noted“thegrowingdesireofthepartofnatives tobecomeproprietorsof land—theyhavepurchased38,000acres.”ThreeyearslaterherecordedthataroundeightthousandAfricanfarmers in the district had bought and started to work on ninetythousandacresofland.AfricawascertainlynotonthevergeofanIndustrialRevolution,butrealchangewasunderway.Privatepropertyinlandhadweakenedthechiefs and enabled new men to buy land and make their wealth,somethingthatwasunthinkablejustdecadesearlier.Thisalsoillustrateshow quickly the weakening of extractive institutions and absolutistcontrol systemscan lead tonewfoundeconomicdynamism.Oneof thesuccess stories was Stephen Sonjica in the Ciskei, a self-made farmerfromapoorbackground.Inanaddressin1911,Sonjicanotedhowwhenhe first expressed to his father his desire to buy land, his father hadresponded:“Buyland?Howcanyouwanttobuyland?Don’tyouknowthat all land is God’s, and he gave it to the chiefs only?” Sonjica’sfather’s reactionwasunderstandable.ButSonjicawasnotdeterred.HegotajobinKingWilliam’sTownandnoted:

I cunningly opened a private bank account into which Idivertedaportionofmysavings…ThiswentonlyuntilIhadsavedeightypounds…[Ibought]aspanofoxenwithyokes,gear, plough and the rest of agricultural paraphernalia… I

now purchased a small farm … I cannot too stronglyrecommend [farming] as a profession to my fellowman … They should however adopt modern methods ofprofitmaking.

An extraordinary piece of evidence supporting the economicdynamismandprosperityofAfricanfarmersinthisperiodisrevealedinalettersentin1869byaMethodistmissionary,W.J.Davis.WritingtoEngland, he recorded with pleasure that he had collected forty-sixpounds in cash “for the LancashireCottonRelief Fund.” In this periodthe prosperous African farmers were donatingmoney for relief of thepoorEnglishtextileworkers!This new economic dynamism, not surprisingly, did not please thetraditional chiefs,who, inapattern that isbynow familiar tous, sawthisaserodingtheirwealthandpower.In1879MatthewBlyth,thechiefmagistrate of the Transkei, observed that there was opposition tosurveyingthelandsothatitcouldbedividedintoprivateproperty.Herecorded that “some of the chiefs… objected, butmost of the peoplewerepleased…thechiefsseethatthegrantingofindividualtitleswilldestroytheirinfluenceamongtheheadmen.”Chiefs also resisted improvements made on the lands, such as thediggingof irrigationditchesor thebuildingof fences.Theyrecognizedthat these improvements were just a prelude to individual propertyrightstotheland,thebeginningoftheendforthem.Europeanobserverseven noted that chiefs and other traditional authorities, such aswitchdoctors,attemptedtoprohibitall“Europeanways,”whichincludednewcrops,toolssuchasplows,anditemsoftrade.ButtheintegrationoftheCiskei and the Transkei into the British colonial state weakened thepower of the traditional chiefs and authorities, and their resistancewould not be enough to stop the new economic dynamism in SouthAfrica.InFingolandin1884,aEuropeanobservernotedthatthepeoplehad

transferred their allegiance to us. Their chiefs have beenchanged to a sort of titled landowner … without politicalpower.Nolongerafraidofthejealousyofthechieforofthedeadlyweapon… thewitchdoctor,which strikes down the

wealthycattleowner,theablecounsellor,theintroductionofnovelcustoms,theskilfulagriculturalist,reducingthemalltothe uniform level ofmediocrity—no longer apprehensive ofthis, the Fingo clansman … is a progressive man. Stillremainingapeasantfarmer…heownswagonsandploughs;heopenswaterfurroughsforirrigation;heistheownerofaflockofsheep.

Even a modicum of inclusive institutions and the erosion of thepowers of the chiefs and their restrictions were sufficient to start avigorousAfricaneconomicboom.Alas,itwouldbeshortlived.Between1890 and 1913 it would come to an abrupt end and go into reverse.DuringthisperiodtwoforcesworkedtodestroytheruralprosperityanddynamismthatAfricanshadcreatedinthepreviousfiftyyears.Thefirstwas antagonism by European farmers who were competing withAfricans.SuccessfulAfricanfarmersdrovedownthepriceofcropsthatEuropeans also produced. The response of Europeanswas to drive theAfricansoutofbusiness.Thesecond forcewasevenmoresinister.TheEuropeans wanted a cheap labor force to employ in the burgeoningmining economy, and they could ensure this cheap supply only byimpoverishingtheAfricans.Thistheywentaboutmethodicallyoverthenextseveraldecades.The1897testimonyofGeorgeAlbu,thechairmanoftheAssociation

ofMines,giventoaCommissionofInquirypithilydescribesthelogicofimpoverishingAfricanssoastoobtaincheaplabor.Heexplainedhowheproposedtocheapenlaborby“simplytellingtheboysthattheirwagesarereduced.”Histestimonygoesasfollows:

Commission:Supposethekaffirs[blackAfricans]retirebacktotheirkraal[cattlepen]?Wouldyoube in favorofaskingtheGovernmenttoenforcelabour?Albu: Certainly … I would make it compulsory … Whyshould a nigger be allowed to do nothing? I think a kaffirshouldbecompelledtoworkinordertoearnhisliving.Commission: Ifamancan livewithoutwork,howcanyouforcehimtowork?Albu:Taxhim,then…

Commission: Then youwould not allow the kaffir to holdlandinthecountry,buthemustworkforthewhitemantoenrichhim?Albu: He must do his part of the work of helping hisneighbours.

Both of the goals of removing competition with white farmers anddeveloping a large low-wage labor force were simultaneouslyaccomplished by the Natives Land Act of 1913. The act, anticipatingLewis’snotionofdualeconomy,dividedSouthAfrica into twoparts,amodern prosperous part and a traditional poor part. Except that theprosperityandpovertywereactuallybeing createdby theact itself. Itstatedthat87percentofthelandwastobegiventotheEuropeans,whorepresented about 20 percent of the population. The remaining 13percentwastogototheAfricans.TheLandActhadmanypredecessors,ofcourse,becausegraduallyEuropeanshadbeenconfiningAfricansontosmallerandsmallerreserves.Butitwastheactof1913thatdefinitivelyinstitutionalizedthesituationandsetthestagefortheformationoftheSouth African Apartheid regime, with the whiteminority having boththepoliticalandeconomicrightsandtheblackmajoritybeingexcludedfrom both. The act specified that several land reserves, including theTranskeiandtheCiskei,weretobecometheAfrican“Homelands.”Laterthese would become known as the Bantustans, another part of therhetoric of theApartheid regime in SouthAfrica, since it claimed thattheAfricanpeoplesofSouthernAfricawerenotnativesoftheareabutweredescendedfromtheBantupeoplewhohadmigratedoutofEasternNigeriaaboutathousandyearsbefore.Theythushadnomore—andofcourse, in practice, less—entitlement to the land than the Europeansettlers.Map 16 (this page) shows the derisory amount of land allocated to

Africansbythe1913LandActanditssuccessorin1936.Italsorecordsinformation from 1970 on the extent of a similar land allocation thattook place during the construction of another dual economy inZimbabwe,whichwediscussinchapter13.The1913 legislation also includedprovisions intended to stop black

sharecroppers and squatters from farmingonwhite-owned land in anycapacityother thanas labor tenants.As the secretary fornativeaffairs

explained,“Theeffectoftheactwastoputastop,forthefuture,toalltransactions involving anything in the nature of partnership betweenEuropeansandnatives in respectof landor the fruitsof land.Allnewcontractswithnativesmustbecontractsofservice.Providedthere isabonafidecontractofthisnaturethereisnothingtopreventanemployerfrompayinganativeinkind,orbytheprivilegeofcultivatingadefinedpieceofground…Butthenativecannotpaythemasteranythingforhisrighttooccupytheland.”

TothedevelopmenteconomistswhovisitedSouthAfricainthe1950sand’60s,whentheacademicdisciplinewastakingshapeandtheideasofArthurLewiswerespreading,thecontrastbetweentheseHomelandsand the prosperous modern white European economy seemed to beexactlywhatthedualeconomytheorywasabout.TheEuropeanpartoftheeconomywasurbanandeducated,andusedmoderntechnology.TheHomelands were poor, rural, and backward; labor there was very

unproductive; people, uneducated. It seemed to be the essence oftimeless,backwardAfrica.Except that the dual economywas not natural or inevitable. It had

been created by European colonialism. Yes, theHomelandswere poorandtechnologicallybackward,andthepeoplewereuneducated.Butallthiswasanoutcomeofgovernmentpolicy,whichhadforciblystampedout African economic growth and created the reservoir of cheap,uneducatedAfricanlabortobeemployedinEuropean-controlledminesandlands.After1913vastnumbersofAfricanswereevictedfromtheirlands, which were taken over by whites, and crowded into theHomelands, which were too small for them to earn an independentliving from.As intended, therefore, theywouldbe forced to look foraliving in the white economy, supplying their labor cheaply. As theireconomicincentivescollapsed,theadvancesthathadtakenplaceintheprecedingfiftyyearswereallreversed.Peoplegaveuptheirplowsandrevertedtofarmingwithhoes—thatis,iftheyfarmedatall.Moreoftentheywerejustavailableascheaplabor,whichtheHomelandshadbeenstructuredtoensure.It was not only the economic incentives that were destroyed. The

political changes thathad started to takeplacealsowent into reverse.Thepowerofchiefsandtraditionalrulers,whichhadpreviouslybeenindecline, was strengthened, because part of the project of creating acheaplaborforcewastoremoveprivatepropertyinland.Sothechiefs’controloverlandwasreaffirmed.Thesemeasuresreachedtheirapogeein 1951, when the government passed the Bantu Authorities Act. Asearlyas1940,G.Findlayputhisfingerrightontheissue:

Tribaltenureisaguaranteethatthelandwillneverproperlybeworkedandwillneverreallybelongtothenatives.Cheaplabour must have a cheap breeding place, and so it isfurnishedtotheAfricansattheirownexpense.

The dispossession of the African farmers led to their massimpoverishment. It created not only the institutional foundations of abackwardeconomy,butthepoorpeopletostockit.Theavailableevidencedemonstratesthereversalinlivingstandardsin

theHomelandsaftertheNativesLandActof1913.TheTranskeiandthe

Ciskeiwentintoaprolongedeconomicdecline.Theemploymentrecordsfrom the gold mining companies collected by the historian FrancisWilson show that this decline was widespread in the South Africaneconomy as a whole. Following the Natives Land Act and otherlegislation,miners’wagesfellby30percentbetween1911and1921.In1961, despite relatively steady growth in the South African economy,thesewageswerestill12percentlowerthantheyhadbeenin1911.Nowonder that over this period South Africa became the most unequalcountryintheworld.But even in these circumstances, couldn’t black Africans havemade

theirwayintheEuropean,moderneconomy,startedabusiness,orhavebecomeeducatedandbegunacareer?Thegovernmentmadesurethesethings could not happen. No Africanwas allowed to own property orstartabusinessintheEuropeanpartoftheeconomy—the87percentofthe land. The Apartheid regime also realized that educated Africanscompetedwithwhites rather than supplying cheap labor to theminesand to white-owned agriculture. As early as 1904 a system of jobreservation for Europeans was introduced in themining economy. NoAfricanwasallowed tobeanamalgamator, anassayer, abanksman,ablacksmith, a boiler maker, a brass finisher, a brassmolder, abricklayer…andthelistwentonandon,allthewaytowoodworkingmachinist.Atastroke,Africanswerebannedfromoccupyinganyskilledjob in themining sector. Thiswas the first incarnation of the famous“colour bar,” one of the several racist inventions of South Africa’sregime.Thecolourbarwasextendedtotheentireeconomyin1926,andlasted until the 1980s. It is not surprising that black Africans wereuneducated;theSouthAfricanstatenotonlyremovedthepossibilityofAfricansbenefitingeconomically fromaneducationbutalso refused toinvest in black schools and discouraged black education. This policyreached its peak in the 1950s,when, under the leadership ofHendrikVerwoerd,oneofthearchitectsoftheApartheidregimethatwouldlastuntil 1994, the government passed the Bantu Education Act. ThephilosophybehindthisactwasbluntlyspelledoutbyVerwoerdhimselfinaspeechin1954:

TheBantumustbeguidedtoservehisowncommunityinallrespects. There is no place for him in the European

communityabovethelevelofcertainformsoflabour…Forthatreasonitistonoavailtohimtoreceiveatrainingwhichhasas itsaimabsorption in theEuropeancommunitywhilehecannotandwillnotbeabsorbedthere.

Naturally,thetypeofdualeconomyarticulatedinVerwoerd’sspeechisratherdifferentfromLewis’sdualeconomytheory.InSouthAfricathedual economy was not an inevitable outcome of the process ofdevelopment.Itwascreatedbythestate.InSouthAfricatherewastobenoseamlessmovementofpoorpeoplefromthebackwardtothemodernsector as the economy developed. On the contrary, the success of themodern sector relied on the existence of the backward sector, whichenabledwhiteemployerstomakehugeprofitsbypayingverylowwagestoblackunskilledworkers.InSouthAfricatherewouldnotbeaprocessoftheunskilledworkersfromthetraditionalsectorgraduallybecomingeducatedand skilled, as Lewis’s approachenvisaged. In fact, theblackworkers were purposefully kept unskilled andwere barred from high-skill occupations so that skilled white workers would not facecompetitionandcouldenjoyhighwages.InSouthAfricablackAfricanswere indeed “trapped” in the traditional economy, in the Homelands.But thiswasnot theproblemofdevelopment thatgrowthwouldmakegood.TheHomelandswerewhatenabledthedevelopmentofthewhiteeconomy.It shouldalsobeno surprise that the typeofeconomicdevelopment

that white South Africa was achieving was ultimately limited, beingbased on extractive institutions the whites had built to exploit theblacks. South African whites had property rights, they invested ineducation, and they were able to extract gold and diamonds and sellthemprofitably in theworldmarket.Butover80percentof theSouthAfrican population was marginalized and excluded from the greatmajority of desirable economic activities. Blacks could not use theirtalents; they could not become skilled workers, businessmen,entrepreneurs, engineers, or scientists. Economic institutions wereextractive;whitesbecamerichbyextractingfromblacks.Indeed,whiteSouth Africans shared the living standards of people of WesternEuropeancountries,whileblackSouthAfricanswerescarcelyricherthanthose in the rest of sub-SaharanAfrica.This economicgrowthwithout

creativedestruction,fromwhichonlythewhitesbenefited,continuedaslong as revenues from gold and diamonds increased. By the 1970s,however,theeconomyhadstoppedgrowing.And itwill again beno surprise that this set of extractive economic

institutionswas built on foundations laid by a set of highly extractivepolitical institutions. Before its overthrow in 1994, the South Africanpolitical system vested all power in whites, who were the only onesallowed to vote and run for office.Whitesdominated thepolice force,the military, and all political institutions. These institutions werestructuredunderthemilitarydominationofwhitesettlers.Atthetimeofthe foundation of the Union of South Africa in 1910, the Afrikanerpolities of theOrange Free State and the Transvaal had explicit racialfranchises,barringblackscompletely frompoliticalparticipation.Nataland the Cape Colony allowed blacks to vote if they had sufficientproperty,whichtypicallytheydidnot.ThestatusquoofNatalandtheCape Colony was kept in 1910, but by the 1930s, blacks had beenexplicitlydisenfranchisedeverywhereinSouthAfrica.ThedualeconomyofSouthAfricadidcometoanendin1994.Butnot

becauseofthereasonsthatSirArthurLewistheorizedabout.Itwasnotthe natural course of economic development that ended the color barandtheHomelands.BlackSouthAfricansprotestedandroseupagainsttheregimethatdidnotrecognizetheirbasicrightsanddidnotsharethegainsofeconomicgrowthwiththem.AftertheSowetouprisingof1976,the protests becamemore organized and stronger, ultimately bringingdown the Apartheid state. It was the empowerment of blacks whomanaged to organize and rise up that ultimately ended South Africa’sdualeconomyinthesamewaythatSouthAfricanwhites’politicalforcehadcreateditinthefirstplace.

DEVELOPMENTREVERSED

World inequality today exists because during the nineteenth andtwentieth centuries some nations were able to take advantage of theIndustrialRevolutionandthetechnologiesandmethodsoforganizationthatitbroughtwhileotherswereunabletodoso.Technologicalchangeisonlyoneoftheenginesofprosperity,butitisperhapsthemostcritical

one.Thecountriesthatdidnottakeadvantageofnewtechnologiesdidnot benefit from the other engines of prosperity, either. As we haveshown in this and the previous chapter, this failure was due to theirextractive institutions, either a consequence of the persistence of theirabsolutist regimes or because they lacked centralized states. But thischapter has also shown that in several instances the extractiveinstitutionsthatunderpinnedthepovertyofthesenationswereimposed,orattheveryleastfurtherstrengthened,bytheverysameprocessthatfueledEuropeangrowth:Europeancommercialandcolonialexpansion.Infact,theprofitabilityofEuropeancolonialempireswasoftenbuiltonthe destruction of independent polities and indigenous economiesaroundtheworld,oronthecreationofextractiveinstitutionsessentiallyfrom the groundup, as in theCaribbean islands,where, following thealmost total collapse of the native populations, Europeans importedAfricanslavesandsetupplantationsystems.Wewill never knowwhat the trajectories of independent city-states

such as those in the Banda Islands, in Aceh, or in Burma (Myanmar)wouldhavebeenwithouttheEuropeanintervention.TheymayhavehadtheirownindigenousGloriousRevolutionorslowlymovedtowardmoreinclusivepoliticalandeconomic institutionsbasedongrowing trade inspicesandothervaluablecommodities.Butthispossibilitywasremovedby the expansion of the Dutch East India Company. The companystampedoutanyhopeof indigenousdevelopment in theBanda Islandsbycarryingoutitsgenocide.Itsthreatalsomadethecity-statesinmanyotherpartsofSoutheastAsiapullbackfromcommerce.The story of one of the oldest civilizations inAsia, India, is similar,

thoughthereversingofdevelopmentwasdonenotbytheDutchbutbytheBritish.Indiawasthelargestproducerandexporteroftextilesintheworldintheeighteenthcentury.IndiancalicoesandmuslinsfloodedtheEuropean markets and were traded throughout Asia and even easternAfrica. The main agent that carried them to the British Isles was theEnglish East India Company. Founded in 1600, two years before itsDutch version, the English East India Company spent the seventeenthcentury trying to establish a monopoly on the valuable exports fromIndia. 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. Themonopoly of the East India Company had been granted by the Stuartkings andwas immediately challenged after 1688, and even abolishedforoveradecade.Thelossofpowerwassignificant,aswesawearlier(this page–this page), because British textile producers were able toinduce Parliament to ban the import of calicoes, the East IndiaCompany’s most profitable item of trade. In the eighteenth century,underthe leadershipofRobertClive, theEast IndiaCompanyswitchedstrategiesandbegantodevelopacontinentalempire.Atthetime,Indiawas split into many competing polities, though many were stillnominallyunder thecontrolof theMughalemperor inDelhi.TheEastIndia Company first expanded in Bengal in the east, vanquishing thelocalpowers at thebattles ofPlassey in1757andBuxar in1764.TheEastIndiaCompanylootedlocalwealthandtookover,andperhapsevenintensified, the extractive taxation institutions of theMughal rulers ofIndia. This expansion coincided with the massive contraction of theIndiantextileindustry,since,afterall,therewasnolongeramarketforthesegoodsinBritain.Thecontractionwentalongwithde-urbanizationandincreasedpoverty.ItinitiatedalongperiodofreverseddevelopmentinIndia.Soon, insteadofproducingtextiles, IndianswerebuyingthemfromBritainandgrowingopium for theEast IndiaCompany to sell inChina.TheAtlantic slave trade repeated the samepattern inAfrica, even if

startingfromlessdevelopedconditionsthaninSoutheastAsiaandIndia.ManyAfricanstateswereturnedintowarmachinesintentoncapturingand selling slaves to Europeans. As conflict between different politiesand states grew into continuous warfare, state institutions, which inmany cases had not yet achievedmuch political centralization in anycase, crumbled in large parts of Africa, paving the way for persistentextractive institutionsand the failed statesof today thatwewill studylater.InafewpartsofAfricathatescapedtheslavetrade,suchasSouthAfrica, Europeans imposed a different set of institutions, this timedesignedtocreateareservoirofcheaplaborfortheirminesandfarms.TheSouthAfricanstatecreatedadualeconomy,preventing80percentof the population from taking part in skilled occupations, commercialfarming, and entrepreneurship. All this not only explains whyindustrializationpassedbylargepartsoftheworldbutalsoencapsulates

how economic developmentmay sometimes feed on, and even create,theunderdevelopmentinsomeotherpartofthedomesticortheworldeconomy.

10.

THEDIFFUSIONOFPROSPERITY

HONORAMONGTHIEVES

EIGHTEENTH-CENTURYENGLAND—ormoreappropriately,GreatBritainafterthe1707unionofEngland,Wales,andScotland—hadasimplesolutionfordealing with criminals: out of sight, out of mind, or at least out oftrouble.Theytransportedmanytopenalcoloniesintheempire.Beforethe War of Independence, the convicted criminals, convicts, wereprimarily sent to the American colonies. After 1783 the independentUnitedStatesofAmericawasnolongersowelcomingtoBritishconvicts,andtheauthoritiesinBritainhadtofindanotherhomeforthem.TheyfirstthoughtaboutWestAfrica.Buttheclimate,withendemicdiseasessuch as malaria and yellow fever, against which Europeans had noimmunity, was so deadly that the authorities decided it wasunacceptable to send even convicts to the “white man’s graveyard.”TheirnextoptionwasAustralia.Itseasternseaboardhadbeenexploredby the great seafarer Captain James Cook. On April 29, 1770, Cooklandedinawonderfulinlet,whichhecalledBotanyBayinhonoroftherich species found there by the naturalists traveling with him. ThisseemedlikeanideallocationtoBritishgovernmentofficials.Theclimatewastemperate,andtheplacewasasfaroutofsightandmindascouldbeimagined.AfleetofelevenshipspackedwithconvictswasonitswaytoBotany

BayinJanuary1788underthecommandofCaptainArthurPhillip.OnJanuary 26, now celebrated as Australia Day, they set up camp inSydneyCove, theheart of themodern city of Sydney.They called thecolony New South Wales. On board one of the ships, the Alexander,captainedbyDuncanSinclair,wereamarriedcoupleofconvicts,Henry

and Susannah Cable. Susannah had been found guilty of stealing andwas initially sentenced to death. This sentencewas later commuted tofourteen years and transportation to the American colonies. That planfell through with the independence of the United States. In themeantime, inNorwich Castle Jail, Susannahmet and fell in lovewithHenry,afellowconvict.In1787shewaspickedtobetransportedtothenew convict colony inAustraliawith the first fleet heading there. ButHenrywasnot.BythistimeSusannahandHenryhadayoungson,alsocalled Henry. This decision meant the family was to be separated.Susannahwasmoved toaprisonboatmooredon theThames,but theword got out about this wrenching event and reached the ears of aphilanthropist, Lady Cadogan. Lady Cadogan organized a successfulcampaigntoreunite theCables.Nowtheywerebothtobe transportedwith young Henry to Australia. Lady Cadogan also raised £20 topurchasegoods for them,which theywould receive inAustralia.TheysailedontheAlexander,butwhentheyarrivedinBotanyBay,theparcelofgoodshadvanished,oratleastthatiswhatCaptainSinclairclaimed.WhatcouldtheCablesdo?Notmuch,accordingtoEnglishorBritishlaw.Eventhoughin1787,Britainhadinclusivepoliticalandeconomicinstitutions, this inclusiveness did not extend to convicts, who hadpracticallynorights.Theycouldnotownproperty.Theycouldcertainlynot sue anyone in court. In fact, they couldnot evengive evidence incourt.Sinclairknewthisandprobablystoletheparcel.Thoughhewouldneveradmitit,hedidboastthathecouldnotbesuedbytheCables.HewasrightaccordingtoBritishlaw.AndinBritainthewholeaffairwouldhave ended there. But not in Australia. A writ was issued to DavidCollins,thejudgeadvocatethere,asfollows:

WhereasHenryCableandhiswife,newsettlersofthisplace,had before they left England a certain parcel shipped onboard the Alexander transport Duncan Sinclair Master,consisting of cloaths and several other articles suitable fortheir present situation,whichwere collected and bought attheexpenceofmanycharitabledisposedpersonsfortheuseof the said Henry Cable, his wife and child. Severalapplications has been made for the express purpose ofobtaining the said parcel from theMaster of the Alexander

now lying at this port, and that without effect (save andexcept) a small part of the said parcel containing a fewbooks, the residue and remainder, which is of a moreconsiderable value still remains on board the said shipAlexander,theMasterofwhich,seemstobeveryneglectfullin not causing the same to be delivered, to its respectiveownersasaforesaid.

Henry and Susannah, since theywere both illiterate, could not signthe writ and just put their “crosses” at the bottom. The words “newsettlersofthisplace”werelatercrossedout,butwerehighlysignificant.SomeoneanticipatedthatifHenryCableandhiswifeweredescribedasconvicts, the case would have no hope of proceeding. Someone hadcome up instead with the idea of calling them new settlers. This wasprobably a bit toomuch for JudgeCollins to take, andmost likely hewas the one who had these words struck out. But the writ worked.Collinsdidnotthrowoutthecase,andconvenedthecourt,withajuryentirely made up of soldiers. Sinclair was called before the court.ThoughCollinswas less thanenthusiastic about the case, and the jurywascomposedofthepeoplesenttoAustraliatoguardconvictssuchasthe Cables, the Cableswon. Sinclair contested thewhole affair on thegrounds that the Cableswere criminals. But the verdict stood, and hehadtopayfifteenpounds.ToreachthisverdictJudgeCollinsdidn’tapplyBritishlaw;heignoredit.ThiswasthefirstcivilcaseadjudicatedinAustralia.ThefirstcriminalcasewouldhaveappearedequallybizarretothoseinBritain.Aconvictwas foundguiltyof stealing another convict’s bread,whichwasworthtwopence.Atthetime,suchacasewouldnothavecometocourt,sinceconvictswere not allowed to own anything.Australiawas not Britain,anditslawwouldnotbejustBritish.AndAustraliawouldsoondivergefromBritain incriminalandcivil lawaswellas inahostofeconomicandpoliticalinstitutions.The penal colony of New South Wales initially consisted of theconvictsandtheirguards,mostlysoldiers.Therewerefew“freesettlers”inAustraliauntilthe1820s,andthetransportationofconvicts,thoughitstoppedinNewSouthWales in1840,continueduntil1868inWesternAustralia. Convicts had to perform “compulsorywork,” essentially just

anothernameforforcedlabor,andtheguardsintendedtomakemoneyoutofit.Initiallytheconvictshadnopay.Theyweregivenonlyfoodinreturn for the labor they performed. The guards kept what theyproduced. But this system, like the ones with which the VirginiaCompanyexperimentedinJamestown,didnotworkverywell,becauseconvictsdidnothavetheincentivestoworkhardordogoodwork.TheywerelashedorbanishedtoNorfolkIsland,justthirteensquaremilesofterritorysituatedmorethanonethousandmileseastofAustraliainthePacific Ocean. But since neither banishing nor lashing worked, thealternativewas togive themincentives.Thiswasnotanatural idea tothe soldiers and guards. Convicts were convicts, and they were notsupposedtoselltheirlabororownproperty.ButinAustraliatherewasnobodyelsetodothework.TherewereofcourseAboriginals,possiblyasmanyasonemillionatthetimeofthefoundingofNewSouthWales.Buttheywerespreadoutoveravastcontinent,andtheirdensityinNewSouthWaleswas insufficient for the creation of an economybased ontheirexploitation.TherewasnoLatinAmericanoptioninAustralia.Theguards thus embarked on a path that would ultimately lead toinstitutions that were evenmore inclusive than those back in Britain.Convictsweregivenasetoftaskstodo,andiftheyhadextratime,theycouldworkforthemselvesandsellwhattheyproduced.Theguardsalsobenefitedfromtheconvicts’neweconomicfreedoms.

Productionincreased,andtheguardssetupmonopoliestosellgoodstotheconvicts.Themostlucrativeofthesewasforrum.NewSouthWalesat this time, just like other British colonies, was run by a governor,appointedbytheBritishgovernment.In1806BritainappointedWilliamBligh, the man who seventeen years previously, in 1789, had beencaptainoftheH.M.S.Bounty,duringthefamous“MutinyontheBounty.”Bligh was a strict disciplinarian, a trait that was probably largelyresponsible for the mutiny. His ways had not changed, and heimmediately challenged the rum monopolists. This would lead toanothermutiny, this timeby themonopolists, ledby a former soldier,John Macarthur. The events, which came to be known as the RumRebellion,againledtoBligh’sbeingoverpoweredbyrebels,thistimeonlandratherthanaboardtheBounty.MacarthurhadBlighlockedup.TheBritish authorities subsequently sent more soldiers to deal with therebellion.Macarthurwas arrested and shipped back to Britain. But he

wassoonreleased,andhereturnedtoAustraliatoplayamajorroleinboththepoliticsandeconomicsofthecolony.TherootsoftheRumRebellionwereeconomic.Thestrategyofgivingthe convicts incentives was making a lot of money for men such asMacarthur,whoarrivedinAustraliaasasoldierinthesecondgroupofships that landed in 1790. In 1796 he resigned from the army toconcentrateonbusiness.Bythattimehealreadyhadhisfirstsheep,andrealizedthattherewasalotofmoneytobemadeinsheepfarmingandwoolexport.InlandfromSydneyweretheBlueMountains,whichwerefinallycrossedin1813,revealingvastexpansesofopengrasslandontheotherside.Itwassheepheaven.MacarthurwassoontherichestmaninAustralia,andheandhis fellowsheepmagnatesbecameknownas theSquatters, since the land on which they grazed their sheep was nottheirs. Itwasownedby theBritishgovernment.Butat first thiswasasmall detail. The Squatters were the elite of Australia, or, moreappropriately,theSquattocracy.Evenwithasquattocracy,NewSouthWalesdidnotlookanythinglikethe absolutist regimes of Eastern Europe or of the South Americancolonies.TherewerenoserfsasinAustria-HungaryandRussia,andnolargeindigenouspopulationstoexploitas inMexicoandPeru.Instead,NewSouthWaleswaslikeJamestown,Virginia,inmanyways:theeliteultimatelyfoundit intheir interesttocreateeconomicinstitutionsthatweresignificantlymoreinclusivethanthoseinAustria-Hungary,Russia,Mexico,andPeru.Convictsweretheonlylaborforce,andtheonlywayto incentivize them was to pay them wages for the work they weredoing.Convictswere soon allowed tobecomeentrepreneurs andhire otherconvicts.Morenotably,theywereevengivenlandaftercompletingtheirsentences,andtheyhadalltheirrightsrestored.Someofthemstartedtoget rich, even the illiterate Henry Cable. By 1798 he owned a hotelcalledtheRampingHorse,andhealsohadashop.Heboughtashipandwentintothetradeofsealskins.By1809heownedatleastninefarmsofabout470acresandalsoanumberofshopsandhousesinSydney.ThenextconflictinNewSouthWaleswouldbebetweentheeliteandthe rest of the society, made up of convicts, ex-convicts, and theirfamilies.Theelite,ledbyformerguardsandsoldierssuchasMacarthur,includedsomeofthefreesettlerswhohadbeenattractedtothecolony

becauseoftheboominthewooleconomy.Mostofthepropertywasstillin the hands of the elite, and the ex-convicts and their descendantswanted an end to transportation, the opportunity of trial by a jury oftheirpeers,andaccesstofreeland.Theelitewantednoneofthese.Theirmainconcernwastoestablishlegaltitletothelandstheysquattedon.The situation was again similar to the events that had transpired inNorthAmericamorethantwocenturiesearlier.Aswesawinchapter1,the victories of the indentured servants against the Virginia Companywere followedby the struggles inMarylandand theCarolinas. InNewSouthWales,therolesofLordBaltimoreandSirAnthonyAshley-Cooperwere played by Macarthur and the Squatters. The British governmentwasagainonthesideoftheelite,thoughtheyalsofearedthatonedayMacarthurandtheSquattersmightbetemptedtodeclareindependence.TheBritishgovernmentdispatchedJohnBiggetothecolonyin1819

toheadacommissionofinquiryintothedevelopmentsthere.Biggewasshocked by the rights that the convicts enjoyed and surprised by thefundamentallyinclusivenatureoftheeconomicinstitutionsofthispenalcolony. He recommended a radical overhaul: convicts could not ownland,nobodyshouldbeallowedtopayconvictswagesanymore,pardonswere to be restricted, ex-convicts were not to be given land, andpunishment was to be made much more draconian. Bigge saw theSquatters as the natural aristocracy of Australia and envisioned anautocraticsocietydominatedbythem.Thiswasn’ttobe.WhileBiggewas trying to turnback theclock, ex-convictsand their

sonsanddaughtersweredemandinggreaterrights.Mostimportant,theyrealized, again just as in the United States, that to consolidate theireconomicandpoliticalrightsfullytheyneededpoliticalinstitutionsthatwouldincludethemintheprocessofdecisionmaking.Theydemandedelections in which they could participate as equals and representativeinstitutionsandassembliesinwhichtheycouldholdoffice.Theex-convictsandtheirsonsanddaughterswereledbythecolorful

writer,explorer,andjournalistWilliamWentworth.Wentworthwasoneof the leaders of the first expedition that crossed the BlueMountains,which opened the vast grasslands to the Squatters; a town on thesemountains is still named after him. His sympathies were with theconvicts, perhaps because of his father, who was accused of highwayrobberyandhadtoaccepttransportationtoAustraliatoavoidtrialand

possible conviction.At this time,Wentworthwas a strong advocate ofmoreinclusivepoliticalinstitutions,anelectedassembly,trialbyjuryforex-convicts and their families, and an end to transportation to NewSouthWales.Hestartedanewspaper,theAustralian,whichwouldfromthenonleadtheattackontheexistingpolitical institutions.Macarthurdidn’tlikeWentworthandcertainlynotwhathewasaskingfor.HewentthroughalistofWentworth’ssupporters,characterizingthemasfollows:

sentencedtobehungsincehecamehererepeatedlyfloggedatthecart’stailaLondonJewJewpublicanlatelydeprivedofhislicenseauctioneertransportedfortradinginslavesoftenfloggedheresonoftwoconvictsaswindler—deeplyindebtanAmericanadventureranattorneywithaworthlesscharacterastrangerlatelyfailedhereinamusickshopmarriedtothedaughtertotwoconvictsmarriedtoaconvictwhowasformerlyatambourinegirl.

Macarthur and the Squatters’ vigorousopposition couldnot stop thetide in Australia, however. The demand for representative institutionswas strong and could not be suppressed.Until 1823 the governor hadruledNewSouthWalesmoreorlessonhisown.Inthatyearhispowerswere limited by the creation of a council appointed by the Britishgovernment. Initially the appointees were from the Squatters andnonconvictelite,Macarthuramongthem,butthiscouldn’tlast.In1831the governor Richard Bourke bowed to pressure and for the first timeallowed ex-convicts to sit on juries. Ex-convicts and in factmanynewfreesettlersalsowantedtransportationofconvictsfromBritaintostop,because it created competition in the labor market and drove downwages. The Squatters liked low wages, but they lost. In 1840transportation to New South Wales was stopped, and in 1842 alegislative council was created with two-thirds of its members beingelected(therestappointed).Ex-convictscouldstandforofficeandvote

iftheyheldenoughproperty,andmanydid.Bythe1850s,Australiahadintroducedadultwhitemalesuffrage.Thedemands of the citizens, ex-convicts and their families, were now farahead ofwhatWilliamWentworth had first imagined. In fact, by thistime he was on the side of conservatives insisting on an unelectedLegislative Council. But just like Macarthur before, Wentworth wouldnotbeabletohaltthetidetowardmoreinclusivepoliticalinstitutions.In1856thestateofVictoria,whichhadbeencarvedoutofNewSouthWalesin1851,andthestateofTasmaniawouldbecomethefirstplacesin theworld to introduce an effective secret ballot in elections,whichstopped vote buying and coercion. Today we still call the standardmethodofachievingsecrecyinvotinginelectionstheAustralianballot.The initial circumstances in Sydney, New South Wales, were verysimilar to those in Jamestown, Virginia, 181 years earlier, though thesettlers at Jamestown were mostly indentured laborers, rather thanconvicts. In both cases the initial circumstances did not allow for thecreation of extractive colonial institutions. Neither colony had densepopulations of indigenous peoples to exploit, ready access to preciousmetals suchas goldor silver, or soil and crops thatwouldmake slaveplantationseconomicallyviable.Theslavetradewasstillvibrantinthe1780s,andNewSouthWalescouldhavebeenfilledupwithslaveshaditbeenprofitable. Itwasn’t. Both theVirginiaCompany and the soldiersand free settlers who ran New South Wales bowed to the pressures,gradually creating inclusive economic institutions that developed intandem with inclusive political institutions. This happened with evenless of a struggle in New South Wales than it had in Virginia, andsubsequentattemptstoputthistrendintoreversefailed.

AUSTRALIA, LIKE THE UNITED STATES, experienced a different path to inclusiveinstitutions than the one taken by England. The same revolutions thatshook England during the CivilWar and then theGlorious Revolutionwere not needed in theUnited States orAustralia because of the verydifferentcircumstancesinwhichthosecountrieswerefounded—thoughthisofcoursedoesnotmeanthatinclusiveinstitutionswereestablishedwithoutanyconflict,and,intheprocess,theUnitedStateshadtothrowoffBritishcolonialism.InEnglandtherewasalonghistoryofabsolutist

rulethatwasdeeplyentrenchedandrequiredarevolutiontoremoveit.IntheUnitedStatesandAustralia,therewasnosuchthing.ThoughLordBaltimore inMarylandandJohnMacarthur inNewSouthWalesmighthave aspired to such a role, they could not establish a strong enoughgrip on society for their plans to bear fruit. The inclusive institutionsestablishedintheUnitedStatesandAustraliameantthattheIndustrialRevolutionspreadquicklytotheselandsandtheybegantogetrich.ThepaththesecountriestookwasfollowedbycoloniessuchasCanadaandNewZealand.There were still other paths to inclusive institutions. Large parts ofWesternEuropetookyetathirdpathtoinclusiveinstitutionsundertheimpetusoftheFrenchRevolution,whichoverthrewabsolutisminFranceand then generated a series of interstate conflicts that spreadinstitutional reform across much of Western Europe. The economicconsequenceofthesereformswastheemergenceofinclusiveeconomicinstitutions inmost ofWestern Europe, the Industrial Revolution, andeconomicgrowth.

BREAKINGTHEBARRIERS:THEFRENCHREVOLUTION

Forthethreecenturiespriorto1789,Francewasruledbyanabsolutistmonarchy.Frenchsocietywasdividedintothreesegments,theso-calledestates.Thearistocrats(thenobility)madeuptheFirstEstate,theclergytheSecondEstate,andeverybodyelsetheThirdEstate.Differentestatesweresubject todifferent laws,and the first twoestateshadrights thatthe restof thepopulationdidnot.Thenobilityand the clergydidnotpay taxes,while the citizens had to pay several different taxes, aswewouldexpectfromaregimethatwaslargelyextractive.Infact,notonlywas the Church exempt from taxes, but it also owned large swaths ofland and could impose its own taxes on peasants. The monarch, thenobility,andtheclergyenjoyedaluxuriouslifestyle,whilemuchoftheThirdEstatelivedindirepoverty.Differentlawsnotonlyguaranteedagreatly advantageous economicposition to thenobility and the clergy,butitalsogavethempoliticalpower.Life in French cities of the eighteenth century was harsh andunhealthy. Manufacturing was regulated by powerful guilds, which

generated good incomes for theirmembers but prevented others fromentering these occupations or starting new businesses. The so-calledancien régime prided itself on its continuity and stability. Entry byentrepreneurs and talented individuals into new occupations wouldcreateinstabilityandwasnottolerated.Iflifeinthecitieswasharsh,lifein the villageswasprobablyworse.Aswehave seen, by this time themostextremeformofserfdom,whichtiedpeopletothelandandforcedthemtoworkforandpayduestothefeudallords,waslongindeclineinFrance.Nevertheless,therewererestrictionsonmobilityandaplethoraof feudal dues that the French peasants were required to pay to themonarch,thenobility,andtheChurch.Against this background, the FrenchRevolutionwas a radical affair.

OnAugust4,1789,theNationalConstituentAssemblyentirelychangedFrenchlawsbyproposinganewconstitution.Thefirstarticlestated:

The National Assembly hereby completely abolishes thefeudalsystem.Itdecreesthat,amongtheexistingrightsanddues, both feudal and censuel, all those originating in orrepresenting real or personal serfdom shall be abolishedwithoutindemnification.

Itsnintharticlethencontinued:

Pecuniaryprivileges,personalorreal,inthepaymentoftaxesare abolished forever. Taxes shall be collected from all thecitizens, and from all property, in the samemanner and inthesameform.Plansshallbeconsideredbywhichthetaxesshall be paid proportionally by all, even for the last sixmonthsofthecurrentyear.

Thus, in one swoop, the French Revolution abolished the feudalsystemandall theobligationsanddues that itentailed,and itentirelyremovedthetaxexemptionsofthenobilityandtheclergy.Butperhapswhatwasmostradical,evenunthinkableat thetime,wastheeleventharticle,whichstated:

All citizens,without distinction of birth, are eligible to any

officeordignity,whetherecclesiastical,civil,ormilitary;andnoprofessionshallimplyanyderogation.

Sotherewasnowequalitybeforethelawforall,notonlyindailylifeand business, but also in politics. The reforms of the revolutioncontinued after August 4. It subsequently abolished the Church’sauthority to levyspecial taxesand turned theclergy intoemployeesofthe state. Together with the removal of the rigid political and socialroles,criticalbarriersagainsteconomicactivitieswerestampedout.Theguildsandalloccupationalrestrictionswereabolished,creatingamorelevelplayingfieldinthecities.These reforms were a first step toward ending the reign of the

absolutist French monarchs. Several decades of instability and warfollowedthedeclarationsofAugust4.Butanirreversiblestepwastakenaway from absolutism and extractive institutions and toward inclusivepoliticalandeconomicinstitutions.Thesechangeswouldbefollowedbyotherreformsintheeconomyandinpolitics,ultimatelyculminatinginthe Third Republic in 1870,whichwould bring to France the type ofparliamentary system that the Glorious Revolution put in motion inEngland. The French Revolution created much violence, suffering,instability, andwar.Nevertheless, thanks to it, the French did not gettrapped with extractive institutions blocking economic growth andprosperity,asdidabsolutistregimesofEasternEuropesuchasAustria-HungaryandRussia.How did the absolutist French monarchy come to the brink of the

1789 revolution?After all,wehave seen thatmany absolutist regimeswere able to survive for long periods of time, even in the midst ofeconomic stagnation and social upheaval. As with most instances ofrevolutions and radical changes, it was a confluence of factors thatopened the way to the French Revolution, and these were intimatelyrelatedtothefactthatBritainwasindustrializingrapidly.Andofcoursethe path was, as usual, contingent, as many attempts to stabilize theregimebythemonarchyfailedandtherevolutionturnedouttobemoresuccessful in changing institutions in France and elsewhere in Europethanmanycouldhaveimaginedin1789.ManylawsandprivilegesinFrancewereremnantsofmedievaltimes.

They not only favored the First and Second Estates relative to the

majority of the population but also gave them privileges vis-à-vis theCrown. Louis XIV, the Sun King, ruled France for fifty-four years,between 1661 to his death in 1715, though he actually came to thethrone in 1643, at the age of five. He consolidated the power of themonarchy, furthering the process toward greater absolutism that hadstarted centuries earlier.Manymonarchs often consulted the so-calledAssembly of Notables, consisting of key aristocrats handpicked by theCrown.Though largely consultative, theAssembly still actedasamildconstraint on the monarch’s power. For this reason, Louis XIV ruledwithoutconveningtheAssembly.Underhisreign,Franceachievedsomeeconomic growth—for example, via participation in Atlantic andcolonial trade. Louis’s able minister of finance, Jean-Baptiste Colbert,also oversaw the development of government-sponsored andgovernment-controlled industry, a type of extractive growth. Thislimited amount of growth benefited almost exclusively the First andSecond Estates. Louis XIV also wanted to rationalize the French taxsystem,becausethestateoftenhadproblemsfinancingitsfrequentwars,its large standing army, and the King’s own luxurious retinue,consumption,andpalaces.Itsinabilitytotaxeventheminornobilityputseverelimitsonitsrevenues.Thoughtherehadbeenlittleeconomicgrowth,bythetimeLouisXVI

came to power in 1774, there had nevertheless been large changes insociety. Moreover, the earlier fiscal problems had turned into a fiscalcrisis, and the Seven Years’ War with the British between 1756 and1763, in which France lost Canada, had been particularly costly. Anumberofsignificant figuresattemptedtobalance theroyalbudgetbyrestructuring the debt and increasing taxes; among them were Anne-Robert-JacquesTurgot,oneofthemostfamouseconomistsofthetime;Jacques Necker, who would also play an important role after therevolution; and Charles Alexandre de Calonne. But none succeeded.Calonne, as part of his strategy, persuaded Louis XVI to summon theAssemblyofNotables.ThekingandhisadvisersexpectedtheAssemblytoendorsehisreformsmuchinthesamewayasCharlesIexpectedtheEnglish Parliament to simply agree to pay for an army to fight theScottishwhen he called it in 1640. TheAssembly took an unexpectedstep and decreed that only a representative body, the Estates-General,couldendorsesuchreforms.

TheEstates-Generalwas a verydifferent body from theAssemblyofNotables. While the latter consisted of the nobility and was largelyhandpicked by the Crown from among major aristocrats, the formerincludedrepresentativesfromallthreeestates.Ithadlastbeenconvenedin 1614. When the Estates-General gathered in 1789 in Versailles, itbecame immediately clear that no agreement could be reached. Therewereirreconcilabledifferences,astheThirdEstatesawthisasitschanceto increase its political power and wanted to have more votes in theEstates-General,which the nobility and the clergy steadfastly opposed.ThemeetingendedonMay5,1789,withoutanyresolution,exceptthedecision to convene a more powerful body, the National Assembly,deepening the political crisis. The Third Estate, particularly themerchants, businessmen, professionals, and artisans, who all haddemandsforgreaterpower,sawthesedevelopmentsasevidenceoftheirincreasing clout. In the National Assembly, they therefore demandedevenmore say in the proceedings and greater rights in general. Theirsupport in the streets all over the country by citizens emboldened bythese developments led to the reconstitution of the Assembly as theNationalConstituentAssemblyonJuly9.Meanwhile, the mood in the country, and especially in Paris, was

becoming more radical. In reaction, the conservative circles aroundLouisXVIpersuadedhimtosackNecker,thereformistfinanceminister.This led to further radicalization in the streets. The outcome was thefamous storming of the Bastille on July 14, 1789. From this pointonward,therevolutionstartedinearnest.Neckerwasreinstated,andtherevolutionaryMarquis de Lafayette was put in charge of the NationalGuardofParis.Even more remarkable than the storming of the Bastille were the

dynamics of the National Constituent Assembly, which on August 4,1789, with its newfound confidence, passed the new constitution,abolishing feudalismand the specialprivilegesof theFirst andSecondEstates. But this radicalization led to fractionalization within theAssembly,sincethereweremanyconflictingviewsabouttheshapethatsocietyshouldtake.Thefirststepwastheformationoflocalclubs,mostnotablytheradicalJacobinClub,whichwouldlatertakecontroloftherevolution. At the same time, the nobles were fleeing the country ingreatnumbers—theso-calledémigrés.Manywerealsoencouragingthe

king to breakwith theAssembly and take action, either byhimself orwith thehelpof foreignpowers, suchasAustria, thenativecountryofQueen Marie Antoinette and where most of the émigrés had fled. Asmany in the streets started to see an imminent threat against theachievements of the revolution over the past two years, radicalizationgathered pace. The National Constituent Assembly passed the finalversionoftheconstitutiononSeptember29,1791,turningFranceintoaconstitutionalmonarchy,with equalityof rights for allmen,no feudalobligations or dues, and an end to all trading restrictions imposed byguilds.Francewasstillamonarchy,butthekingnowhadlittleroleand,infact,notevenhisfreedom.But thedynamicsof the revolutionwere then irreversiblyalteredby

thewarthatbrokeoutin1792betweenFranceandthe“firstcoalition,”led by Austria. The war increased the resolve and radicalism of therevolutionaries and of the masses (the so-called sans-culottes, whichtranslatesas“withoutkneebreeches,”becausetheycouldnotaffordtowearthestyleoftrousersthenfashionable).TheoutcomeofthisprocesswastheperiodknownastheTerror,underthecommandoftheJacobinfactionledbyRobespierreandSaint-Just,unleashedaftertheexecutionsofLouisXVIandMarieAntoinette. It led to theexecutionsofnotonlyscores of aristocrats and counterrevolutionaries but also several majorfigures of the revolution, including the former popular leaders Brissot,Danton,andDesmoulins.ButtheTerrorsoonspunoutofcontrolandultimatelycametoanend

in July 1794 with the execution of its own leaders, includingRobespierreandSaint-Just.Therefollowedaphaseofrelativestability,firstunderthesomewhatineffectiveDirectory,between1795and1799,and thenwithmore concentratedpower in the formof a three-personConsulate,consistingofDucos,Sieyès,andNapoleonBonaparte.Alreadyduring the Directory, the young general Napoleon Bonaparte hadbecomefamousforhismilitarysuccesses,andhisinfluencewasonlytogrowafter1799.TheConsulatesoonbecameNapoleon’spersonalrule.The years between 1799 and the end of Napoleon’s reign, 1815,

witnessedaseriesofgreatmilitaryvictoriesforFrance,includingthoseatAusterlitz,Jena-Auerstadt,andWagram,bringingcontinentalEuropetoitsknees.TheyalsoallowedNapoleontoimposehiswill,hisreforms,andhislegalcodeacrossawideswathofterritory.ThefallofNapoleon

afterhisfinaldefeatin1815wouldalsobringaperiodofretrenchment,more restricted political rights, and the restoration of the Frenchmonarchy under Louis XVII. But all these were simply slowing theultimateemergenceofinclusivepoliticalinstitutions.The forces unleashed by the revolution of 1789 ended Frenchabsolutismandwouldinevitably,evenifslowly, leadtotheemergenceof inclusive institutions. France, and those parts of Europe where therevolutionary reforms had been exported,would thus take part in theindustrializationprocessalreadyunderwayinthenineteenthcentury.

EXPORTINGTHEREVOLUTION

On the eve of the French Revolution in 1789, there were severerestrictions placed on Jews throughout Europe. In the German city ofFrankfurt,forexample,theirliveswereregulatedbyorderssetoutinastatutedatingfromtheMiddleAges.TherecouldbenomorethanfivehundredJewishfamiliesinFrankfurt,andtheyallhadtoliveinasmall,walledpartoftown,theJudengasse,theJewishghetto.Theycouldnotleavetheghettoatnight,onSundays,orduringanyChristianfestival.The Judengassewas incredibly cramped. It was a quarter of amilelongbutnomorethantwelvefeetwideandinsomeplaceslessthantenfeet wide. Jews lived under constant repression and regulation. Eachyear,atmosttwonewfamiliescouldbeadmittedtotheghetto,andatmost twelve Jewish couples could get married, and only if they werebothabovetheageoftwenty-five.Jewscouldnotfarm;theycouldalsonottradeinweapons,spices,wine,orgrain.Until1726theyhadtowearspecificmarkers,twoconcentricyellowringsformenandastripedveilforwomen.AllJewshadtopayaspecialpolltax.As the French Revolution erupted, a successful young businessman,Mayer Amschel Rothschild, lived in the Frankfurt Judengasse. By theearly1780s,Rothschildhadestablishedhimselfastheleadingdealerincoins,metals,andantiquesinFrankfurt.ButlikeallJewsinthecity,hecouldnotopenabusinessoutsidetheghettoorevenliveoutsideit.Thiswas all to change soon. In 1791 the FrenchNational AssemblyemancipatedFrenchJewry.TheFrencharmieswerenowalsooccupyingthe Rhineland and emancipating the Jews of Western Germany. In

Frankfurt their effect would be more abrupt and perhaps somewhatunintentional. In 1796 the French bombarded Frankfurt, demolishinghalfof theJudengasse intheprocess.AroundtwothousandJewswerelefthomelessandhadtomoveoutsidetheghetto.TheRothschildswereamong them.Onceoutside theghetto,andnowfreed fromthemyriadregulations barring them from entrepreneurship, they could seize newbusiness opportunities. This included a contract to supply grain to theAustrianarmy,somethingtheywouldpreviouslynothavebeenallowedtodo.By theendof thedecade,Rothschildwasoneof the richestJews inFrankfurtandalreadyawell-establishedbusinessman.Fullemancipationhadtowaituntil1811;itwasfinallyimplementedbyKarlvonDalberg,who had been made Grand Duke of Frankfurt in Napoleon’s 1806reorganizationofGermany.MayerAmscheltoldhisson,“[Y]ouarenowacitizen.”Sucheventsdidnot end the struggle for Jewish emancipation, sincethereweresubsequentreverses,particularlyattheCongressofViennaof1815,which formedthepost-Napoleonicpolitical settlement.But therewasnogoingbacktotheghettofortheRothschilds.MayerAmschelandhissonswouldsoonhavethelargestbankinnineteenth-centuryEurope,withbranchesinFrankfurt,London,Paris,Naples,andVienna.Thiswasnotanisolatedevent.FirsttheFrenchRevolutionaryArmiesand then Napoleon invaded large parts of continental Europe, and inalmostalltheareastheyinvaded,theexistinginstitutionswereremnantsof medieval times, empowering kings, princes, and nobility andrestricting trade both in cities and the countryside. Serfdom andfeudalismweremuchmore important inmany of these areas than inFrance itself. In Eastern Europe, including Prussia and the Hungarianpart of Austria-Hungary, serfs were tied to the land. In theWest thisstrictformofserfdomhadalreadyvanished,butpeasantsowedtofeudallordsvariousseigneurialfees,taxes,andlaborobligations.Forexample,in thepolityofNassau-Usingen,peasantswere subject to230differentpayments, dues, and services. Dues included one that had to be paidafterananimalhadbeenslaughtered,calledthebloodtithe;therewasalso a bee tithe and awax tithe. If a piece of propertywasbought orsold,thelordwasowedfees.Theguildsregulatingallkindsofeconomicactivityinthecitieswerealsotypicallystrongerintheseplacesthanin

France. In the western German cities of Cologne and Aachen, theadoption of spinning and weaving textile machines was blocked byguilds.Manycities,fromBerneinSwitzerlandtoFlorenceinItaly,werecontrolledbyafewfamilies.The leaders of the French Revolution and, subsequently, Napoleonexported the revolution to these lands, destroying absolutism, endingfeudallandrelations,abolishingguilds,andimposingequalitybeforethelaw—the all-important notion of rule of law,whichwewill discuss ingreaterdetailinthenextchapter.TheFrenchRevolutionthuspreparednotonlyFrancebutmuchoftherestofEuropeforinclusiveinstitutionsandtheeconomicgrowththatthesewouldspur.As we have seen, alarmed by the developments in France, severalEuropean powers organized around Austria in 1792 to attack France,ostensibly to free King Louis XVI, but in reality to crush the FrenchRevolution.Theexpectationwasthatthemakeshiftarmiesfieldedbytherevolutionwouldsooncrumble.Butaftersomeearlydefeats,thearmiesofthenewFrenchRepublicwerevictoriousinaninitiallydefensivewar.Therewereseriousorganizationalproblemstoovercome.ButtheFrenchwereaheadofothercountriesinamajorinnovation:massconscription.Introduced in August 1793, mass conscription allowed the French tofield large armies and develop a military advantage verging onsupremacy even before Napoleon’s famousmilitary skills came on thescene.

InitialmilitarysuccessencouragedtheRepublic’sleadershiptoexpandFrance’s borders, with an eye toward creating an effective bufferbetween the new republic and the hostile monarchs of Prussia andAustria. The French quickly seized the Austrian Netherlands and theUnitedProvinces,essentially today’sBelgiumandtheNetherlands.TheFrench also took over much of modern-day Switzerland. In all threeplaces,theFrenchhadstrongcontrolthroughthe1790s.Germanywas initiallyhotly contested.But by1795, the Frenchhadfirmcontrolover theRhineland, thewesternpartofGermany lyingontheleftbankoftheRhineRiver.ThePrussianswereforcedtorecognizethisfactundertheTreatyofBasel.Between1795and1802,theFrenchheld the Rhineland, but not any other part of Germany. In 1802 theRhinelandwasofficiallyincorporatedintoFrance.Italyremainedthemainseatofwarinthesecondhalfthe1790s,withtheAustriansastheopponents.SavoywasannexedbyFrancein1792,andastalematewasreacheduntilNapoleon’sinvasioninApril1796.Inhis first major continental campaign, by early 1797, Napoleon hadconqueredalmostallNorthernItaly,exceptforVenice,whichwastaken

bytheAustrians.TheTreatyofCampoFormio,signedwiththeAustriansinOctober1797,endedtheWaroftheFirstCoalitionandrecognizedanumber of French-controlled republics inNorthern Italy.However, theFrench continued to expand their control over Italy even after thistreaty,invadingthePapalStatesandestablishingtheRomanRepublicinMarch 1798. In January 1799, Naples was conquered and theParthenopean Republic created. With the exception of Venice, whichremained Austrian, the French now controlled the entire Italianpeninsula either directly, as in the case of Savoy, or through satellitestates, such as the Cisalpine, Ligurian, Roman, and Parthenopeanrepublics.Therewasfurtherback-and-forthintheWaroftheSecondCoalition,

between 1798 and 1801, but this ended with the French essentiallyremaining in control. The French revolutionary armies quickly startedcarryingoutaradicalprocessofreformin the lands they’dconquered,abolishing the remaining vestiges of serfdomand feudal land relationsandimposingequalitybeforethelaw.Theclergywerestrippedoftheirspecial status and power, and the guilds in urban areaswere stampedoutorattheveryleastmuchweakened.ThishappenedintheAustrianNetherlands immediately after the French invasion in 1795 and in theUnitedProvinces,wheretheFrenchfoundedtheBatavianRepublic,withpolitical institutionsverysimilar to those inFrance. InSwitzerlandthesituationwassimilar,andtheguildsaswellasfeudallandlordsandtheChurch were defeated, feudal privileges removed, and the guildsabolishedandexpropriated.WhatwasstartedbytheFrenchRevolutionaryArmieswascontinued,

inone formoranother,byNapoleon.Napoleonwas firstand foremostinterestedinestablishingfirmcontrolovertheterritoriesheconquered.This sometimes involved cutting deals with local elites or putting hisfamilyandassociatesincharge,asduringhisbriefcontrolofSpainandPoland.ButNapoleonalsohadagenuinedesiretocontinueanddeepenthe reforms of the revolution.Most important, he codified the Romanlaw and the ideas of equality before the law into a legal system thatbecame known as the Code Napoleon. Napoleon saw this code as hisgreatestlegacyandwishedtoimposeitineveryterritoryhecontrolled.Of course, the reforms imposed by the French Revolution and

Napoleon were not irreversible. In some places, such as in Hanover,

Germany,theoldeliteswerereinstatedshortlyafterNapoleon’sfallandmuchofwhattheFrenchachievedwaslostforgood.Butinmanyotherplaces, feudalism, the guilds, and the nobility were permanentlydestroyedorweakened.Forinstance,evenaftertheFrenchleft,inmanycasestheCodeNapoleonremainedineffect.Allinall,FrencharmieswroughtmuchsufferinginEurope,butthey

alsoradicallychangedthelayoftheland.InmuchofEurope,gonewerefeudal relations; the power of the guilds; the absolutist control ofmonarchs and princes; the grip of the clergy on economic, social, andpolitical power; and the foundation of ancien régime, which treateddifferent people unequally based on their birth status. These changescreatedthetypeofinclusiveeconomicinstitutionsthatwouldthenallowindustrialization to take root in these places. By the middle of thenineteenthcentury,industrializationwasrapidlyunderwayinalmostallthe places that the French controlled, whereas places such as Austria-HungaryandRussia,whichtheFrenchdidnotconquer,orPolandandSpain,whereFrenchholdwastemporaryandlimited,werestill largelystagnant.

SEEKINGMODERNITY

In the autumn of 1867, Ōkubo Toshimichi, a leading courtier of thefeudalJapaneseSatsumadomain,traveledfromthecapitalofEdo,nowTokyo, to the regional cityofYamaguchi.OnOctober14hemetwithleaders of the Chōshū domain. He had a simple proposal: theywouldjoin forces,march their armies toEdo, andoverthrow the shogun, therulerofJapan.BythistimeŌkuboToshimichialreadyhadtheleadersoftheTosa andAkidomainsonboard.Once the leaders of thepowerfulChōshūagreed,asecretSatchoAlliancewasformed.In1868Japanwasaneconomicallyunderdevelopedcountrythathad

been controlled since 1600 by the Tokugawa family, whose ruler hadtakenthetitleshogun(commander)in1603.TheJapaneseemperorwassidelinedandassumedapurelyceremonialrole.TheTokugawashogunswere the dominantmembers of a class of feudal lordswho ruled andtaxed their owndomains, among them those of Satsuma, ruled by theShimazu family. These lords, along with their military retainers, the

famous samurai, ran a society that was similar to that of medievalEurope, with strict occupational categories, restrictions on trade, andhighratesoftaxationonfarmers.TheshogunruledfromEdo,wherehemonopolized and controlled foreign trade and banned foreigners fromthe country. Political and economic institutions were extractive, andJapanwaspoor.But the domination of the shogun was not complete. Even as the

Tokugawafamilytookoverthecountryin1600,theycouldnotcontroleveryone. In the south of the country, the Satsuma domain remainedquiteautonomousandwasevenallowedtotradeindependentlywiththeoutsideworldthroughtheRyūkyūIslands.ItwasintheSatsumacapitalofKagoshimawhereŌkuboToshimichiwasbornin1830.Asthesonofasamurai,he,too,becameasamurai.HistalentwasspottedearlyonbyShimazuNariakira, the lordofSatsuma,whoquicklypromotedhim inthebureaucracy.Atthetime,ShimazuNariakirahadalreadyformulateda plan to use Satsuma troops to overthrow the shogun. Hewanted toexpand trade with Asia and Europe, abolish the old feudal economicinstitutions,andconstructamodernstateinJapan.Hisnascentplanwascut shortbyhisdeath in1858.His successor, ShimazuHisamitsu,wasmorecircumspect,atleastinitially.ŌkuboToshimichihadbynowbecomemoreandmoreconvincedthat

Japan needed to overthrow the feudal shogunate, and he eventuallyconvinced Shimazu Hisamitsu. To rally support for their cause, theywrapped it in outrage over the sidelining of the emperor. The treaty(Ōkubo Toshimichi had already signedwith the Tosa domain assertedthat“acountrydoesnothavetwomonarchs,ahomedoesnothavetwomasters;governmentdevolves tooneruler.”But thereal intentionwasnot simply to restore theemperor topowerbut tochange thepoliticaland economic institutions completely. On the Tosa side, one of thetreaty’ssignerswasSakamotoRyūma.AsSatsumaandChōshūmobilizedtheirarmies,SakamotoRyūmapresentedtheshogunwithaneight-pointplan,urginghimtoresigntoavoidcivilwar.Theplanwasradical,andthough clause 1 stated that “political power of the country should bereturnedto the ImperialCourt,andalldecrees issuedbytheCourt,” itincludedfarmorethanjusttherestorationoftheemperor.Clauses2,3,4,and5stated:

2.Two legislativebodies,anUpperandLowerhouse, shouldbeestablished,andallgovernmentmeasuresshouldbedecidedonthebasisofgeneralopinion.

3. Men of ability among the lords, nobles and people at largeshouldbeemployedascouncillors,andtraditionalofficesofthepastwhichhavelosttheirpurposeshouldbeabolished.

4. Foreign affairs should be carried on according to appropriateregulationsworkedoutonthebasisofgeneralopinion.

5.Legislationandregulationsofearliertimesshouldbesetasideandanewandadequatecodeshouldbeselected.

ShogunYoshinobuagreedtoresign,andonJanuary3,1868,theMeijiRestoration was declared; Emperor Kōmei and, one month later afterKōmeidied,hissonMeijiwererestoredtopower.ThoughSatsumaandChōshū forces now occupied Edo and the imperial capital Kyōto, theyfearedthattheTokugawaswouldattempttoregainpowerandre-createthe shogunate. (Ōkubo Toshimichi wanted the Tokugawas crushedforever.HepersuadedtheemperortoabolishtheTokugawadomainandconfiscate their lands. On January 27 the former shogun YoshinobuattackedSatsumaandChōshū forces, andcivilwarbrokeout; it rageduntilthesummer,whenfinallytheTokugawaswerevanquished.FollowingtheMeijiRestorationtherewasaprocessoftransformative

institutionalreformsinJapan.In1869feudalismwasabolished,andthethreehundredfiefsweresurrenderedtothegovernmentandturnedintoprefectures, under the control of an appointed governor. Taxationwascentralized,andamodernbureaucraticstatereplacedtheoldfeudalone.In1869theequalityofallsocialclassesbeforethelawwasintroduced,and restrictions on internal migration and trade were abolished. Thesamurai class was abolished, though not without having to put downsomerebellions.Individualpropertyrightsonlandwereintroduced,andpeoplewereallowedfreedomtoenterandpracticeanytrade.Thestatebecameheavilyinvolvedintheconstructionofinfrastructure.Incontrasttotheattitudesofabsolutistregimestorailways, in1869theJapaneseregimeformedasteamshiplinebetweenTokyoandOsakaandbuiltthefirst railwaybetweenTokyoandYokohama. Italsobegantodevelopamanufacturingindustry,and(ŌkuboToshimichi,asministeroffinance,

oversawthebeginningofaconcertedeffortofindustrialization.Thelordof Satsuma domain had been a leader in this, building factories forpottery, cannon, and cotton yarn and importing English textilemachinery to create the firstmodern cotton spinningmill in Japan in1861.Healsobuilttwomodernshipyards.By1890JapanwasthefirstAsian country to adopt a written constitution, and it created aconstitutional monarchy with an elected parliament, the Diet, and anindependent judiciary.Thesechangesweredecisive factors inenablingJapan to be the primary beneficiary from the Industrial Revolution inAsia.

IN THE MID-NINETEENTH CENTURY both China and Japan were poor nations,languishingunderabsolutistregimes.TheabsolutistregimeinChinahadbeen suspicious of change for centuries. Though there were manysimilarities between China and Japan—the Tokugawa shogunate hadalso banned overseas trade in the seventeenth century, as Chineseemperorshaddoneearlier,andwereopposedtoeconomicandpoliticalchange—there were also notable political differences. China was acentralized bureaucratic empire ruled by an absolute emperor. Theemperorcertainlyfacedconstraintsonhispower,themostimportantofwhichwasthethreatofrebellion.Duringtheperiod1850to1864,thewholeofsouthernChinawasravagedbytheTaipingRebellion,inwhichmillions died either in conflict or through mass starvation. Butoppositiontotheemperorwasnotinstitutionalized.The structure of Japanese political institutions was different. The

shogunate had sidelined the emperor, but as we have seen, theTokugawa power was not absolute, and domains such as that of theSatsumasmaintainedindependence,eventheabilitytoconductforeigntradeontheirownbehalf.As with France, an important consequence of the British Industrial

Revolution for China and Japanwasmilitary vulnerability. Chinawashumbled by British sea power during the First Opium War, between1839and1842,andthesamethreatbecamealltoorealfortheJapaneseasU.S.warships,ledbyCommodoreMatthewPerry,pulledintoEdoBayin 1853. The reality that economic backwardness created militarybackwardnesswaspartoftheimpetusbehindShimazuNariakira’splan

to overthrow the shogunate and put in motion the changes thateventually led to the Meiji Restoration. The leaders of the Satsumadomainrealizedthateconomicgrowth—perhapsevenJapanesesurvival—could be achieved only by institutional reforms, but the shogunopposed this because his power was tied to the existing set ofinstitutions.Toexactreforms,theshogunhadtobeoverthrown,andhewas.ThesituationwassimilarinChina,butthedifferentinitialpoliticalinstitutionsmade itmuchharder tooverthrowtheemperor, somethingthat happened only in 1911. Instead of reforming institutions, theChinese tried to match the British militarily by importing modernweapons.TheJapanesebuilttheirownarmamentsindustry.Asaconsequenceoftheseinitialdifferences,eachcountryresponded

differently to the challenges of the nineteenth century, and Japan andChinadivergeddramatically in the faceof thecritical juncturecreatedby the Industrial Revolution. While Japanese institutions were beingtransformedandtheeconomywasembarkingonapathofrapidgrowth,inChinaforcespushingforinstitutionalchangewerenotstrongenough,and extractive institutions persisted largely unabated until theywouldtakeaturnfortheworsewithMao’scommunistrevolutionin1949.

ROOTSOFWORLDINEQUALITY

Thisandthepreviousthreechaptershavetoldthestoryofhowinclusiveeconomic and political institutions emerged in England to make theIndustrialRevolutionpossible,andwhycertaincountriesbenefitedfromthe Industrial Revolution and embarked on the path to growth, whileothersdidnotor,infact,steadfastlyrefusedtoalloweventhebeginningof industrialization.Whetheracountrydidembarkon industrializationwas largely a function of its institutions. The United States, whichunderwenta transformationsimilar totheEnglishGloriousRevolution,hadalreadydevelopeditsownbrandofinclusivepoliticalandeconomicinstitutionsbytheendoftheeighteenthcentury.ItwouldthusbecomethefirstnationtoexploitthenewtechnologiescomingfromtheBritishIsles, and would soon surpass Britain and become the forerunner ofindustrializationand technologicalchange.Australia followedasimilarpathtoinclusiveinstitutions,evenifsomewhatlaterandsomewhatless

noticed.Itscitizens,justlikethoseinEnglandandtheUnitedStates,hadto fight to obtain inclusive institutions. Once these were in place,Australiawould launch its own process of economic growth. AustraliaandtheUnitedStatescouldindustrializeandgrowrapidlybecausetheirrelatively inclusive institutions would not block new technologies,innovation,orcreativedestruction.NotsoinmostoftheotherEuropeancolonies.Theirdynamicswould

bequitetheoppositeofthoseinAustraliaandtheUnitedStates.Lackofa native population or resources to be extracted made colonialism inAustralia and the United States a very different sort of affair, even iftheircitizenshadtofighthardfortheirpoliticalrightsandforinclusiveinstitutions. In the Moluccas as in the many other places EuropeanscolonizedinAsia,intheCaribbean,andinSouthAmerica,citizenshadlittlechanceofwinningsuchafight.Intheseplaces,Europeancolonistsimposed a newbrand of extractive institutions, or took overwhateverextractiveinstitutionstheyfound,inordertobeabletoextractvaluableresources,rangingfromspicesandsugartosilverandgold.Inmanyoftheseplaces,theyputinmotionasetofinstitutionalchangesthatwouldmake the emergenceof inclusive institutions veryunlikely. In someofthem they explicitly stamped out whatever burgeoning industry orinclusiveeconomicinstitutionsexisted.Mostoftheseplaceswouldbeinno situation tobenefit from industrialization in thenineteenth centuryoreveninthetwentieth.The dynamics in the rest of Europe were also quite different from

thoseinAustraliaandtheUnitedStates.AstheIndustrialRevolutioninBritainwasgatheringspeedat theendof theeighteenthcentury,mostEuropean countries were ruled by absolutist regimes, controlled bymonarchsandbyaristocracieswhosemajorsourceofincomewasfromtheir landholdings or from trading privileges they enjoyed thanks toprohibitive entry barriers. The creative destruction that would bewrought by the process of industrialization would erode the leaders’tradingprofitsandtakeresourcesandlaborawayfromtheirlands.Thearistocracies would be economic losers from industrialization. Moreimportant, they would also be political losers, as the process ofindustrialization would undoubtedly create instability and politicalchallengestotheirmonopolyofpoliticalpower.But the institutional transitions in Britain and the Industrial

Revolution created new opportunities and challenges for Europeanstates.ThoughtherewasabsolutisminWesternEurope,theregionhadalsosharedmuchof the institutionaldrift thathad impactedBritain inthepreviousmillennium.ButthesituationwasverydifferentinEasternEurope,theOttomanEmpire,andChina.Thesedifferencesmatteredforthedisseminationof industrialization. Just like theBlackDeathor therise of Atlantic trade, the critical juncture created by industrializationintensifiedtheever-presentconflictover institutions inmanyEuropeannations.AmajorfactorwastheFrenchRevolutionof1789.TheendofabsolutisminFranceopenedthewayfor inclusive institutions,andtheFrench ultimately embarked on industrialization and rapid economicgrowth.TheFrenchRevolutioninfactdidmorethanthat.Itexporteditsinstitutionsbyinvadingandforciblyreformingtheextractiveinstitutionsof several neighboring countries. It thus opened the way toindustrialization not only in France, but in Belgium, the Netherlands,Switzerland, andparts ofGermany and Italy. Farther east the reactionwas similar to that after theBlackDeath,when, instead of crumbling,feudalismintensified.Austria-Hungary,Russia,andtheOttomanEmpirefell even further behind economically, but their absolutist monarchiesmanagedtostayinplaceuntiltheFirstWorldWar.Elsewhere in the world, absolutism was as resilient as in Eastern

Europe. This was particularly true in China, where the Ming-Qingtransitionledtoastatecommittedtobuildingastableagrariansocietyand hostile to international trade. But there were also institutionaldifferences that mattered in Asia. If China reacted to the IndustrialRevolution as Eastern Europe did, Japan reacted in the same way asWestern Europe. Just as in France, it took a revolution to change thesystem,thistimeoneledbytherenegadelordsoftheSatsuma,Chōshū,Tosa,andAkidomains.These lordsoverthrew the shogun, created theMeiji Restoration, and moved Japan onto the path of institutionalreformsandeconomicgrowth.We also saw that absolutism was resilient in isolated Ethiopia.

Elsewhere on the continent the very same force of international tradethathelpedtotransformEnglishinstitutionsintheseventeenthcenturylocked large parts ofwestern and central Africa into highly extractiveinstitutionsvia the slave trade.Thisdestroyed societies in someplacesandledtothecreationofextractiveslavingstatesinothers.

The institutional dynamicswe have described ultimately determinedwhichcountriestookadvantageofthemajoropportunitiespresentinthenineteenthcenturyonwardandwhichonesfailedtodoso.Therootsoftheworldinequalityweobservetodaycanbefoundinthisdivergence.With a few exceptions, the rich countries of today are those thatembarked on the process of industrialization and technological changestartinginthenineteenthcentury,andthepooronesarethosethatdidnot.

11.

THEVIRTUOUSCIRCLE

THEBLACKACT

WINDSOR CASTLE, located justwest of London, is one of the great royalresidencies of England. In the early eighteenth century, the castlewassurroundedbyagreat forest, full ofdeer, though littleof this remainstoday.Oneofthekeepersoftheforestin1722,BaptistNunn,waslockedintoaviolentconflict.OnJune27herecorded,

Blackscameinthenightshotatme3times2bulletsintomychamber window and [I] agreed to pay them 5 guineas atCrowthorneonthe30th.

Anotherentry inNunn’sdiary read, “A fresh surprise.Oneappeareddisguisedwithamessageofdestruction.”Who were these mysterious “Blacks” making threats, shooting at

Nunn,anddemandingmoney?TheBlacksweregroupsoflocalmenwhohad their faces “blacked” to conceal their appearance at night. Theyappeared widely across southern England in this period, killing andmaiming deer and other animals, burning down haystacks and barns,and destroying fences and fish ponds. On the surface it was sheerlawlessness, but it wasn’t. Illegal hunting (poaching) deer in landsownedbythekingorothermembersofthearistocracyhadbeengoingon for a long time. In the 1640s, during the Civil War, the entirepopulationofdeeratWindsorCastlewaskilled.AftertheRestorationin1660,whenCharlesIIcametothethrone,thedeerparkwasrestocked.ButtheBlackswerenotjustpoachingdeertoeat;theyalsoengagedinwantondestruction.Towhatend?Acrucialbuildingblockof theGloriousRevolutionof1688was the

pluralistic nature of interests represented in Parliament. None of themerchants, industrialists, gentry, or aristocracy allied with William ofOrangeandthenwiththeHanoverianmonarchs,whosucceededQueenAnnein1714,werestrongenoughtoimposetheirwillunilaterally.AttemptsatrestoringtheStuartmonarchycontinuedthroughoutmuchoftheeighteenthcentury.AfterJamesII’sdeathin1701,hisson,JamesFrancisEdwardStuart,the“OldPretender,”wasrecognizedasthelawfulheirtotheEnglishCrownbyFrance,Spain,thepope,andsupportersoftheStuartmonarchyinEnglandandScotland,theso-calledJacobites.In1708theOldPretenderattemptedtotakebackthethronewithsupportof French troops, but was unsuccessful. In the ensuing decades therewould be several Jacobite revolts, including major ones in 1715 and1719. In1745–46, theOldPretender’s son,CharlesEdwardStuart, the“Young Pretender,”made an attempt to take back the throne, but hisforcesweredefeatedbytheBritisharmy.TheWhigpoliticalparty,whichaswesaw(thispage–thispage)wasfounded in the 1670s to represent the new mercantile and economicinterests,wasthemainorganizationbehindtheGloriousRevolution,andtheWhigs dominated Parliament from 1714 to 1760. Once in power,they were tempted to use their newly found position to prey on therightsofothers,tohavetheircakeandeatit,too.Theywerenodifferentfrom the Stuart kings, but their power was far from absolute. It wasconstrained both by competing groups in Parliament, particularly theTory Party which had formed to oppose the Whigs, and by the veryinstitutions that theyhad fought to introduce to strengthenParliamentandtopreventtheemergenceofanewabsolutismandthereturnoftheStuarts.ThepluralisticnatureofsocietythatemergedfromtheGloriousRevolutionalsomeantthat thepopulationat large,eventhosewithoutformal representation in Parliament, had been empowered, and“blacking” was precisely a response by the common people toperceptionsthattheWhigswereexploitingtheirposition.ThecaseofWilliamCadogan,a successfulgeneral in theWarof theSpanish Succession between 1701 and 1714 and in the suppression ofthe Jacobite revolts, illustrates the sort of encroachment of commonpeople’s rights by the Whigs that led to blacking. George I madeCadogan a baron in 1716 and then an earl in 1718. He was also aninfluential member of the Regency Council of Lords Justices, which

presided over major affairs of state, and he served as the actingcommander in chief. He bought a large property of about a thousandacresatCaversham,abouttwentymileswestofWindsor.Therehebuiltagrandhouseandornategardensandlaidouta240-acredeerpark.Yetthis property was consolidated by encroaching on the rights of thosearound the estate. People were evicted, and their traditional rights tograze animals and collect peat and firewoodwere abrogated.Cadoganfaced thewrathof theBlacks.OnJanuary1,1722,andagain inJuly,the park was raided by mounted and armed Blacks. The first attackkilled sixteen deer. Earl Cadogan was not alone. The estates of manynotablelandownersandpoliticianswerealsoraidedbytheBlacks.TheWhiggovernmentwasnotgoingtotakethislyingdown.InMay1723,ParliamentpassedtheBlackAct,whichcreatedanextraordinaryfiftynewoffensesthatwerepunishablebyhanging.TheBlackActmadeitacrimenotonlytocarryweaponsbuttohaveablackenedface.Thelawinfactwassoonamendedtomakeblackingpunishablebyhanging.TheWhig eliteswent about implementing the lawwith gusto. BaptistNunn set up anetworkof informers inWindsor Forest todiscover theidentity of theBlacks. Soon severalwere arrested. The transition fromarresttohangingoughttohavebeenastraightforwardaffair.Afterall,the Black Act had already been enacted, theWhigswere in charge ofParliament, Parliament was in charge of the country, and the Blackswere acting directly contrary to the interests of somepowerfulWhigs.Even Sir RobertWalpole, secretary of state, then primeminister—andlikeCadogan,anotherinfluentialmemberoftheRegencyCounciloftheLordsJustices—wasinvolved.HehadavestedinterestinRichmondParkin southwest London,whichhadbeen createdout of common landbyCharlesI.Thisparkalsoencroacheduponthetraditionalrightsoflocalresidents to graze their animals, hunt hares and rabbits, and collectfirewood. But the ending of these rights appears to have been ratherlaxly enforced, and grazing and hunting continued, until Walpolearranged forhis son tobecome thepark ranger.At this time, theparkwas closed off, a new wall was constructed, and man traps wereinstalled. Walpole liked hunting deer, and he had a lodge built forhimselfatHoughton,withinthepark.TheanimosityoflocalBlackswassoonignited.On November 10, 1724, a local resident outside the park, John

Huntridge, was accused of aiding deer stealers and abetting knownBlacks, both crimes punishable by hanging. The prosecution ofHuntridgecamerightfromthetop,initiatedbytheRegencyCouncilofLordsJustices,whichWalpoleandCadogandominated.Walpolewentsofar as to extract evidence himself as to Huntridge’s guilt from aninformant,RichardBlackburn.Convictionoughttohavebeenaforegoneconclusion, but itwasn’t. After a trial of eight or nine hours, the juryfound Huntridge innocent, partly on procedural grounds, since therewereirregularitieswiththewaytheevidencehadbeencollected.NotallBlacksorthosewhosympathizedwiththemwereasluckyas

Huntridge. Though some others were also acquitted or had theirconvictions commuted,manywere hanged or transported to the penalcolonyofchoiceat the time,NorthAmerica; the law in fact stayedonthestatutebooksuntilitwasrepealedin1824.YetHuntridge’svictoryisremarkable.ThejurywasmadeupnotofHuntridge’speers,butofmajorlandownersandgentry,whoought tohavesympathizedwithWalpole.Butthiswasnolongertheseventeenthcentury,wheretheCourtofStarChamberwouldsimplyfollowthewishesofStuartmonarchsandactasan open tool of repression against their opponents, and where kingscouldremovejudgeswhosedecisionstheydidnotlike.NowtheWhigsalsohadtoabidebytheruleoflaw,theprinciplethatlawsshouldnotbeappliedselectivelyorarbitrarilyandthatnobodyisabovethelaw.

THE EVENTS SURROUNDING the Black Act would show that the GloriousRevolutionhadcreatedtheruleoflaw,andthatthisnotionwasstrongerinEnglandandBritain, and the eliteswere farmore constrainedby itthantheythemselvesimagined.Notably,theruleoflawisnotthesameasrulebylaw.Evenif theWhigscouldpassaharsh,repressivelawtoquash obstacles from common people, they had to contend withadditionalconstraintsbecauseoftheruleoflaw.Theirlawviolatedtherights that the Glorious Revolution and the changes in politicalinstitutionsthatfollowedfromithadalreadyestablishedforeverybodybytearingdownthe“divine”rightsofkingsandtheprivilegesofelites.Theruleof lawthenimpliedthatbothelitesandnonelitesalikewouldresistitsimplementation.Theruleoflawisaverystrangeconceptwhenyouthinkaboutitin

historicalperspective.Whyshouldlawsbeappliedequallytoall?Ifthekingandthearistocracyhavepoliticalpowerandtherestdon’t,it’sonlynatural that whatever is fair game for the king and the aristocracyshouldbebannedandpunishablefortherest.Indeed,theruleoflawisnot imaginableunderabsolutistpolitical institutions. It isacreationofpluralist political institutions and of the broad coalitions that supportsuchpluralism.It’sonlywhenmanyindividualsandgroupshaveasayindecisions,andthepoliticalpowertohaveaseatatthetable,thattheidea that they should all be treated fairly startsmaking sense. By theearly eighteenth century, Britain was becoming sufficiently pluralistic,and theWhigeliteswoulddiscover that, as enshrined in thenotionoftheruleoflaw,lawsandinstitutionswouldconstrainthem,too.ButwhydidtheWhigsandparliamentariansabidebysuchrestraints?Whydidn’ttheyusetheircontroloverParliamentandthestatetoforceanuncompromising implementation of theBlackAct and overturn thecourtswhenthedecisionsdidn’tgotheirway?TheanswerrevealsmuchaboutthenatureoftheGloriousRevolution—whyitdidn’t justreplaceanoldabsolutismwithanewversion—the linkbetweenpluralismandthe rule of law, and the dynamics of virtuous circles. As we saw inchapter7,theGloriousRevolutionwasnottheoverthrowofoneelitebyanother,butarevolutionagainstabsolutismbyabroadcoalitionmadeupofthegentry,merchants,andmanufacturersaswellasgroupingsofWhigsandTories.Theemergenceofpluralistpoliticalinstitutionswasaconsequence of this revolution. The rule of law also emerged as a by-productofthisprocess.Withmanypartiesatthetablesharingpower,itwasnatural tohave lawsandconstraintsapplytoallof them, lestonepartystartamassingtoomuchpowerandultimatelyunderminetheveryfoundations of pluralism. Thus the notion that there were limits andrestraintsonrulers,theessenceoftheruleoflaw,waspartofthelogicof pluralism engendered by the broad coalition that made up theoppositiontoStuartabsolutism.Inthislight,itshouldbenosurprisethattheprincipleoftheruleoflaw,coupledwiththenotionthatmonarchsdidnothavedivinerights,was in fact a key argument against Stuart absolutism. As the Britishhistorian E. P. Thompson put it, in the struggle against the Stuartmonarchs:

immense efforts were made … to project the image of aruling classwhichwas itself subject to the ruleof law, andwhose legitimacyrestedupontheequityanduniversalityofthose legal forms. And the rulers were, in serious senses,whetherwillinglyorunwillingly, theprisonersof theirownrhetoric; they played games of power according to ruleswhich suited them, but they could not break those rules orthewholegamewouldbethrownaway.

Throwingthegameawaywoulddestabilize thesystemandopentheway for absolutismbya subset of thebroad coalitionor even risk thereturn of the Stuarts. InThompson’swords,what inhibitedParliamentfromcreatinganewabsolutismwasthat

takeawaylaw,andtheroyalprerogative…mightfloodbackupontheirpropertiesandlives.

Moreover,

itwasinherentintheverynatureofthemediumwhichthey[those aristocrats, merchants etc. fighting the Crown] hadselected for their own self-defense that it could not bereserved for the exclusive use only of their own class. Thelaw,initsformsandtraditions,entailedprinciplesofequityanduniversalitywhich…hadtobeextendedtoallsortsanddegreesofmen.

Onceinplace,thenotionoftheruleoflawnotonlykeptabsolutismatbaybutalsocreatedatypeofvirtuouscircle:ifthelawsappliedequallyto everybody, then no individual or group, not even Cadogan orWalpole, could rise above the law, and common people accused ofencroachingonprivatepropertystillhadtherighttoafairtrial.

WESAWHOWINCLUSIVEeconomicandpoliticalinstitutionsemerge.Butwhydotheypersistovertime?ThehistoryoftheBlackActandthelimitstoitsimplementation illustrate the virtuous circle, a powerful process ofpositivefeedbackthatpreservestheseinstitutionsinthefaceofattempts

at undermining them and, in fact, sets in motion forces that lead togreaterinclusiveness.Thelogicofvirtuouscirclesstemspartlyfromthefactthatinclusiveinstitutionsarebasedonconstraintsontheexerciseofpower and on a pluralistic distribution of political power in society,enshrinedintheruleoflaw.Theabilityofasubsettoimposeitswillonotherswithoutanyconstraints,evenifthoseothersareordinarycitizens,as Huntridge was, threatens this very balance. If it were temporarilysuspended in the case of the peasants protesting against elitesencroachingontheircommunallands,whatwastheretoguaranteethatitwouldnotbesuspendedagain?Andthenext timeitwassuspended,whatwouldprevent theCrownandaristocracy from takingbackwhatthe merchants, businessmen, and the gentry had gained in theintervening half century? In fact, the next time it was suspended,perhaps the entire project of pluralism would come crumbling down,becauseanarrow setof interestswould take control at the expenseofthe broad coalition. The political systemwould not risk this. But thismadepluralism,andtheruleoflawthatitimplied,persistentfeaturesofBritishpoliticalinstitutions.Andwewillseethatoncepluralismandtherule of lawwere established, therewould be demand for even greaterpluralismandgreaterparticipationinthepoliticalprocess.Thevirtuouscirclearisesnotonlyfromtheinherentlogicofpluralism

andtheruleoflaw,butalsobecauseinclusivepoliticalinstitutionstendto support inclusive economic institutions. This then leads to a moreequal distribution of income, empowering a broad segment of societyandmakingthepoliticalplayingfieldevenmorelevel.Thislimitswhatonecanachievebyusurpingpoliticalpowerandreducestheincentivestore-createextractivepoliticalinstitutions.ThesefactorswereimportantintheemergenceoftrulydemocraticpoliticalinstitutionsinBritain.Pluralism also creates a more open system and allows independent

mediatoflourish,makingiteasierforgroupsthathaveaninterestinthecontinuation of inclusive institutions to become aware and organizeagainst threats to these institutions. It is highly significant that theEnglishstatestoppedcensoringthemediaafter1688.Themediaplayedasimilarlyimportantroleinempoweringthepopulationatlargeandinthe continuation of the virtuous circle of institutional development intheUnitedStates,aswewillseeinthischapter.While thevirtuouscirclecreatesa tendency for inclusive institutions

topersist,itisneitherinevitablenorirreversible.BothinBritainandtheUnitedStates,inclusiveeconomicandpoliticalinstitutionsweresubjectto many challenges. In 1745 the Young Pretender got all the way toDerby,amerehundredmilesfromLondon,withanarmytounseatthepolitical institutions forgedduring theGloriousRevolution.Buthewasdefeated. More important than the challenges from without werepotential challenges from within that might also have led to theunraveling of inclusive institutions. As we saw in the context of thePeterlooMassacreinManchesterin1819(thispage),andaswewillseeinmoredetailnext,Britishpoliticalelitesthoughtofusingrepressiontoavoidhavingtofurtheropenthepoliticalsystem,buttheypulledbackfromthebrink.Similarly,inclusiveeconomicandpoliticalinstitutionsintheUnitedStatesfacedseriouschallenges,whichcouldhaveconceivablysucceeded,butdidn’t.Andof course itwasnotpreordained that thesechallenges shouldbedefeated. It is due tonotonly thevirtuous circlebutalsototherealizationofthecontingentpathofhistorythatBritishand U.S. inclusive institutions survived and became substantiallystrongerovertime.

THESLOWMARCHOFDEMOCRACY

TheresponsetotheBlackActshowedordinaryBritishpeoplethattheyhadmorerights thantheypreviouslyrealized.TheycoulddefendtheirtraditionalrightsandeconomicinterestsinthecourtsandinParliamentthroughtheuseofpetitionsandlobbying.Butthispluralismhadnotyetdelivered effective democracy.Most adultmen could not vote; neithercouldwomen;andthereweremanyinequitiesintheexistingdemocraticstructures. All this was to change. The virtuous circle of inclusiveinstitutionsnotonlypreserveswhathasalreadybeenachievedbutalsoopens the door to greater inclusiveness. The odds were against theBritisheliteoftheeighteenthcenturymaintainingtheirgriponpoliticalpower without serious challenges. This elite had come to power bychallenging the divine right of kings and opening the door toparticipationbythepeopleinpolitics,butthentheygavethisrightonlytoasmallminority.Itwasonlyamatteroftimeuntilmoreandmoreofthepopulationdemandedtherighttoparticipateinthepoliticalprocess.

Andintheyearsleadingupto1831,theydid.Thefirstthreedecadesofthenineteenthcenturywitnessedincreasingsocial unrest in Britain, mostly in response to increasing economicinequities and demands from the disenfranchised masses for greaterpoliticalrepresentation.TheLudditeRiotsof1811–1816,whereworkersfoughtagainsttheintroductionofnewtechnologiestheybelievedwouldreducetheirwages,werefollowedbyriotsexplicitlydemandingpoliticalrights,theSpaFieldsRiotsof1816inLondonandthePeterlooMassacreof1819inManchester.IntheSwingRiotsof1830,agriculturalworkersprotestedagainst falling living standardsaswell as the introductionofnew technology. Meanwhile, in Paris, the July Revolution of 1830exploded. A consensus among elites was starting to form that thediscontentwas reaching theboilingpoint, and the onlyway todefusesocialunrest,andturnbackarevolution,wasbymeetingthedemandsofthemassesandundertakingparliamentaryreform.It was no surprise then that the 1831 election was mostly about asingleissue:politicalreform.TheWhigs,almostonehundredyearsafterSir RobertWalpole, were muchmore responsive to the wishes of thecommonman and campaigned to extend voting rights. But thismeantonlyasmallincreaseintheelectorate.Universalsuffrage,evenonlyformen,wasnotonthetable.TheWhigswontheelection,andtheirleader,Earl Grey, became the prime minister. Earl Grey was no radical—farfromit.HeandtheWhigspushedforreformnotbecausetheythoughtabroadervotingfranchisewasmorejustorbecausetheywantedtosharepower.Britishdemocracywasnotgivenbytheelite.Itwaslargelytakenbythemasses,whowereempoweredbythepoliticalprocessesthathadbeen ongoing in England and the rest of Britain for the last severalcenturies.Theyhadbecomeemboldenedbythechangesinthenatureofpolitical institutions unleashed by the Glorious Revolution. Reformsweregrantedbecausetheelitethoughtthatreformwastheonlywaytosecurethecontinuationoftheirrule,albeitinasomewhatlessenedform.Earl Grey, in his famous speech to Parliament in favor of politicalreform,saidthisveryclearly:

There is no-one more decided against annual Parliaments,universalsuffrageandtheballot,thanIam.Myobjectisnotto favour, but to put an end to such hopes and

projects … The principle of my reform is, to prevent thenecessity of revolution… reforming to preserve and not tooverthrow.

Themassesdidnotjustwantthevoteforitsownsakebuttohaveaseat at the table to be able to defend their interests. This was wellunderstood by the Chartist movement, which led the campaign foruniversal suffrage after1838, taking its name from its adoptionof thePeople’s Charter, named to evoke a parallel with the Magna Carta.ChartistJ.R.Stephensarticulatedwhyuniversalsuffrage,andthevoteforallcitizens,waskeyforthemasses:

The question of universal suffrage … is a knife and forkquestion, a bread and cheese question … by universalsuffrage Imean to say that everyworkingman in the landhas a right to a good coat on his back, a good hat on hishead, a good roof for the shelter of his household, a gooddinneruponhistable.

Stephens had well understood that universal suffrage was the mostdurablewayofempoweringtheBritishmassesfurtherandguaranteeingacoat,ahat,aroof,andagooddinnerfortheworkingman.Ultimately,EarlGreywas successfulboth inensuring thepassageof

the First Reform Act and in defusing the revolutionary tides withouttaking any major strides toward universal mass suffrage. The 1832reformsweremodest,onlydoublingthevotingfranchisefrom8percentto about 16 percent of the adult male population (from about 2 to 4percentofallthepopulation).TheyalsogotridofrottenboroughsandgaveindependentrepresentationtothenewindustrializingcitiessuchasManchester, Leeds, and Sheffield. But this still left many issuesunresolved.Hence therewere soon furtherdemands for greater votingrights and further social unrest. In response, further reform wouldfollow.WhydidtheBritishelitesgiveintothedemands?WhydidEarlGrey

feel that partial—indeed, very partial—reform was the only way topreservethesystem?Whydidtheyhavetoputupwiththelesserofthetwo evils, reform or revolution, rather than maintaining their power

without any reform? Couldn’t they just have done what the Spanishconquistadors did in South America, what Austria-Hungarian andRussian monarchs would do in the next several decades when thedemands for reform reached those lands, and what the BritishthemselvesdidintheCaribbeanandinIndia:useforcetoputdownthedemands?The answer to this question comes from the virtuous circle.The economic and political changes that had already taken place inBritainmadeusingforcetorepressthesedemandsbothunattractivefortheeliteandincreasinglyinfeasible.AsE.P.Thompsonwrote:

When the struggles of 1790–1832 signalled that thisequilibrium had changed, the rulers of Englandwere facedwith alarming alternatives. They could either dispensewiththe rule of law, dismantle their elaborate constitutionalstructures,countermandtheirownrhetoricandrulebyforce;or theycould submit to theirownrulesandsurrender theirhegemony…theytookhaltingstepsinthefirstdirection.Butin the end, rather than shatter their own self-image andrepudiate 150 years of constitutional legality, theysurrenderedtothelaw.

Putdifferently,thesameforcesthatmadetheBritishelitenotwishtoteardowntheedificeoftheruleoflawduringtheBlackActalsomadethem shun repression and rule by force, which would again risk thestability of the entire system. If undermining the law in trying toimplement the Black Act would have weakened the system thatmerchants, businessmen, and the gentry had built in the GloriousRevolution, setting up a repressive dictatorship in 1832 would haveentirely undermined it. In fact, the organizers of the protests forparliamentaryreformwerewellawareof the importanceof theruleoflaw and its symbolism to the British political institutions during thisperiod.Theyuseditsrhetorictobringhomethispoint.Oneofthefirstorganizations seeking parliamentary reform was called the HampdenClub, after themember of Parliamentwho had first resisted Charles Iover the shipmoney tax, a crucial event leading up to the firstmajoruprisingagainstStuartabsolutism,aswesawinchapter7.Therewasalsodynamicpositivefeedbackbetweeninclusiveeconomic

and political institutions making such a course of action attractive.Inclusive economic institutions led to the development of inclusivemarkets, inducing a more efficient allocation of resources, greaterencouragementtoacquireeducationandskills,andfurtherinnovationsin technology. All of these forces were in play in Britain by 1831.Clamping down on popular demands and undertaking a coup againstinclusive political institutions would also destroy these gains, and theelitesopposinggreaterdemocratizationandgreaterinclusivenessmightfindthemselvesamongthoselosingtheirfortunesfromthisdestruction.Another aspect of this positive feedback is that under inclusive

economic and political institutions, controlling power became lesscentral. InAustria-Hungaryand inRussia,aswesaw inchapter8, themonarchs and the aristocracy hadmuch to lose from industrializationand reform. In contrast, in Britain at the beginning of the nineteenthcentury, thanks to the development of inclusive economic institutions,there was much less at stake: there were no serfs, relatively littlecoercion in the labor market, and fewmonopolies protected by entrybarriers.Clinging topowerwas thusmuch lessvaluable for theBritishelite.The logicof thevirtuouscirclealsomeant that suchrepressivesteps

wouldbeincreasinglyinfeasible,againbecauseofthepositivefeedbackbetween inclusive economic and political institutions. Inclusiveeconomicinstitutionsleadtoamoreequitabledistributionofresourcesthanextractiveinstitutions.Assuch,theyempowerthecitizensatlargeand thus create amore level playing field, evenwhen it comes to thefightforpower.Thismakesitmoredifficultforasmallelitetocrushthemasses rather than to give in to their demands, or at least to someofthem.TheBritish inclusive institutions had also alreadyunleashed theIndustrial Revolution, and Britain was highly urbanized. Usingrepression against anurban, concentrated, andpartially organized andempowered group of people would have been much harder thanrepressingapeasantryordependentserfs.The virtuous circle thus brought the First Reform Act to Britain in

1832. But this was just the beginning. There was still a long road totraveltowardrealdemocracy,becausein1832theelitehadonlyofferedwhattheythoughttheyhadtoandnomore.TheissueofparliamentaryreformwastakenupbytheChartistmovement,whosePeople’sCharter

of1838includedtheclauses

Avoteforeverymantwenty-oneyearsofage,ofsoundmind,andnotundergoingpunishmentforcrime.Theballot.—Toprotecttheelectorintheexerciseofhisvote.No property qualification for members of Parliament—thusenablingtheconstituenciestoreturnthemanoftheirchoice,beherichorpoor.Payment of members, thus enabling an honest tradesman,workingman, or other person, to serve a constituency, whentaken from his business to attend to the interests of theCountry.EqualConstituencies,securingthesameamountofrepresentationfor the same number of electors, instead of allowing smallconstituenciestoswampthevotesoflargeones.Annual Parliaments, thus presenting themost effectual check tobriberyandintimidation,sincethoughaconstituencymightbebought once in seven years (even with the ballot), no pursecouldbuyaconstituency(underasystemofuniversalsuffrage)in each ensuing twelve-month; and since members, whenelected for ayearonly,wouldnotbeable todefy andbetraytheirconstituentsasnow.

By the “ballot,” they meant the secret ballot and the end of openvoting, which had facilitated the buying of votes and the coercion ofvoters.The Chartist movement organized a series of mass demonstrations,

and throughout this period Parliament continually discussed thepotential for further reforms. Though the Chartists disintegrated after1848, they were followed by the National Reform Union, founded in1864,andtheReformLeague,whichwasfoundedin1865.InJuly1866,majorpro-reformriotsinHydeParkbroughtreformrighttothetopofthepoliticalagendaoncemore.Thispressureboredividendsintheformof the Second Reform Act of 1867, in which the total electorate wasdoubled and working-class voters became the majority in all urbanconstituencies. Shortly afterward the secret ballot was introduced and

moves were made to eliminate corrupt electoral practices such as“treating” (essentially buying votes in exchange for which the voterreceived a treat, usuallymoney, food, or alcohol). The electorate wasdoubled again by the Third Reform Act of 1884, when 60 percent ofadult males were enfranchised. Following the First World War, theRepresentationofthePeopleActof1918gavethevotetoalladultmalesover the ageof twenty-one, and towomenover the ageof thirtywhowere taxpayers or married to taxpayers. Ultimately, all women alsoreceived thevoteon the same termsasmen in1928.Themeasuresof1918 were negotiated during the war and reflected a quid pro quobetweenthegovernmentandtheworkingclasses,whowereneededtofightandproducemunitions.ThegovernmentmayalsohavetakennoteoftheradicalismoftheRussianRevolution.Parallel with the gradual development of more inclusive political

institutions was a movement toward even more inclusive economicinstitutions. One major consequence of the First Reform Act was therepealoftheCornLawsin1846.Aswesawinchapter7,theCornLawsbanned the importofgrainsandcereals,keeping theirpriceshighandensuring lucrative profits for large landowners. The newparliamentarians fromManchesterandBirminghamwantedcheapcornand low wages. They won, and the landed interests suffered a majordefeat.The changes in the electorate and other dimensions of political

institutions taking place during the course of the nineteenth centurywere followed by further reforms. In 1871 the Liberal primeministerGladstoneopenedupthecivil service topublicexamination,making itmeritocratic, and thuscontinuing theprocessofpolitical centralizationand the building of state institutions that started during the Tudorperiod. Liberal and Tory governments during this period introduced aconsiderable amount of labor market legislation. For example, theMastersandServantsActs,whichallowedemployers touse the law toreducethemobilityoftheirworkers,wasrepealed,changingthenatureof labor relations in favor of workers. During 1906–1914, the LiberalParty, under the leadership ofH.H.Asquith andDavid LloydGeorge,began to use the state to provide far more public services, includinghealth and unemployment insurance, government-financed pensions,minimum wages, and a commitment to redistributive taxation. As a

resultof thesefiscalchanges, taxesasaproportionofnationalproductmorethandoubled in the last threedecadesof thenineteenthcentury,andthendoubledagaininthefirstthreedecadesofthetwentieth.Thetax system also became more “progressive,” so that wealthier peopleboreaheavierburden.Meanwhile, the education system, which was previously eitherprimarilyfortheelite,runbyreligiousdenominations,orrequiredpoorpeople to pay fees, was made more accessible to the masses; theEducation Act of 1870 committed the government to the systematicprovision of universal education for the first time. Education becamefreeofchargein1891.Theschool-leavingagewassetatelevenin1893.In 1899 it was increased to twelve, and special provisions for thechildrenofneedyfamilieswereintroduced.Asaresultofthesechanges,the proportion of ten-year-olds enrolled in school, which stood at adisappointing 40 percent in 1870, increased to 100 percent in 1900.Finally,theEducationActof1902ledtoalargeexpansioninresourcesfor schools and introduced the grammar schools, which subsequentlybecamethefoundationofsecondaryeducationinBritain.In fact, the British example, an illustration of the virtuous circle ofinclusiveinstitutions,providesanexampleofa“gradualvirtuouscircle.”Thepoliticalchangeswereunmistakablytowardmoreinclusivepoliticalinstitutionsandweretheresultofdemandsfromempoweredmasses.Buttheywerealsogradual.Everydecadeanother step, sometimes smaller,sometimeslarger,wastakentowarddemocracy.Therewasconflictovereach step, and the outcome of each was contingent. But the virtuouscircle created forces that reduced the stakes involved in clinging topower. It also spurred the rule of law, making it harder to use forceagainst those who were demanding what these elites had themselvesdemandedfromStuartmonarchs.Itbecamelesslikelythatthisconflictwould turn intoanall-out revolutionandmore likely that itwouldberesolved in favor of greater inclusiveness. There is great virtue in thissort of gradual change. It is less threatening to the elite than thewholesale overthrow of the system. Each step is small, and it makessense to give in to a small demand rather than create a majorshowdown.ThispartlyexplainshowtheCornLawwasrepealedwithoutmore serious conflict. By 1846 landowners could no longer controllegislationinParliament.ThiswasanoutcomeoftheFirstReformAct.

However, if in1832 theexpansionof theelectorate, the reformof therottenboroughs, and the repeal of theCorn Lawshad all beenon thetable, landowners would have put upmuchmore resistance. The factthattherewerefirstlimitedpoliticalreformsandthatrepealoftheCornLawscameontheagendaonlylaterdefusedconflict.Gradual changealsopreventedventures intouncharted territories.Aviolentoverthrowofthesystemmeansthatsomethingentirelynewhastobebuilt inplaceofwhathasbeenremoved.Thiswas thecasewiththeFrenchRevolution,whenthefirstexperimentwithdemocracyledtotheTerrorandthenbacktoamonarchytwicebeforefinallyleadingtothe French Third Republic in 1870. It was the case in the RussianRevolution,wherethedesiresofmanyforamoreequalsystemthanthatof the Russian Empire led to a one-party dictatorship that was muchmore violent, bloody, and vicious than what it had replaced. Gradualreform was difficult in these societies precisely because they lackedpluralism and were highly extractive. It was the pluralism emergingfromtheGloriousRevolution,andtheruleoflawthatitintroduced,thatmadegradualchangefeasible,anddesirable,inBritain.The conservative English commentator Edmund Burke, whosteadfastly opposed the French Revolution, wrote in 1790, “It is withinfinite caution that any man should venture upon pulling down anedifice, which has answered in any tolerable degree for ages thecommonpurposesofsociety,oronbuildingitupagainwithouthavingmodels and patterns of approved utility before his eyes.” Burke waswrongonthebigpicture.TheFrenchRevolutionhadreplacedarottenedificeandopenedthewayforinclusiveinstitutionsnotonlyinFrance,but throughoutmuch ofWestern Europe. But Burke’s cautionwas notentirely off the mark. The gradual process of British political reform,whichhadstartedin1688andwouldpickuppacethreedecadesafterBurke’sdeath,wouldbemoreeffectivebecauseitsgradualnaturemadeitmorepowerful,hardertoresist,andultimatelymoredurable.

BUSTINGTRUSTS

InclusiveinstitutionsintheUnitedStateshadtheirrootsinthestrugglesinVirginia,Maryland,andtheCarolinasduringthecolonialperiod(this

page–thispage).These institutionswere reinforcedby theConstitutionoftheUnitedStates,withitssystemofconstraintsanditsseparationofpowers.ButtheConstitutiondidnotmarktheendofthedevelopmentofinclusive institutions. Just as in Britain, these were strengthened by aprocessofpositivefeedback,basedonthevirtuouscircle.Bythemiddleofthenineteenthcentury,allwhitemales,thoughnotwomenorblacks,couldvoteintheUnitedStates.Economicinstitutionsbecamemoreinclusive—forexample,withthepassageoftheHomesteadActin1862(thispage),whichmadefrontierlandavailabletopotentialsettlersratherthanallocatingtheselandstopoliticalelites.ButjustasinBritain, challenges to inclusive institutionswere never entirely absent.TheendoftheU.S.CivilWarinitiatedarapidspurtofeconomicgrowthin the North. As railways, industry, and commerce expanded, a fewpeoplemadevastfortunes.Emboldenedbytheireconomicsuccess,thesemenandtheircompaniesbecameincreasinglyunscrupulous.TheywerecalledtheRobberBaronsbecauseoftheirhard-nosedbusinesspracticesaimed at consolidating monopolies and preventing any potentialcompetitor from entering the market or doing business on an equalfooting. One of themost notorious of these was Cornelius Vanderbilt,whofamouslyremarked,“WhatdoIcareabouttheLaw?Hain’tIgotthepower?”Another was John D. Rockefeller, who started the Standard OilCompany in 1870. He quickly eliminated rivals in Cleveland andattempted tomonopolize the transportationandretailingofoilandoilproducts.By1882hehadcreatedamassivemonopoly—inthelanguageof theday, a trust. By1890StandardOil controlled88percent of therefined oil flows in the United States, and Rockefeller became theworld’sfirstbillionairein1916.ContemporarycartoonsdepictStandardOilasanoctopuswrappingitselfaroundnotjusttheoilindustrybutalsoCapitolHill.Almost as infamous was John Pierpont Morgan, the founder of themodern banking conglomerate J.P. Morgan, which later, after manymergersoverdecades,eventuallybecameJPMorganChase.AlongwithAndrewCarnegie,MorganfoundedtheU.S.SteelCompanyin1901,thefirstcorporationwithacapitalizedvalueofmorethan$1billionandbyfarthelargeststeelcorporationintheworld. Inthe1890s, largetrustsbegan to emerge in nearly every sector of the economy, andmany of

them controlled more than 70 percent of the market in their sector.These included several household names, such as Du Pont, EastmanKodak, and International Harvester. Historically the United States, atleast the northern and midwestern United States, had relativelycompetitivemarketsandhadbeenmoreegalitarianthanotherpartsofthecountry,particularlytheSouth.Butduringthisperiod,competitiongavewaytomonopoly,andwealthinequalityrapidlyincreased.The pluralistic U.S. political system already empowered a broadsegment of society that could stand up against such encroachments.ThosewhowerethevictimsofthemonopolisticpracticesoftheRobberBarons, or who objected to their unscrupulous domination of theirindustries, began to organize against them. They formed the PopulistandthensubsequentlytheProgressivemovements.ThePopulistmovementemergedoutofalong-runningagrariancrisis,whichafflicted theMidwest fromthe late1860sonward.TheNationalGrangeof theOrder of Patrons ofHusbandry, knownas theGrangers,wasfoundedin1867andbegantomobilizefarmersagainstunfairanddiscriminatorybusinesspractices. In1873and1874, theGrangerswoncontrol of eleven midwestern state legislatures, and rural discontentculminatedintheformationofthePeople’sPartyin1892,whichgot8.5percentofthepopularvoteinthe1892presidentialelection.Inthenexttwo elections, the Populists fell in behind the two unsuccessfulDemocraticcampaignsbyWilliamJenningsBryan,whomademanyoftheir issues his own.Grass-roots opposition to the spread of the trustshad now organized to try to counteract the influence that RockefellerandotherRobberBaronswereexertingovernationalpolitics.Thesepoliticalmovementsslowlybegantohaveanimpactonpoliticalattitudesandthenonlegislation,particularlyconcerningtheroleofthestate in the regulation of monopoly. The first important piece oflegislationwastheInterstateCommerceActof1887,whichcreatedtheInterstateCommerceCommission and initiated thedevelopmentof thefederalregulationofindustry.ThiswasquicklyfollowedbytheShermanAntitrustActof1890.TheShermanAct,which is still amajorpart ofU.S. antitrust regulation, would become the basis for attacks on theRobber Barons’ trusts. Major action against the trusts came after theelectionofpresidentscommittedtoreformandtolimitingthepowerofthe Robber Barons: Theodore Roosevelt, 1901–1909; William Taft,

1909–1913;andWoodrowWilson,1913–1921.Akeypoliticalforcebehindantitrustandthemovetoimposefederal

regulation of industry was again the farm vote. Early attempts byindividual states in the1870s to regulate railroadscame from farmers’organizations. Indeed, nearly all the fifty-ninepetitions that concernedtrustssenttoCongresspriortotheenactmentoftheShermanActcamefrom farming states and emanated from organizations such as theFarmers’Union,Farmers’Alliance,Farmers’MutualBenefitAssociation,andPatronsofAnimalHusbandry.Farmersfoundacollectiveinterestinopposingthemonopolisticpracticesofindustry.FromtheashesofthePopulists,whoseriouslydeclinedafterthrowing

their weight behind the Democrats, came the Progressives, aheterogeneous reform movement concerned with many of the sameissues. The Progressivemovement initially gelled around the figure ofTeddyRoosevelt,whowasWilliamMcKinley’s vicepresident andwhoassumed the presidency following McKinley’s assassination in 1901.Prior to his rise to national office, Roosevelt had been anuncompromising governor of New York and had worked hard toeliminatepoliticalcorruptionand“machinepolitics.”InhisfirstaddresstoCongress,Rooseveltturnedhisattentiontothetrusts.Hearguedthattheprosperityof theUnitedStateswasbasedonmarket economyandtheingenuityofbusinessmen,butatthesametime,

there are real and grave evils … and a … widespreadconvictioninthemindsoftheAmericanpeoplethatthegreatcorporationsknownas trustsare incertainof their featuresand tendencies hurtful to the general welfare. This springsfromnospiritofenvyorun-charitableness,norlackofpridein the great industrial achievements that have placed thiscountryattheheadofthenationsstrugglingforcommercialsupremacy. It does not rest upon a lack of intelligentappreciation of the necessity of meeting changing andchanged conditions of trade with new methods, nor uponignoranceofthefactthatcombinationofcapitalintheeffortto accomplish great things is necessary when the world’sprogressdemandsthatgreatthingsbedone.Itisbaseduponsincereconvictionthatcombinationandconcentrationshould

be, not prohibited, but supervised and within reasonablelimitscontrolled;andinmyjudgmentthisconvictionisright.

He continued: “It should be asmuch the aimof thosewho seek forsocialbettermenttoridthebusinessworldofcrimesofcunningastoridtheentirebodypoliticofcrimesofviolence.”Hisconclusionwasthat

in the interest of the whole people, the nation should,withoutinterferingwiththepowerofthestatesinthematteritself,alsoassumepowerof supervisionandregulationoverall corporations doing an interstate business. This isespeciallytruewherethecorporationderivesaportionofitswealth from the existence of somemonopolistic element ortendencyinitsbusiness.

Roosevelt proposed that Congress establish a federal agency withpower to investigate the affairs of the great corporations and that, ifnecessary,aconstitutionalamendmentcouldbeusedtocreatesuchanagency.By1902Roosevelthadused theShermanAct tobreakup theNorthernSecuritiesCompany,affectingtheinterestsofJ.P.Morgan,andsubsequent suits had been brought against Du Pont, the AmericanTobacco Company, and the Standard Oil Company. Rooseveltstrengthened the Interstate Commerce Act with the Hepburn Act of1906, which increased the powers of the Interstate CommerceCommission,particularlyallowingittoinspectthefinancialaccountsofrailways and extending its authority into new spheres. Roosevelt’ssuccessor, William Taft, prosecuted trusts even more assiduously, thehigh point of this being the breakup of the Standard Oil Company in1911. Taft also promoted other important reforms, such as theintroductionofafederalincometax,whichcamewiththeratificationoftheSixteenthAmendmentin1913.TheapogeeofProgressivereformscamewiththeelectionofWoodrow

Wilson in 1912.Wilson noted in his 1913 book,TheNew Freedom, “Ifmonopolypersists,monopolywillalwayssitatthehelmofgovernment.Idonotexpecttoseemonopolyrestrainitself. If therearemeninthiscountrybigenoughtoownthegovernmentoftheUnitedStates,theyaregoingtoownit.”

Wilson worked to pass the Clayton Antitrust Act in 1914,strengthening the Sherman Act, and he created the Federal TradeCommission, which enforced the Clayton Act. In addition, under theimpetus of the investigation of the Pujo Committee, led by Louisianacongressman Arsene Pujo, into the “money trust,” the spread ofmonopoly into the financial industry, Wilson moved to increaseregulationofthefinancialsector.In1913hecreatedtheFederalReserveBoard, which would regulate monopolistic activities in the financialsector.The rise of Robber Barons and their monopoly trusts in the late

nineteenthandearlytwentiethcenturiesunderscoresthat,aswealreadyemphasized in chapter 3, the presence of markets is not by itself aguaranteeof inclusive institutions.Marketscanbedominatedbya fewfirms,chargingexorbitantpricesandblockingtheentryofmoreefficientrivalsandnewtechnologies.Markets,lefttotheirowndevices,canceaseto be inclusive, becoming increasingly dominated by the economicallyandpoliticallypowerful.Inclusiveeconomicinstitutionsrequirenotjustmarkets, but inclusive markets that create a level playing field andeconomic opportunities for the majority of the people. Widespreadmonopoly, backed by the political power of the elite, contradicts this.But the reaction to the monopoly trusts also illustrates that whenpolitical institutions are inclusive, they create a countervailing forceagainst movements away from inclusive markets. This is the virtuouscircle in action. Inclusive economic institutions provide foundationsuponwhich inclusivepolitical institutions can flourish,while inclusivepolitical institutions restrict deviations away from inclusive economicinstitutions. Trust busting in theUnited States, in contrast towhatwehave seen inMexico (this page–this page), illustrates this facet of thevirtuous circle. While there is no political body in Mexico restrictingCarlosSlim’smonopoly,theShermanandClaytonActshavebeenusedrepeatedly in theUnited States over thepast century to restrict trusts,monopolies,andcartels,andtoensurethatmarketsremaininclusive.The U.S. experience in the first half of the twentieth century also

emphasizes the important role of free media in empowering broadsegments of society and thus in the virtuous circle. In 1906Rooseveltcoinedthetermmuckraker,basedonaliterarycharacter,themanwiththe muckrake in Bunyan’s Pilgrim’s Progress, to describe what he

regardedasintrusivejournalism.Thetermstuckandcametosymbolizejournalists who were intrusively, but also effectively, exposing theexcesses of Robber Barons as well as corruption in local and federalpolitics. Perhaps the most famous muckraker was Ida Tarbell, whose1904 book,History of the Standard Oil Company, played a key role inmoving public opinion against Rockefeller and his business interests,culminating in the breakup of Standard Oil in 1911. Another keymuckrakerwas lawyer and author LouisBrandeis,whowould later benamedSupremeCourt justicebyPresidentWilson.Brandeisoutlinedaseries of financial scandals in his bookOther People’s Money and HowBankersUse It, andwas highly influential on thePujoCommittee. ThenewspapermagnateWilliamRandolphHearstalsoplayedasalientroleasmuckraker.HisserializationinhismagazineTheCosmopolitanin1906ofarticlesbyDavidGrahamPhillips,called“TheTreasonoftheSenate,”galvanized the campaign to introduce direct elections for the Senate,anotherkeyProgressivereformthathappenedwiththeenactmentoftheSeventeenthAmendmenttotheU.S.constitutionin1913.The muckrakers played a major role in inducing politicians to take

actionagainstthetrusts.TheRobberBaronshatedthemuckrakers,butthepoliticalinstitutionsoftheUnitedStatesmadeitimpossibleforthemto stamp out and silence them. Inclusive political institutions allow afreemedia to flourish, anda freemedia, in turn,makes itmore likelythatthreatsagainstinclusiveeconomicandpoliticalinstitutionswillbewidely known and resisted. In contrast, such freedom is impossibleunder extractive political institutions, under absolutism, or underdictatorships, which helps extractive regimes to prevent seriousoppositionfromforminginthefirstplace.Theinformationthatthefreemedia provided was clearly key during the first half of the twentiethcentury in theUnited States.Without this information, theU.S. publicwouldnothaveknown the trueextentof thepowerandabusesof theRobberBaronsandwouldnothavemobilizedagainsttheirtrusts.

PACKINGTHECOURT

Franklin D. Roosevelt, the Democratic Party candidate and cousin ofTeddyRoosevelt,waselectedpresidentin1932inthemidstoftheGreat

Depression.HecametopowerwithapopularmandatetoimplementanambitioussetofpoliciesforcombatingtheGreatDepression.Atthetimeof his inauguration in early 1933, one-quarter of the labor force wasunemployed,withmanythrownintopoverty.IndustrialproductionhadfallenbyoverhalfsincetheDepressionhitin1929,andinvestmenthadcollapsed. The policies Roosevelt proposed to counteract this situationwere collectively known as the New Deal. Roosevelt had won a solidvictory,with57percentofthepopularvote,andtheDemocraticPartyhad majorities in both the Congress and Senate, enough to pass NewDeal legislation.However, some of the legislation raised constitutionalissuesandendedup in theSupremeCourt,whereRoosevelt’selectoralmandatecutmuchlessice.One of the key pillars of the New Deal was the National Industrial

RecoveryAct.TitleIfocusedonindustrialrecovery.PresidentRooseveltand his team believed that restraining industrial competition, givingworkers greater rights to form trade unions, and regulating workingstandards were crucial to the recovery effort. Title II established thePublicWorksAdministration,whoseinfrastructureprojectsincludesuchlandmarks as the Thirtieth Street railroad station in Philadelphia, theTriboroughBridge, theGrandCouleeDam, and theOverseasHighwayconnecting KeyWest, Florida, with the mainland. President Rooseveltsigned thebill into lawon June16, 1933, and theNational IndustrialRecovery Act was put into operation. However, it immediately facedchallenges in the courts. On May 27, 1935, the Supreme Courtunanimously ruled that Title I of the act was unconstitutional. Theirverdict noted solemnly, “Extraordinary conditions may call forextraordinaryremedies.But…extraordinaryconditionsdonotcreateorenlargeconstitutionalpower.”Before the Court’s ruling came in, Roosevelt hadmoved to the next

step of his agenda and had signed the Social Security Act, whichintroducedthemodernwelfarestateintotheUnitedStates:pensionsatretirement, unemployment benefits, aid to families with dependentchildren, and some public health care and disability benefits. He alsosignedtheNationalLaborRelationsAct,whichfurtherstrengthenedtherights of workers to organize unions, engage in collective bargaining,andconductstrikesagainst theiremployers.Thesemeasuresalso facedchallenges in the Supreme Court. As these were making their way

through the judiciary, Roosevelt was reelected in 1936 with a strongmandate,receiving61percentofthepopularvote.With his popularity at record highs, Roosevelt had no intention of

lettingtheSupremeCourtderailmoreofhispolicyagenda.HelaidouthisplansinoneofhisregularFiresideChats,whichwasbroadcastliveon the radioonMarch9,1937.He startedbypointingout that inhisfirstterm,much-neededpolicieshadonlyclearedtheSupremeCourtbyawhisker.Hewenton:

I am reminded of that evening in March, four years ago,when Imademy first radio report toyou.Wewere then inthe midst of the great banking crisis. Soon after, with theauthorityof theCongress,weasked thenation to turnoverall of its privately held gold, dollar for dollar, to thegovernment of the United States. Today’s recovery proveshowrightthatpolicywas.Butwhen,almosttwoyearslater,it came before the Supreme Court its constitutionality wasupheld only by a five-to-four vote. The change of one votewould have thrown all the affairs of this great nation backinto hopeless chaos. In effect, four justices ruled that therightunderaprivatecontract toexactapoundof fleshwasmore sacred than themainobjectivesof theConstitution toestablishanenduringnation.

Obviously,thisshouldnotberiskedagain.Rooseveltcontinued:

LastThursdayIdescribedtheAmericanformofgovernmentas a three-horse team provided by the Constitution to theAmerican people so that their field might be plowed. Thethreehorsesare,ofcourse,thethreebranchesofgovernment—the Congress, the executive, and the courts. Two of thehorses,theCongressandtheexecutive,arepullinginunisontoday;thethirdisnot.

RooseveltthenpointedoutthattheU.S.Constitutionhadnotactuallyendowed the Supreme Court with the right to challenge theconstitutionalityoflegislation,butthatithadassumedthisrolein1803.

At the time, Justice Bushrod Washington had stipulated that theSupremeCourt should “presume in favor of [a law’s] validity until itsviolation of the Constitution is proved beyond all reasonable doubt.”Rooseveltthencharged:

In the last four years the sound rule of giving statutes thebenefitofallreasonabledoubthasbeencastaside.TheCourthasbeenactingnotasajudicialbody,butasapolicymakingbody.

Roosevelt claimed that he had an electoral mandate to change thissituation and that “after consideration of what reform to propose theonly method which was clearly constitutional … was to infuse newbloodintoallourcourts.”HealsoarguedthattheSupremeCourtjudgeswereoverworked,andtheloadwasjusttoomuchfortheolder justices—whohappened to be the ones strikingdownhis legislation.He thenproposedthatalljudgesshouldfacecompulsoryretirementattheageofseventyandthatheshouldbeallowedtoappointuptosixnewjustices.This plan, which Roosevelt presented as the Judiciary ReorganizationBill,wouldhavesufficedtoremovethejusticeswhohadbeenappointedearlier by more conservative administrations and who had moststrenuouslyopposedtheNewDeal.Though Roosevelt skillfully tried to win popular support for the

measure, opinion polls suggested that only about 40 percent of thepopulationwasinfavoroftheplan.LouisBrandeiswasnowaSupremeCourt justice. Though Brandeis sympathized with much of Roosevelt’slegislation,hespokeagainstthepresident’sattemptstoerodethepowerof the Supreme Court and his allegations that the justices wereoverworked.Roosevelt’sDemocraticPartyhad largemajorities inbothhouses of Congress. But the House of Representatives more or lessrefusedtodealwithRoosevelt’sbill.RooseveltthentriedtheSenate.ThebillwassenttotheSenateJudiciaryCommittee,whichthenheldhighlycontentious meetings, soliciting various opinions on the bill. TheyultimatelysentitbacktotheSenatefloorwithanegativereport,arguingthatthebillwasa“needless,futileandutterlydangerousabandonmentof constitutional principle … without precedent or justification.” TheSenatevoted70to20tosenditbacktocommitteetoberewritten.All

the “court packing” elementswere stripped away. Rooseveltwould beunable to remove the constraintsplacedonhis powerby the SupremeCourt.EventhoughRoosevelt’spowersremainedconstrained,therewerecompromises,and theSocialSecurityand theNationalLaborRelationsActswerebothruledconstitutionalbytheCourt.Moreimportantthanthefateofthesetwoactswasthegenerallesson

from this episode. Inclusive political institutions not only checkmajordeviations from inclusive economic institutions, but they also resistattemptstounderminetheirowncontinuation.Itwasintheimmediateinterestsof theDemocraticCongressandSenate topack thecourtandensurethatallNewDeallegislationsurvived.ButinthesamewaythatBritish political elites in the early eighteenth century understood thatsuspendingtheruleof lawwouldendangerthegainstheyhadwrestedfrom the monarchy, congressmen and senators understood that if thepresidentcouldunderminethe independenceof the judiciary, thenthiswould undermine the balance of power in the system that protectedthem from the president and ensured the continuity of pluralisticpoliticalinstitutions.PerhapsRooseveltwouldhavedecidednextthatobtaininglegislative

majorities took too much compromise and time and that he wouldinstead rule by decree, totally undermining pluralism and the U.S.political system.Congress certainlywould not have approved this, butthen Roosevelt could have appealed to the nation, asserting thatCongresswasimpedingthenecessarymeasurestofighttheDepression.HecouldhaveusedthepolicetocloseCongress.Soundfarfetched?ThisisexactlywhathappenedinPeruandVenezuelainthe1990s.PresidentsFujimori and Chávez appealed to their popular mandate to closeuncooperativecongressesandsubsequentlyrewrotetheirconstitutionstomassively strengthen the powers of the president. The fear of thisslippery slope by those sharing power under pluralistic politicalinstitutionsisexactlywhatstoppedWalpolefromfixingBritishcourtsinthe 1720s, and it is what stopped the U.S. Congress from backingRoosevelt’scourt-packingplan.Roosevelthadencounteredthepowerofvirtuouscircles.But this logicdoesnotalwaysplayout,particularly in societies that

may have some inclusive features but that are broadly extractive.Wehave already seen these dynamics in Rome and Venice. Another

illustrationcomesfromcomparingRoosevelt’sfailedattempttopacktheCourt with similar efforts in Argentina, where crucially the samestrugglestookplaceinthecontextofpredominantlyextractiveeconomicandpoliticalinstitutions.The 1853 constitution of Argentina created a Supreme Court with

duties similar to those of the U.S. Supreme Court. An 1887 decisionallowedtheArgentinecourttoassumethesameroleasthatoftheU.S.SupremeCourtindecidingwhetherspecificlawswereconstitutional.Intheory,theSupremeCourtcouldhavedevelopedasoneoftheimportantelements of inclusivepolitical institutions inArgentina, but the rest ofthepoliticalandeconomicsystemremainedhighlyextractive,andtherewasneitherempowermentofbroadsegmentsofsocietynorpluralisminArgentina.AsintheUnitedStates,theconstitutionalroleoftheSupremeCourt would also be challenged in Argentina. In 1946 Juan DomingoPerónwas democratically elected president of Argentina. Perónwas aformer colonel and had first come to national prominence after amilitary coup in 1943,which had appointed himminister of labor. Inthispost,hebuilt apolitical coalitionwith tradeunionsand the labormovement,whichwouldbecrucialforhispresidentialbid.Shortly after Perón’s victory, his supporters in the Chamber of

DeputiesproposedtheimpeachmentoffourofthefivemembersoftheCourt.ThechargesleveledagainsttheCourtwereseveral.Oneinvolvedunconstitutionallyacceptingthelegalityoftwomilitaryregimesin1930and1943—ratherironic,sincePerónhadplayedakeyroleinthelattercoup.Theother focusedon legislation that thecourthadstruckdown,justasitsU.S.counterparthaddone.Inparticular,justpriortoPerón’selectionaspresident,theCourthadissuedadecisionrulingthatPerón’snew national labor relations board was unconstitutional. Just asRoosevelt heavily criticized the Supreme Court in his 1936 reelectioncampaign,Peróndidthesameinhis1946campaign.Ninemonthsafterinitiatingtheimpeachmentprocess,theChamberofDeputiesimpeachedthree of the judges, the fourth having already resigned. The Senateapproved the motion. Perón then appointed four new justices. Theundermining of the Court clearly had the effect of freeing Perón frompoliticalconstraints.Hecouldnowexerciseuncheckedpower, inmuchthesamewaythemilitaryregimesinArgentinadidbeforeandafterhispresidency. His newly appointed judges, for example, ruled as

constitutional the convictionofRicardoBalbín, the leader of themainopposition party to Perón, the Radical Party, for disrespecting Perón.Peróncouldeffectivelyruleasadictator.SincePerónsuccessfullypackedtheCourt,ithasbecomethenorminArgentina for any new president to handpick his own Supreme Courtjustices. So a political institution that might have exercised someconstraints on the power of the executive is gone. Perón’s regimewasremoved frompowerbyanothercoup in1955,andwas followedbyalongsequenceoftransitionsbetweenmilitaryandcivilianrule.Bothnewmilitary and civilian regimes picked their own justices. But pickingSupreme Court justices in Argentina was not an activity confined totransitionsbetweenmilitaryandcivilianrule.In1990Argentinafinallyexperiencedatransitionbetweendemocraticallyelectedgovernments—one democratic government followed by another. Yet, by this timedemocraticgovernmentsdidnotbehavemuchdifferentlyfrommilitaryoneswhen it came to theSupremeCourt.The incomingpresidentwasCarlosSaúlMenemofthePerónistParty.ThesittingSupremeCourthadbeenappointedafterthetransitiontodemocracyin1983bytheRadicalParty president Raúl Alfonsín. Since this was a democratic transition,thereshouldhavebeennoreasonforMenemtoappointhisowncourt.Butintherun-uptotheelection,Menemhadalreadyshownhiscolors.He continually, though not successfully, tried to encourage (or evenintimidate)membersofthecourttoresign.HefamouslyofferedJusticeCarlosFaytanambassadorship.Buthewasrebuked,andFaytrespondedbysendinghimacopyofhisbookLawandEthics,withthenote“BewareIwrotethis”inscribed.Undeterred,withinthreemonthsoftakingoffice,MenemsentalawtotheChamberofDeputiesproposingtoexpandtheCourtfromfivetoninemembers.OneargumentwasthesameRooseveltused in 1937: the court was overworked. The law quickly passed theSenateandChamber,andthisallowedMenemtonamefournewjudges.Hehadhismajority.Menem’svictoryagainsttheSupremeCourtsetinmotionthetypeofslippery-slope dynamics we mentioned earlier. His next step was torewrite the constitution to remove the term limit so he could run forpresident again. After being reelected, Menem moved to rewrite theconstitution again, but was stopped not by Argentina politicalinstitutions but by factionswithin his own Perónist Party,who fought

backagainsthispersonaldomination.Since independence, Argentina has suffered from most of theinstitutional problems that have plagued Latin America. It has beentrapped in a vicious, not a virtuous, circle.As a consequence, positivedevelopments,suchasfirststepstowardthecreationofanindependentSupremeCourt,nevergainedafoothold.Withpluralism,nogroupwantsordarestooverthrowthepowerofanother,forfearthatitsownpowerwill be subsequently challenged. At the same time, the broaddistribution of power makes such an overthrow difficult. A SupremeCourt can have power if it receives significant support from broadsegmentsofsocietywillingtopushbackattemptstovitiatetheCourt’sindependence. That has been the case in the United States, but notArgentina.LegislatorstherewerehappytounderminetheCourtevenifthey anticipated that this could jeopardize their own position. Onereason is that with extractive institutions there is much to gain fromoverthrowing the SupremeCourt, and the potential benefits areworththerisks.

POSITIVEFEEDBACKANDVIRTUOUSCIRCLES

Inclusive economic and political institutions do not emerge bythemselves.Theyareoften theoutcomeof significant conflictbetweenelitesresistingeconomicgrowthandpoliticalchangeandthosewishingto limit the economic and political power of existing elites. Inclusiveinstitutionsemergeduringcriticaljunctures,suchasduringtheGloriousRevolution in England or the foundation of the Jamestown colony inNorthAmerica,whenaseriesoffactorsweakentheholdoftheelitesinpower, make their opponents stronger, and create incentives for theformation of a pluralistic society. The outcome of political conflict isnevercertain,andevenifinhindsightweseemanyhistoricaleventsasinevitable,thepathofhistoryiscontingent.Nevertheless,onceinplace,inclusive economic and political institutions tend to create a virtuouscircle, a process of positive feedback,making itmore likely that theseinstitutionswillpersistandevenexpand.Thevirtuouscircleworksthroughseveralmechanisms.First,thelogicof pluralistic political institutions makes usurpation of power by a

dictator, a faction within the government, or even a well-meaningpresidentmuchmoredifficult,asFranklinRooseveltdiscoveredwhenhetriedtoremovethechecksonhispowerimposedbytheSupremeCourt,andasSirRobertWalpolediscoveredwhenheattemptedtosummarilyimplementtheBlackAct. Inbothcases,concentratingpowerfurtherinthe hands of an individual or a narrow group would have startedunderminingthefoundationsofpluralisticpoliticalinstitutions,andthetruemeasureofpluralismispreciselyitsabilitytoresistsuchattempts.Pluralismalsoenshrinesthenotionoftheruleoflaw,theprinciplethatlaws should be applied equally to everybody—something that isnaturallyimpossibleunderanabsolutistmonarchy.Buttheruleoflaw,in turn, implies that laws cannot simply be used by one group toencroachupon the rightsofanother.What’smore, theprincipleof therule of law opens the door for greater participation in the politicalprocessandgreaterinclusivity,asitpowerfullyintroducestheideathatpeopleshouldbeequalnotonlybeforethelawbutalsointhepoliticalsystem. This was one of the principles that made it difficult for theBritishpoliticalsystemtoresisttheforcefulcallsforgreaterdemocracythroughout the nineteenth century, opening the way to the gradualextensionofthefranchisetoalladults.Second, as we have seen several times before, inclusive politicalinstitutions support and are supported by inclusive economicinstitutions. This creates another mechanism of the virtuous circle.Inclusive economic institutions remove the most egregious extractiveeconomicrelations,suchasslaveryandserfdom,reducetheimportanceofmonopolies,andcreateadynamiceconomy,allofwhichreducestheeconomic benefits that one can secure, at least in the short run, byusurping political power. Because economic institutions had alreadybecome sufficiently inclusive in Britain by the eighteenth century, theelitehadlesstogainbyclingingtopowerand,infact,muchtolosebyusing widespread repression against those demanding greaterdemocracy.Thisfacetofthevirtuouscirclemadethegradualmarchofdemocracy in nineteenth-century Britain both less threatening to theelite and more likely to succeed. This contrasts with the situation inabsolutist regimes such as the Austro-Hungarian or Russian empires,where economic institutions were still highly extractive and, inconsequence, where calls for greater political inclusion later in the

nineteenthcenturywouldbemetbyrepressionbecausetheelitehadtoomuchtolosefromsharingpower.Finally, inclusivepolitical institutionsallowa freemedia to flourish,and a free media often provides information about and mobilizesopposition to threats against inclusive institutions, as it didduring thelastquarterofthenineteenthcenturyandfirstquarterofthetwentiethcentury,whentheincreasingeconomicdominationoftheRobberBaronswas threatening the essence of inclusive economic institutions in theUnitedStates.Though the outcome of the ever-present conflicts continues to becontingent, through these mechanisms the virtuous circle creates apowerful tendency for inclusive institutions to persist, to resistchallenges, and to expand as they did in both Britain and the UnitedStates. Unfortunately, as we will see in the next chapter, extractiveinstitutions create equally strong forces toward their persistence—theprocessoftheviciouscircle.

12.

THEVICIOUSCIRCLE

YOUCAN’TTAKETHETRAINTOBOANYMORE

ALLOFTHEWESTAFRICANnationofSierraLeonebecameaBritishcolonyin1896.Thecapitalcity,Freetown,hadoriginallybeenfoundedinthelateeighteenthcenturyasahomeforrepatriatedandfreedslaves.ButwhenFreetownbecameaBritishcolony,theinteriorofSierraLeonewasstillmadeupofmanysmallAfricankingdoms.Gradually,inthesecondhalfof the nineteenth century, the British extended their rule into theinteriorthroughalongseriesoftreatieswithAfricanrulers.OnAugust31,1896,theBritishgovernmentdeclaredthecolonyaprotectorateonthe basis of these treaties. The British identified important rulers andgave them a new title, paramount chief. In eastern Sierra Leone, forexample, in the modern diamond-mining district of Kono, theyencountered Suluku, a powerful warrior king. King Suluku was madeParamountChief Suluku, and the chieftaincyofSandorwas createdasanadministrativeunitintheprotectorate.Though kings such as Suluku had signed treaties with a British

administrator, they had not understood that these treaties would beinterpretedascarteblanchetosetupacolony.WhentheBritishtriedtolevyahuttax—ataxoffiveshillingstoberaisedfromeveryhouse—inJanuary1898,thechiefsroseupinacivilwarthatbecameknownastheHutTaxRebellion.Itstartedinthenorth,butwasstrongestandlastedlongerinthesouth,particularlyinMendeland,dominatedbytheMendeethnicgroup.TheHutTaxRebellionwas soondefeated,but itwarnedthe British about the challenges of controlling the Sierra Leoneanhinterland. The British had already started to build a railway fromFreetown into the interior. Work began in March 1896, and the line

reached Songo Town in December 1898, in themidst of the Hut TaxRebellion.Britishparliamentarypapersfrom1904recordedthat:

In the case of the Sierra Leone Railways the NativeInsurrectionthatbrokeoutinFebruary1898hadtheeffectofcompletelystoppingtheworksanddisorganizingthestaffforsometime.Therebelsdescendedupontherailway,withtheresult that the entire staff had to be withdrawn toFreetown…Rotifunk,nowsituatedupontherailwaysat55miles from Freetown, was at that time completely in thehandsoftherebels.

In fact, Rotifunkwas not on the planned railway line in 1894. Theroute was changed after the start of the rebellion, so that instead ofgoing to the northeast, itwent south, via Rotifunk and on to Bo, intoMendeland.TheBritishwantedquickaccesstoMendeland,theheartoftherebellion,andtootherpotentiallydisruptivepartsofthehinterlandifotherrebellionsweretoflareup.WhenSierraLeonebecame independent in1961, theBritishhandedpowertoSirMiltonMargaiandhisSierraLeonePeople’sParty(SLPP),whichattractedsupportprimarilyinthesouth,particularlyMendeland,andtheeast.SirMiltonwasfollowedasprimeministerbyhisbrother,Sir Albert Margai, in 1964. In 1967 the SLPP narrowly lost a hotlycontested election to the opposition, the All People’s Congress Party(APC), ledbySiakaStevens.StevenswasaLimba, fromthenorth,andthe APC got most of their support from northern ethnic groups, theLimba,theTemne,andtheLoko.ThoughtherailwaytothesouthwasinitiallydesignedbytheBritishtoruleSierraLeone,by1967itsrolewaseconomic,transportingmostofthe country’s exports: coffee, cocoa, and diamonds. The farmers whogrew coffee and cocoawereMende, and the railwaywasMendeland’swindowtotheworld.MendelandhadvotedhugelyforAlbertMargaiinthe1967election. Stevenswasmuchmore interested inholdingon topower thanpromotingMendeland’s exports.His reasoningwas simple:whateverwasgood for theMendewasgood for theSLPP,andbad forStevens.Sohepulledup the railway line toMendeland.He thenwentahead and sold off the track and rolling stock tomake the change as

irreversibleaspossible.Now,asyoudriveoutofFreetownto theeast,you pass the dilapidated railway stations of Hastings and Waterloo.TherearenomoretrainstoBo.Ofcourse,Stevens’sdrasticactionfatallydamaged some of themost vibrant sectors of Sierra Leone’s economy.ButlikemanyofAfrica’spostindependenceleaders,whenthechoicewasbetween consolidating power and encouraging economic growth,Stevenschoseconsolidatinghispower,andheneverlookedback.Todayyoucan’ttakethetraintoBoanymore,becauselikeTsarNicholasI,whofeared that the railways would bring revolution to Russia, Stevensbelieved the railways would strengthen his opponents. Like so manyother rulers in control of extractive institutions, he was afraid ofchallenges tohispoliticalpowerandwaswilling to sacrificeeconomicgrowthtothwartthosechallenges.Stevens’sstrategyatfirstglancecontrastswiththatoftheBritish.Butinfact,therewasasignificantamountofcontinuitybetweenBritishruleandStevens’sregimethatillustratesthelogicofviciouscircles.StevensruledSierraLeonebyextractingresourcesfromitspeopleusingsimilarmethods. He was still in power in 1985 not because he had beenpopularly reelected, but because after 1967 he set up a violentdictatorship, killing and harassing his political opponents, particularlythemembersoftheSLPP.Hemadehimselfpresidentin1971,andafter1978,SierraLeonehadonlyonepoliticalparty,Stevens’sAPC.Stevensthus successfully consolidated his power, even if the cost wasimpoverishingmuchofthehinterland.Duringthecolonialperiod,theBritishusedasystemofindirectruletogovernSierraLeone,astheydidwithmostoftheirAfricancolonies.Atthebaseofthissystemweretheparamountchiefs,whocollectedtaxes,distributedjustice,andkeptorder.TheBritishdealtwiththecocoaandcoffeefarmersnotbyisolatingthem,butbyforcingthemtosellalltheirproduce to a marketing board developed by the colonial officepurportedly to help the farmers. Prices for agricultural commoditiesfluctuatedwildlyovertime.Cocoapricesmightbehighoneyearbutlowthenext.Theincomesoffarmersfluctuatedintandem.Thejustificationformarketingboardswas that they,not the farmers,wouldabsorb theprice fluctuations.Whenworldpriceswerehigh, theboardwouldpaythe farmers inSierraLeone less than theworldprice, butwhenworldpriceswere low, theywoulddotheopposite. It seemedagoodidea in

principle. The reality was very different, however. The Sierra LeoneProduce Marketing Board was set up in 1949. Of course the boardneededasourceofrevenuestofunction.Thenaturalwaytoattainthesewasbypaying farmers justa little less than theyshouldhavereceivedeitheringoodorbadyears.Thesefundscouldthenbeusedforoverheadexpenditures andadministration. Soon the little lessbecamea lot less.The colonial statewas using themarketing board as away of heavilytaxingfarmers.Many expected the worst practices of colonial rule in sub-Saharan

Africa to stop after independence, and the use ofmarketing boards toexcessivelytaxfarmerstocometoanend.Butneitherhappened.Infact,theextractionoffarmersusingmarketingboardsgotmuchworse.Bythemid-1960s, the farmersofpalmkernelsweregetting56percentof theworldprice from themarketingboard; cocoa farmers, 48percent; andcoffee farmers, 49 percent. By the time Stevens left office in 1985,resigningtoallowhishandpickedsuccessor,JosephMomoh,tobecomepresident, thesenumberswere37,19,and27percent, respectively.Aspitiful as this might sound, it was better than what the farmers weregetting during Stevens’s reign, which had often been as low as 10percent—thatis,90percentoftheincomeofthefarmerswasextractedby Stevens’s government, and not to provide public services, such asroads or education, but to enrich himself and his cronies and to buypoliticalsupport.Aspartof their indirect rule, theBritishhadalso stipulated that the

officeoftheparamountchiefwouldbeheldforlife.Tobeeligibletobea chief, one had to be amember of a recognized “ruling house.” Theidentityoftherulinghousesinachieftaincydevelopedovertime,butitwasessentiallybasedonthelineageofthekingsinaparticularareaandof the elite families who signed treaties with the British in the latenineteenthcentury.Chiefswereelected,butnotdemocratically.AbodycalledtheTribalAuthority,whosememberswerelesservillagechiefsorwere appointed by paramount chiefs, village chiefs, or the Britishauthorities,decidedwhowouldbecometheparamountchief.Onemighthave imagined that this colonial institution would also have beenabolished or at least reformed after independence. But just like themarketing board, it was not, and continued unchanged. Todayparamountchiefsarestillinchargeofcollectingtaxes.Itisnolongera

huttax,butitsclosedescendant,apolltax.In2005theTribalAuthorityin Sandor elected a new paramount chief. Only candidates from theFasulukurulinghouse,whichistheonlyrulinghouse,couldstand.ThevictorwasShekuFasuluku,KingSuluku’sgreat-great-grandson.Thebehaviorof themarketingboardsand the traditional systemsoflandownershipgoalongwaytoexplainwhyagriculturalproductivityisso low in Sierra Leone andmuch of sub-Saharan Africa. The politicalscientistRobertBatessetoutinthe1980stounderstandwhyagriculturewas so unproductive in Africa even though according to textbookeconomics thisought tohavebeen themostdynamiceconomic sector.He realized that thishadnothing todowithgeographyor the sortsoffactors discussed in chapter 2 that have been claimed to makeagriculturalproductivityintrinsicallylow.Rather,itwassimplybecausethepricingpoliciesofthemarketingboardsremovedanyincentivesforthefarmerstoinvest,usefertilizers,orpreservethesoil.The reason that the policies of the marketing boards were sounfavorable to rural interests was that these interests had no politicalpower.Thesepricingpoliciesinteractedwithotherfundamentalfactorsmaking tenure insecure, further undermining investment incentives. InSierra Leone, paramount chiefs not only provide law and order andjudicialservices,andraisetaxes,buttheyarealsothe“custodiansoftheland.” Though families, clans, and dynasties have user rights andtraditionalrightstoland;attheendofthedaychiefshavethelastsayonwhofarmswhere.Yourpropertyrightstolandareonlysecureifyouare connected to the chief, perhaps from the same ruling family. Landcannotbeboughtorsoldorusedascollateralforaloan,andifyouarebornoutsideachieftaincy,youcannotplantanyperennialcropsuchascoffee,cocoa,orpalmfor fear that thiswillallowyoutoestablish“defacto”propertyrights.The contrast between the extractive institutions developed by theBritish in Sierra Leone and the inclusive institutions that developed inother colonies, such as Australia, is illustrated by the way mineralresourcesweremanaged.DiamondswerediscoveredinKonoineasternSierraLeoneinJanuary1930.Thediamondswerealluvial,thatis,notindeepmines.Sotheprimarymethodofminingthemwasbypanninginrivers.Somesocialscientistscallthese“democraticdiamonds,”becausethey allow many people to become involved in mining, creating a

potentially inclusive opportunity. Not so in Sierra Leone. Happilyignoring the intrinsically democratic nature of panning for diamonds,the British government set up amonopoly for the entire protectorate,calledittheSierraLeoneSelectionTrust,andgrantedittoDeBeers,thegiant South African diamondmining company. In 1936 De Beers wasalso given the right to create theDiamondProtection Force, a privatearmythatwouldbecomelargerthanthatofthecolonialgovernmentinSierra Leone. Even so, the widespread availability of the alluvialdiamonds made the situation difficult to police. By the 1950s, theDiamond Protection Force was overwhelmed by thousands of illegaldiamondminers, a massive source of conflict and chaos. In 1955 theBritish government opened up some of the diamond fields to licenseddiggers outside the Sierra Leone Selection Trust, though the companystill kept the richest areas in Yengema and Koidu and Tongo Fields.Things only got worse after independence. In 1970 Siaka Stevenseffectively nationalized the Sierra Leone Selection Trust, creating theNationalDiamondMiningCompany(SierraLeone)Limited,inwhichthegovernment, effectivelymeaning Stevens, had a51percent stake.ThiswastheopeningphaseofStevens’splantotakeoverdiamondmininginthecountry.Innineteenth-centuryAustraliaitwasgold,discoveredin1851inNew

SouthWalesandthenewlycreatedstateofVictoria,notdiamonds,thatattractedeveryone’sattention.Likediamonds inSierraLeone, thegoldwas alluvial, and a decision had to bemade about how to exploit it.Some,suchasJamesMacarthur,sonofJohnMacarthur,theprominentleader of the Squatters we discussed earlier (this page–this page),proposed that fences be placed around the mining areas and themonopolyrightsauctionedoff.TheywantedanAustralianversionoftheSierraLeoneSelectionTrust.YetmanyinAustraliawantedfreeaccesstothegoldminingareas.Theinclusivemodelwon,andinsteadofsettingup a monopoly, Australian authorities allowed anyone who paid anannualmininglicensefeetosearchanddigforgold.Soonthediggers,asthese adventurers came to be known, were a powerful force inAustralian politics, particularly in Victoria. They played an importantroleinpushingforwardtheagendaofuniversalsuffrageandthesecretballot.We have already seen two pernicious effects of European expansion

and colonial rule in Africa: the introduction of the transatlantic slavetrade, which encouraged the development of African political andeconomicinstitutionsinanextractivedirection,andtheuseofcoloniallegislation and institutions to eliminate the development of Africancommercial agriculture that might have competed with Europeans.SlaverywascertainlyaforceinSierraLeone.Atthetimeofcolonizationtherewas no strong centralized state in the interior, justmany small,mutually antagonistic kingdoms continually raiding one another andcapturing one another’s men and women. Slavery was endemic, withpossibly 50 percent of the population working as slaves. The diseaseenvironmentmeantthatlarge-scalewhitesettlementwasnotpossibleinSierra Leone, as it was in South Africa. Hence there were no whitescompetingwith theAfricans.Moreover, the lackof amining economyon the scale of Johannesburg meant that, in addition to the lack ofdemand forAfrican labor fromwhite farms, therewasno incentive tocreate the extractive labor market institutions so characteristic ofApartheidSouthAfrica.But other mechanisms were also in play. Sierra Leone’s cocoa and

coffeefarmersdidnotcompetewithwhites,thoughtheirincomeswerestill expropriated via a government monopoly, the marketing board.Sierra Leone also suffered from indirect rule. In many parts of Africawhere the British authorities wished to use indirect rule, they foundpeopleswhodidnothaveasystemofcentralizedauthoritywhocouldbetaken over. For example, in eastern Nigeria the Igbo peoples had nochiefswhentheBritishencounteredtheminthenineteenthcentury.TheBritish then created chiefs, the warrant chiefs. In Sierra Leone, theBritishwouldbase indirect ruleonexisting indigenous institutionsandsystemsofauthority.Nevertheless, regardless of the historical basis for the individuals

recognized as paramount chiefs in 1896, indirect rule, and thepowersthat it invested in paramount chiefs, completely changed the existingpolitics of Sierra Leone. For one, it introduced a system of socialstratification—therulinghouses—wherenonehadexistedpreviously.Ahereditary aristocracy replaced a situation that had been much morefluid and where chiefs had required popular support. Instead whatemergedwasarigidsystemwithchiefsholdingofficeforlife,beholdento theirpatrons inFreetownorBritain,and far lessaccountable to the

peopletheyruled.TheBritishwerehappytosubverttheinstitutionsinotherways,too,forexample,byreplacinglegitimatechiefswithpeoplewhoweremorecooperative.Indeed,theMargaifamily,whichsuppliedthe first two prime ministers of independent Sierra Leone, came topower in theLowerBantachieftaincyby sidingwith theBritish in theHut Tax Rebellion against the reigning chief, Nyama. Nyama wasdeposed, and the Margais became chiefs and held the position until2010.What is remarkable is the extentof continuitybetween colonial andindependentSierraLeone.TheBritishcreatedthemarketingboardsandused them to tax farmers. Postcolonial governments did the sameextractingatevenhigherrates.TheBritishcreatedthesystemofindirectrule through paramount chiefs. Governments that followedindependencedidn’t reject this colonial institution; rather, theyused itto govern the countryside as well. The British set up a diamondmonopoly and tried to keep out African miners. Postindependencegovernments did the same. It is true that the British thought thatbuilding railways was a good way to rule Mendeland, while SiakaStevens thought the opposite. The British could trust their army andknewitcouldbesenttoMendelandifarebellionarose.Stevens,ontheotherhand,couldnotdoso.AsinmanyotherAfricannations,astrongarmy would have become a threat to Stevens’s rule. It was for thisreason that he emasculated the army, cutting it down and privatizingviolencethroughspeciallycreatedparamilitaryunits loyalonlytohim,andintheprocess,heacceleratedthedeclineofthelittlestateauthoritythatexistedinSierraLeone.Insteadofthearmy,firstcametheInternalSecurityUnit,theISU,whichSierraLeone’slong-sufferingpeopleknewas“IShootU.”ThencametheSpecialSecurityDivision,theSSD,whichthepeopleknewas“SiakaStevens’sDogs.”Intheend,theabsenceofanarmysupportingtheregimewouldalsobeitsundoing.Itwasagroupofonly thirty soldiers, ledbyCaptainValentineStrasser, thatpitched theAPCregimefrompoweronApril29,1992.SierraLeone’sdevelopment,orlackthereof,couldbebestunderstoodas the outcome of the vicious circle. British colonial authorities builtextractive institutions in the first place, and the postindependenceAfrican politicians were only too happy to take up the baton forthemselves.Thepatternwas eerily similar all over sub-SaharanAfrica.

Thereweresimilarhopes forpostindependenceGhana,Kenya,Zambia,and many other African countries. Yet in all these cases, extractiveinstitutionswerere-createdinapatternpredictedbytheviciouscircle—onlytheybecamemoreviciousas timewentby. Inall thesecountries,forexample, theBritishcreationofmarketingboardsand indirect ruleweresustained.There are natural reasons for this vicious circle. Extractive politicalinstitutionsleadtoextractiveeconomicinstitutions,whichenrichafewat theexpenseofmany.Thosewhobenefit fromextractive institutionsthushavetheresourcestobuildtheir(private)armiesandmercenaries,to buy their judges, and to rig their elections in order to remain inpower.Theyalsohaveeveryinterestindefendingthesystem.Therefore,extractive economic institutions create the platform for extractivepolitical institutions to persist. Power is valuable in regimes withextractivepolitical institutions,becausepower isuncheckedandbringseconomicriches.Extractivepolitical institutionsalsoprovidenochecksagainstabusesof power. Whether power corrupts is debatable, but Lord Acton wascertainlyrightwhenhearguedthatabsolutepowercorruptsabsolutely.We saw in the previous chapter that even when Franklin Rooseveltwishedtousehispresidentialpowersinawaythathethoughtwouldbebeneficialforthesociety,unencumberedbyconstraintsimposedbytheSupreme Court, the inclusive U.S. political institutions prevented himfrom setting aside the constraints on his power. Under extractivepolitical institutions, there is littlecheckagainst theexerciseofpower,howeverdistortedandsociopathicitmaybecome.In1980SamBangura,then the governor of the central bank in Sierra Leone, criticized SiakaStevens’s policies for being profligate. He was soon murdered andthrown from the top floor of the central bank building onto the aptlynamed Siaka Stevens Street. Extractive political institutions thus alsotend to create a vicious circle because theyprovideno lineof defenseagainst thosewhowant to furtherusurpandmisuse thepowersof thestate.Yet another mechanism for the vicious circle is that extractiveinstitutions, by creating unconstrained power and great incomeinequality, increase the potential stakes of the political game. Becausewhoever controls the state becomes the beneficiary of this excessive

power and the wealth that it generates, extractive institutions createincentives for infighting in order to control power and its benefits, adynamic that we saw played out in Maya city-states and in AncientRome.Inthislight,itisnosurprisethattheextractiveinstitutionsthatmany African countries inherited from the colonial powers sowed theseedsofpowerstrugglesandcivilwars.Thesestruggleswouldbeverydifferent conflicts from the English Civil War and the GloriousRevolution. Theywould not be fought to change political institutions,introduceconstraintsontheexerciseofpower,orcreatepluralism,butto capture power and enrich one group at the expense of the rest. InAngola,Burundi,Chad,Côted’Ivoire,theDemocraticRepublicofCongo,Ethiopia,Liberia,Mozambique,Nigeria,RepublicofCongoBrazzaville,Rwanda,Somalia,Sudan,andUganda,andofcourseinSierraLeone,aswewillseeinmoredetailinthenextchapter,theseconflictswouldturnintobloodycivilwarsandwouldcreateeconomicruinandunparalleledhumansuffering—aswellascausestatefailure.

FROMENCOMIENDATOLANDGRAB

On January 14, 1993, Ramiro De León Carpio was sworn in as thepresident of Guatemala. He named Richard Aitkenhead Castillo as hisminister of finance, and Ricardo Castillo Sinibaldi as his minister ofdevelopment.These threemenallhad something incommon:allweredirect descendants of Spanish conquistadors who had come toGuatemalaintheearlysixteenthcentury.DeLeón’sillustriousancestorwas JuanDe LeónCardona,while theCastilloswere related toBernalDíazdelCastillo,amanwhowroteoneofthemostfamouseyewitnessaccountsoftheconquestofMexico.InrewardforhisservicetoHernánCortés, Díaz del Castillo was appointed governor of Santiago de losCaballeros, which is today the city of Antigua in Guatemala. BothCastilloandDeLeónfoundeddynastiesalongwithotherconquistadors,such as Pedro de Alvarado. The Guatemalan sociologist Marta CasaúsArzú identified a core group of twenty-two families inGuatemala thathadtiesthroughmarriagetoanothertwenty-sixfamiliesjustoutsidethecore.Hergenealogicalandpolitical studysuggested that these familieshavecontrolledeconomicandpoliticalpowerinGuatemalasince1531.

An even broader definition of which families were part of this elitesuggestedthattheyaccountedforjustover1percentofthepopulationinthe1990s.InSierraLeoneandinmuchofsub-SaharanAfrica,theviciouscircle

took the form of the extractive institutions set up by colonial powersbeingtakenoverbypostindependenceleaders.InGuatemala,asinmuchofCentralAmerica,we see a simpler,more naked formof the viciouscircle: those who have economic and political power structureinstitutionstoensurethecontinuityoftheirpower,andsucceedindoingso. This type of vicious circle leads to the persistence of extractiveinstitutionsandthepersistenceofthesameelitesinpowertogetherwiththepersistenceofunderdevelopment.Atthetimeoftheconquest,Guatemalawasdenselysettled,probably

withapopulationofaroundtwomillionMayas.DiseaseandexploitationtookaheavytollaseverywhereelseintheAmericas.Itwasnotuntilthe1920sthatitstotalpopulationreturnedtothislevel.AselsewhereintheSpanishEmpire, the indigenouspeoplewereallocated toconquistadorsingrantsofencomienda.AswesawinthecontextofthecolonizationofMexico and Peru, the encomiendawas a systemof forced labor,whichsubsequentlygavewaytoothersimilarcoerciveinstitutions,particularlytotherepartimiento,alsocalledthemandamientoinGuatemala.Theelite,madeupof thedescendantsof theconquistadorsand some indigenouselements,notonlybenefited fromthevarious forced laborsystemsbutalsocontrolledandmonopolizedtradethroughamerchantguildcalledtheConsuladodeComercio.Most of the population inGuatemalawashigh in themountains and far from the coast.Thehigh transportationcosts reduced theextentof theexporteconomy,and initially landwasnot very valuable. Much of it was still in the hands of indigenouspeoples, who had large communal landholdings called ejidos. Theremainder was largely unoccupied and notionally owned by thegovernment. There was more money in controlling and taxing trade,suchasitwas,thanincontrollingtheland.JustasinMexico,theGuatemalaneliteviewedtheCadizConstitution

(thispage–thispage)withhostility,which encouraged them todeclareindependence just as the Mexican elites did. Following a brief unionwith Mexico and the Central American Federation, the colonial eliteruledGuatemalaunderthedictatorshipofRafaelCarrerafrom1839to

1871.During thisperiod thedescendantsof the conquistadorsand theindigenous elitemaintained the extractive economic institutions of thecolonialeralargelyunchanged.EventheorganizationoftheConsuladodidnotalterwithindependence.Thoughthiswasaroyalinstitution,ithappilycontinuedunderarepublicangovernment.Independence thenwas simply a coup by the preexisting local elite,

justasinMexico;theycarriedonasusualwiththeextractiveeconomicinstitutionsfromwhichtheyhadbenefitedsomuch.Ironicallyenough,during this period the Consulado remained in charge of the economicdevelopmentofthecountry.Butashadbeenthecasepre-independence,theConsuladohad itsown interestsatheart,not thoseof thecountry.Partofitsresponsibilitywasforthedevelopmentofinfrastructure,suchasportsandroads,butasinAustria-Hungary,Russia,andSierraLeone,this often threatened creative destruction and could have destabilizedthe system. Therefore, the development of infrastructure, rather thanbeingimplemented,wasoftenresisted.Forexample,thedevelopmentofaportontheSuchitepéquezcoast,borderingthePacificOcean,wasoneoftheproposedprojects.AtthetimetheonlyproperportswereontheCaribbean coast, and these were controlled by the Consulado. TheConsuladodidnothingonthePacificsidebecauseaportinthatregionwouldhaveprovidedamucheasieroutletforgoodsfromthehighlandtowns of Mazatenango and Quezaltenango, and access to a differentmarket for these goods would have undermined the Consulado’smonopoly on foreign trade. The same logic applied to roads, where,again, the Consulado had the responsibility for the entire country.Predictablyitalsorefusedtobuildroadsthatwouldhavestrengthenedcompeting groups or would have potentially undone its monopoly.Pressure to do so again came from western Guatemala andQuezaltenango,intheLosAltosregion.ButiftheroadbetweenLosAltosandtheSuchitepéquezcoasthadbeenimproved,thiscouldhavecreatedamerchantclass,whichwouldhavebeenacompetitortotheConsuladomerchantsinthecapital.Theroaddidnotgetimproved.Asa resultof this elitedominance,Guatemalawas caught ina time

warp in themiddleof thenineteenth century, as the restof theworldwas changing rapidly. But these changes would ultimately affectGuatemala. Transportation costs were falling due to technologicalinnovationssuchasthesteamtrain,therailways,andnew,muchfaster

typesofships.Moreover,therisingincomesofpeopleinWesternEuropeandNorthAmericawerecreatingamassdemandformanyproductsthatacountrysuchasGuatemalacouldpotentiallyproduce.Early in the century, some indigo and then cochineal, both natural

dyes,hadbeenproducedforexport,butthemoreprofitableopportunitywouldbecomecoffeeproduction.Guatemalahada lotof land suitableforcoffee,andcultivationbegantospread—withoutanyassistancefromtheConsulado.Astheworldpriceofcoffeeroseandinternationaltradeexpanded,therewerehugeprofitstobemade,andtheGuatemalanelitebecame interested in coffee. In 1871 the long-lasting regime of thedictator Carrera was finally overthrown by a group of people callingthemselvesLiberals,aftertheworldwidemovementofthatname.Whatliberalismmeanshaschangedover time.But in thenineteenthcenturyin theUnitedStatesandEurope, itwassimilar towhat is todaycalledlibertarianism, and it stood for freedom of individuals, limitedgovernment, and free trade. Things worked a little differently inGuatemala.LedinitiallybyMiguelGarcíaGranados,andafter1873byJustoRufinoBarrios, theGuatemalanLiberalswere, for themostpart,not new men with liberal ideals. By and large, the same familiesremainedincharge.Theymaintainedextractivepoliticalinstitutionsandimplemented a huge reorganization of the economy to exploit coffee.They did abolish the Consulado in 1871, but economic circumstanceshad changed.The focusof extractive economic institutionswouldnowbetheproductionandexportofcoffee.Coffee production needed land and labor. To create land for coffee

farms, the Liberals pushed through land privatization, in fact really alandgrabinwhichtheywouldbeabletocapturelandpreviouslyheldcommunally or by the government. Though their attemptwas bitterlycontested, given the highly extractive political institutions and theconcentrationofpoliticalpowerinGuatemala,theelitewereultimatelyvictorious. Between 1871 and 1883 nearly one million acres of land,mostly indigenous communal land and frontier lands, passed into thehandsof the elite, and itwasonly then that coffeedeveloped rapidly.The aimwas the formationof large estates. Theprivatized landswereauctioned off typically to members of the traditional elite or thoseconnectedwiththem.ThecoercivepoweroftheLiberalstatewasthenused to help large landowners gain access to labor by adapting and

intensifying various systems of forced labor. In November 1876,PresidentBarrioswrotetoallthegovernorsofGuatemalanotingthat

becausethecountryhasextensiveareasoflandthatitneedstoexploitbycultivationusingthemultitudeofworkerswhotoday remain outside themovement of development of thenation’s productive elements, you are to give all help toexportagriculture:1. From the Indian towns of your jurisdiction provide to

theownersoffincas[farms]ofthatdepartmentwhoaskforlabor the number of workers they need, be it fifty or onehundred.

The repartimiento, the forced labor draft, had never been abolishedafter independence,butnowitwas increased inscopeandduration. Itwas institutionalized in 1877 by Decree 177, which specified thatemployers could request and receive from the government up to sixtyworkers for fifteen days of work if the property was in the samedepartment,andforthirtydaysifitwasoutsideit.Therequestcouldberenewed if the employer so desired. These workers could be forciblyrecruitedunless they could demonstrate from their personalworkbookthat such service had recently been performed satisfactorily. All ruralworkers were also forced to carry a workbook, called a libreta,whichincluded details of whom they were working for and a record of anydebts. Many rural workers were indebted to their employers, and anindebted worker could not leave his current employer withoutpermission. Decree 177 further stipulated that the only way to avoidbeingdrafted into the repartimientowas to showyouwere currently indebt toanemployer.Workerswere trapped. Inaddition to these laws,numerous vagrancy laws were passed so that anyone who could notprovehehadajobwouldbeimmediatelyrecruitedfortherepartimientoorothertypesofforcedlaborontheroads,orwouldbeforcedtoacceptemployment on a farm.As in nineteenth- and twentieth-century SouthAfrica, land policies after 1871 were also designed to undermine thesubsistence economyof the indigenouspeoples, to force them toworkforlowwages.Therepartimientolasteduntilthe1920s;thelibretasystemand the full gamut of vagrancy laws were in effect until 1945, when

Guatemalaexperienceditsfirstbrieffloweringofdemocracy.Just as before 1871, the Guatemalan elite ruled via militarystrongmen.Theycontinuedtodosoafterthecoffeeboomtookoff.JorgeUbico,presidentbetween1931and1944,ruledlongest.Ubicowonthepresidential election in 1931 unopposed, since nobody was foolishenough to run against him. Like the Consulado, he didn’t approve ofdoing things that would have induced creative destruction andthreatened both his political power and his and the elite’s profits. HethereforeopposedindustryforthesamereasonthatFrancisIinAustria-Hungary and Nicholas I in Russia did: industrial workers would havecaused trouble. In a legislation unparalleled in its paranoidrepressiveness,Ubicobannedtheuseofwordssuchasobreros(workers),sindicatos (labor unions), and huelgas (strikes). You could be jailed forusinganyoneofthem.EventhoughUbicowaspowerful,theelitepulledthe strings. Opposition to his regime mounted in 1944, headed bydisaffected university students who began to organize demonstrations.Populardiscontentincreased,andonJune24,311people,manyofthemfrom the elite, signed the Memorial de los 311, an open letterdenouncing the regime. Ubico resigned on July 1. Though he wasfollowed by a democratic regime in 1945, this was overthrown by acoupin1954,leadingtoamurderouscivilwar.Guatemalademocratizedagainafteronly1986.The Spanish conquistadors had no compunction about setting up anextractivepoliticalandeconomicsystem.Thatwaswhytheyhadcomeall theway to theNewWorld.Butmostof the institutions theysetupwere meant to be temporary. The encomienda, for example, was atemporarygrantofrightsoverlabor.Theydidnothaveafullyworked-out plan of how they would set up a system that would persist foranotherfourhundredyears.Infact,theinstitutionstheysetupchangedsignificantlyalongtheway,butonethingdidnot:theextractivenatureoftheinstitutions,theresultoftheviciouscircle.Theformofextractionchanged, but neither the extractive nature of the institutions nor theidentityoftheelitedid.InGuatemalatheencomienda,therepartimiento,and themonopolization of trade gaveway to the libreta and the landgrab.ButthemajorityoftheindigenousMayacontinuedtoworkaslow-wagelaborerswithlittleeducation,norights,andnopublicservices.InGuatemala,as inmuchofCentralAmerica, ina typicalpatternof

the vicious circle, extractive political institutions supported extractiveeconomic institutions, which in turn provided the basis for extractivepoliticalinstitutionsandthecontinuationofthepowerofthesameelite.

FROMSLAVERYTOJIMCROW

InGuatemala, extractive institutionspersisted fromcolonial tomoderntimeswith the same elite firmly in control.Any change in institutionsresulted from adaptations to changing environments, as was the casewith the land grab by the elite motivated by the coffee boom. Theinstitutions in the U.S. South were similarly extractive until the CivilWar. Economics and politics were dominated by the southern elite,plantationownerswithlargelandandslaveholdings.Slaveshadneitherpoliticalnoreconomicrights;indeed,theyhadfewrightsofanykind.The South’s extractive economic and political institutions made itconsiderably poorer than the North by the middle of the nineteenthcentury.TheSouthlackedindustryandmaderelativelylittleinvestmentin infrastructure. In 1860 its totalmanufacturing outputwas less thanthatofPennsylvania,NewYork,orMassachusetts.Only9percentofthesouthernpopulationlivedinurbanareas,comparedwith35percent intheNortheast. The density of railroads (i.e.,miles of track divided bylandarea)wasthreetimeshigherintheNorththaninsouthernstates.Theratioofcanalmileagewassimilar.Map 18 (this page) shows the extent of slavery by plotting thepercentage of the population that were slaves across U.S. counties in1840.It isapparentthatslaverywasdominantintheSouthwithsomecounties,forexample,alongtheMississippiRiverhavingasmuchas95percentofthepopulationslaves.Map19(thispage)thenshowsoneofthe consequences of this, the proportion of the labor forceworking inmanufacturing in 1880. Though this was not high anywhere bytwentieth-century standards, there aremarked differences between theNorthandtheSouth.InmuchoftheNortheast,morethan10percentofthe labor force worked in manufacturing. In contrast in much of theSouth, particularly the areas with heavy concentrations of slaves, theproportionwasbasicallyzero.

The South was not even innovative in the sectors in which itspecialized:from1837to1859,thenumbersofpatentsissuedperyearfor innovations related tocornandwheatwereonaverage twelveandten,respectively;therewasjustoneperyearforthemostimportantcropoftheSouth,cotton.Therewasnoindicationthatindustrializationandeconomicgrowthwouldcommenceanytimesoon.ButdefeatintheCivilWar was followed by fundamental economic and political reform atbayonet point. Slaverywas abolished, and blackmenwere allowed tovote.These major changes should have opened the way for a radicaltransformation of southern extractive institutions into inclusive ones,andlaunchedtheSouthontoapathtoeconomicprosperity.But inyet

anothermanifestationoftheviciouscircle,nothingofthesorthappened.Acontinuationofextractiveinstitutions,thistimeoftheJimCrowkindrather than of slavery, emerged in the South. The phrase Jim Crow,which supposedly originated from “Jump Jim Crow,” an early-nineteenth-centurysatireofblackpeopleperformedbywhiteperformersin “blackface,” came to refer to the whole gamut of segregationistlegislationthatwasenactedintheSouthafter1865.Thesepersistedforalmostanothercentury,untilyetanothermajorupheaval,thecivilrightsmovement. In the meantime, blacks continued to be excluded frompower and repressed. Plantation-type agriculture based on low-wage,poorly educated labor persisted, and southern incomes fell furtherrelativetotheU.S.average.Theviciouscircleofextractiveinstitutionswasstrongerthanmanyhadexpectedatthetime.

The reason that the economic and political trajectory of the Southneverchanged,eventhoughslaverywasabolishedandblackmenweregiven the right to vote, was because blacks’ political power andeconomic independence were tenuous. The southern planters lost thewar,butwouldwin thepeace.Theywerestillorganizedand theystillowned the land. During the war, freed slaves had been offered thepromiseoffortyacresandamulewhenslaverywasabolished,andsomeevengotitduringthefamouscampaignsofGeneralWilliamT.Sherman.Butin1865,PresidentAndrewJohnsonrevokedSherman’sorders,andthehoped-for land redistributionnever tookplace. Inadebateon thisissue in Congress, Congressman George Washington Julian prescientlynoted, “Of what avail would be an act of congress totally abolishing

slavery … if the old agricultural basis of aristocratic power shallremain?”Thiswas thebeginningof the“redemption”of theoldSouthandthepersistenceoftheoldsouthernlandedelite.ThesociologistJonathanWienerstudiedthepersistenceoftheplanter

eliteinfivecountiesoftheBlackBelt,primecottoncountry,ofsouthernAlabama.Tracking families fromtheU.S.censusandconsidering thosewithatleast$10,000ofrealestate,hefoundthatofthe236membersofthe planter elite in 1850, 101 maintained their position in 1870.Interestingly, this rate of persistence was very similar to thatexperienced in thepre–CivilWarperiod; of the236wealthiest planterfamiliesof1850,only110remainedsoadecadelater.Nevertheless,ofthe25planterswith the largest landholdings in1870,18 (72percent)had been in the elite families in 1860; 16 had been in the 1850 elitegroup. While more than 600,000 were killed in the Civil War, theplanterelitessufferedfewcasualties.Thelaw,designedbytheplantersandfortheplanters,exemptedoneslaveholderfrommilitaryserviceforevery twenty slaves held. As hundreds of thousands of men died topreserve the southern plantation economy,many big slaveholders andtheirsonssatoutthewarontheirporchesandthuswereabletoensurethepersistenceoftheplantationeconomy.After theendof thewar, theeliteplanterscontrollingthe landwere

abletoreexerttheircontroloverthelaborforce.Thoughtheeconomicinstitutionof slaverywasabolished, theevidenceshowsaclear lineofpersistence in the economic system of the South based on plantation-typeagriculturewithcheaplabor.Thiseconomicsystemwasmaintainedthroughavarietyofchannels,includingbothcontroloflocalpoliticsandexercise of violence. As a consequence, in the words of the AfricanAmericanscholarW.E.B.DuBois, theSouthbecame“simplyanarmedcampforintimidatingblackfolk.”In 1865 the state legislature of Alabama passed the Black Code, an

important landmark toward the repression of black labor. Similar toDecree 177 in Guatemala, the Black Code of Alabama consisted of avagrancy law and a law against the “enticement” of laborers. It wasdesignedtoimpedelabormobilityandreducecompetitioninthelabormarket,anditensuredthatsouthernplanterswouldstillhaveareliablelow-costlaborpool.FollowingtheCivilWar,theperiodcalledReconstructionlastedfrom

1865until1877.Northernpoliticians,withthehelpoftheUnionArmy,engineeredsomesocialchangesintheSouth.Butasystematicbacklashfrom the southern elite in the guise of support for the so-calledRedeemers,seekingtheSouth’sredemption,re-createdtheoldsystem.Inthe 1877 presidential election, Rutherford Hayes needed southernsupportintheelectoralcollege.Thiscollege,stillusedtoday,wasattheheart of the indirect election for president created by the U.S.Constitution. Citizens’ votes do not directly elect the president butinstead elect electors who then choose the president in the electoralcollege. In exchange for their support in the electoral college, thesouthernersdemandedthatUnionsoldiersbewithdrawnfromtheSouthand the region left to its own devices. Hayes agreed. With southernsupport,Hayesbecamepresidentandpulledoutthetroops.Theperiodafter 1877 then marked the real reemergence of the pre–Civil Warplanterelite.Theredemptionof theSouthinvolvedthe introductionofnew poll taxes and literacy tests for voting, which systematicallydisenfranchisedblacks,andoftenalsothepoorwhitepopulation.Theseattempts succeeded and created a one-party regime under theDemocraticParty,withmuchofthepoliticalpowervestedinthehandsoftheplanterelite.TheJimCrowlawscreatedseparate,andpredictablyinferior,schools.

Alabama, forexample, rewrote itsconstitution in1901toachieve this.Shockingly,eventodaySection256ofAlabama’sconstitution,thoughnolongerenforced,stillstates:

Duty of legislature to establish and maintain public schoolsystem; apportionment of public school fund; separateschoolsforwhiteandcoloredchildren.The legislature shall establish, organize, and maintain a

liberal systemofpublic schools throughout thestate for thebenefitofthechildrenthereofbetweentheagesofsevenandtwenty-one years. The public school fund shall beapportioned to the several counties in proportion to thenumberofschoolchildrenofschoolagetherein,andshallbesoapportionedtotheschoolsinthedistrictsortownshipsinthe counties as to provide, as nearly as practicable, schooltermsofequaldurationinsuchschooldistrictsortownships.

Separate schools shall be provided for white and coloredchildren, and no child of either race shall be permitted toattendaschooloftheotherrace.

An amendment to strike Section 256 from the constitution wasnarrowlydefeatedinthestatelegislaturein2004.Disenfranchisement, the vagrancy laws such as the Black Code of

Alabama,variousJimCrowlaws,andtheactionsof theKuKluxKlan,often financed and supported by the elite, turned the post–Civil WarSouthintoaneffectiveapartheidsociety,whereblacksandwhitesliveddifferentlives.AsinSouthAfrica,theselawsandpracticeswereaimedatcontrollingtheblackpopulationanditslabor.SouthernpoliticiansinWashingtonalsoworkedtomakesurethatthe

extractive institutions of the South could persist. For instance, theyensured that no federal projects or public works that would havejeopardized southern elite control over the black workforce ever gotapproved. Consequently, the South entered the twentieth century as alargely rural society with low levels of education and backwardtechnology, still employing hand labor and mule power virtuallyunassistedbymechanical implements.Thoughtheproportionofpeopleinurbanareasincreased,itwasfarlessthanintheNorth.In1900,forexample,13.5percentofthepopulationoftheSouthwasurbanized,ascomparedwith60percentintheNortheast.All in all, the extractive institutions in the southern United States,

basedonthepowerofthelandedelite,plantationagriculture,andlow-wage, low-education labor, persisted well into the twentieth century.These institutions started to crumble only after the SecondWorldWarand then truly after the civil rights movement destroyed the politicalbasisofthesystem.Anditwasonlyafterthedemiseoftheseinstitutionsin the 1950s and ’60s that the South began its process of rapidconvergencetotheNorth.TheU.S.Southshowsanother,moreresilientsideoftheviciouscircle:

as in Guatemala, the southern planter elite remained in power andstructured economic and political institutions in order to ensure thecontinuity of its power. But differently from Guatemala, it was facedwith significant challenges after its defeat in the Civil War, whichabolished slavery and reversed the total, constitutional exclusion of

blacks from political participation. But there ismore than oneway ofskinning a cat: as long as the planter elite was in control of its hugelandholdings and remained organized, it could structure a new set ofinstitutions,JimCrowinsteadofslavery,toachievethesameobjective.The vicious circle turned out to be stronger than many, includingAbrahamLincoln,hadthought.Theviciouscircleisbasedonextractivepolitical institutionscreatingextractiveeconomic institutions,which inturn support the extractive political institutions, because economicwealthandpowerbuypoliticalpower.Whenfortyacresandamulewasoff the table, the southern planter elite’s economic power remaineduntarnished.And,unsurprisinglyandunfortunately,theimplicationsforthe black population of the South, and the South’s economicdevelopment,werethesame.

THEIRONLAWOFOLIGARCHY

TheSolomonicdynasty inEthiopia lasteduntil itwasoverthrownbyamilitarycoupin1974.ThecoupwasledbytheDerg,agroupofMarxistarmyofficers.TheregimethattheDergpitchedfrompowerlookedlikeit was frozen in some earlier century, a historical anachronism. TheemperorHaileSelassiewouldstarthisdaybyarrivinginthecourtyardattheGrandPalace,whichhadbeenbuiltbyEmperorMenelikIIinthelate nineteenth century. Outside the palace would be a crowd ofdignitariesanticipatinghisarrival,bowinganddesperatelytryingtogethisattention.TheemperorwouldholdcourtintheAudienceHall,sittingontheimperialthrone.(Selassiewasasmallman;sothathislegswerenotleftswingingintheair, itwasthejobofaspecialpillowbearertoaccompany him wherever he went to make sure there was a suitablepillowtoputunderhisfeet.Thebearerkeptastockoffifty-twopillowsto cope with any situation.) Selassie presided over an extreme set ofextractiveinstitutionsandranthecountryashisownprivateproperty,handing out favors and patronage and ruthlessly punishing lack ofloyalty. There was no economic development to speak of in EthiopiaundertheSolomonicdynasty.The Derg initially formed out of 108 representatives of different

militaryunitsfromalloverthecountry.TherepresentativeoftheThird

DivisioninHararprovincewasamajornamedMengistuHaileMariam.Though in their initial declaration of July 4, 1974, the Derg officersdeclared their loyalty to the emperor, they soon started to arrestmembers of the government, testing how much opposition it wouldcreate. As they became more confident that the support for Selassie’sregimewashollow, theymovedon theemperorhimself,arrestinghimon September 12. Then the executions began.Many politicians at thecoreof theold regimewere swiftlykilled.ByDecember, theDerghaddeclared that Ethiopia was a socialist state. Selassie died, probablymurdered, onAugust27,1975. In1975 theDerg startednationalizingproperty, includingallurbanand rural landandmostkindsofprivateproperty.Theincreasinglyauthoritarianbehavioroftheregimesparkedoppositionaroundthecountry.LargepartsofEthiopiawereputtogetherduringtheEuropeancolonialexpansioninthelatenineteenthandearlytwentiethcenturiesbythepoliciesofEmperorMenelikII, thevictorofthe battle of Adowa, which we encountered before (this page). Theseincluded Eritrea and Tigray in the north and the Ogaden in the east.Independence movements in response to the Derg’s ruthless regimeemerged in Eritrea and Tigray, while the Somali army invaded theSomali-speakingOgaden.TheDergitselfstartedtodisintegrateandsplitinto factions. Major Mengistu turned out to be the most ruthless andcleverofthem.Bymid-1977hehadeliminatedhismajoropponentsandeffectively taken chargeof the regime,whichwas saved fromcollapseonlybyahugeinfluxofweaponsandtroopsfromtheSovietUnionandCubalaterinNovemberofthatyear.In 1978 the regime organized a national celebration marking the

fourth anniversary of the overthrow of Haile Selassie. By this timeMengistuwastheunchallengedleaderoftheDerg.Ashisresidence,theplacefromwherehewouldruleEthiopia,hehadchosenSelassie’sGrandPalace, left unoccupied since the monarchy was abolished. At thecelebration,he satonagildedarmchair, just like theemperorsofold,watchingtheparade.OfficialfunctionswerenowheldonceagainattheGrand Palace, with Mengistu sitting on Haile Selassie’s old throne.Mengistu started to compare himself to Emperor Tewodros, who hadrefoundedtheSolomonicDynastyinthemid-nineteenthcenturyafteraperiodofdecline.Oneofhisministers,DawitWoldeGiorgis,recalledinhismemoir:

At the beginning of the Revolution all of us had utterlyrejected anything to dowith the past.Wewould no longerdrivecars,orwear suits;necktieswereconsideredcriminal.Anythingthatmadeyoulookwell-offorbourgeois,anythingthat smacked of affluence or sophistication,was scorned aspart of the old order. Then, around1978, all that began tochange. Gradually materialism became accepted, thenrequired. Designer clothes from the best European tailorswere the uniform of all senior government officials andmembers of the Military Council. We had the best ofeverything: thebesthomes, thebest cars, thebestwhiskey,champagne,food.ItwasacompletereversaloftheidealsoftheRevolution.

GiorgisalsovividlyrecordedhowMengistuchangedoncehebecamesoleruler:

The real Mengistu emerged: vengeful, cruel andauthoritarian…Many of us who used to talk to himwithhandsinourpockets,asifhewereoneofus,foundourselvesstanding stiffly to attention, cautiously respectful in hispresence.Inaddressinghimwehadalwaysusedthefamiliarformof“you,”ante;nowwefoundourselvesswitchingtothemore formal “you,” ersiwo. He moved into a bigger, morelavishofficeinthePalaceofMenelik…HebeganusingtheEmperor’scars…Weweresupposedtohavearevolutionofequality;nowhehadbecomethenewEmperor.

ThepatternofviciouscircledepictedbythetransitionbetweenHaileSelassie and Mengistu, or between the British colonial governors ofSierra Leone and Siaka Stevens, is so extreme and at some level sostrange that it deserves a special name. As we already mentioned inchapter4,theGermansociologistRobertMichelscalledit theironlawof oligarchy. The internal logic of oligarchies, and in fact of allhierarchical organizations, is that, arguedMichels, theywill reproducethemselvesnotonlywhenthesamegroupisinpower,butevenwhenanentirely new group takes control. What Michels did not anticipate

perhapswasanechoofKarlMarx’sremarkthathistoryrepeatsitself—thefirsttimeastragedy,thesecondtimeasfarce.It is not only that many of the postindependence leaders of Africa

moved into the same residences, made use of the same patronagenetworks, and employed the same ways of manipulating markets andextractingresourcesashadthecolonialregimesandtheemperorstheyreplaced;buttheyalsomadethingsworse.ItwasindeedafarcethatthestaunchlyanticolonialStevenswouldbeconcernedwithcontrollingthesamepeople,theMende,whomtheBritishhadsoughttocontrol;thathewould rely on the same chiefs whom the British had empowered andthenusedtocontrol thehinterland; thathewouldruntheeconomyinthe same way, expropriating the farmers with the same marketingboardsandcontrolling thediamondsundera similarmonopoly. Itwasindeed a farce, a very sad farce indeed, that Laurent Kabila, whomobilized an army against Mobutu’s dictatorship with the promise offreeingthepeopleandendingthestiflingandimpoverishingcorruptionand repression ofMobutu’s Zaire, would then set up a regime just ascorruptandperhapsevenmoredisastrous.Itwascertainlyfarcicalthathe tried to start aMobutuesque personality cult aided and abetted byDominique Sakombi Inongo, previously Mobutu’s minister ofinformation,andthatMobutu’sregimewas itself fashionedonpatternsof exploitation of the masses that had started more than a centurypreviouslywithKingLeopold’sCongoFreeState. Itwas indeeda farcethattheMarxistofficerMengistuwouldstartlivinginapalace,viewinghimselfasanemperor,andenrichinghimselfandhisentouragejustlikeHaileSelassieandotheremperorsbeforehimhaddone.Itwasallafarce,butalsomoretragicthantheoriginaltragedy,and

notonlyforthehopesthatweredashed.StevensandKabila,likemanyother rulers inAfrica,would startmurdering theiropponentsand theninnocentcitizens.MengistuandtheDerg’spolicieswouldbringrecurringfamine toEthiopia’s fertile lands.Historywas repeating itself,but inaverydistortedform.ItwasafamineinWolloprovincein1973towhichHaile Selassie was apparently indifferent that did so much finally tosolidify opposition to his regime. Selassie had at least been onlyindifferent.Mengistuinsteadsawfamineasapoliticaltooltounderminethestrengthofhisopponents.Historywasnotonly farcicalandtragic,butalsocrueltothecitizensofEthiopiaandmuchofsub-SaharanAfrica.

The essence of the iron lawof oligarchy, this particular facet of theviciouscircle, is thatnewleadersoverthrowingoldoneswithpromisesofradicalchangebringnothingbutmoreofthesame.Atsomelevel,theiron law of oligarchy is harder to understand than other forms of theviciouscircle.There isaclear logic to thepersistenceof theextractiveinstitutions in the U.S. South and in Guatemala. The same groupscontinuedtodominatetheeconomyandthepoliticsforcenturies.Evenwhenchallenged,astheU.S.southernplanterswereaftertheCivilWar,theirpowerremainedintactandtheywereabletokeepandre-createasimilar set of extractive institutions from which they would againbenefit. But how canwe understand thosewho come to power in thenameofradicalchangere-creatingthesamesystem?Theanswertothisquestion reveals, once again, that the vicious circle is stronger than itfirstappears.Notallradicalchangesaredoomedtofailure.TheGloriousRevolution

wasa radical change, and it led towhatperhaps turnedout tobe themost important political revolution of the past two millennia. TheFrenchRevolutionwasevenmoreradical,with itschaosandexcessiveviolenceandtheascentofNapoleonBonaparte,butitdidnotre-createtheancienrégime.Three factors greatly facilitated the emergence of more inclusive

political institutions following the Glorious Revolution and the FrenchRevolution. The first was newmerchants and businessmen wishing tounleash the power of creative destruction fromwhich they themselveswould benefit; these new men were among the key members of therevolutionarycoalitionsanddidnotwishtoseethedevelopmentofyetanothersetofextractiveinstitutionsthatwouldagainpreyonthem.Thesecondwasthenatureofthebroadcoalitionthathadformedin

both cases. For example, the Glorious Revolution wasn’t a coup by anarrowgrouporaspecificnarrowinterest,butamovementbackedbymerchants,industrialists,thegentry,anddiversepoliticalgroupings.ThesamewaslargelytruefortheFrenchRevolution.Thethirdfactorrelates tothehistoryofEnglishandFrenchpolitical

institutions. They created a background against which new, moreinclusiveregimescoulddevelop.Inbothcountriestherewasatraditionof parliaments and power sharing going back to the Magna Carta inEngland and to the Assembly of Notables in France. Moreover, both

revolutions happened in the midst of a process that had alreadyweakenedthegraspoftheabsolutist,oraspiringabsolutist,regimes.Inneithercasewouldthesepoliticalinstitutionsmakeiteasyforanewsetof rulers or a narrow group to take control of the state and usurpexisting economic wealth and build unchecked and durable politicalpower.IntheaftermathoftheFrenchRevolution,anarrowgroupunderthe leadership of Robespierre and Saint-Just did take control, withdisastrousconsequences,butthiswastemporaryanddidnotderail thepath toward more inclusive institutions. All this contrasts with thesituationofsocietieswithlonghistoriesofextremeextractiveeconomicandpoliticalinstitutions,andnochecksonthepowerofrulers.Inthesesocieties, there would be no new strong merchants or businessmensupportingandbankrollingtheresistanceagainsttheexistingregimeinparttosecuremoreinclusiveeconomicinstitutions;nobroadcoalitionsintroducingconstraintsagainstthepowerofeachoftheirmembers;nopolitical institutions inhibiting new rulers intent on usurping andexploitingpower.Inconsequence,inSierraLeone,Ethiopia,andtheCongo,theviciouscircle would be far harder to resist, and moves toward inclusiveinstitutions far more unlikely to get under way. There were also notraditionalorhistoricalinstitutionsthatcouldcheckthepowerofthosewho would take control of the state. Such institutions had existed insome parts of Africa, and some, as in Botswana, even survived thecolonial era. But they were much less prominent throughout SierraLeone’shistory,andtotheextentthattheyexisted,theywerewarpedbyindirectrule.ThesamewastrueinotherBritishcoloniesinAfrica,suchasKenyaandNigeria.Theynever existed in theabsolutist kingdomofEthiopia. In the Congo, indigenous institutions were emasculated byBelgiancolonialruleandtheautocraticpoliciesofMobutu.Inallthesesocieties, there were also no new merchants, businessmen, orentrepreneurs supporting the new regimes and demanding securepropertyrightsandanendtopreviousextractiveinstitutions.Infact,theextractiveeconomicinstitutionsofthecolonialperiodmeantthattherewasnotmuchentrepreneurshiporbusinessleftatall.The international community thought that postcolonial Africanindependencewouldleadtoeconomicgrowththroughaprocessofstateplanningandcultivationoftheprivatesector.Buttheprivatesectorwas

notthere—exceptinruralareas,whichhadnorepresentationinthenewgovernmentsandwouldthusbetheirfirstprey.Mostimportantperhaps,inmostofthesecasestherewereenormousbenefitsfromholdingpower.These benefits both attracted the most unscrupulous men, such asStevens,whowished tomonopolize thispower,andbrought theworstoutof themonce theywere inpower.Therewasnothing tobreak theviciouscircle.

NEGATIVEFEEDBACKANDVICIOUSCIRCLES

Richnationsarerichlargelybecausetheymanagedtodevelopinclusiveinstitutions at some point during the past three hundred years. Theseinstitutionshavepersistedthroughaprocessofvirtuouscircles.Evenifinclusiveonly in a limited sense tobeginwith, and sometimes fragile,they generated dynamics that would create a process of positivefeedback, gradually increasing their inclusiveness. England did notbecomeademocracyaftertheGloriousRevolutionof1688.Farfromit.Only a small fractionof thepopulationhad formal representation, butcrucially,shewaspluralistic.Oncepluralismwasenshrined,therewasatendencyfortheinstitutionstobecomemoreinclusiveovertime,evenifthiswasarockyanduncertainprocess.In this, England was typical of virtuous circles: inclusive politicalinstitutions create constraints against the exercise and usurpation ofpower.Theyalsotendtocreateinclusiveeconomicinstitutions,whichinturnmakethecontinuationofinclusivepoliticalinstitutionsmorelikely.Under inclusive economic institutions,wealth is not concentrated inthe hands of a small group that could then use its economicmight toincrease its political power disproportionately. Furthermore, underinclusive economic institutions there are more limited gains fromholding political power, thus weaker incentives for every group andeveryambitious,upstartindividualtotrytotakecontrolofthestate.Aconfluenceof factorsatacritical juncture, including interplaybetweenexistinginstitutionsandtheopportunitiesandchallengesbroughtbythecritical juncture, is generally responsible for the onset of inclusiveinstitutions, as theEnglish casedemonstrates. But once these inclusiveinstitutionsareinplace,wedonotneedthesameconfluenceoffactors

for them to survive.Virtuous circles, though still subject to significantcontingency, enable the institutions’ continuityandoftenevenunleashdynamicstakingsocietytowardgreaterinclusiveness.As virtuous circlesmake inclusive institutions persist, vicious circlescreatepowerful forces toward thepersistenceofextractive institutions.Historyisnotdestiny,andviciouscirclesarenotunbreakable,aswewillseefurtherinchapter14.Buttheyareresilient.Theycreateapowerfulprocess of negative feedback, with extractive political institutionsforgingextractiveeconomic institutions,which in turncreate thebasisfor thepersistenceofextractivepolitical institutions.WesawthismostclearlyinthecaseofGuatemala,wherethesameeliteheldpower,firstundercolonialrule,theninindependentGuatemala,formorethanfourcenturies;extractiveinstitutionsenrichtheelite,andtheirwealthformsthebasisforthecontinuationoftheirdomination.The same process of the vicious circle is also apparent in thepersistenceof theplantationeconomy in theU.S.South, except that italso showcases the vicious circle’s great resilience in the face ofchallenges.U.S.southernplanters losttheirformalcontrolofeconomicand political institutions after their defeat in the Civil War. Slavery,which was the basis of the plantation economy, was abolished, andblacksweregivenequalpoliticalandeconomicrights.YettheCivilWardidnotdestroy thepoliticalpowerof theplantereliteor its economicbasis, and theywere able to restructure the system, under a differentguisebutstillundertheirownlocalpoliticalcontrol,andtoachievethesameobjective:abundanceoflow-costlaborfortheplantations.This form of the vicious circle, where extractive institutions persistbecausetheelitecontrollingthemandbenefitingfromthempersists, isnot itsonlyform.Atfirstamorepuzzling,butnolessrealandnolessvicious, form of negative feedback shaped the political and economicdevelopmentofmanynations,andisexemplifiedbytheexperiencesofmuchofsub-SaharanAfrica,inparticularSierraLeoneandEthiopia.InaformthatthesociologistRobertMichelswouldrecognizeastheironlawof oligarchy, the overthrow of a regime presiding over extractiveinstitutions heralds the arrival of a new set of masters to exploit thesamesetofperniciousextractiveinstitutions.Thelogicofthistypeofviciouscircleisalsosimpletounderstandinhindsight: extractive political institutions create few constraints on the

exerciseofpower,sothereareessentiallynoinstitutionstorestraintheuse and abuse of power by those overthrowing previous dictators andassumingcontrolofthestate;andextractiveeconomicinstitutionsimplythattherearegreatprofitsandwealthtobemademerelybycontrollingpower,expropriatingtheassetsofothers,andsettingupmonopolies.Ofcourse,theironlawofoligarchyisnotatruelaw,inthesensethatthe laws of physics are. It does not chart an inevitable path, as theGlorious Revolution in England or the Meiji Restoration in Japanillustrate.A key factor in these episodes, which saw a major turn towardinclusive institutions, was the empowerment of a broad coalition thatcould stand up against absolutism and would replace the absolutistinstitutionsbymoreinclusive,pluralisticones.Arevolutionbyabroadcoalitionmakes theemergenceofpluralisticpolitical institutionsmuchmorelikely.InSierraLeoneandEthiopia,theironlawofoligarchywasmade more likely not only because existing institutions were highlyextractivebut alsobecauseneither the independencemovement in theformer nor the Derg coup in the latter were revolutions led by suchbroadcoalitions,butratherbyindividualsandgroupsseekingpowersothattheycoulddotheextracting.Thereisyetanother,evenmoredestructivefacetoftheviciouscircle,anticipatedbyourdiscussionoftheMayacity-statesinchapter5.Whenextractive institutions create huge inequalities in society and greatwealth and unchecked power for those in control, therewill bemanywishing to fight to takecontrolof thestateand institutions.Extractiveinstitutionsthennotonlypavethewayforthenextregime,whichwillbe evenmore extractive, but they also engender continuous infightingand civilwars. These civilwars then causemorehuman suffering andalso destroy even what little state centralization these societies haveachieved. This also often starts a process of descent into lawlessness,state failure, and political chaos, crushing all hopes of economicprosperity,asthenextchapterwillillustrate.

13.

WHYNATIONSFAILTODAY

HOWTOWINTHELOTTERYINZIMBABWE

IT WAS JANUARY 2000 in Harare, Zimbabwe. Master of Ceremonies FallotChawawawas inchargeofdrawingthewinningticket for thenationallotteryorganizedbyapartlystate-ownedbank, theZimbabweBankingCorporation(Zimbank).Thelotterywasopentoallclientswhohadkeptfive thousand or more Zimbabwe dollars in their accounts duringDecember1999.WhenChawawadrewthe ticket,hewasdumfounded.AsthepublicstatementofZimbankputit,“MasterofCeremoniesFallotChawawa couldhardly believehis eyeswhen the ticket drawn for theZ$100,000 prize was handed to him and he saw His Excellency RGMugabewrittenonit.”President Robert Mugabe, who had ruled Zimbabwe by hook or by

crook, and usuallywith an iron fist, since 1980, hadwon the lottery,which was worth a hundred thousand Zimbabwe dollars, about fivetimestheannualpercapitaincomeofthecountry.ZimbankclaimedthatMr.Mugabe’snamehadbeendrawnfromamong thousandsofeligiblecustomers.Whataluckyman!Needlesstosayhedidn’treallyneedthemoney. Mugabe had in fact only recently awarded himself and hiscabinetsalaryhikesofupto200percent.The lottery ticket was just one more indication of Zimbabwe’s

extractive institutions. One could call this corruption, but it is just asymptomoftheinstitutionalmalaiseinZimbabwe.ThefactthatMugabecould evenwin the lottery if hewanted showedhowmuchcontrolhehad over matters in Zimbabwe, and gave the world a glimpse of theextentofthecountry’sextractiveinstitutions.Themostcommonreasonwhynationsfailtodayisbecausetheyhave

extractive institutions. Zimbabwe under Mugabe’s regime vividlyillustrates the economic and social consequences. Though the nationalstatistics inZimbabweareveryunreliable, thebest estimate is thatby2008,Zimbabwe’spercapitaincomewasabouthalfofwhatitwaswhenthecountrygaineditsindependencein1980.Dramaticasthissounds,itdoesnotinfactbegintocapturethedeteriorationinlivingstandardsinZimbabwe.Thestatehascollapsedandmoreor less stoppedprovidinganybasicpublicservices. In2008–2009thedeterioration in thehealthsystemsledtoanoutbreakofcholeraacrossthecountry.AsofJanuary10, 2010, there have been 98,741 reported cases and 4,293 deaths,making it the deadliest cholera outbreak in Africa over the previousfifteen years. In the meantime, mass unemployment has also reachedunprecedentedlevels.Inearly2009,theUNOfficefortheCoordinationofHumanitarianAffairsclaimedthattheunemploymentratehadhitanincredible94percent.TherootsofmanyeconomicandpoliticalinstitutionsinZimbabwe,asis the case formuch of sub-SaharanAfrica, can be traced back to thecolonial period. In 1890 Cecil Rhodes’s British South Africa Companysentamilitaryexpeditionintothethen-kingdomof theNdebele,basedin Matabeleland, and also into the neighboring Mashonaland. Theirsuperiorweaponry quickly suppressedAfrican resistance, and by 1901thecolonyofSouthernRhodesia,namedafterRhodes,hadbeenformedin the area that is currently Zimbabwe. Now that the area was aprivatelyownedconcessionoftheBritishSouthAfricaCompany,Rhodesanticipated making money there through prospecting and mining forpreciousminerals.Theventuresnevergotoff theground,but theveryrich farmlands began attracting white migration. These settlers soonannexedmuchoftheland.By1923theyhadfreedthemselvesfromtherule of the British South Africa Company and persuaded the Britishgovernmenttograntthemself-government.WhatthenoccurredisverysimilartowhathadhappenedinSouthAfricaadecadeorsopreviously.The1913NativesLandAct(thispage–thispage)createdadualeconomyinSouthAfrica.Rhodesiapassedverysimilarlaws,andinspiredbytheSouthAfricanmodel,awhite-onlyapartheidstatewasconstructedsoonafter1923.AstheEuropeancolonialempirescollapsedinthelate1950sandearly1960s,thewhiteeliteinRhodesia,ledbyIanSmith,comprisingpossibly

5 percent of the population, declared independence from Britain in1965. Few international governments recognized Rhodesia’sindependence, and the United Nations levied economic and politicalsanctions against it. The black citizens organized a guerrillawar frombases in the neighboring countries of Mozambique and Zambia.Internationalpressureandtherebellionwagedbythetwomaingroups,Mugabe’sZANU(theZimbabweAfricanNationalUnion)andZAPU(theZimbabweAfricanPeople’sUnion),ledbyJoshuaNkomo,resultedinanegotiated end to white rule. The state of Zimbabwe was created in1980.After independence,Mugabequicklyestablishedhispersonalcontrol.Heeitherviolentlyeliminatedhisopponentsorco-optedthem.Themostegregious acts of violence happened inMatabeleland, the heartland ofsupportforZAPU,whereasmanyastwentythousandpeoplewerekilledin the early 1980s. By 1987 ZAPU had merged with ZANU to createZANU-PF,andJoshuaNkomowassidelinedpolitically.Mugabewasableto rewrite the constitution he had inherited as a part of theindependencenegotiation,makinghimselfpresident (hehad startedasprime minister), abolishing white voter rolls that were part of theindependence agreement, and eventually, in 1990, getting rid of theSenate altogether and introducing positions in the legislature that hecouldnominate.Ade factoone-partystateheadedbyMugabewas theresult.Upon independence,Mugabe took over a set of extractive economicinstitutions created by the white regime. These included a host ofregulations on prices and international trade, state-run industries, andthe obligatory agricultural marketing boards. State employmentexpandedrapidly,with jobsgiven tosupportersofZANU-PF.The tightgovernment regulation of the economy suited the ZANU-PF elitesbecause it made it difficult for an independent class of Africanbusinessmen, who might then have challenged the former’s politicalmonopoly, toemerge.Thiswasverysimilar to thesituationwesawinGhana in the 1960s in chapter 2 (this page–this page). Ironically, ofcourse,thisleftwhitesasthemainbusinessclass.Duringthisperiodthemainstrengthsofthewhiteeconomy,particularlythehighlyproductiveagriculturalexport sector,was leftuntouched.But thiswould lastonlyuntilMugabebecameunpopular.

The model of regulation and market intervention gradually becameunsustainable,andaprocessofinstitutionalchange,withthesupportoftheWorld Bank and the International Monetary Fund, began in 1991after a severe fiscal crisis. The deteriorating economic performancefinally led to theemergenceofa seriouspoliticalopposition toZANU-PF’sone-party rule: theMovement forDemocraticChange (MDC).The1995parliamentaryelectionswerefarfromcompetitive.ZANU-PFwon81percentof thevoteand118outof the120seats.Fifty-fiveof thesemembers of Parliament were elected unopposed. The presidentialelectionthefollowingyearshowedevenmoresignsofirregularitiesandfraud.Mugabewon93percentofthevote,buthistwoopponents,AbelMuzorewa and Ndabaningi Sithole, had already withdrawn theircandidacypriortotheelection,accusingthegovernmentofcoercionandfraud.After2000,despiteallthecorruption,ZANU-PF’sgripwasweakening.

Ittookonly49percentofthepopularvote,andonly63seats.AllwerecontestedbytheMDC,whotookeveryseatinthecapital,Harare.Inthepresidential election of 2002, Mugabe scraped home with only 56percent of the vote. Both sets of elections went ZANU-PF’s way onlybecauseofviolenceandintimidation,coupledwithelectoralfraud.TheresponseofMugabetothebreakdownofhispoliticalcontrolwas

to intensify both the repression and the use of government policies tobuy support. He unleashed a full-scale assault on white landowners.Starting in 2000, he encouraged and supported an extensive series ofland occupations and expropriations. They were often led by warveterans’ associations, groups supposedly comprised of formercombatants inthewarof independence.Someoftheexpropriatedlandwas given to these groups, butmuch of it also went to the ZANU-PFelites.TheinsecurityofpropertyrightswroughtbyMugabeandZANU-PF led to a collapse of agricultural output and productivity. As theeconomy crumbled, the only thing left was to print money to buysupport, which led to enormous hyperinflation. In January 2009, itbecame legal to use other currencies, such as the South African rand,andtheZimbabweandollarvanishedfromcirculation,aworthlesspieceofpaper.What happened in Zimbabwe after 1980 was commonplace in sub-

SaharanAfricasince independence.Zimbabweinheritedasetofhighly

extractive political and economic institutions in 1980. For the firstdecade and a half, theseweremaintained relatively untouched.Whileelections took place, political institutionswere anything but inclusive.Economic institutions changed somewhat; for example, there was nolonger explicit discrimination against blacks. But on the whole theinstitutions remained extractive, with the only difference being thatinsteadofIanSmithandthewhitesdoingtheextracting,itwasRobertMugabe and the ZANU-PF elites filling their pockets. Over time theinstitutions became even more extractive, and incomes in Zimbabwecollapsed.TheeconomicandpoliticalfailureinZimbabweisyetanothermanifestation of the iron law of oligarchy—in this instance, with theextractive and repressive regime of Ian Smith being replaced by theextractive, corrupt,and repressive regimeofRobertMugabe.Mugabe’sfakelotterywinin2000wasthensimplythetipofaverycorruptandhistoricallyshapediceberg.

NATIONS FAIL TODAY because their extractive economic institutions do notcreate the incentives needed for people to save, invest, and innovate.Extractive political institutions support these economic institutions bycementing the power of those who benefit from the extraction.Extractiveeconomicandpolitical institutions, thoughtheirdetailsvaryunderdifferentcircumstances,arealwaysat the rootof this failure. Inmany cases, for example, as we will see in Argentina, Colombia, andEgypt,thisfailuretakestheformoflackofsufficienteconomicactivity,becausethepoliticiansarejusttoohappytoextractresourcesorquashanytypeofindependenteconomicactivitythatthreatensthemselvesandtheeconomicelites. Insomeextremecases,as inZimbabweandSierraLeone,whichwe discuss next, extractive institutions pave theway forcompletestatefailure,destroyingnotonlylawandorderbutalsoeventhemost basic economic incentives. The result is economic stagnationand—astherecenthistoryofAngola,Cameroon,Chad, theDemocraticRepublic of Congo, Haiti, Liberia, Nepal, Sierra Leone, Sudan, andZimbabwe illustrates—civil wars, mass displacements, famines, andepidemics,makingmanyofthesecountriespoorertodaythantheywereinthe1960s.

ACHILDREN’SCRUSADE?

On March 23, 1991, a group of armed men under the leadership ofFoday Sankoh crossed the border from Liberia into Sierra Leone andattacked the southern frontier town of Kailahun. Sankoh, formerly acorporal in theSierraLeoneanarmy,hadbeen imprisonedafter takingpart in an abortive coup against Siaka Stevens’s government in 1971.Afterbeingreleased,heeventuallyendedupinLibya,whereheenteredatrainingcampthattheLibyandictatorColonelQaddafiranforAfricanrevolutionaries. There he met Charles Taylor, who was plotting tooverthrow thegovernment inLiberia.WhenTaylor invadedLiberiaonChristmasEve1989,Sankohwaswithhim,anditwaswithagroupofTaylor’s men, mostly Liberians and Burkinabes (citizens of BurkinaFaso), that Sankoh invaded Sierra Leone. They called themselves theRUF, the Revolutionary United Front, and they announced that theywere there tooverthrow the corruptand tyrannical governmentof theAPC.Aswesawinthepreviouschapter,SiakaStevensandhisAllPeople’s

Congress, theAPC, tookoverand intensified theextractive institutionsof colonial rule in Sierra Leone, just as Mugabe and ZANU-PF did inZimbabwe. By 1985,when Stevens, illwith cancer, brought in JosephMomohtoreplacehim,theeconomywascollapsing.Stevens,apparentlywithoutirony,usedtoenjoyquotingtheaphorism“Thecoweatswhereitistethered.”AndwhereStevenshadonceeaten,Momohnowgorged.The roads fell to pieces, and schools disintegrated. National televisionbroadcasts stopped in 1987, when the transmitter was sold by theminister of information, and in 1989 a radio tower that relayed radiosignals outside Freetown fell down, ending transmissions outside thecapital. An analysis published in a newspaper in the capital city ofFreetownin1995ringsverytrue:

by the end of Momoh’s rule he had stopped paying civilservants, teachers and even Paramount Chiefs. Centralgovernmenthadcollapsed,andthenofcoursewehadborderincursions, “rebels” and all the automatic weapons pouringovertheborderfromLiberia.TheNPRC,the“rebels”andthe“sobels”[soldiersturnedrebels]allamounttothechaosone

expectswhengovernmentdisappears.Noneof themare thecausesofourproblems,buttheyaresymptoms.

ThecollapseofthestateunderMomoh,onceagainaconsequenceoftheviciouscircleunleashedbytheextremeextractiveinstitutionsunderStevens, meant that there was nothing to stop the RUF from comingacross the border in 1991. The state had no capacity to oppose it.Stevenshadalreadyemasculatedthemilitary,becauseheworriedtheymightoverthrowhim.Itwastheneasyforarelativelysmallnumberofarmed men to create chaos in most of the country. They even had amanifestocalled“FootpathstoDemocracy,”whichstartedwithaquotefromtheblackintellectualFrantzFanon:“Eachgenerationmust,outofrelativeobscurity,discoveritsmission,fulfillitorbetrayit.”Thesection“WhatAreWeFightingFor?”begins:

Wecontinuetofightbecausewearetiredofbeingperpetualvictims of state sponsored poverty and human degradationvisitedonusbyyearsofautocraticruleandmilitarism.But,we shall exercise restraintandcontinue towaitpatientlyattherendezvousofpeace—whereweshallallbewinners.Weare committed to peace, by anymeans necessary, butwhatwe are not committed to is becoming victims of peace.WeknowourcausetobejustandGod/AllahwillneverabandonusinourstruggletoreconstructanewSierraLeone.

ThoughSankohandotherRUFleadersmayhavestartedwithpoliticalgrievances, and thegrievancesof thepeople sufferingunder theAPC’sextractiveinstitutionsmayhaveencouragedthemtojointhemovementearly on, the situation quickly changed and spun out of control. The“mission” of the RUF plunged the country into agony, as in thetestimonyofateenagerfromGeoma,inthesouthofSierraLeone:

Theygatheredsomeofus…Theychosesomeofourfriendsand killed them, two of them. These were people whosefathers were the chiefs, and they had soldiers’ boots andpropertyintheirhouses.Theywereshot,fornootherreasonthan that they were accused of harbouring soldiers. The

chiefs were also killed—as part of the government. Theychose someone to be the new chief. Theywere still sayingtheyhadcome to freeus from theAPC.Afterapoint, theywerenotchoosingpeopletokill,justshootingpeople.

In the first year of the invasion, any intellectual roots that theRUFmay have had were completely extinguished. Sankoh executed thosewhocriticized themountingstreamofatrocities.Soon, fewvoluntarilyjoinedtheRUF.Insteadtheyturnedtoforciblerecruitment,particularlyof children. Indeed,all sidesdid this, including thearmy. If theSierraLeoneancivilwarwasacrusadetobuildabettersociety, intheenditwas a children’s crusade. The conflict intensified with massacres andmassivehumanrightsabuses,includingmassrapesandtheamputationofhandsandears.WhentheRUFtookoverareas,theyalsoengagedineconomic exploitation. It was most obvious in the diamond miningareas, where they press-ganged people into diamond mining, but waswidespreadelsewhereaswell.The RUF wasn’t alone in committing atrocities, massacres, andorganized forced labor. The government did so as well. Suchwas thecollapseoflawandorderthatitbecamedifficultforpeopletotellwhowas a soldier and who was a rebel. Military discipline completelyvanished.Bythetimethewarendedin2001,probablyeightythousandpeople had died and the whole country had been devastated. Roads,houses,andbuildingswereentirelydestroyed.Today,ifyougotoKoidu,a major diamond-producing area in the east, you’ll still see rows ofburned-outhousesscarredwithbulletholes.By 1991 the state in Sierra Leone had totally failed. Think of whatKingShyaamstartedwiththeBushong(thispage–thispage):hesetupextractive institutions to cement his power and extract the output therest of society would produce. But even extractive institutions withcentralauthorityconcentrated inhishandswerean improvementoverthesituationwithoutany lawandorder,centralauthority,orpropertyrights thatcharacterized theLele societyon theother sideof the riverKasai.SuchlackoforderandcentralauthorityhasbeenthefateofmanyAfricannationsinrecentdecades,partlybecausetheprocessofpoliticalcentralizationwas historically delayed inmuch of sub-Saharan Africa,butalsobecausetheviciouscircleofextractiveinstitutionsreversedany

statecentralizationthatexisted,pavingthewayforstatefailure.Sierra Leoneduringherbloody civilwarof tenyears, from1991 to2001,wasa typicalcaseofa failedstate. It startedoutas justanothercountrymarredbyextractiveinstitutions,albeitofaparticularlyviciousandinefficienttype.Countriesbecomefailedstatesnotbecauseoftheirgeography or their culture, but because of the legacy of extractiveinstitutions,whichconcentratepowerandwealthinthehandsofthosecontrolling the state, opening theway for unrest, strife, and civilwar.Extractive institutions also directly contribute to the gradual failing ofthe state by neglecting investment in the most basic public services,exactlywhathappenedinSierraLeone.Extractiveinstitutionsthatexpropriateandimpoverishthepeopleandblock economic development are quite common in Africa, Asia, andSouth America. Charles Taylor helped to start the civil war in SierraLeone while at the same time initiating a savage conflict in Liberia,whichledtostatefailurethere,too.Thepatternofextractiveinstitutionscollapsing into civil war and state failure has happened elsewhere inAfrica;forexample,inAngola,Côted’Ivoire,theDemocraticRepublicofCongo,Mozambique,Republic ofCongo, Somalia, Sudan, andUganda.Extraction paves the way for conflict, not unlike the conflict that thehighlyextractiveinstitutionsoftheMayacity-statesgeneratedalmostathousandyearsago.Conflictprecipitatesstatefailure.Soanotherreasonwhy nations fail today is that their states fail. This, in turn, is aconsequenceofdecadesofruleunderextractiveeconomicandpoliticalinstitutions.

WHOISTHESTATE?

The cases of Zimbabwe, Somalia, and Sierra Leone, even if typical ofpoor countries in Africa, and perhaps even some in Asia, seem ratherextreme. Surely Latin American countries do not have failed states?Surelytheirpresidentsarenotbrazenenoughtowinthelottery?InColombia,theAndeanMountainsgraduallymergetothenorthwithalargecoastalplainthatborderstheCaribbeanOcean.Colombianscallthis the tierra caliente, the “hot country,” as distinct from the Andeanworld of the tierra fria, the “cold country.” For the last fifty years,

Colombia has been regarded by most political scientists andgovernmentsasademocracy.TheUnitedStatesfeelshappytonegotiateapotentialfreetradeagreementwiththecountryandpoursallkindsofaid into it, particularly military aid. After a short-lived militarygovernment,whichended in1958, electionshavebeen regularlyheld,eventhoughuntil1974apactrotatedpoliticalpowerandthepresidencybetweenthetwotraditionalpoliticalparties, theConservativesandtheLiberals. Still, this pact, the National Front, was itself ratified by theColombianpeopleviaaplebiscite,andthisallseemsdemocraticenough.YetwhileColombiahasalonghistoryofdemocraticelections,itdoes

nothave inclusive institutions. Instead, itshistoryhasbeenmarredbyviolations of civil liberties, extrajudicial executions, violence againstcivilians, and civil war. Not the sort of outcomes we expect from ademocracy. The civil war in Colombia is different from that in SierraLeone,wherethestateandsocietycollapsedandchaosreigned.Butitisacivilwarnonethelessandonethathascausedfarmorecasualties.Themilitaryruleofthe1950swasitselfpartiallyinresponsetoacivilwarknowninSpanishsimplyasLaViolencia,or“TheViolence.”Sincethattime quite a range of insurgent groups, mostly communistrevolutionaries, have plagued the countryside, kidnapping andmurdering. To avoid either of these unpleasant options in ruralColombia, you have to pay the vacuna, literally “the vaccination,”meaningthatyouhavetovaccinateyourselfagainstbeingmurderedorkidnappedbypayingoffsomegroupofarmedthugseachmonth.NotallarmedgroupsinColombiaarecommunists.In1981members

of the main communist guerrilla group in Colombia, the FuerzasArmadas Revolucionarias de Colombia (the FARC—the RevolutionaryArmed Forces of Colombia) kidnapped a dairy farmer, Jesus Castaño,who lived in a small town called Amalfi in the hot country in thenortheasternpartofthedepartmentofAntioquia.TheFARCdemandedaransom amounting to $7,500, a small fortune in rural Colombia. Thefamily raised it bymortgaging the farm, but their father’s corpsewasfound anyway, chained to a tree. Enough was enough for three ofCastaño’ssons,Carlos,Fidel,andVicente.Theyfoundedaparamilitarygroup,LosTangueros, tohuntdownmembersof theFARCandavengethis act. The brothers were good at organizing, and soon their groupgrew and began to find a common interest with other similar

paramilitarygroupsthathaddevelopedfromsimilarcauses.Colombiansinmany areaswere suffering at the hands of left-wing guerrillas, andright-wing paramilitaries formed in opposition. Paramilitaries werebeing used by landowners to defend themselves against the guerrillas,but they were also involved in drug trafficking, extortion, and thekidnappingandmurderofcitizens.By 1997 the paramilitaries, under the leadership of the Castaño

brothers,hadmanagedtoformanationalorganizationforparamilitariescalled the Autodefensas Unidas de Colombia (the AUC—United Self-DefenseForcesofColombia).TheAUCexpandedintolargepartsofthecountry, particularly into the hot country, in the departments ofCórdoba,Sucre,Magdalena,andCésar.By2001theAUCmayhavehadasmanyasthirtythousandarmedmenatitsdisposalandwasorganizedinto different blocks. In Córdoba, the paramilitary Bloque CatatumbowasledbySalvatoreMancuso.Asitspowercontinuedtogrow,theAUCmadeastrategicdecisiontoget involvedinpolitics.Paramilitariesandpoliticians courted each other. Several of the leaders of the AUCorganizedameetingwithprominentpoliticiansinthetownofSantaFéde Ralito in Córdoba. A joint document, a pact, calling for the“refoundingofthecountry”wasissuedandsignedbyleadingmembersoftheAUC,suchas“Jorge40”(thenicknameforRodrigoTovarPupo),AdolfoPaz(anomdeguerreforDiegoFernando“DonBerna”Murillo),and Diego Vecino (real name: Edwar Cobo Téllez), along withpoliticians,includingnationalsenatorsWilliamMontesandMigueldelaEspriella.By thispoint theAUCwas running large tractsofColombia,anditwaseasyforthemtofixwhogotelectedinthe2002electionsforthe Congress and Senate. For example, in the municipality of SanOnofre, in Sucre, the electionwas arrangedby theparamilitary leaderCadena(“chain”).Oneeyewitnessdescribedwhathappenedasfollows:

The trucks sentbyCadenawentaround theneighborhoods,corregimientosandruralareasofSanOnofrepickingpeopleup.According tosome inhabitants…for the2002electionshundreds of peasantswere taken to the corregimiento PlanParejosotheycouldseethefacesofthecandidatestheyhadtovoteforintheparliamentarianelections:JairoMerlanoforSenateandMurielBenitoRebolloforCongress.

Cadena put in a bag the names of the members of themunicipalcouncil, tookout twoandsaid thathewouldkillthem and other people chosen randomly if Muriel did notwin.

The threat seems to have worked: each candidate obtained fortythousandvotesinthewholeofSucre.ItisnosurprisethatthemayorofSanOnofresignedthepactofSantaFédeRalito.Probablyone-thirdofthe congressmen and senators owed their election in 2002 toparamilitarysupport,andMap20,whichdepictstheareasofColombiaunder paramilitary control, shows how widespread their hold was.SalvatoreMancusohimselfputitinaninterviewinthefollowingway:

35percentoftheCongresswaselectedinareaswheretherewere states of the Self-Defense groups, in those states wewere theonescollecting taxes,wedelivered justice,andwehadthemilitaryandterritorialcontrolof theregionandallthepeoplewhowanted togo intopoliticshad tocomeanddealwiththepoliticalrepresentativeswehadthere.

It is not difficult to imagine the effect of this extent of paramilitarycontrol of politics and society on economic institutions and publicpolicy.Theexpansionof theAUCwasnotapeacefulaffair.ThegroupnotonlyfoughtagainsttheFARC,butalsomurderedinnocentciviliansandterrorizedanddisplacedhundredsofthousandsofpeoplefromtheirhomes. According to the Internal Displacement Monitoring Centre(IDMC) of the Norwegian Refugee Council, in early 2010 around 10percent of Colombia’s population, nearly 4.5 million people, wasinternallydisplaced.Theparamilitariesalso,asMancusosuggested,tookover the government and all its functions, except that the taxes theycollectedwerejustexpropriationfortheirownpockets.Anextraordinarypactbetween theparamilitary leaderMartínLlanos (realname:HéctorGermánBuitrago) and themayors of themunicipalities ofTauramena,Aguazul, Maní, Villanueva, Monterrey, and Sabanalarga, in thedepartmentofCasanareineasternColombia,liststhefollowingrulestowhichthemayorshadtoadherebyorderofthe“ParamilitaryPeasantsofCasanare”:

9)Give50percentofthemunicipalitybudgettobemanagedbytheParamilitaryPeasantsofCasanare.

10)10percentofeachandeverycontractofthemunicipality[tobegiventotheParamilitaryPeasantsofCasanare].

11)Mandatoryassistancetoallthemeetingscalledbythe

ParamilitaryPeasantsofCasanare.12)InclusionoftheParamilitaryPeasantsofCasanareineveryinfrastructureproject.

13)AffiliationtothenewpoliticalpartyformedbytheParamilitaryPeasantsofCasanare.

14)Accomplishmentofhis/hersgovernanceprogram.

Casanareisnotapoordepartment.Onthecontrary,ithasthehighestlevelofpercapitaincomeofanyColombiandepartment,becauseithassignificant oil deposits, just the kind of resources that attractparamilitaries. In fact, once they gained power, the paramilitariesintensified their systematic expropriationof property.Mancusohimselfreputedlyaccumulated$25millionworthofurbanand ruralproperty.EstimatesoflandexpropriatedinColombiabyparamilitariesareashighas10percentofallruralland.Colombia isnotacaseofa failed stateabout tocollapse.But it isa

state without sufficient centralization and with far-from-completeauthority over all its territory. Though the state is able to providesecurity and public services in large urban areas such as Bogotá andBarranquilla,therearesignificantpartsofthecountrywhereitprovidesfew public services and almost no law and order. Instead, alternativegroupsandpeople, suchasMancuso, controlpolitics and resources. Inpartsofthecountry,economicinstitutionsfunctionquitewell,andtherearehighlevelsofhumancapitalandentrepreneurialskill;inotherpartstheinstitutionsarehighlyextractive,evenfailingtoprovideaminimaldegreeofstateauthority.Itmightbehard tounderstandhowa situation like this can sustain

itselffordecades,evencenturies.Butinfact,thesituationhasalogicofits own, as a type of vicious circle. Violence and the absence ofcentralized state institutions of this type enter into a symbioticrelationshipwithpoliticiansrunningthefunctionalpartsofthesociety.Thesymbioticrelationshiparisesbecausenationalpoliticiansexploitthelawlessnessinperipheralpartsofthecountry,whileparamilitarygroupsarelefttotheirowndevicesbythenationalgovernment.Thispatternbecameparticularlyapparent in the2000s. In2002 the

presidentialelectionwaswonbyÁlvaroUribe.Uribehadsomethingin

commonwith the Castaño brothers: his father had been killed by theFARC. Uribe ran a campaign repudiating the attempts of the previousadministration to try tomake peacewith the FARC. In 2002 his votesharewas3percentagepointshigher inareaswithparamilitaries thanwithout them. In 2006,whenhewas reelected, his vote sharewas 11percentage points higher in such areas. If Mancuso and his partnerscoulddeliverthevoteforCongressandtheSenate,theycoulddosoinpresidential elections as well, particularly for a president stronglyalignedwiththeirworldviewandlikelytobelenientonthem.AsJairoAngarita,SalvatoreMancuso’sdeputyandtheformerleaderoftheAUC’sSinúandSanJorgeblocs,declaredinSeptember2005,hewasproudtoworkforthe“reelectionofthebestpresidentwehaveeverhad.”Once elected, the paramilitary senators and congressmen voted forwhat Uribewanted, in particular changing the constitution so that hecouldbereelectedin2006,whichhadnotbeenallowedatthetimeofhis first election, in 2002. In exchange, President Uribe delivered ahighly lenient law that allowed the paramilitaries to demobilize.Demobilization did not mean the end of paramilitarism, simply itsinstitutionalizationinlargepartsofColombiaandtheColombianstate,whichtheparamilitarieshadtakenoverandwereallowedtokeep.InColombiamanyaspectsofeconomicandpoliticalinstitutionshavebecomemoreinclusiveovertime.Butcertainmajorextractiveelementsremain. Lawlessness and insecure property rights are endemic in largeswathsofthecountry,andthisisaconsequenceofthelackofcontrolbythenationalstateinmanypartsofthecountry,andtheparticularformoflackofstatecentralizationinColombia.Butthisstateofaffairsisnotaninevitableoutcome. It is itselfaconsequenceofdynamicsmirroringthe vicious circle: political institutions in Colombia do not generateincentivesforpoliticianstoprovidepublicservicesandlawandorderinmuch of the country and do not put enough constraints on them toprevent them from entering into implicit or explicit deals withparamilitariesandthugs.

ELCORRALITO

Argentinawas inthegripofaneconomiccrisis in late2001.Forthree

years,incomehadbeenfalling,unemploymenthadbeenrising,andthecountry had accumulated a massive international debt. The policiesleadingtothissituationwereadoptedafter1989bythegovernmentofCarlosMenem, to stophyperinflationand stabilize theeconomy.Foratimetheyweresuccessful.In1991Menemtied theArgentinepeso to theU.S.dollar.Onepesowas equal to one dollar by law. There was to be no change in theexchange rate.Endof story.Well, almost.Toconvincepeople that thegovernmentreallymeanttosticktothelaw,itpersuadedpeopletoopenbankaccountsinU.S.dollars.DollarscouldbeusedintheshopsofthecapitalcityofBuenosAiresandwithdrawnfromcashmachinesalloverthecity.Thispolicymayhavehelpedstabilizetheeconomy,butithadonebigdrawback.ItmadeArgentineexportsveryexpensiveandforeignimportsverycheap.Exportsdribbled toahalt; importsgushed in.Theonly way to pay for them was to borrow. It was an unsustainablesituation.Asmorepeoplebeganworryingaboutthesustainabilityofthepeso,theyputmoreoftheirwealthintodollaraccountsatbanks.Afterall, if the government ripped up the law and devalued the peso, theywouldbesafewithdollaraccounts,right?Theywererighttobeworriedaboutthepeso.Buttheyweretoooptimisticabouttheirdollars.On December 1, 2001, the government froze all bank accounts,initially forninetydays.Onlya small amountof cashwasallowed forwithdrawalonaweeklybasis.First itwas250pesos,stillworth$250;then300pesos.But thiswasallowed tobewithdrawnonly frompesoaccounts. Nobody was allowed to withdraw money from their dollaraccounts,unless theyagreed to convert thedollars intopesos.Nobodywantedtodoso.ArgentinesdubbedthissituationElCorralito,“theLittleCorral”:depositorswerehemmedintoacorrallikecows,withnowhereto go. In January the devaluation was finally enacted, and instead oftherebeingonepesoforonedollar,thereweresoonfourpesosforonedollar.This shouldhavebeena vindicationof thosewho thought thatthey should put their savings in dollars. But it wasn’t, because thegovernment then forcibly converted all the dollar bank accounts intopesos,butattheoldone-for-oneexchangerate.Someonewhohadhad$1,000savedsuddenly foundhimselfwithonly$250.Thegovernmenthadexpropriatedthree-quartersofpeople’ssavings.For economists,Argentina is a perplexing country.To illustratehow

difficult it was to understand Argentina, the Nobel Prize–winningeconomistSimonKuznetsoncefamouslyremarkedthattherewerefoursorts of countries: developed, underdeveloped, Japan, and Argentina.Kuznets thought so because, around the time of the FirstWorldWar,Argentinawasoneoftherichestcountriesintheworld.ItthenbeganasteadydeclinerelativetotheotherrichcountriesinWesternEuropeandNorthAmerica,which turned, in the 1970s and ’80s, into an absolutedecline. On the surface of it, Argentina’s economic performance ispuzzling,butthereasonsforitsdeclinebecomeclearerwhenlookedatthroughthelensofinclusiveandextractiveinstitutions.Itistruethatbefore1914,Argentinaexperiencedaroundfiftyyearsofeconomicgrowth,butthiswasaclassiccaseofgrowthunderextractiveinstitutions.Argentinawasthenruledbyanarroweliteheavilyinvestedin the agricultural export economy. The economy grew by exportingbeef, hides, and grain in themiddle of a boom in theworld prices ofthesecommodities.Likeallsuchexperiencesofgrowthunderextractiveinstitutions,itinvolvednocreativedestructionandnoinnovation.Anditwasnotsustainable.AroundthetimeoftheFirstWorldWar,mountingpoliticalinstabilityandarmedrevoltsinducedtheArgentineelitestotrytobroadenthepoliticalsystem,butthisledtothemobilizationofforcesthey could not control, and in 1930 came the first military coup.Between then and 1983, Argentina oscillated backward and forwardbetween dictatorship and democracy and between various extractiveinstitutions. There was mass repression under military rule, whichpeakedinthe1970swithatleastninethousandpeopleandprobablyfarmorebeing illegallyexecuted.Hundredsof thousandswere imprisonedandtortured.Duringtheperiodsofcivilianruletherewereelections—ademocracyofsorts.Butthepoliticalsystemwasfarfrominclusive.SincetheriseofPerón in the 1940s, democratic Argentina has been dominated by thepoliticalpartyhecreated,thePartidoJusticialista,usuallyjustcalledthePerónist Party. The Perónists won elections thanks to a huge politicalmachine,which succeededby buying votes, dispensing patronage, andengaging in corruption, including government contracts and jobs inexchange forpolitical support. Ina sense thiswasademocracy,but itwasnotpluralistic.PowerwashighlyconcentratedinthePerónistParty,whichfacedfewconstraintsonwhat itcoulddo,at least in theperiod

when themilitary restrained from throwing it frompower.Aswe sawearlier(thispage–thispage), if theSupremeCourtchallengedapolicy,somuchtheworsefortheSupremeCourt.Inthe1940s,Perónhadcultivatedthelabormovementasapoliticalbase.When it was weakened bymilitary repression in the 1970s and’80s, his party simply switched to buying votes from others instead.Economic policies and institutionswere designed to deliver income totheir supporters, not to create a level playing field. When PresidentMenem faced a term limit that kept him from being reelected in the1990s, it was just more of the same; he could simply rewrite theconstitutionandgetridofthetermlimit.AsElCorralitoshows,evenifArgentina has elections and popularly elected governments, thegovernmentisquiteabletooverridepropertyrightsandexpropriateitsowncitizenswithimpunity.ThereislittlecheckonArgentinepresidentsandpoliticalelites,andcertainlynopluralism.What puzzled Kuznets, and no doubtmany otherswho visit BuenosAires, is thatthecityseemssodifferentfromLima,GuatemalaCity,orevenMexicoCity.Youdonotseeindigenouspeople,andyoudonotseethe descendants of former slaves. Mostly you see the gloriousarchitecture andbuildingsputupduring theBelleEpoch, theyears ofgrowthunder extractive institutions. But inBuenosAires you see onlypartofArgentina.Menem,forexample,wasnotfromBuenosAires.HewasborninAnillaco,intheprovinceofLaRioja,inthemountainsfartothenorthwestofBuenosAires,andheservedthreetermsasgovernoroftheprovince.AtthetimeoftheconquestoftheAmericasbytheSpanish,thisareaofArgentinawasanoutlyingpartoftheIncaEmpireandhadadense population of indigenous people (seeMap 1 on this page). TheSpanish created encomiendas here, and a highly extractive economydevelopedgrowingfoodandbreedingmulesfortheminersinPotosítothenorth.Infact,LaRiojawasmuchmoreliketheareaofPotosíinPeruandBoliviathanitwaslikeBuenosAires.Inthenineteenthcentury,LaRioja produced the famous warlord Facundo Quiroga, who ruled thearea lawlesslyandmarchedhisarmyonBuenosAires.ThestoryaboutthedevelopmentofArgentinepoliticalinstitutionsisastoryabouthowtheinteriorprovinces,suchasLaRioja,reachedagreementswithBuenosAires.Theseagreementswereatruce:thewarlordsofLaRiojaagreedtoleave Buenos Aires alone so that it couldmakemoney. In return, the

Buenos Aires elites gave up on reforming the institutions of “theinterior.” So Argentina at first appears a world apart from Peru orBolivia, but it is really not so different once you leave the elegantboulevardsofBuenosAires.ThatthepreferencesandthepoliticsoftheinteriorgotembeddedintoArgentineinstitutionsisthereasonwhythecountry has experienced a very similar institutional path to those ofotherextractiveLatinAmericancountries.Thatelectionshavenotbroughteitherinclusivepoliticaloreconomic

institutions is the typical case in Latin America. In Colombia,paramilitariescanfixone-thirdofnationalelections.InVenezuelatoday,asinArgentina,thedemocraticallyelectedgovernmentofHugoChávezattacks its opponents, fires them from public-sector jobs, closes downnewspaperswhoseeditorialsitdoesn’tlike,andexpropriatesproperty.Inwhateverhedoes,Chávez ismuchmorepowerfuland lessconstrainedthan Sir Robert Walpole was in Britain in the 1720s, when he wasunabletocondemnJohnHuntridgeundertheBlackAct(thispage–thispage). Huntridge would have fared much less well in present-dayVenezuelaorArgentina.While the democracy emerging in Latin America is in principle

diametricallyopposedtoeliterule,andinrhetoricandactionittriestoredistributerightsandopportunitiesawayfromatleastasegmentoftheelite,itsrootsarefirmlybasedinextractiveregimesintwosenses.First,inequitiespersistingforcenturiesunderextractiveregimesmakevotersinnewlyemergingdemocraciesvoteinfavorofpoliticianswithextremepolicies. It is not that Argentinians are just naïve and think that JuanPerón or the more recent Perónist politicians such as Menem or theKirchners are selfless and looking out for their interests, or thatVenezuelans see their salvation in Chávez. Instead,manyArgentiniansandVenezuelansrecognizethatallotherpoliticiansandpartieshaveforso long failed togive themvoice, toprovide themwith themostbasicpublicservices,suchasroadsandeducation,andtoprotect themfromexploitation by local elites. So many Venezuelans today support thepoliciesthatChávezisadoptingevenifthesecomewithcorruptionandwaste in the same way that many Argentinians supported Perón’spolicies in the 1940s and 1970s. Second, it is again the underlyingextractiveinstitutionsthatmakepoliticssoattractiveto,andsobiasedinfavorof,strongmensuchasPerónandChávez,ratherthananeffective

party system producing socially desirable alternatives. Perón, Chávez,anddozensofotherstrongmeninLatinAmericaarejustanotherfacetoftheironlawofoligarchy,andasthenamesuggests,therootsofthisironlawliesintheunderlyingelite-controlledregimes.

THENEWABSOLUTISM

InNovember2009, thegovernmentofNorthKorea implementedwhateconomistscallacurrencyreform.Severeboutsofinflationareoftenthereasonsforsuchreforms.InFranceinJanuary1960,acurrencyreformintroducedanewfrancthatwasequalto100oftheexistingfrancs.Oldfrancscontinuedincirculationandpeopleevenquotedpricesinthemasthe change to the new francs was graduallymade. Finally, old francsceasedtobelegaltenderinJanuary2002,whenFranceintroducedtheeuro.TheNorthKoreanreformlookedsimilaronthefaceofit.LiketheFrenchin1960,theNorthKoreangovernmentdecidedtotaketwozerosoff the currency.Onehundredoldwons, the currencyofNorthKorea,were to be worth one new won. Individuals were allowed to comeforwardtoexchangetheiroldcurrencyforthenewlyprintedcurrency,thoughthishadtobedoneinoneweek,ratherthanforty-twoyears,asin the French case. Then came the catch: the government announcedthat no one could convert more than 100,000 won, though it laterrelaxed this to500,000.Onehundred thousandwonwasabout$40atthe black market exchange rate. In one stroke, the government hadwipedoutahuge fractionofNorthKoreancitizens’privatewealth;wedo not know exactly how much, but it is probably greater than thatexpropriatedbytheArgentinegovernmentin2002.ThegovernmentinNorthKoreaisacommunistdictatorshipopposed

to private property and markets. But it is difficult to control blackmarkets,andblackmarketsmaketransactionsincash.Ofcoursequiteabit of foreign exchange is involved, particularly Chinese currency, butmanytransactionsusewon.Thecurrencyreformwasdesignedtopunishpeoplewhousedthesemarketsand,morespecifically,tomakesurethatthey did not become too wealthy or powerful enough to threaten theregime.Keepingthempoorwassafer.Blackmarketsarenotthewholestory. People in North Korea also keep their savings in wons because

therearefewbanksinKorea,andtheyareallownedbythegovernment.Ineffect,thegovernmentusedthecurrencyreformtoexpropriatemuchofpeople’ssavings.Though the government says it regards markets as bad, the North

Koreaneliteratherlikewhatmarketscanproduceforthem.Theleader,Kim Jong-Il, has a seven-story pleasure palace equippedwith a bar, akaraokemachine, and aminimovie theater. The ground floor has anenormousswimmingpoolwithawavemachine,whereKimlikestouseabodyboardfittedwithasmallmotor.Whenin2006theUnitedStatesplaced sanctionsonNorthKorea, itknewhow to reallyhit the regimewhereithurt.ItmadeitillegaltoexportmorethansixtyluxuryitemstoNorthKorea,includingyachts,waterscooters,racingcars,motorcycles,DVD players, and televisions larger than twenty-nine inches. Therewouldbenomore silk scarves,designer fountainpens, furs,or leatherluggage. These were exactly the items collected by Kim and hisCommunistPartyelites.OnescholarusedsalesfiguresfromtheFrenchcompanyHennessytoestimatethatKim’sannualcognacbudgetbeforethesanctionscouldhavebeenashighas$800,000ayear.Itisimpossibletounderstandmanyofthepoorestregionsoftheworld

at the end of the twentieth century without understanding the newabsolutism of the twentieth century: communism.Marx’s visionwas asystem thatwould generate prosperity undermore humane conditionsandwithoutinequality.LeninandhisCommunistPartywereinspiredbyMarx, but the practice could not have been more different from thetheory.TheBolshevikRevolutionof1917wasabloodyaffair,andtherewas no humane aspect to it. Equality was not part of the equation,either,sincethefirstthingLeninandhisentouragedidwastocreateanewelite, themselves, at theheadof theBolshevikParty. Indoing so,theypurgedandmurderednotonlynon-communist elements, but alsoothercommunistswhocouldhavethreatenedtheirpower.Buttherealtragedies were yet to come: first with the Civil War, and then underStalin’scollectivizationandhisall-too-frequentpurges,whichmayhavekilledasmanyasfortymillionpeople.Russiancommunismwasbrutal,repressive,andbloody,butnotunique.Theeconomicconsequencesandthehumansufferingwerequitetypicalofwhathappenedelsewhere—forexample, inCambodia in the1970sunder theKhmerRouge, inChina,and in North Korea. In all cases communism brought vicious

dictatorships andwidespread human rights abuses. Beyond the humansufferingandcarnage,thecommunistregimesallsetupvarioustypesofextractive institutions. The economic institutions, with or withoutmarkets, were designed to extract resources from the people, and byentirelyabhorringpropertyrights,theyoftencreatedpovertyinsteadofprosperity. In the Soviet case, aswe saw in chapter5, theCommunistsystem at first generated rapid growth, but then faltered and led tostagnation. The consequences were much more devastating in ChinaunderMao, inCambodiaunder theKhmerRouge,and inNorthKorea,where the Communist economic institutions led to economic collapseandfamine.The Communist economic institutions were in turn supported by

extractivepolitical institutions,concentratingallpowerinthehandsofCommunistpartiesandintroducingnoconstraintsontheexerciseofthispower.Thoughtheseweredifferentextractiveinstitutionsinform,theyhad similar effects on the livelihoods of the people as the extractiveinstitutionsinZimbabweandSierraLeone.

KINGCOTTON

Cotton accounts for about 45 percent of the exports of Uzbekistan,making it the most important crop since the country establishedindependenceatthebreakupoftheSovietUnionin1991.UnderSovietcommunismall farmland inUzbekistanwasunder thecontrolof2,048state-ownedfarms.Thesewerebrokenupandthelanddistributedafter1991.Butthatdidn’tmeanfarmerscouldactindependently.Cottonwastoo valuable to the new government of Uzbekistan’s first, and so faronly, president, Ismail Karimov. Instead, regulations were introducedthat determinedwhat farmers couldplant and exactlyhowmuch theycouldsellitfor.Cottonwasavaluableexport,andfarmerswerepaidasmallfractionofworldmarketpricesfortheircrop,withthegovernmenttakingtherest.Nobodywouldhavegrowncottonatthepricespaid,sothe government forced them. Every farmer now has to allocate 35percent of his land to cotton. This causedmany problems, difficultieswith machinery being one. At the time of independence, about 40percentoftheharvestwaspickedbycombineharvesters.After1991,not

surprisingly, given the incentives that President Karimov’s regimecreated for farmers, they were not willing to buy these or maintainthem. Recognizing the problem, Karimov came up with a solution, infact,acheaperoptionthancombineharvesters:schoolchildren.The cotton bolls start to ripen and are ready to be picked in early

September, at about the same time that children return to school.Karimovissuedorderstolocalgovernorstosendcottondeliveryquotasto schools. In early September the schools are emptied of 2.7 millionchildren (2006 figures). Teachers, instead of being instructors, becamelabor recruiters. Gulnaz, amother of two of these children, explainedwhathappens:

At the beginning of each school year, approximately at thebeginningofSeptember,theclassesinschoolaresuspended,andinsteadofclasseschildrenaresenttothecottonharvest.Nobody asks for the consent of parents. They don’t haveweekendholidays[duringtheharvestingseason].Ifachildisfor any reason left at home, his teacher or class curatorcomesoveranddenouncestheparents.Theyassignaplantoeachchild,from20to60kgperdaydependingonthechild’sage.Ifachildfailstofulfilthisplanthennextmorningheislambastedinfrontofthewholeclass.

Theharvest lasts for twomonths.Ruralchildren luckyenough tobeassignedtofarmsclosetohomecanwalkorarebusedtowork.Childrenfarther away or from urban areas have to sleep in the sheds orstorehouses with the machinery and animals. There are no toilets orkitchens.Childrenhavetobringtheirownfoodforlunch.The main beneficiaries from all this forced labor are the political

elites,ledbyPresidentKarimov,thedefactokingofallUzbekicotton.The schoolchildren are supposedly paid for their labor, but onlysupposedly.In2006,whentheworldpriceofcottonwasaround$1.40(U.S.)perkilo,thechildrenwerepaidabout$0.03fortheirdailyquotaoftwentytosixtykilos.Probably75percentofthecottonharvestisnowpickedbychildren.Inthespring,schoolisclosedforcompulsoryhoeing,weeding,andtransplanting.Howdiditallcometothis?Uzbekistan,liketheotherSovietSocialist

Republics,was supposed to gain its independence after the collapse oftheSovietUnionanddevelopamarketeconomyanddemocracy.Asinmany other Soviet Republics, this is not what happened, however.President Karimov, who began his political career in the CommunistParty of the old Soviet Union, rising to the post of first secretary forUzbekistan at the opportunemoment of 1989, just as the BerlinWallwas collapsing,managed to reinventhimself as a nationalist.With thecrucial support of the security forces, in December 1991 he wonUzbekistan’s first-ever presidential election. After taking power, hecracked down on the independent political opposition. Opponents arenow in prison or exile. There is no freemedia in Uzbekistan, and nonongovernmental organizations are allowed. The apogee of theintensifyingrepressioncamein2005,whenpossibly750,maybemore,demonstratorsweremurderedbythepoliceandarmyinAndijon.Using this command of the security forces and total control of the

media, Karimov first extended his presidential term for five years,through a referendum, and then won reelection for a new seven-yeartermin2000,with91.2percentofthevote.HisonlyopponentdeclaredthathehadvotedforKarimov!Inhis2007reelection,widelyregardedasfraudulent,hewon88percentofthevote.ElectionsinUzbekistanaresimilartothosethatJosephStalinusedtoorganizeintheheydayoftheSoviet Union. One in 1937 was famously covered byNew York TimescorrespondentHaroldDenny,whoreproducedatranslationfromPravda,thenewspaperoftheCommunistParty,whichwasmeanttoconveythetensionandexcitementofSovietelections:

Midnighthasstruck.ThetwelfthofDecember,thedayofthefirst general, equal and direct elections to the SupremeSoviet, has ended. The result of the voting is about to beannounced.Thecommissionremainsaloneinitsroom.Itisquiet,and

the lamps are shining solemnly. Amid the general attentiveand intense expectation the chairman performs all thenecessary formalities before counting of the ballots—checking up by list how many voters there were and howmany have voted—and the result is 100 per cent. 100 percent!Whatelection inwhatcountry forwhatcandidatehas

givena100percentresponse?The main business starts now. Excitedly the chairman

inspects the seals on the boxes. Then the members of thecommissioninspectthem.Thesealsareintactandarecutoff.Theboxesareopened.Itisquiet.Theysitattentivelyandseriously,theseelection

inspectorsandexecutives.Now it is time to open the envelopes. Threemembers of

thecommissiontakescissors.Thechairmanrises.Thetellershavetheircopybooksready.Thefirstenvelopeisslit.Alleyesare directed to it. The chairman takes out two slips—white[foracandidatefortheSovietoftheUnion]andblue[foracandidate for the Soviet ofNationalities]—and reads loudlyanddistinctly,“ComradeStalin.”Instantly the solemnity is broken. Everybody in the room

jumps up and applauds joyously and stormily for the firstballot of the first general secret election under the StalinistConstitution—a ballot with the name of the Constitution’screator.

This mood would have captured the suspense surrounding thereelectionsofKarimov,whoappearsanaptpupilofStalinwhenitcomestorepressionandpoliticalcontrolandseems toorganizeelections thatcompetewiththoseofStalinintheirsurrealism.UnderKarimov,Uzbekistanisacountrywithveryextractivepolitical

and economic institutions. And it is poor. Probably one-third of thepeopleliveinpoverty,andtheaverageannualincomeisaround$1,000.Not all the development indicators are bad. According toWorld Bankdata, school enrollment is 100 percent…well, except possibly duringthecottonpickingseason.Literacyisalsoveryhigh,thoughapartfromcontrolling all themedia, the regime also bans books and censors theInternet. While most people are paid only a few cents a day to pickcotton, the Karimov family and former communist cadres whoreinvented themselves after 1989 as the new economic and politicalelitesofUzbekistanhavebecomefabulouslywealthy.ThefamilyeconomicinterestsarerunbyKarimov’sdaughterGulnora,

who is expected to succeed her father as president. In a country so

untransparent and secretive, nobody knows exactly what the Karimovfamilycontrolsorhowmuchmoneytheyearn,buttheexperienceoftheU.S.companyInterspanisindicativeofwhathashappenedintheUzbekeconomy in the last two decades. Cotton is not the only agriculturalcrop; parts of the country are ideal for growing tea, and Interspandecided to invest. By 2005 it had taken over 30 percent of the localmarket, but then it ran into trouble. Gulnora decided that the teaindustry looked economically promising. Soon Interspan’s localpersonnel started to be arrested, beaten up, and tortured. It becameimpossibletooperate,andbyAugust2006thecompanyhadpulledout.ItsassetsweretakenoverbytheKarimovfamilies’rapidlyexpandingteainterests,at the timerepresenting67percentof themarket,up from2percentacoupleofyearsearlier.Uzbekistaninmanywayslookslikearelicfromthepast,aforgotten

age. It isacountry languishingundertheabsolutismofasingle familyand the cronies surrounding them, with an economy based on forcedlabor—infact,theforcedlaborofchildren.Exceptthatitisn’t.It’spartof the current mosaic of societies failing under extractive institutions,andunfortunately ithasmanycommonalitieswithother formerSovietSocialistRepublics,rangingfromArmeniaandAzerbaijantoKyrgyzstan,Tajikistan,andTurkmenistan,and remindsus thateven in the twenty-first century, extractiveeconomicandpolitical institutions can takeanunashamedatrociouslyextractiveform.

KEEPINGTHEPLAYINGFIELDATANANGLE

The1990swereaperiodofreforminEgypt.Sincethemilitarycoupthatremovedthemonarchyin1954,Egypthadbeenrunasaquasi-socialistsociety inwhichthegovernmentplayedacentralrole intheeconomy.Many sectors of the economy were dominated by state-ownedenterprises. Over the years, the rhetoric of socialism lapsed, marketsopened,and theprivate sectordeveloped.Yet thesewerenot inclusivemarkets, but markets controlled by the state and by a handful ofbusinessmen allied with the National Democratic Party (NDP), thepoliticalpartyfoundedbyPresidentAnwarSadatin1978.Businessmenbecamemoreandmore involvedwiththeparty,andthepartybecame

more and more involved with them under the government of HosniMubarak. Mubarak, who became president in 1981 following AnwarSadat’sassassination,ruledwiththeNDPuntilbeingforcedfrompowerbypopularprotestsandthemilitaryinFebruary2011,aswediscussedinthePreface(thispage).Major businesspeople were appointed to key government posts in

areas closely related to their economic interests. Rasheed MohamedRasheed, formerpresident ofUnileverAMET (Africa,MiddleEast, andTurkey), became minister of foreign trade and industry; MohamedZoheir Wahid Garana, the owner and managing director of GaranaTravel Company, one of the largest in Egypt, became minister oftourism; Amin Ahmed Mohamed Osman Abaza, founder of the NileCottonTradeCompany,thelargestcotton-exportingcompanyinEgypt,becameministerofagriculture.In many sectors of the economy, businessmen persuaded the

government to restrict entry through state regulation. These sectorsincluded themedia, iron and steel, the automotive industry, alcoholicbeverages, and cement. Each sector was very concentrated with highentry barriers protecting the politically connected businessmen andfirms.Bigbusinessmenclosetotheregime,suchasAhmedEzz(ironandsteel), the Sawiris family (multimedia, beverages, andtelecommunications), and Mohamed Nosseir (beverages andtelecommunications)receivednotonlyprotectionfromthestatebutalsogovernment contracts and large bank loanswithout needing to put upcollateral. Ahmed Ezzwas both the chairman of Ezz Steel, the largestcompanyinthecountry’ssteelindustry,producing70percentofEgypt’ssteel,andalsoahigh-rankingmemberoftheNDP,thechairmanofthePeople’sAssemblyBudgetandPlanningCommittee,andacloseassociateofGamalMubarak,oneofPresidentMubarak’ssons.The economic reforms of the 1990s promoted by international

financial institutionsandeconomistswereaimedat freeingupmarketsandreducingtheroleofthestateintheeconomy.Akeypillarofsuchreformseverywherewastheprivatizationofstate-ownedassets.Mexicanprivatization (this page–this page), instead of increasing competition,simplyturnedstate-ownedmonopoliesintoprivatelyownedmonopolies,in the process enriching politically connected businessmen such asCarlos Slim. Exactly the same thing took place in Egypt. The

businesspeople connected to the regimewereable toheavily influenceimplementationofEgypt’s privatizationprogram so that it favored thewealthybusiness elite—or the “whales,” as they are known locally.Atthetimethatprivatizationbegan,theeconomywasdominatedbythirty-twoofthesewhales.OnewasAhmedZayat,at thehelmof theLuxorGroup. In1996thegovernmentdecidedtoprivatizeAlAhrambeverages(ABC),whichwasthemonopolymakerofbeerinEgypt.Abidcameinfromaconsortiumof the Egyptian Finance Company, led by real estate developer FaridSaad, alongwith the first venture capital company formed inEgypt in1995. The consortium included Fouad Sultan, former minister oftourism, Mohamed Nosseir, and Mohamed Ragab, another elitebusinessman. The group was well connected, but not well connectedenough.Itsbidof400millionEgyptianpoundswasturneddownastoolow.Zayatwasbetterconnected.Hedidn’thavethemoneytopurchaseABC,sohecameupwithaschemeofCarlosSlim–typeingenuity.ABCshareswerefloatedforthefirsttimeontheLondonStockExchange,andtheLuxorGroupacquired74.9percentofthosesharesat68.5Egyptianpoundspershare.Threemonthslatertheshareswerethensplitintwo,andtheLuxorGroupwasable tosellallof themat52.5poundseach,netting a 36 percent profit, with which Zayat was able to fund thepurchase ofABC for 231million pounds the nextmonth.At the time,ABC was making an annual profit of around 41.3 million Egyptianpounds and had cash reserves of 93 million Egyptian pounds. It wasquite a bargain. In 1999 the newly privatized ABC extended itsmonopoly frombeer intowinebybuying theprivatizednationalwinemonopolyGianaclis.Gianacliswas a veryprofitable company,nestlingbehinda3,000percenttariff imposedonimportedwines,andithada70percentprofitmarginonwhatitsold.In2002themonopolychangedhandsagainwhenZayatsoldABCtoHeinekenfor1.3billionEgyptianpounds.A563percentprofitinfiveyears.MohamedNosseirhadn’talwaysbeenon the losingside. In1993hepurchased the privatized El Nasr Bottling Company, which had themonopolyrightstobottleandsellCoca-ColainEgypt.Nosseir’srelationswiththethen-ministerofthepublicbusinesssector,AtefEbeid,allowedhimtomakethepurchasewithlittlecompetition.Nosseirthensoldthecompanyaftertwoyearsformorethanthreetimestheacquisitionprice.

Anotherexamplewasthemoveinthelate1990stoinvolvetheprivatesector inthestatecinemaindustry.Againpoliticalconnections impliedthatonlytwofamilieswereallowedtobidforandoperatethecinemas—oneofwhomwastheSawirisfamily.Egypt today is a poor nation—not as poor asmost countries to thesouth, in sub-SaharanAfrica,but still onewherearound40percentofthe population is very poor and lives on less than two dollars a day.Ironically, as we saw earlier (this page–this page), in the nineteenthcentury Egypt was the site of an initially successful attempt atinstitutionalchangeandeconomicmodernizationunderMuhammadAli,whodidgenerateaperiodofextractiveeconomicgrowthbeforeitwaseffectively annexed to the British Empire. From the British colonialperiod a set of extractive institutions emerged, andwere continuedbythe military after 1954. There was some economic growth andinvestment in education, but the majority of the population had feweconomic opportunities, while the new elite could benefit from theirconnectionstothegovernment.These extractive economic institutions were again supported byextractive political institutions. PresidentMubarak planned to begin apoliticaldynasty,groominghissonGamaltoreplacehim.Hisplanwascutshortonlybythecollapseofhisextractiveregimeinearly2011inthe face ofwidespread unrest and demonstrations during the so-calledArabSpring.During theperiodwhenNasserwaspresident, thereweresome inclusiveaspectsofeconomic institutions,and thestatedidopenup the education system and provide some opportunities that thepreviousregimeofKingFaroukhadnot.Butthiswasanexampleofanunstable combination of extractive political institutions with someinclusivityofeconomicinstitutions.Theinevitableoutcome,whichcameduringMubarak’sreign,wasthateconomicinstitutionsbecamemoreextractive,reflectingthedistributionof political power in society. In some sense the Arab Spring was areactiontothis.ThiswastruenotjustinEgyptbutalsoinTunisia.ThreedecadesofTunisiangrowthunderextractivepoliticalinstitutionsstartedtogointoreverseasPresidentBenAliandhisfamilybegantopreymoreandmoreontheeconomy.

WHYNATIONSFAIL

Nations fail economically because of extractive institutions. Theseinstitutionskeeppoorcountriespoorandpreventthemfromembarkingon a path to economic growth. This is true today in Africa, in placessuchasZimbabweandSierraLeone;inSouthAmerica,incountriessuchas Colombia and Argentina; in Asia, in countries such as North KoreaandUzbekistan;andintheMiddleEast,innationssuchasEgypt.Therearenotabledifferencesamongthesecountries.Somearetropical,someare in temperate latitudes. Some were colonies of Britain; others, ofJapan,Spain,andRussia.Theyhaveverydifferenthistories, languages,andcultures.What theyall share is extractive institutions. In all thesecases the basis of these institutions is an elite who design economicinstitutionsinordertoenrichthemselvesandperpetuatetheirpoweratthe expense of the vast majority of people in society. The differenthistoriesandsocialstructuresofthecountriesleadtothedifferencesinthenatureof theelitesand in thedetailsof theextractive institutions.Butthereasonwhytheseextractiveinstitutionspersistisalwaysrelatedtotheviciouscircle,andtheimplicationsoftheseinstitutionsintermsofimpoverishingtheircitizensaresimilar—eveniftheirintensitydiffers.InZimbabwe,forexample,theelitecompriseRobertMugabeandthecoreofZANU-PF,whospearheadedtheanticolonial fight inthe1970s.In North Korea, they are the clique around Kim Jong-Il and theCommunist Party. In Uzbekistan it is President Islam Karimov, hisfamily, and his reinvented Soviet Union–era cronies. These groups areobviouslyverydifferent,andthesedifferences,alongwiththevariegatedpolities and economies they govern, mean that the specific form theextractive institutions take differs. For instance, because North Koreawascreatedbyacommunistrevolution,ittakesasitspoliticalmodeltheone-party ruleof theCommunistParty.ThoughMugabedid invite theNorth Korean military into Zimbabwe in the 1980s to massacre hisopponents in Matabeleland, such a model for extractive politicalinstitutions isnotapplicable inZimbabwe. Instead,becauseof thewayhecametopowerintheanticolonialstruggle,Mugabehadtocloakhisrulewithelections,evenifforawhilehemanagedactuallytoengineeraconstitutionallysanctifiedone-partystate.In contrast, Colombia has had a long history of elections, which

emergedhistoricallyasamethodforsharingpowerbetweentheLiberalandConservativeparties in thewakeof independence fromSpain.Notonly is the nature of elites different, but their numbers are. InUzbekistan, Karimov could hijack the remnants of the Soviet state,whichgavehimastrongapparatus tosuppressandmurderalternativeelites.InColombia,thelackofauthorityofthecentralstateinpartsofthecountryhasnaturally led tomuchmore fragmentedelites—in fact,so much so that they sometimes murder one another. Nevertheless,despite these variegated elites and political institutions, theseinstitutionsoftenmanagetocementandreproducethepoweroftheelitethatcreatedthem.Butsometimestheinfightingtheyinduceleadstothecollapseofthestate,asinSierraLeone.Just as different histories and structures mean that the identity ofelitesandthedetailsofextractivepoliticalinstitutionsdiffer,sodothedetails of the extractive economic institutions that the elites set up. InNorth Korea, the tools of extraction were again inherited from thecommunisttoolkit:theabolitionofprivateproperty,state-runfarms,andindustry.InEgypt,thesituationwasquitesimilarundertheavowedlysocialistmilitaryregimecreatedbyColonelNasserafter1952.Nassersidedwiththe Soviet Union in the cold war, expropriating foreign investments,such as the British-owned SuezCanal, and took into public ownershipmuchoftheeconomy.However,thesituationinEgyptinthe1950sand’60swas very different from that inNorth Korea in the 1940s. ItwasmucheasierfortheNorthKoreanstocreateamoreradicallycommunist-styleeconomy,sincetheycouldexpropriateformerJapaneseassetsandbuildontheeconomicmodeloftheChineseRevolution.Incontrast, theEgyptianRevolutionwasmoreacoupbyagroupofmilitaryofficers.WhenEgyptchangedsidesinthecoldwarandbecamepro-Western, itwas therefore relatively easy, aswell as expedient, forthe Egyptian military to change from central command to cronycapitalism as a method of extraction. Even so, the better economicperformanceofEgyptcomparedwithNorthKoreawasaconsequenceofthe more limited extractive nature of Egyptian institutions. For onething,lackingthestiflingcontroloftheNorthKoreanCommunistParty,the Egyptian regime had to placate its population in a way that theNorth Korean regime does not. For another, even crony capitalism

generatessomeincentives for investment,at leastamongthosefavoredbytheregime,thataretotallyabsentinNorthKorea.Though these details are all important and interesting, the morecriticallessonsareinthebigpicture,whichrevealsthatineachofthesecases, extractive political institutions have created extractive economicinstitutions,transferringwealthandpowertowardtheelite.Theintensityofextractioninthesedifferentcountriesobviouslyvariesand has important consequences for prosperity. In Argentina, forexample,theconstitutionanddemocraticelectionsdonotworkwelltopromotepluralism,buttheydofunctionmuchbetterthaninColombia.At least the state can claim the monopoly of violence in Argentina.Partlyasaconsequence,incomepercapitainArgentinaisdoublethatofColombia.Thepolitical institutionsofbothcountriesdoamuchbetterjobofrestrainingelitesthanthoseinZimbabweandSierraLeone,andasa result, Zimbabwe and Sierra Leone aremuch poorer than ArgentinaandColombia.Theviciouscirclealso implies thatevenwhenextractive institutionsleadtothecollapseofthestate,asinSierraLeoneandZimbabwe,thisdoesn’t put a conclusive end to the rule of these institutions.Wehavealready seen that civil wars and revolutions, while they may occurduringcriticaljunctures,donotnecessarilyleadtoinstitutionalchange.The events in Sierra Leone since the civil war ended in 2002 vividlyillustratethispossibility.In2007 inademocraticelection, theoldpartyofSiakaStevens, theAPC, returned to power. Though the man who won the presidentialelection, Ernest Bai Koroma, had no association with the old APCgovernments,manyofhis cabinetdid.TwoofStevens’s sons,Bockarieand Jengo, were even made ambassadors to the United States andGermany. In a sense this is a more volatile version of what we sawhappeninColombia.Therethelackofstateauthorityinmanypartsofthecountrypersistsovertimebecauseitisintheinterestsofpartofthenationalpoliticalelitetoallowittodoso,butthecorestateinstitutionsare also strong enough to prevent this disorder from turning intocomplete chaos. In SierraLeone,partlybecauseof themore extractivenature of economic institutions and partly because of the country’shistoryofhighlyextractivepoliticalinstitutions,thesocietyhasnotonlysuffered economically but has also tipped between complete disorder

andsomesortoforder.Still,thelong-runeffectisthesame:thestateallbutremainsabsent,andinstitutionsareextractive.In all these cases there has been a long history of extractiveinstitutionssinceatleastthenineteenthcentury.Eachcountryistrappedin a vicious circle. In Colombia andArgentina, they are rooted in theinstitutionsofSpanishcolonialrule(thispage–thispage).ZimbabweandSierra Leone originated in British colonial regimes set up in the latenineteenth century. In Sierra Leone, in the absence of white settlers,these regimes built extensively on precolonial extractive structures ofpoliticalpowerand intensified them.These structures themselveswerethe outcome of a long vicious circle that featured lack of politicalcentralizationandthedisastrouseffectsoftheslavetrade.InZimbabwe,there was much more of a construction of a new form of extractiveinstitutions, because the British South Africa Company created a dualeconomy.Uzbekistan could take over the extractive institutions of theSoviet Union and, like Egypt,modify them into crony capitalism. TheSovietUnion’s extractive institutions themselveswere inmanyways acontinuationofthoseofthetsaristregime,againinapatternpredicatedontheironlawofoligarchy.Asthesevariousviciouscirclesplayedoutindifferentpartsoftheworldoverthepast250years,worldinequalityemerged,andpersists.Thesolutiontotheeconomicandpolitical failureofnationstodayisto transform their extractive institutions toward inclusive ones. Theviciouscirclemeansthatthisisnoteasy.Butitisnotimpossible,andtheironlawofoligarchyisnotinevitable.Eithersomepreexistinginclusiveelementsininstitutions,orthepresenceofbroadcoalitionsleadingthefightagainsttheexistingregime,orjustthecontingentnatureofhistory,can break vicious circles. Just like the civil war in Sierra Leone, theGlorious Revolution in 1688 was a struggle for power. But it was astruggle of a very different nature than the civil war in Sierra Leone.ConceivablysomeinParliamentfightingtoremoveJamesIIinthewakeoftheGloriousRevolutionimaginedthemselvesplayingtheroleof thenewabsolutist,asOliverCromwelldidafter theEnglishCivilWar.Butthefact thatParliamentwasalreadypowerfulandmadeupofabroadcoalition consistingof different economic interests anddifferentpointsofviewmadetheironlawofoligarchylesslikelytoapplyin1688.AnditwashelpedbythefactthatluckwasonthesideofParliamentagainst

James II. In the next chapter,wewill see other examples of countriesthathavemanagedtobreakthemoldandtransformtheirinstitutionsforthebetter,evenafteralonghistoryofextractiveinstitutions.

14.

BREAKINGTHEMOLD

THREEAFRICANCHIEFS

ON SEPTEMBER 6, 1895, the ocean liner Tantallon Castle docked atPlymouthonthesoutherncoastofEngland.ThreeAfricanchiefs,Khamaof the Ngwato, Bathoen of the Ngwaketse, and Sebele of the Kwena,disembarked and took the 8:10 express train to Paddington Station,London.ThethreechiefshadcometoBritainonamission:tosavetheirand five other Tswana states from Cecil Rhodes. The Ngwato,Ngwaketse,andKwenawerethreeoftheeightTswanastatescomprisingwhatwasthenknownasBechuanaland,whichwouldbecomeBotswanaafterindependencein1966.ThetribeshadbeentradingwithEuropeansformostofthenineteenth

century.Inthe1840s,thefamousScottishmissionaryDavidLivingstonehadtraveledextensivelyinBechuanalandandconvertedKingSecheleofthe Kwena to Christianity. The first translation of the Bible into anAfricanlanguagewasinSetswana,thelanguageoftheTswana.In1885Britain had declared Bechuanaland a protectorate. The Tswana werecontentwith the arrangement, as they thought thiswould bring themprotectionfromfurtherEuropeaninvasions,particularlyfromtheBoers,with whom they had been clashing since the Great Trek in 1835, amigrationofthousandsofBoersintotheinteriortoescapefromBritishcolonialism.TheBritish,ontheotherhand,wantedcontrolof theareatoblockbothfurtherexpansionsbytheBoers(thispage–thispage)andpossibleexpansionsbyGermans,whohadannexedtheareaofsouthwestAfricacorrespondingtotoday’sNamibia.TheBritishdidnotthinkthatafull-scale colonization was worthwhile. The high commissioner ReysummarizedtheattitudesoftheBritishgovernmentin1885clearly:“We

have no interest in the country to the north of the Molope [theBechuanalandprotectorate],exceptasa road to the interior;wemightthereforeconfineourselvesforthepresenttopreventingthatpartoftheProtectoratebeingoccupiedbyeitherfilibustersorforeignpowersdoingaslittleinthewayofadministrationorsettlementaspossible.”But things changed for the Tswana in 1889 when Cecil Rhodes’sBritish South Africa Company started expanding north out of SouthAfrica,expropriatinggreatswathsoflandthatwouldeventuallybecomeNorthernandSouthernRhodesia,nowZambiaandZimbabwe.By1895,the year of the three chiefs’ visit to London, Rhodes had his eye onterritoriestothesouthwestofRhodesia,Bechuanaland.Thechiefsknewthat only disaster and exploitation lay ahead for territories if they fellunder the control of Rhodes. Though it was impossible for them todefeat Rhodes militarily, they were determined to fight him any waythey could. They decided to opt for the lesser of two evils: greatercontrolbytheBritishratherthanannexationbyRhodes.Withthehelpof the London Missionary Society, they traveled to London to try topersuade Queen Victoria and Joseph Chamberlain, then colonialsecretary, to take greater control of Bechuanaland and protect it fromRhodes.On September 11, 1895, they had their first meeting withChamberlain. Sebele spoke first, then Bathoen, and finally Khama.ChamberlaindeclaredthathewouldconsiderimposingBritishcontroltoprotect the tribes from Rhodes. In the meantime, the chiefs quicklyembarkedonanationwidespeakingtourtodrumuppopularsupportfortheirrequests.TheyvisitedandspokeatWindsorandReading,closetoLondon; in Southampton on the south coast; and in Leicester andBirmingham,inChamberlain’spoliticalsupportbase,theMidlands.Theywent north to industrial Yorkshire, to Sheffield, Leeds, Halifax, andBradford;theyalsowentwesttoBristolandthenuptoManchesterandLiverpool.Meanwhile, back in South Africa, Cecil Rhodes was makingpreparations for what would become the disastrous Jameson Raid, anarmed assault on the Boer Republic of the Transvaal, despiteChamberlain’sstrongobjections.Theseevents likelymadeChamberlainmuchmore sympathetic to the chiefs’ plight than hemight have beenotherwise. On November 6, they met with him again in London. The

chiefsspokethroughaninterpreter:

Chamberlain:IwillspeakaboutthelandsoftheChiefs,andabouttherailway,andaboutthelawwhichistobeobservedin the territory of the Chiefs … Now let us look at themap…Wewill takethe landthatwewantfortherailway,andnomore.Khama: I say, that if Mr. Chamberlain will take the landhimself,Iwillbecontent.Chamberlain: Then tell him that I will make the railwaymyselfby theeyesofonewhomIwill sendand Iwill takeonlyasmuchasIrequire,andwillgivecompensationifwhatItakeisofvalue.Khama: Iwould liketoknowhow[i.e.,where]therailwaywillgo.Chamberlain: It shall go through his territory but shall befencedin,andwewilltakenoland.Khama:Itrustthatyouwilldothisworkasformyself,andtreatmefairlyinthismatter.Chamberlain:Iwillguardyourinterests.

The next day, Edward Fairfield, at the Colonial Office, explainedChamberlain’ssettlementinmoredetail:

Each of the three chiefs, Khama, Sebele and Bathoen, shallhaveacountrywithinwhichtheyshallliveashithertounderthe protection of the Queen. The Queen shall appoint anofficer to reside with them. The chiefs will rule their ownpeoplemuchasatpresent.

Rhodes’sreactiontobeingoutmaneuveredbythethreeAfricanchiefswaspredictable.Hecabledtooneofhisemployees,saying,“Idoobjecttobeingbeatenbythreecantingnatives.”The chiefs in fact had something valuable that they had protectedfromRhodesandwouldsubsequentlyprotectfromBritishindirectrule.Bythenineteenthcentury,theTswanastateshaddevelopedacoresetofpolitical institutions. These involved both an unusual degree, by sub-

Saharan African standards, of political centralization and collectivedecision-making procedures that can even be viewed as a nascent,primitive form of pluralism. Just as the Magna Carta enabled theparticipation of barons into the political decision-making process andput some restrictions on the actions of the English monarchs, thepolitical institutions of the Tswana, in particular the kgotla, alsoencouraged political participation and constrained chiefs. The SouthAfricananthropologist IsaacSchaperadescribeshow thekgotlaworkedasfollows:

all matters of tribal policy are dealt with finally before ageneral assembly of the adult males in the chief’s kgotla(council place). Such meetings are very frequentlyheld … among the topics discussed … are tribal disputes,quarrelsbetweenthechiefandhisrelatives,theimpositionofnew levies, the undertaking of new public works, thepromulgation of new decrees by the chief … it is notunknownforthetribalassemblytooverrulethewishesofthechief.Sinceanyonemayspeak,thesemeetingsenablehimtoascertainthefeelingsofthepeoplegenerally,andprovidethelatterwithanopportunityof stating their grievances. If theoccasion calls for it, he and his advisers may be takenseverely to task, for the people are seldom afraid to speakopenlyandfrankly.

Beyondthekgotla, theTswanachieftaincywasnotstrictlyhereditarybut open to any man demonstrating significant talent and ability.Anthropologist JohnComaroff studied in detail the political history ofanother of the Tswana states, the Rolong. He showed that though inappearance the Tswana had clear rules stipulating how the chieftancywas tobe inherited, inpractice theseruleswere interpreted toremovebad rulers and allow talented candidates to become chief. He showedthatwinningthechieftancywasamatterofachievement,butwasthenrationalizedsothatthesuccessfulcompetitorappearedtobetherightfulheir. The Tswana captured this idea with a proverb, with a tinge ofconstitutionalmonarchy:kgosi kekgosi kamorafe, “Theking iskingbythegraceofthepeople.”

The Tswana chiefs continued in their attempts to maintain theirindependence from Britain and preserve their indigenous institutionsaftertheirtriptoLondon.TheyconcededtheconstructionofrailwaysinBechuanaland,butlimitedtheinterventionoftheBritishinotheraspectsofeconomicandpoliticallife.Theywerenotopposedtotheconstructionof the railways, certainly not for the same reasons as the Austro-Hungarian and Russianmonarchs blocked railways. They just realizedthatrailways,liketherestofthepoliciesoftheBritish,wouldnotbringdevelopment toBechuanalandas longas itwasundercolonialcontrol.The early experience of Quett Masire, president of independentBotswanafrom1980to1998,explainswhy.Masirewasanenterprisingfarmer in the 1950s; he developed new cultivation techniques forsorghumandfoundapotentialcustomerinVryburgMilling,acompanylocatedacrosstheborderinSouthAfrica.HewenttotherailwaystationmasteratLobatseinBechuanalandandaskedtorenttworailtruckstomove his crop to Vryburg. The stationmaster refused. Then he got awhite friend to intervene. The station master reluctantly agreed, butquoted Masire four times the rate for whites. Masire gave up andconcluded, “It was the practice of the whites, not just the lawsprohibiting Africans from owning freehold land or holding tradinglicensesthatkeptblacksfromdevelopingenterprisesinBechuanaland.”Allinall,thechiefs,andtheTswanapeople,hadbeenlucky.Perhapsagainst all odds, they succeeded in preventing Rhodes’s takeover. AsBechuanaland was still marginal for the British, the establishment ofindirectruletheredidnotcreatethetypeofviciouscircleplayingoutinSierra Leone (this page–this page). They also avoided the kind ofcolonial expansion that went on in the interior of South Africa thatwouldturnthoselandsintoreservoirsofcheaplaborforwhiteminersorfarmers. The early stages of the process of colonization are a criticaljuncture for most societies, a crucial period during which events thatwill have important long-term consequences for their economic andpolitical development transpire. As we discussed in chapter 9, mostsocietiesinsub-SaharanAfrica,justasthoseinSouthAmericaandSouthAsia, witnessed the establishment or intensification of extractiveinstitutionsduring colonization.TheTswanawould instead avoidbothintense indirect rule and the far worse fate that would have befallenthemhadRhodes succeeded inannexing their lands.Thiswasnot just

blindluck,however.Itwasonceagainaresultoftheinterplaybetweentheexistinginstitutions,shapedbytheinstitutionaldriftoftheTswanapeople,andthecriticaljuncturebroughtaboutbycolonialism.ThethreechiefshadmadetheirownluckbytakingtheinitiativeandtravelingtoLondon, and they were able to do this because they had an unusualdegreeofauthority, comparedwithother tribal leaders in sub-SaharanAfrica, owing to the political centralization the Tswana tribes hadachieved, and perhaps they also had an unusual degree of legitimacy,because of the modicum of pluralism embedded in their tribalinstitutions.Another critical juncture at the end of the colonial periodwould be

morecentraltothesuccessofBotswana,enablingittodevelopinclusiveinstitutions. By the time Bechuanaland became independent in 1966under thenameBotswana, the lucky successofchiefsSebele,Bathoen,and Khamawas long in the past. In the intervening years, the Britishinvestedlittle inBechuanaland.At independence,Botswanawasoneofthepoorestcountriesintheworld;ithadatotaloftwelvekilometersofpaved roads, twenty-two citizens who had graduated from university,andonehundredfromsecondaryschool.Totopitalloff,itwasalmostcompletely surroundedby thewhite regimesofSouthAfrica,Namibia,andRhodesia,allofwhichwerehostiletoindependentAfricancountriesrunbyblacks.Itwouldhavebeenonfewpeople’slistofcountriesmostlikely to succeed. Yet over the next forty-five years, Botswana wouldbecome one of the fastest-growing countries in the world. TodayBotswanahasthehighestpercapitaincomeinsub-SaharanAfrica,andisat the same level as successful Eastern European countries such asEstonia andHungary, and themost successful LatinAmericannations,suchasCostaRica.HowdidBotswanabreak themold?By quickly developing inclusive

economicandpoliticalinstitutionsafterindependence.Sincethen,ithasbeendemocratic,holdsregularandcompetitiveelections,andhasneverexperienced civilwar ormilitary intervention. The government set upeconomic institutions enforcing property rights, ensuringmacroeconomic stability, and encouraging the development of aninclusivemarketeconomy.Butofcourse,themorechallengingquestionis, how did Botswana manage to establish a stable democracy andpluralisticinstitutions,andchooseinclusiveeconomicinstitutions,while

mostotherAfricancountriesdidtheopposite?Toanswerthis,wehavetounderstandhowacriticaljuncture,thistimetheendofcolonialrule,interactedwithBotswana’sexistinginstitutions.In most of sub-Saharan Africa—for example, for Sierra Leone and

Zimbabwe—independencewasanopportunitymissed, accompaniedbythe re-creation of the same type of extractive institutions that existedduringthecolonialperiod.Earlystagesofindependencewouldplayoutvery differently in Botswana, again largely because of the backgroundcreated by Tswana historical institutions. In this, Botswana exhibitedmany parallels to England on the verge of the Glorious Revolution.England had achieved rapid political centralization under the TudorsandhadtheMagnaCartaandthetraditionofParliamentthatcouldatleastaspiretoconstrainmonarchsandensuresomedegreeofpluralism.Botswana also had some amount of state centralization and relativelypluralistic tribal institutions that survived colonialism. England had anewly forming broad coalition, consisting of Atlantic traders,industrialists,andthecommerciallymindedgentry,thatwasinfavorofwell-enforced property rights. Botswana had its coalition in favor ofsecure procedure rights, the Tswana chiefs, and eliteswho owned themajor assets in the economy, cattle. Even though land was heldcommunally, cattlewasprivateproperty in theTswana states, and theelitesweresimilarlyinfavorofwell-enforcedpropertyrights.Allthisofcourseisnotdenyingthecontingentpathofhistory.Thingswouldhaveturnedoutverydifferently inEngland ifparliamentary leadersandthenew monarch had attempted to use the Glorious Revolution to usurppower. Similarly, things could have turned out very differently inBotswana, especially if it hadn’t been so fortunate as to have leaderssuchasSeretseKhama,orQuettMasire,whodecidedtocontestpowerin elections rather than subvert the electoral system, as manypostindependenceleadersinsub-SaharanAfricadid.At independence the Tswana emerged with a history of institutions

enshrining limited chieftaincy and some degree of accountability ofchiefstothepeople.TheTswanawereofcoursenotuniqueinAfricaforhavinginstitutionslikethis,buttheywereuniqueintheextenttowhichthese institutions survived the colonial period unscathed. British rulehadbeenallbutabsent.BechuanalandwasadministeredfromMafeking,inSouthAfrica,anditwasonlyduringthetransitiontoindependencein

the1960sthattheplansforthecapitalofGaboronewerelaidout.Thecapital and the new structures there were not meant to expunge theindigenous institutions, but to build on them; as Gaborone wasconstructed,newkgotlaswereplannedalongwithit.Independence was also a relatively orderly affair. The drive forindependencewasledbytheBotswanaDemocraticParty(BDP),foundedin1960byQuettMasireandSeretseKhama.KhamawasthegrandsonofKing Khama III; his given name, Seretse, means “the clay that bindstogether.” It was to be an extraordinarily apt name. Khama was thehereditarychiefoftheNgwato,andmostoftheTswanachiefsandelitesjoined the Botswana Democratic Party. Botswana didn’t have amarketing board, because the British had been so uninterested in thecolony. The BDP quickly set one up in 1967, the Botswana MeatCommission. But instead of expropriating the ranchers and cattleowners, theMeat Commission played a central role in developing thecattleeconomy; itputup fences tocontrol foot-and-mouthdiseaseandpromoted exports, which would both contribute to economicdevelopment and increase the support for inclusive economicinstitutions.Though theearlygrowth inBotswanareliedonmeatexports, thingschanged dramatically when diamonds were discovered. Themanagement of natural resources in Botswana also differed markedlyfrom that in other African nations. During the colonial period, theTswana chiefs had attempted to block prospecting for minerals inBechuanalandbecausetheyknewthatifEuropeansdiscoveredpreciousmetalsorstones, theirautonomywouldbeover.Thefirstbigdiamonddiscovery was under Ngwato land, Seretse Khama’s traditionalhomeland. Before the discovery was announced, Khama instigated achange in the lawso thatall subsoilmineral rightswerevested in thenation,notthetribe.ThisensuredthatdiamondwealthwouldnotcreategreatinequitiesinBotswana.Italsogavefurtherimpetustotheprocessof state centralization as diamond revenues could now be used forbuilding a state bureaucracy and infrastructure and for investing ineducation.InSierraLeoneandmanyothersub-SaharanAfricannations,diamondsfueledconflictbetweendifferentgroupsandhelpedtosustaincivil wars, earning the label Blood Diamonds for the carnage broughtabout by the wars fought over their control. In Botswana, diamond

revenuesweremanagedforthegoodofthenation.ThechangeinsubsoilmineralrightswasnottheonlypolicyofstatebuildingthatSeretseKhama’sgovernmentimplemented.Ultimately,theChieftaincy Act of 1965 passed by the legislative assembly prior toindependence, and the Chieftaincy Amendment Act of 1970 wouldcontinuetheprocessofpoliticalcentralization,enshriningthepowerofthestateandtheelectedpresidentbyremovingfromchiefstherighttoallocatelandandenablingthepresidenttoremoveachieffromofficeifnecessary.Anotherfacetofpoliticalcentralizationwastheefforttounifythe country further, for example, with legislation ensuring that onlySetswanaandEnglishweretobetaughtinschool.TodayBotswanalookslike a homogenous country, without the ethnic and linguisticfragmentationassociatedwithmanyotherAfricannations.Butthiswasan outcome of the policy to have only English and a single nationallanguage, Setswana, taught in schools to minimize conflict betweendifferent tribes and groups within society. The last census to askquestions about ethnicity was the one taken in 1946, which revealedconsiderable heterogeneity in Botswana. In the Ngwato reserve, forexample,only20percentofthepopulationidentifiedthemselvesaspureNgwato;thoughtherewereotherTswanatribespresent,therewerealsomanynon-Tswanagroupswhose first languagewasnotSetswana.Thisunderlyingheterogeneityhasbeenmodulatedbothbythepoliciesofthepostindependencegovernmentandbytherelativelyinclusiveinstitutionsof the Tswana tribes in the sameway as heterogeneity in Britain, forexample,betweentheEnglishandtheWelsh,hasbeenmodulatedbytheBritishstate.TheBotswananstatedidthesame.Sinceindependence,thecensusinBotswanahasneveraskedaboutethnicheterogeneity,becauseinBotswanaeveryoneisTswana.Botswana achieved remarkable growth rates after independencebecause Seretse Khama, Quett Masire, and the Botswana DemocraticParty led Botswana onto a path of inclusive economic and politicalinstitutions.Whenthediamondscameonstreaminthe1970s,theydidnot lead to civil war, but provided a strong fiscal base for thegovernment,whichwouldusetherevenuestoinvestinpublicservices.There was much less incentive to challenge or overthrow thegovernment and control the state. Inclusive political institutions bredpolitical stability and supported inclusive economic institutions. In a

pattern familiar from the virtuous circle described in chapter 11,inclusiveeconomic institutions increased theviabilityanddurabilityofinclusivepoliticalinstitutions.Botswana broke the mold because it was able to seize a critical

juncture, postcolonial independence, and set up inclusive institutions.The Botswana Democratic Party and the traditional elites, includingKhama himself, did not try to form a dictatorial regime or set upextractive institutionsthatmighthaveenrichedthemat theexpenseofsociety. This was once again an outcome of the interplay between acritical juncture and existing institutions. Aswe have seen, differentlyfromalmostanywhereelseinsub-SaharanAfrica,Botswanaalreadyhadtribal institutions that had achieved some amount of centralizedauthority and contained important pluralistic features. Moreover, thecountry had economic elites who themselves had much to gain fromsecurepropertyrights.No less important, the contingent path of history worked in

Botswana’s favor. Itwasparticularly luckybecauseSeretseKhamaandQuettMasire were not Siaka Stevens and RobertMugabe. The formerworked hard and honestly to build inclusive institutions on thefoundations of the Tswanas’ tribal institutions. All this made it morelikely that Botswanawould succeed in taking a path toward inclusiveinstitutions,whereasmuchoftherestofsub-SaharanAfricadidnoteventry,orfailedoutright.

THEENDOFTHESOUTHERNEXTRACTION

It was December 1, 1955. The city of Montgomery, Alabama, arrestwarrant lists the time that the offense occurred as 6:06 p.m. JamesBlake,abusdriver,washavingtrouble,hecalledthepolice,andOfficersDayandMixonarrivedonthescene.Theynotedintheirreport:

Wereceivedacalluponarrivalthebusoperatorsaidhehadacoloredfemalesitting inthewhitesectionof thebus,andwouldnotmoveback.We…alsosawher.Thebusoperatorsigned awarrant for her.RosaParks (cf)was chargedwithchapter6section11oftheMontgomeryCityCode.

RosaParks’s offensewas to sit in a sectionof theClevelandAvenuebusreservedforwhites,acrimeunderAlabama’sJimCrowlaws.Parkswasfinedtendollarsinadditiontocourtfeesoffourdollars.RosaParkswasn’t justanybody.Shewasalready thesecretaryof theMontgomerychapter of the National Association for the Advancement of ColoredPeople, the NAACP, which had long been struggling to change theinstitutionsoftheU.S.South.Herarresttriggeredamassmovement,theMontgomeryBusBoycott,mastermindedbyMartinLutherKing,Jr.ByDecember3,Kingandotherblackleadershadorganizedacoordinatedbusboycott,convincingallblackpeoplethattheyshouldnotrideonanybus in Montgomery. The boycott was successful and it lasted untilDecember 20, 1956. It set inmotion a process that culminated in theU.S. Supreme Court ruling that the laws that segregated buses inAlabamaandMontgomerywereunconstitutional.TheMontgomery Bus Boycott was a keymoment in the civil rights

movement in the U.S. South. This movement was part of a series ofeventsandchangesthatfinallybrokethemoldintheSouthandledtoafundamentalchangeof institutions.Aswesaw inchapter12, after theCivil War, southern landowning elites had managed to re-create theextractive economic and political institutions that had dominated theSouth before the Civil War. Though the details of these institutionschanged—for example, slavery was no longer possible—the negativeimpact on economic incentives and prosperity in the South was thesame.TheSouthwasnotablypoorerthantherestoftheUnitedStates.Starting in the1950s, southern institutionswouldbegin tomovethe

region onto a much faster growth trajectory. The type of extractiveinstitutionsultimatelyeliminatedintheU.S.Southweredifferent fromthe colonial institutions of pre-independence Botswana. The type ofcritical juncture that started the process of their downfall was alsodifferentbutsharedseveralcommonalities.Startinginthe1940s,thosewhoborethebruntofthediscriminationandtheextractiveinstitutionsintheSouth,peoplesuchasRosaParks,startedtobecomemuchbetterorganized in their fight against them. At the same time, the U.S.Supreme Court and the federal government finally began to intervenesystematicallytoreformtheextractiveinstitutionsintheSouth.ThusamainfactorcreatingacriticaljunctureforchangeintheSouthwastheempowermentofblackAmericansthereandtheendoftheunchallenged

dominationofthesouthernelites.Thesouthernpoliticalinstitutions,bothbeforetheCivilWarandafter,

had a clear economic logic, not too different from the South AfricanApartheidregime:tosecurecheaplaborfortheplantations.Butbythe1950s, this logic became less compelling. For one, significant massoutmigrationofblacksfromtheSouthwasalreadyunderway,alegacyofboth theGreatDepressionand theSecondWorldWar. In the1940sand ’50s, this reached an average of a hundred thousand people peryear. Meanwhile, technological innovation in agriculture, thoughadopted only slowly, was reducing the dependence of the plantationowners on cheap labor. Most labor in the plantations was used forpicking cotton. In 1950 almost all southern cottonwas still picked byhand.Butthemechanizationofcottonpickingwasreducingthedemandforthistypeofwork.By1960,inthekeystatesofAlabama,Louisiana,andMississippi,almosthalfofproductionhadbecomemechanized.JustasblacksbecamehardertotrapintheSouth,theyalsobecamenolongerindispensable for theplantationowners.Therewasthus lessreasonforelites to fight vigorously to maintain the old extractive economicinstitutions. This did notmean that theywould accept the changes ininstitutionswillingly,however.Instead,aprotractedconflictensued.Anunusual coalition, between southern blacks and the inclusive federalinstitutions of the United States, created a powerful force away fromsouthern extraction and toward equal political and civil rights forsouthernblacks,whichwould finally remove thesignificantbarriers toeconomicgrowthintheU.S.South.The most important impetus for change came from the civil rights

movement.ItwastheempowermentofblacksintheSouththatledtheway, as in Montgomery, by challenging extractive institutions aroundthem, by demanding their rights, and by protesting andmobilizing inorder to obtain them.But theyweren’t alone in this, because theU.S.Southwasnota separatecountryand the southernelitesdidnothavefree rein as didGuatemalan elites, for example. As part of theUnitedStates of America, the Southwas subject to the U.S. Constitution andfederallegislation.ThecauseforfundamentalreformintheSouthwouldfinallyreceivesupportfromtheU.S.executive,legislature,andSupremeCourtpartlybecausethecivilrightsmovementwasabletohaveitsvoiceheardoutsidetheSouth,therebymobilizingthefederalgovernment.

Federal intervention to change the institutions in the South startedwith thedecisionof theSupremeCourt in1944 thatprimaryelectionswhereonlywhitepeoplecouldstandwereunconstitutional.Aswehaveseen,blackshadbeenpoliticallydisenfranchised in the1890swith theuseofpolltaxesandliteracytests(thispage–thispage).Thesetestswereroutinelymanipulated to discriminate against black people, while stillallowing poor and illiteratewhites to vote. In a famous example fromtheearly1960s,inLouisianaawhiteapplicantwasjudgedliterateaftergivingtheanswer“FRDUMFOOFSPETGH”toaquestionaboutthestateconstitution.TheSupremeCourtdecisionin1944wastheopeningsalvoin the longer battle to openup the political system to blacks, and theCourtunderstoodtheimportanceoflooseningwhitecontrolofpoliticalparties.ThatdecisionwasfollowedbyBrownv.BoardofEducationin1954,in

which the Supreme Court ruled that state-mandated segregation ofschools and other public siteswas unconstitutional. In 1962 theCourtknockedawayanotherpillarof thepoliticaldominanceofwhiteelites:legislativemalapportionment.Whenalegislatureismalapportioned—aswere the “rotten boroughs” in England before the First Reform Act—some areas or regions receive much greater representation than theyshould based on their share of the relevant population.MalapportionmentintheSouthmeantthattheruralareas,theheartlandof the southern planter elite, were heavily overrepresented relative tourban areas. The Supreme Court put an end to this in 1962 with itsdecision in the Baker v. Carr case, which introduced the “one-person,one-vote”standard.Butall therulings fromtheSupremeCourtwouldhaveamountedto

little if they hadn’t been implemented. In the 1890s, in fact, federallegislationenfranchisingsouthernblackswasnotimplemented,becauselocal lawenforcementwasunder the control of the southern elite andthe Democratic Party, and the federal government was happy to goalongwiththisstateofaffairs.Butasblacksstartedrisingupagainstthesouthernelite, thisbastionof support for JimCrowcrumbled,and theDemocraticParty,ledbyitsnon-southernelements,turnedagainstracialsegregation. The renegade southern Democrats regrouped under thebanneroftheStates’RightsDemocraticPartyandcompetedinthe1948presidential election. Their candidate, Strom Thurmond, carried four

statesandgainedthirty-ninevotesintheElectoralCollege.Butthiswasa far cry from the power of the unified Democratic Party in nationalpolitics and the capture of that party by the southern elites. StromThurmond’scampaignwascenteredonhischallengetotheabilityofthefederal government to intervene in the institutions of the South. Hestatedhis position forcefully: “Iwanna tell you, ladies andgentlemen,thatthere’snotenoughtroopsinthearmytoforcetheSouthernpeopleto breakdown segregation and admit thenigra race into our theaters,intoourswimmingpools,intoourhomes,andintoourchurches.”Hewouldbeprovedwrong.TherulingsoftheSupremeCourtmeant

thatsoutherneducationalfacilitieshadtobedesegregated,includingtheUniversity ofMississippi in Oxford. In 1962, after a long legal battle,federal courts ruled that James Meredith, a young black air forceveteran, had to be admitted to “Ole Miss.” Opposition to theimplementationofthisrulingwasorchestratedbytheso-calledCitizens’Councils,thefirstofwhichhadbeenformedinIndianola,Mississippi,in1954 to fight desegregation of the South. State governor Ross Barnettpublicly rejected the court-ordered desegregation on television onSeptember13,announcingthatstateuniversitieswouldclosebeforetheyagreed to be desegregated. Finally, after much negotiation betweenBarnett and President John Kennedy and Attorney General RobertKennedy inWashington, the federal government intervened forcibly toimplement this ruling.Adaywas setwhenU.S.marshalswouldbringMeredith to Oxford. In anticipation, white supremacists began toorganize.OnSeptember30,thedaybeforeMeredithwasduetoappear,U.S.marshals entered the university campus and surrounded themainadministration building. A crowd of about 2,500 came to protest, andsoonariotbrokeout.Themarshalsusedteargastodispersetherioters,butsooncameunderfire.By10:00p.m.thatnight,federaltroopsweremovedintothecitytorestoreorder.Soontherewere20,000troopsand11,000 National Guardsmen in Oxford. In total, 300 people would bearrested. Meredith decided to stay on campus, where, protected fromdeath threats by U.S. marshals and 300 soldiers, he eventuallygraduated.Federallegislationwaspivotalintheprocessofinstitutionalreformin

theSouth.DuringthepassageofthefirstCivilRightsActin1957,StromThurmond, then a senator, spoke nonstop for twenty-four hours and

eighteenminutestoprevent,oratleastdelay,passageoftheact.DuringhisspeechhereadeverythingfromtheDeclarationof Independencetovarious phone books. But to no avail. The 1957 act culminated in theCivilRightsActof1964outlawingawholegamutofsegregationiststatelegislation and practices. The Voting Rights Act of 1965 declared theliteracy tests, poll taxes, and other methods used for disenfranchisingsouthern blacks to be illegal. It also extended a great deal of federaloversightintostateelections.The impactof all these eventswasa significant change in economicand legal institutions in the South. In Mississippi, for example, onlyabout5percentofeligibleblackpeoplewerevoting in1960.By1970thisfigurehadincreasedto50percent.InAlabamaandSouthCarolina,itwent fromaround10percent in1960 to50percent in1970.Thesepatterns changed the nature of elections, both for local and nationaloffices. More important, the political support from the dominantDemocratic Party for the extractive institutions discriminating againstblacks eroded. The way was then open for a range of changes ineconomic institutions. Prior to the institutional reforms of the 1960s,blacks had been almost entirely excluded from jobs in textilemills. In1960onlyabout5percentofemployees in southern textilemillswereblack.Civil rights legislation stopped this discrimination. By 1970 thisproportionhad increased to15percent; by1990 itwas at25percent.Economic discrimination against blacks began to decline, theeducational opportunities for blacks improved significantly, and thesouthern labor market became more competitive. Together withinclusive institutions camemore rapid economic improvements in theSouth.In1940southernstateshadonlyabout50percentofthelevelofpercapitaincomeoftheUnitedStates.Thisstartedtochangeinthelate1940sand’50s.By1990thegaphadbasicallyvanished.As in Botswana, the key in the U.S. South was the development ofinclusive political and economic institutions. This came at thejuxtapositionoftheincreasingdiscontentamongblackssufferingundersouthernextractiveinstitutionsandthecrumblingoftheone-partyruleof theDemocratic Party in the South.Once again, existing institutionsshaped the path of change. In this case, it was pivotal that southerninstitutionsweresituatedwithintheinclusivefederalinstitutionsoftheUnited States, and this allowed southernblacks finally tomobilize the

federal government and institutions for their cause.Thewholeprocesswas also facilitated by the fact that,with themassive outmigration ofblacks from the South and the mechanization of cotton production,economic conditions had changed so that southern elites were lesswillingtoputupmoreofafight.

REBIRTHINCHINA

The Communist Party under the leadership of Mao Zedong finallyoverthrew the Nationalists, led by Chiang Kai-shek, in 1949. ThePeople’sRepublicofChinawasproclaimedonOctober1.Thepoliticaland economic institutions created after 1949 were highly extractive.Politically, they featured the dictatorship of the Chinese CommunistParty.Noother political organizationhas been allowed inChina sincethen.Until his death in1976,Mao entirelydominated theCommunistPartyandthegovernment.Accompanyingtheseauthoritarian,extractivepolitical institutionswere highly extractive economic institutions.Maoimmediatelynationalizedlandandabolishedallkindsofpropertyrightsin one fell swoop. He had landlords, as well as other segments hedeemed to be against the regime, executed. Themarket economywasessentially abolished. People in rural areas were gradually organizedonto communal farms. Money and wages were replaced by “workpoints,” which could be traded for goods. Internal passports wereintroducedin1956forbiddingtravelwithoutappropriateauthorization,in order to increase political and economic control. All industry wassimilarly nationalized, and Mao launched an ambitious attempt topromotetherapiddevelopmentofindustrythroughtheuseof“five-yearplans,”modeledonthoseintheSovietUnion.As with all extractive institutions, Mao’s regime was attempting toextractresourcesfromthevastcountryhewasnowcontrolling.Asinthecase of the government of Sierra Leonewith its marketing board, theChineseCommunistPartyhadamonopolyoverthesaleofproduce,suchasriceandgrain,whichwasusedtoheavilytaxfarmers.Theattemptsatindustrialization turned into the infamous Great Leap Forward after1958withtheroll-outofthesecondfive-yearplan.Maoannouncedthatsteel output would double in a year based on small-scale “backyard”

blast furnaces.He claimed that in fifteen years,Chinawould catchupwithBritish steelproduction.Theonlyproblemwas that therewasnofeasible way ofmeeting these targets. Tomeet the plan’s goals, scrapmetalhadtobefound,andpeoplewouldhavetomeltdowntheirpotsandpansandeventheiragriculturalimplementssuchashoesandplows.Workerswhooughttohavebeentendingthefieldsweremakingsteelbydestroying theirplows,and thus their futureability to feed themselvesand the country. The result was a calamitous famine in the Chinesecountryside.ThoughscholarsdebatetheroleofMao’spolicycomparedwiththeimpactofdroughtsatthesametime,nobodydoubtsthecentralroleoftheGreatLeapForwardincontributingtothedeathofbetweentwenty and fortymillion people.We don’t know precisely howmany,becauseChinaunderMaodidnotcollectthenumbersthatwouldhavedocumentedtheatrocities.Percapitaincomefellbyaroundone-quarter.OneconsequenceoftheGreatLeapForwardwasthataseniormemberoftheCommunistParty,DengXiaoping,averysuccessfulgeneralduringthe revolution, who led an “anti-rightist” campaign resulting in theexecutionofmany“enemiesoftherevolution,”hadachangeofheart.AtaconferenceinGuangzhouinthesouthofChinain1961,Dengargued,“Nomatterwhether the cat is blackorwhite, if it catchesmice, it’s agood cat.” It did not matter whether policies appeared communist ornot; China neededpolicies thatwould encourage production so that itcouldfeeditspeople.YetDengwassoontosufferforhisnewfoundpracticality.OnMay16,1966, Mao announced that the revolution was under threat from“bourgeois” intereststhatwereunderminingChina’scommunistsocietyandwishingtore-createcapitalism.Inresponse,heannouncedtheGreatProletarian Cultural Revolution, usually referred to as the CulturalRevolution. The Cultural Revolution was based on sixteen points. Thefirststarted:

Although the bourgeoisie has been overthrown, it is stilltryingtousetheoldideas,culture,andcustoms,andhabitsoftheexploitingclassestocorruptthemasses,capturetheirminds, and endeavor to stage a comeback. The proletariatmust do just the opposite: it must meet head-on everychallengeof thebourgeoisie in the ideological fieldanduse

thenewideas,culture,customs,andhabitsoftheproletariatto change the mental outlook of the whole of society. Atpresent our objective is to struggle against and crush thosepersons in authority who are taking the capitalist road, tocriticize and repudiate the reactionary bourgeois academicauthoritiesandtheideologyofthebourgeoisieandallotherexploitingclassesandtransformeducation,literature,andartand all other parts of the superstructure that do notcorrespondto thesocialisteconomicbase, soas to facilitatetheconsolidationanddevelopmentofthesocialistsystem.

SoontheCulturalRevolution,justliketheGreatLeapForward,wouldstartwreckingboth theeconomyandmanyhuman lives.UnitsofRedGuardswereformedacrossthecountry:young,enthusiasticmembersoftheCommunistPartywhowereusedtopurgeopponentsoftheregime.Many people were killed, arrested, or sent into internal exile. Maohimself retorted to concerns about the extent of the violence, stating,“This man Hitler was even more ferocious. The more ferocious, thebetter, don’t you think? The more people you kill, the morerevolutionaryyouare.”Deng foundhimself labelednumber-two capitalist roader,was jailedin1967,andthenwasexiledtoJiangxiprovincein1969,toworkinarural tractor factory. He was rehabilitated in 1974, and Mao waspersuaded by Premier Zhou Enlai to make Deng first vice-premier.Already in 1975, Deng supervised the composition of three partydocuments that would have charted a new direction had they beenadopted.Theycalledforarevitalizationofhighereducation,areturntomaterial incentives in industry and agriculture, and the removal of“leftists”fromtheparty.Atthetime,Mao’shealthwasdeterioratingandpower was increasingly concentrated in the hands of the very leftistswhomDengXiaopingwantedtoremovefrompower.Mao’swife,JiangQing,andthreeofhercloseassociates,collectivelyknownastheGangof Four, had been great supporters of the Cultural Revolution and theresulting repression. They intended to continue using this blueprint torunthecountryunderthedictatorshipoftheCommunistParty.OnApril5, a spontaneous celebration of the life of Zhou Enlai in TiananmenSquareturnedintoaprotestagainstthegovernment.TheGangofFour

blamedDengforthedemonstrations,andhewasoncemorestrippedofallhispositionsanddismissed.Insteadofachievingtheremovaloftheleftists,Dengfoundthattheleftistshadremovedhim.AfterthedeathofZhou Enlai, Mao had appointed Hua Guofeng as the acting premierinsteadofDeng.Intherelativepowervacuumof1976,Huawasabletoaccumulateagreatdealofpersonalpower.In September there was a critical juncture: Mao died. The Chinese

CommunistPartyhadbeenunderMao’sdomination,andtheGreatLeapForward and the Cultural Revolution had been largely his initiatives.WithMao gone, therewas a true power vacuum,which resulted in astrugglebetweenthosewithdifferentvisionsanddifferentbeliefsabouttheconsequencesofchange.TheGangofFourintendedtocontinuewiththepoliciesoftheCulturalRevolutionastheonlywayofconsolidatingtheirs and the Communist Party’s power. Hua Guofeng wanted toabandontheCulturalRevolution,buthecouldnotdistancehimselftoomuch fromit,becauseheowedhisownrise in theparty to itseffects.Instead, he advocated a return to a more balanced version of Mao’svision,whichhe encapsulated in the “TwoWhatevers,” as thePeople’sDaily, the newspaper of the Chinese Communist Party, put it in 1977.Hua argued, “We will resolutely uphold whatever policy decisionsChairman Mao made, and unswervingly follow whatever instructionsChairmanMaogave.”Deng Xiaoping did not wish to abolish the communist regime and

replace itwith inclusivemarketsanymore thanHuadid.He, too,waspart of the same group of people brought to power by the communistrevolution.Butheandhissupportersthoughtthatsignificanteconomicgrowth could be achieved without endangering their political control:theyhad amodel of growthunder extractivepolitical institutions thatwouldnotthreatentheirpower,becausetheChinesepeoplewereindireneedofimprovedlivingstandardsandbecauseallmeaningfuloppositiontotheCommunistPartyhadbeenobliteratedduringMao’sreignandtheCulturalRevolution.Toachieve this, theywished to repudiatenot justtheCulturalRevolutionbutalsomuchoftheMaoistinstitutionallegacy.They realized that economic growth would be possible only withsignificant moves toward inclusive economic institutions. They thuswishedtoreformtheeconomyandbolstertheroleofmarketforcesandincentives.Theyalsowantedtoexpandthescopeforprivateownership

and reduce the role of the Communist Party in society and theadministration, getting rid of such concepts as class struggle. Deng’sgroupwasalsoopentoforeigninvestmentandinternationaltrade,andwishedtopursueamuchmoreaggressivepolicyofintegratingwiththeinternational economy. Still, there were limits, and building trulyinclusive economic institutions and significantly lessening the grip theCommunistPartyhadontheeconomyweren’tevenoptions.The turning point for China was Hua Guofeng’s power and his

willingnesstouseitagainsttheGangofFour.WithinamonthofMao’sdeath,Huamountedacoupagainst theGangofFour,having themallarrested. He then reinstated Deng in March 1977. There was nothinginevitableeitheraboutthiscourseofeventsoraboutthenextsignificantsteps,whichresultedfromHuahimselfbeingpoliticallyoutmaneuveredby Deng Xiaoping. Deng encouraged public criticism of the CulturalRevolutionandbegantofillkeypositionsintheCommunistPartyatalllevelswithpeoplewho, likehim,had sufferedduring thisperiod.HuacouldnotrepudiatetheCulturalRevolution,andthisweakenedhim.Hewasalsoacomparativenewcomertothecentersofpower,andhelackedtheweb of connections and informal relations that Deng had built upovermanyyears. Inaseriesofspeeches,DengbegantocriticizeHua’spolicies. InSeptember1978,heexplicitlyattackedtheTwoWhatevers,notingthatratherthanletwhateverMaohadsaiddeterminepolicy,thecorrectapproachwasto“seektruthfromfacts.”Dengalsobrilliantlybegan tobringpublicpressure tobearonHua,

whichwasreflectedmostpowerfullyintheDemocracyWallmovementin1978,inwhichpeoplepostedcomplaintsaboutthecountryonawallin Beijing. In July of 1978, one of Deng’s supporters, Hu Qiaomu,presentedsomebasicprinciplesofeconomicreform.Theseincludedthenotions that firms should be given greater initiative and authority tomaketheirownproductiondecisions.Pricesshouldbeallowedtobringsupply and demand together, rather than just being set by thegovernment, and the state regulation of the economy more generallyought to be reduced. These were radical suggestions, but Deng wasgaining influence. InNovemberandDecember1978, theThirdPlenumoftheEleventhCentralPartyCommitteeproducedabreakthrough.OverHua’s objections, it was decided that, from then on, the focus of theparty would be not class struggle but economic modernization. The

plenum announced some tentative experiments with a “householdresponsibility system” insomeprovinces,whichwasanattempt to rollback collective agriculture and introduce economic incentives intofarming. By the next year, the Central Committee was acknowledgingthe centrality of the notion of “truth from facts” and declaring theCultural Revolution to have been a great calamity for the Chinesepeople.Throughout thisperiod,Dengwas securing theappointmentofhis own supporters to important positions in the party, army, andgovernment.ThoughhehadtomoveslowlyagainstHua’ssupportersintheCentralCommittee,hecreatedparallelbasesofpower.By1980Huawasforcedtostepdownfromthepremiership, tobereplacedbyZhaoZiyang. By 1982Hua had been removed from the Central Committee.ButDengdidnotstopthere.AttheTwelfthPartyCongressin1982,andthen in theNationalPartyConference inSeptember1985,heachievedanalmostcompletereshufflingofthepartyleadershipandseniorcadres.Incamemuchyounger,reform-mindedpeople.Ifonecompares1980to1985,thenbythelatterdate,twenty-oneofthetwenty-sixmembersofthe Politburo, eight of the eleven members of the Communist Partysecretariat,andtenoftheeighteenvice-premiershadbeenchanged.Now that Deng and the reformers had consummated their political

revolution andwere in control of the state, they launched a series offurtherchangesineconomicinstitutions.Theybeganinagriculture:By1983, following the ideas of HuQiaomu, the household responsibilitysystem, which would provide economic incentives to farmers, wasuniversally adopted. In 1985 themandatory state purchasing of grainwasabandonedand replacedbya systemofmorevoluntary contracts.Administrativecontrolofagriculturalpriceswasgreatlyrelaxedin1985.Intheurbaneconomy,stateenterprisesweregivenmoreautonomy,andfourteen “open cities” were identified and given the ability to attractforeigninvestment.It was the rural economy that took off first. The introduction of

incentives led to a dramatic increase in agricultural productivity. By1984 grain output was one-third higher than in 1978, though fewerpeoplewereinvolvedinagriculture.Manyhadmovedintoemploymentin new rural industries, the so-called Township Village Enterprises.Thesehadbeen allowed to growoutside the systemof state industrialplanning after 1979,when itwas accepted that new firms could enter

and compete with state-owned firms. Gradually economic incentiveswere also introduced into the industrial sector, in particular into theoperationofstate-runenterprises,thoughatthisstagetherewasnohintatprivatization,whichhadtowaituntilthemid-1990s.TherebirthofChinacamewithasignificantmoveawayfromoneof

the most extractive set of economic institutions and toward moreinclusive ones. Market incentives in agriculture and industry, thenfollowed by foreign investment and technology,would set China on apath to rapid economic growth.Aswewill discuss further in the nextchapter, thiswas growthunder extractivepolitical institutions, even ifthey were not as repressive as they had been under the CulturalRevolution and even if economic institutions were becoming partiallyinclusive. All of this should not understate the degree to which thechangesineconomicinstitutionsinChinawereradical.Chinabrokethemold, even if it did not transform its political institutions. As inBotswanaandtheU.S.South,thecrucialchangescameduringacriticaljuncture—in the case ofChina, followingMao’s death.Theywere alsocontingent, in fact highly contingent, as there was nothing inevitableabouttheGangofFour losingthepowerstruggle;andif theyhadnot,Chinawouldnothaveexperiencedthesustainedeconomicgrowthithasseen in the last thirty years. But the devastation and human sufferingthat the Great Leap Forward and the Cultural Revolution causedgeneratedsufficientdemandforchangethatDengXiaopingandhisallieswereabletowinthepoliticalfight.

BOTSWANA,CHINA, and theU.S.South, just like theGloriousRevolution inEngland,theFrenchRevolution,andtheMeijiRestorationinJapan,arevivid illustrations thathistory isnotdestiny.Despite theviciouscircle,extractiveinstitutionscanbereplacedbyinclusiveones.Butitisneitherautomatic nor easy. A confluence of factors, in particular a criticaljuncturecoupledwithabroadcoalitionof thosepushing for reformorotherpropitious existing institutions, is oftennecessary for anation tomakestridestowardmoreinclusiveinstitutions.Inadditionsomeluckiskey,becausehistoryalwaysunfoldsinacontingentway.

15.

UNDERSTANDINGPROSPERITYANDPOVERTY

HISTORICALORIGINS

THERE ARE HUGE DIFFERENCES in living standards around theworld. Even thepoorestcitizensoftheUnitedStateshaveincomesandaccesstohealthcare,education,public services,andeconomicandsocialopportunitiesthatarefarsuperiortothoseavailabletothevastmassofpeoplelivinginsub-SaharanAfrica,SouthAsia,andCentralAmerica.ThecontrastofSouth andNorth Korea, the twoNogaleses, and theUnited States andMexico reminds us that these are relatively recent phenomena. Fivehundredyearsago,Mexico,hometotheAztecstate,wascertainlyricherthanthepolitiestothenorth,andtheUnitedStatesdidnotpullaheadofMexicountilthenineteenthcentury.ThegapbetweenthetwoNogalesesisevenmorerecent.SouthandNorthKoreawereeconomically,aswellas socially and culturally, indistinguishable before the country wasdividedatthe38thparallelaftertheSecondWorldWar.Similarly,mostofthehugeeconomicdifferencesweobservearoundustodayemergedoverthelasttwohundredyears.Did this all need to be so?Was it historically—or geographically or

culturallyorethnically—predeterminedthatWesternEurope,theUnitedStates, and Japan would become so much richer than sub-SaharanAfrica,LatinAmerica,andChinaoverthelasttwohundredyearsorso?WasitinevitablethattheIndustrialRevolutionwouldgetunderwayinthe eighteenth century in Britain, and then spread toWestern Europeand Europe’s offshoots in North America and Australasia? Is acounterfactualworldwhere theGloriousRevolution and the IndustrialRevolutiontakeplaceinPeru,whichthencolonizesWesternEuropeandenslaveswhites,possible,orisitjustaformofhistoricalsciencefiction?

Toanswer—infact,eventoreasonabout—thesequestions,weneedatheory of why some nations are prosperous while others fail and arepoor. This theory needs to delineate both the factors that create andretard prosperity and their historical origins. This book has proposedsucha theory.Anycomplex socialphenomenon, suchas theoriginsofthedifferenteconomicandpolitical trajectoriesofhundredsofpolitiesaroundtheworld, likelyhasamultitudeofcauses,makingmostsocialscientistsshunmonocausal,simple,andbroadlyapplicabletheoriesandinstead seek different explanations for seemingly similar outcomesemerging in different times and areas. Instead we’ve offered a simpletheory and used it to explain the main contours of economic andpoliticaldevelopmentaroundtheworldsince theNeolithicRevolution.Ourchoicewasmotivatednotbyanaïvebeliefthatsuchatheorycouldexplaineverything,butby thebelief thata theory shouldenableus tofocus on the parallels, sometimes at the expense of abstracting frommany interesting details. A successful theory, then, does not faithfullyreproducedetails, butprovidesauseful andempiricallywell-groundedexplanationforarangeofprocesseswhilealsoclarifyingthemainforcesatwork.Ourtheoryhasattemptedtoachievethisbyoperatingontwolevels.The first is the distinction between extractive and inclusive economicand political institutions. The second is our explanation for whyinclusive institutions emerged in some parts of the world and not inothers. While the first level of our theory is about an institutionalinterpretation of history, the second level is about how history hasshapedinstitutionaltrajectoriesofnations.Central to our theory is the link between inclusive economic andpoliticalinstitutionsandprosperity.Inclusiveeconomicinstitutionsthatenforce property rights, create a level playing field, and encourageinvestments in new technologies and skills are more conducive toeconomic growth than extractive economic institutions that arestructuredtoextractresourcesfromthemanybythefewandthatfailtoprotect property rights or provide incentives for economic activity.Inclusive economic institutions are in turn supported by, and support,inclusive political institutions, that is, those that distribute politicalpower widely in a pluralistic manner and are able to achieve someamountofpolitical centralization soas toestablish lawandorder, the

foundationsofsecurepropertyrights,andaninclusivemarketeconomy.Similarly, extractive economic institutions are synergistically linked toextractivepoliticalinstitutions,whichconcentratepowerinthehandsofafew,whowillthenhaveincentivestomaintainanddevelopextractiveeconomicinstitutionsfortheirbenefitandusetheresourcestheyobtaintocementtheirholdonpoliticalpower.Thesetendenciesdonot implythatextractiveeconomicandpoliticalinstitutions are inconsistent with economic growth. On the contrary,everyelitewould,allelsebeingequal,liketoencourageasmuchgrowthaspossibleinordertohavemoretoextract.Extractiveinstitutionsthathave achieved at least aminimal degree of political centralization areoftenabletogeneratesomeamountofgrowth.Whatiscrucial,however,isthatgrowthunderextractiveinstitutionswillnotbesustained,fortwokeyreasons.First, sustainedeconomicgrowthrequires innovation,andinnovation cannot be decoupled from creative destruction, whichreplaces the old with the new in the economic realm and alsodestabilizes established power relations in politics. Because elitesdominating extractive institutions fear creative destruction, they willresist it, and any growth that germinates under extractive institutionswillbeultimatelyshortlived.Second,theabilityofthosewhodominateextractive institutions to benefit greatly at the expense of the rest ofsocietyimpliesthatpoliticalpowerunderextractiveinstitutionsishighlycoveted, makingmany groups and individuals fight to obtain it. As aconsequence, there will be powerful forces pushing societies underextractiveinstitutionstowardpoliticalinstability.The synergies between extractive economic and political institutionscreateaviciouscircle,whereextractiveinstitutions,onceinplace,tendtopersist.Similarly, there isavirtuouscircleassociatedwith inclusiveeconomic and political institutions. But neither the vicious nor thevirtuous circle is absolute. In fact, some nations live under inclusiveinstitutionstodaybecause, thoughextractive institutionshavebeenthenorm inhistory, some societieshavebeenable tobreak themold andtransition toward inclusive institutions. Our explanation for thesetransitions is historical, but not historically predetermined. Majorinstitutional change, the requisite for major economic change, takesplace as a result of the interaction between existing institutions andcritical junctures. Critical junctures are major events that disrupt the

existingpoliticalandeconomicbalanceinoneormanysocieties,suchastheBlackDeath,whichkilledpossiblyasmuchashalfthepopulationofmost areas in Europe during the fourteenth century; the opening ofAtlantic trade routes, which created enormous profit opportunities formany inWesternEurope; and the IndustrialRevolution,whichofferedthe potential for rapid but also disruptive changes in the structure ofeconomiesaroundtheworld.Existing institutional differences among societies themselves are a

result of past institutional changes.Why does the path of institutionalchange differ across societies? The answer to this question lies ininstitutional drift. In the same way that the genes of two isolatedpopulations of organisms will drift apart slowly because of randommutations in the so-calledprocessof evolutionaryorgeneticdrift, twootherwise similar societies will also drift apart institutionally—albeit,again, slowly. Conflict over income and power, and indirectly overinstitutions, is a constant in all societies. This conflict often has acontingentoutcome,eveniftheplayingfieldoverwhichittranspiresisnotlevel.Theoutcomeofthisconflictleadstoinstitutionaldrift.Butthisisnotnecessarilyacumulativeprocess.Itdoesnotimplythatthesmalldifferences that emerge at some point will necessarily become largerover time. On the contrary, as our discussion of Roman Britain inchapter6illustrates,smalldifferencesopenup,andthendisappear,andthen reappear again. However, when a critical juncture arrives, thesesmalldifferencesthathaveemergedasaresultofinstitutionaldriftmaybe the small differences thatmatter in leading otherwise quite similarsocietiestodivergeradically.Wesawinchapters7and8thatdespitethemanysimilaritiesbetween

England, France, and Spain, the critical juncture of the Atlantic tradehad themost transformative impact onEnglandbecause of such smalldifferences—the fact thatbecauseofdevelopmentsduring the fifteenthandsixteenthcenturies,theEnglishCrowncouldnotcontrolalloverseastrade, as this tradewasmostly under Crownmonopoly in France andSpain. As a result, in France and Spain, it was themonarchy and thegroupsalliedwithitwhowerethemainbeneficiariesofthelargeprofitscreatedbyAtlantictradeandcolonialexpansion,whileinEnglanditwasgroups strongly opposed to the monarchy who gained from economicopportunitiesthrownopenbythiscriticaljuncture.Thoughinstitutional

driftleadstosmalldifferences,itsinterplaywithcriticaljuncturesleadsto institutional divergence, and thus this divergence then creates thenowmoremajor institutionaldifferences that thenextcritical juncturewillaffect.History is key, since it is historical processes that, via institutionaldrift, create the differences that may become consequential duringcritical junctures. Critical junctures themselves are historical turningpoints.Andtheviciousandvirtuouscirclesimplythatwehavetostudyhistory to understand the nature of institutional differences that havebeen historically structured. Yet our theory does not imply historicaldeterminism—oranyotherkindofdeterminism.Itisforthisreasonthattheanswer to thequestionwe startedwith in this chapter isno: therewas no historical necessity that Peru end up so much poorer thanWesternEuropeortheUnitedStates.Tostartwith,incontrastwiththegeographyandculturehypotheses,Peruisnotcondemnedtopovertybecauseofitsgeographyorculture.Inourtheory,PeruissomuchpoorerthanWesternEuropeandtheUnitedStatestodaybecauseofitsinstitutions,andtounderstandthereasonsforthis, we need to understand the historical process of institutionaldevelopment in Peru. As we saw in the second chapter, five hundredyears ago the Inca Empire, which occupied contemporary Peru, wasricher, more technologically sophisticated, and more politicallycentralized than the smaller polities occupying North America. Theturningpointwasthewayinwhichthisareawascolonizedandhowthiscontrasted with the colonization of North America. This resulted notfromahistoricallypredeterminedprocessbutasthecontingentoutcomeofseveralpivotalinstitutionaldevelopmentsduringcriticaljunctures.Atleast three factors could have changed this trajectory and led to verydifferentlong-runpatterns.First,institutionaldifferenceswithintheAmericasduringthefifteenthcenturyshapedhowtheseareaswerecolonized.NorthAmericafolloweda different institutional trajectory than Peru because it was sparselysettled before colonization and attracted European settlers who thensuccessfullyroseupagainsttheelitewhomentitiessuchastheVirginiaCompanyandtheEnglishCrownhadtriedtocreate.Incontrast,Spanishconquistadors found a centralized, extractive state in Peru they couldtakeoveranda largepopulation theycouldput towork inminesand

plantations.Therewasalsonothinggeographicallypredeterminedaboutthe lay of the land within the Americas at the time the Europeansarrived.InthesamewaythattheemergenceofacentralizedstateledbyKing Shyaamamong theBushongwas a result of amajor institutionalinnovation,orperhapsevenofpoliticalrevolution,aswesawinchapter5, the Inca civilization in Peru and the large populations in this arearesultedfrommajorinstitutional innovations.ThesecouldinsteadhavetakenplaceinNorthAmerica,inplacessuchastheMississippiValleyoreventhenortheasternUnitedStates.Hadthisbeenthecase,EuropeansmighthaveencounteredemptylandsintheAndesandcentralizedstatesinNorthAmerica,andtherolesofPeruandtheUnitedStatescouldhavebeenreversed.EuropeanswouldthenhavesettledinareasaroundPeru,andtheconflictbetweenthemajorityofsettlersandtheelitecouldhaveled to the creation of inclusive institutions there instead of in NorthAmerica. The subsequent paths of economic development would thenlikelyhavebeendifferent.Second,theIncaEmpiremighthaveresistedEuropeancolonialism,as

JapandidwhenCommodorePerry’s ships arrived inEdoBay.ThoughthegreaterextractivenessoftheIncaEmpireincontrastwithTokugawa,Japan,certainlymadeapoliticalrevolutionakintotheMeijiRestorationless likely in Peru, there was no historical necessity that the Incacompletely succumb toEuropeandomination. If theyhadbeenable toresistandeveninstitutionallymodernizeinresponsetothethreats,thewhole path of the history of the New World, and with it the entirehistoryoftheworld,couldhavebeendifferent.Thirdandmostradically, it isnotevenhistoricallyorgeographically

or culturally predetermined thatEuropeans shouldhavebeen theonescolonizingtheworld.ItcouldhavebeentheChineseoreventheIncas.Of course, such an outcome is impossiblewhenwe look at theworldfromthevantagepointofthefifteenthcentury,bywhichtimeWesternEuropehadpulledaheadoftheAmericas,andChinahadalreadyturnedinward. But Western Europe of the fifteenth century was itself anoutcome of a contingent process of institutional drift punctuated bycriticaljunctures,andnothingaboutitwasinevitable.WesternEuropeanpowerscouldnothavesurgedaheadandconqueredtheworldwithoutseveral historic turning points. These included the specific path thatfeudalismtook,replacingslaveryandweakeningthepowerofmonarchs

on the way; the fact that the centuries following the turn of the firstmillennium in Europe witnessed the development of independent andcommerciallyautonomouscities;thefactthatEuropeanmonarchswerenot as threatened by, and consequently did not try to discourage,overseas trade as the Chinese emperors did during the Ming dynasty;and thearrivalof theBlackDeath,which shookup the foundationsofthefeudalorder.Iftheseeventshadtranspireddifferently,wecouldbelivinginaverydifferentworldtoday,oneinwhichPerumightbericherthanWesternEuropeortheUnitedStates.

NATURALLY, THE PREDICTIVE POWERofa theorywherebothsmalldifferencesandcontingencyplaykeyroleswillbelimited.Fewwouldhavepredictedinthe fifteenth or even the sixteenth centuries, let alone in the manycenturies following the fall of the Roman Empire, that the majorbreakthrough toward inclusive institutionswould happen in Britain. ItwasonlythespecificprocessofinstitutionaldriftandthenatureofthecriticaljuncturecreatedbytheopeningofAtlantictradethatmadethispossible.NeitherwouldmanyhavebelievedinthemidstoftheCulturalRevolutionduringthe1970sthatChinawouldsoonbeonapathtowardradical changes in its economic institutions and subsequently on abreakneck growth trajectory. It is similarly impossible to predict withanycertaintywhatthelayofthelandwillbeinfivehundredyears.Yetthesearenotshortcomingsofourtheory.Thehistoricalaccountwehavepresented so far indicates that any approach based on historicaldeterminism—based on geography, culture, or even other historicalfactors—is inadequate. Small differences and contingency are not justpartofourtheory;theyarepartoftheshapeofhistory.Evenifmakingprecisepredictionsaboutwhichsocietieswillprosper

relativetoothersisdifficult,wehaveseenthroughoutthebookthatourtheory explains the broad differences in the prosperity and poverty ofnations around the world fairly well. We will see in the rest of thischapterthatitalsoprovidessomeguidelinesastowhattypesofsocietiesare more likely to achieve economic growth over the next severaldecades.First, vicious and virtuous circles generate a lot of persistence and

sluggishness.Thereshouldbelittledoubtthatinfiftyorevenahundred

years, the United States andWestern Europe, based on their inclusiveeconomic and political institutions, will be richer, most likelyconsiderably richer, than sub-Saharan Africa, theMiddle East, CentralAmerica,orSoutheastAsia.However,withinthesebroadpatternstherewill be major institutional changes in the next century, with somecountriesbreakingthemoldandtransitioningfrompoortorich.Nationsthathaveachievedalmostnopoliticalcentralization,suchasSomaliaandAfghanistan,orthosethathaveundergoneacollapseofthestate, such asHaiti did over the last several decades—long before themassiveearthquaketherein2010ledtothedevastationofthecountry’sinfrastructure—are unlikely either to achieve growth under extractivepolitical institutions or to make major changes toward inclusiveinstitutions.Instead,nationslikelytogrowoverthenextseveraldecades—albeit probably under extractive institutions—are those that haveattained some degree of political centralization. In sub-Saharan Africathis includesBurundi,Ethiopia,Rwanda,nationswith longhistoriesofcentralized states, and Tanzania, which has managed to build suchcentralization, or at least put in place some of the prerequisites forcentralization, since independence. InLatinAmerica, it includesBrazil,Chile,andMexico,whichhavenotonlyachievedpoliticalcentralizationbut alsomade significant strides towardnascent pluralism.Our theorywould suggest that sustained economic growth is very unlikely inColombia.Our theory also suggests that growth under extractive politicalinstitutions,asinChina,willnotbringsustainedgrowth,andislikelytorunoutofsteam.Beyondthesecases, thereismuchuncertainty.Cuba,for example, might transition toward inclusive institutions andexperienceamajoreconomictransformation,oritmaylingeronunderextractivepoliticalandeconomicinstitutions.ThesameistrueofNorthKorea andBurma (Myanmar) inAsia. Thus,while our theoryprovidesthe tools for thinking about how institutions change and theconsequences of such changes, the nature of this change—the role ofsmall differences and contingency—makes more precise predictionsdifficult.Evengreatercautionisnecessaryindrawingpolicyrecommendationsfromthisbroadaccountoftheoriginsofprosperityandpoverty.Inthesame way that the impact of critical junctures depends on existing

institutions,howasocietywillrespondtothesamepolicyinterventiondependsontheinstitutionsthatareinplace.Ofcourse,ourtheoryisallabout how nations can take steps toward prosperity—by transformingtheir institutions fromextractive to inclusive.But italsomakes itveryclearfromtheoutsetthattherearenoeasyrecipesforachievingsuchatransition. First, the vicious circle implies that changing institutions ismuch harder than it first appears. In particular, extractive institutionscanre-createthemselvesunderdifferentguises,aswesawwiththeironlawofoligarchyinchapter12.Thusthefactthattheextractiveregimeof President Mubarak was overturned by popular protest in February2011 does not guarantee that Egypt will move onto a path to moreinclusive institutions. Instead extractive institutions may re-createthemselves despite the vibrant and hopeful pro-democracymovement.Second,becausethecontingentpathofhistoryimpliesthatitisdifficulttoknowwhetheraparticularinterplayofcriticaljuncturesandexistinginstitutional differences will lead toward more inclusive or extractiveinstitutions, it would be heroic to formulate general policyrecommendations to encourage change toward inclusive institutions.Nevertheless,ourtheoryisstillusefulforpolicyanalysis,asitenablesustorecognizebadpolicyadvice,basedoneitherincorrecthypothesesorinadequateunderstandingofhowinstitutionscanchange. Inthis,as inmost things,avoidingtheworstmistakes isas importantas—andmorerealistic than—attempting to develop simple solutions. Perhaps this ismostclearlyvisiblewhenweconsidercurrentpolicy recommendationsencouraging “authoritarian growth” based on the successful Chinesegrowth experience of the last several decades. We next explain whythesepolicyrecommendationsaremisleadingandwhyChinesegrowth,asithasunfoldedsofar,isjustanotherformofgrowthunderextractivepolitical institutions, unlikely to translate into sustained economicdevelopment.

THEIRRESISTIBLECHARMOFAUTHORITARIANGROWTH

DaiGuofangrecognizedthecomingurbanboominChinaearlyon.Newhighways,businesscenters, residences,and skyscraperswere sprawlingeverywhere around China in the 1990s, and Dai thought this growth

would only pick up speed in the next decade. He reasoned that hiscompany,JingsuTiebenIronandSteel,couldcapturealargemarketasa low-cost producer, especially compared with the inefficient state-ownedsteel factories.Daiplannedtobuildatruesteelgiant,andwithsupportfromthelocalpartybossesinChangzhou,hestartedbuildingin2003.ByMarch2004,however,theprojecthadbeenstoppedbyorderof the Chinese Communist Party in Beijing, and Dai was arrested forreasons never clearly articulated. The authorities may have presumedthat theywould findsomeincriminatingevidence inDai’saccounts. Intheevent,hespent thenext fiveyears in jailandhomedetention,andwasfoundguiltyonaminorchargein2009.Hisrealcrimewastostartalargeprojectthatwouldcompetewithstate-sponsoredcompaniesanddo sowithout the approval of thehigher-ups in theCommunist Party.Thiswascertainlythelessonthatothersdrewfromthecase.TheCommunistParty’s reaction toentrepreneurs suchasDai should

not be a surprise.ChenYun, oneofDengXiaoping’s closest associatesand arguably the major architect behind the early market reforms,summarized the views of most party cadres with a “bird in a cage”analogy for the economy: China’s economy was the bird; the party’scontrol, the cage, had to be enlarged to make the bird healthier andmoredynamic,butitcouldnotbeunlockedorremoved,lestthebirdflyaway. Jiang Zemin, shortly after becoming general secretary of theCommunist Party in 1989, themost powerful position in China, wenteven furtherand summarized theparty’s suspicionofentrepreneursbycharacterizingthemas“self-employedtradersandpeddlers[who]cheat,embezzle, bribe and evade taxation.” Throughout the 1990s, even asforeign investmentwaspouring intoChinaandstate-ownedenterpriseswereencouragedtoexpand,privateentrepreneurshipwasgreetedwithsuspicion, and many entrepreneurs were expropriated or even jailed.JiangZemin’sviewofentrepreneurs, though in relativedecline, is stillwidespread in China. In the words of a Chinese economist, “Big statecompanies can get involved in huge projects. But when privatecompaniesdoso,especially incompetitionwith thestate, thentroublecomesfromeverycorners[sic].”While scores of private companies are now profitably operating in

China, many elements of the economy are still under the party’scommandandprotection. JournalistRichardMcGregor reports that on

the desk of the head of each of the biggest state companies in Chinastandsaredphone.Whenitrings,itisthepartycallingwithordersonwhat the company should do, where it should invest, and what itstargetswill be. These giant companies are still under the commandoftheparty,a factweare remindedofwhen thepartydecides toshuffletheir chief executives, fire them, or promote them, with littleexplanation.ThesestoriesofcoursedonotdenythatChinahasmadegreatstrides

toward inclusive economic institutions, strides that underpin itsspectaculargrowthratesover thepast thirtyyears.Mostentrepreneurshavesomesecurity,notleastbecausetheycultivatethesupportoflocalcadres and Communist Party elites in Beijing. Most state-ownedenterprisesseekprofitsandcompete in internationalmarkets.This isaradical change from the China of Mao. As we saw in the previouschapter,ChinawasfirstabletogrowbecauseunderDengXiaopingtherewere radical reforms away from the most extractive economicinstitutions and toward inclusive economic institutions. Growth hascontinuedasChineseeconomicinstitutionshavebeenonapathtowardgreater inclusiveness, albeit at a slow pace. China is also greatlybenefitingfromitslargesupplyofcheaplaboranditsaccesstoforeignmarkets,capital,andtechnologies.EvenifChineseeconomicinstitutionsareincomparablymoreinclusive

todaythanthreedecadesago, theChineseexperience isanexampleofgrowth under extractive political institutions. Despite the recentemphasis in China on innovation and technology, Chinese growth isbasedontheadoptionofexistingtechnologiesandrapidinvestment,notcreativedestruction.An importantaspectof this is thatpropertyrightsarenotentirelysecureinChina.Everynowandthen,justlikeDai,someentrepreneursareexpropriated.Labormobilityistightlyregulated,andthemostbasicofpropertyrights,therighttosellone’sownlaborinthewayonewishes,isstillhighlyimperfect.Theextenttowhicheconomicinstitutions are still far from being truly inclusive is illustrated by thefactthatonlyafewbusinessmenand-womenwouldevenventureintoanyactivitywithoutthesupportofthelocalpartycadreor,evenmoreimportant,ofBeijing.Theconnectionbetweenbusinessandthepartyishighly lucrative for both. Businesses supported by the party receivecontracts on favorable terms, can evict ordinary people to expropriate

their land,andviolate lawsand regulationswith impunity.Thosewhostandinthepathofthisbusinessplanwillbetrampledandcanevenbejailedormurdered.The all-too-present weight of the Communist Party and extractive

institutionsinChinaremindusofthemanysimilaritiesbetweenSovietgrowth in the1950sand ’60sandChinesegrowth today, though thereare also notable differences. The Soviet Union achieved growth underextractive economic institutions and extractive political institutionsbecause it forcibly allocated resources toward industry under acentralized command structure, particularly armaments and heavyindustry. Such growth was feasible partly because there was a lot ofcatching up to be done. Growth under extractive institutions is easierwhen creative destruction is not a necessity. Chinese economicinstitutionsarecertainlymoreinclusivethanthoseintheSovietUnion,but China’s political institutions are still extractive. The CommunistPartyisall-powerfulinChinaandcontrolstheentirestatebureaucracy,the armed forces, themedia, and large parts of the economy. Chinesepeople have few political freedoms and very little participation in thepoliticalprocess.ManyhavelongbelievedthatgrowthinChinawouldbringdemocracy

and greater pluralism. There was a real sense in 1989 that theTiananmen Square demonstrations would lead to greater opening andperhaps even the collapse of the communist regime. But tanks wereunleashed on the demonstrators, and instead of a peaceful revolution,history books now call it the Tiananmen Square Massacre. In manyways, Chinese political institutions became more extractive in theaftermathofTiananmen;reformerssuchasZhaoZiyang,whoasgeneralsecretary of the Communist Party lent his support to the students inTiananmenSquare,werepurged,and thepartyclampeddownoncivillibertiesandpressfreedomwithgreaterzeal.ZhaoZiyangwasputunderhouse arrest for more than fifteen years, and his public record wasgraduallyerased,sothathewouldnotbeevenasymbolforthosewhosupportedpoliticalchange.Today the party’s control over themedia, including the Internet, is

unprecedented.Muchofthisisachievedthroughself-censorship:mediaoutletsknowthat theyshouldnotmentionZhaoZiyangorLiuXiaobo,the government critic demanding greater democratization, who is still

languishinginprisonevenafterhewasawardedtheNobelPeacePrize.Self-censorshipissupportedbyanOrwellianapparatusthatcanmonitorconversationsandcommunications,closeWebsitesandnewspapers,andevenselectivelyblockaccesstoindividualnewsstoriesontheInternet.Allof thiswasondisplaywhennewsaboutcorruptionchargesagainstthesonofthegeneralsecretaryofthepartysince2002,HuJintao,brokeout in2009.Theparty’sapparatus immediately sprang intoactionandwasnotonlyabletopreventChinesemediafromcoveringthecasebutalsomanagedtoselectivelyblockstoriesaboutthecaseontheNewYorkTimesandFinancialTimesWebsites.Becauseoftheparty’scontrolovereconomicinstitutions,theextentof

creativedestructionisheavilycurtailed,anditwillremainsountilthereisradicalreforminpoliticalinstitutions.JustasintheSovietUnion,theChinese experience of growth under extractive political institutions isgreatlyfacilitatedbecausethereisalotofcatchinguptodo.IncomepercapitainChinaisstillafractionofthatintheUnitedStatesandWesternEurope.Ofcourse,ChinesegrowthisconsiderablymorediversifiedthanSovietgrowth;itdoesn’trelyononlyarmamentsorheavyindustry,andChineseentrepreneursareshowingalotofingenuity.Allthesame,thisgrowthwillrunoutofsteamunlessextractivepoliticalinstitutionsmakeway for inclusive institutions. As long as political institutions remainextractive,growthwillbeinherentlylimited,asithasbeeninallothersimilarcases.TheChineseexperiencedoesraiseseveralinterestingquestionsabout

the futureofChinesegrowthand,more important, thedesirabilityandviability of authoritarian growth. Such growth has become a popularalternative to the “Washington consensus,” which emphasizes theimportance of market and trade liberalization and certain forms ofinstitutional reform for kick-starting economic growth in many lessdevelopedpartsoftheworld.Whilepartoftheappealofauthoritariangrowth comes as a reaction to theWashington consensus, perhaps itsgreater charm—certainly to the rulers presiding over extractiveinstitutions—is that it gives them free rein in maintaining and evenstrengtheningtheirholdonpowerandlegitimizestheirextraction.Asourtheoryhighlights,particularlyinsocietiesthathaveundergone

somedegreeofstatecentralization,thistypeofgrowthunderextractiveinstitutions is possible and may even be the most likely scenario for

many nations, ranging from Cambodia and Vietnam to Burundi,Ethiopia, and Rwanda. But it also implies that like all examples ofgrowthunderextractivepoliticalinstitutions,itwillnotbesustained.InthecaseofChina,thegrowthprocessbasedoncatch-up,importof

foreign technology, and export of low-end manufacturing products islikelytocontinueforawhile.Nevertheless,Chinesegrowthisalsolikelyto come to an end, particularly once China reaches the standards oflivinglevelofamiddle-incomecountry.ThemostlikelyscenariomaybefortheChineseCommunistPartyandtheincreasinglypowerfulChineseeconomicelitetomanagetomaintaintheirverytightgriponpowerinthenextseveraldecades.Inthiscase,historyandourtheorysuggestthatgrowthwithcreativedestructionandtrueinnovationwillnotarrive,andthe spectacular growth rates in China will slowly evaporate. But thisoutcomeisfarfrompreordained;itcanbeavoidedifChinatransitionstoinclusive political institutions before its growth under extractiveinstitutionsreaches its limit.Nevertheless,aswewill seenext, there islittle reason toexpect thata transition inChina towardmore inclusivepoliticalinstitutionsislikelyorthatitwilltakeplaceautomaticallyandpainlessly.EvensomevoiceswithintheChineseCommunistPartyarerecognizing

the dangers on the road ahead and are throwing around the idea thatpolitical reform—that is, a transition to more inclusive politicalinstitutions,touseourterminology—isnecessary.ThepowerfulpremierWen Jiabao has recently warned of the danger that economic growthwillbehamperedunlesspoliticalreformgetsunderway.WethinkWen’sanalysisisprescient,evenifsomepeopledoubthissincerity.Butmanyin theWestdonotagreewithWen’spronouncements.To them,Chinareveals an alternative path to sustained economic growth, one underauthoritarianism rather than inclusive economic and politicalinstitutions. But they are wrong.We have already seen the importantsalient roots of Chinese success: a radical change in economicinstitutions away from rigidly communist ones and toward institutionsthatprovideincentivestoincreaseproductivityandtotrade.Lookedatfrom this perspective, there is nothing fundamentally different aboutChina’s experience relative to that of countries that have managed totake steps away from extractive and toward inclusive economicinstitutions, even when this takes place under extractive political

institutions, as in theChinese case.Chinahas thus achieved economicgrowth not thanks to its extractive political institutions, but despitethem:itssuccessfulgrowthexperienceoverthelastthreedecadesisduetoaradicalshiftawayfromextractiveeconomicinstitutionsandtowardsignificantly more inclusive economic institutions, which was mademore difficult, not easier, by the presence of highly authoritarian,extractivepoliticalinstitutions.

A DIFFERENT TYPE of endorsement of authoritarian growth recognizes itsunattractive nature but claims that authoritarianism is just a passingstage. This idea goes back to one of the classical theories of politicalsociology, the theoryofmodernization, formulatedbySeymourMartinLipset.Modernization theorymaintains thatall societies,as theygrow,areheaded towardamoremodern,developed, and civilized existence,and in particular toward democracy.Many followers ofmodernizationtheoryalsoclaimthat,likedemocracy,inclusiveinstitutionswillemergeas a by-product of the growth process. Moreover, even thoughdemocracy is not the same as inclusive political institutions, regularelectionsandrelativelyunencumberedpoliticalcompetitionarelikelytobring forth thedevelopmentof inclusivepolitical institutions.Differentversionsofmodernizationtheoryalsoclaimthataneducatedworkforcewillnaturallyleadtodemocracyandbetterinstitutions.Inasomewhatpostmodernversionofmodernizationtheory,NewYorkTimescolumnistThomas Friedman went so far as to suggest that once a country gotenoughMcDonald’srestaurants,democracyandinstitutionswereboundtofollow.Allthispaintsanoptimisticpicture.Overthepastsixtyyears,most countries, even many of those with extractive institutions, haveexperiencedsomegrowth,andmosthavewitnessednotableincreasesintheeducationalattainmentoftheirworkforces.So,astheirincomesandeducational levels continue to rise,onewayoranother,allothergoodthings, such as democracy, human rights, civil liberties, and securepropertyrights,shouldfollow.Modernization theory has awide following bothwithin and outsideacademia.RecentU.S. attitudes towardChina, for example, have beenshaped by this theory. George H. W. Bush summarized U.S. policytowardChinesedemocracyas “Trade freelywithChinaand time ison

our side.” The idea was that as China traded freely with theWest, itwould grow, and that growth would bring democracy and betterinstitutions inChina, asmodernization theory predicted.Yet the rapidincrease in U.S.-China trade since the mid-1980s has done little forChinese democracy, and the even closer integration that is likely tofollowduringthenextdecadewilldoequallylittle.TheattitudesofmanyaboutthefutureofIraqisocietyanddemocracyin the aftermath of the U.S.-led invasion were similarly optimisticbecause of modernization theory. Despite its disastrous economicperformance under SaddamHussein’s regime, Iraqwas not as poor in2002asmanysub-SaharanAfricannations,andithadacomparativelywell-educatedpopulation, so itwas believed to be ripe ground for thedevelopmentofdemocracyandcivilliberties,andperhapsevenwhatwewoulddescribeaspluralism.ThesehopeswerequicklydashedaschaosandcivilwardescendeduponIraqisociety.Modernization theory is both incorrect and unhelpful for thinkingabouthow to confront themajorproblemsof extractive institutions infailingnations.Thestrongestpieceofevidenceinfavorofmodernizationtheory is that rich nations are the ones that have democratic regimes,respect civil and human rights, and enjoy functioning markets andgenerally inclusive economic institutions. Yet interpreting thisassociationassupportingmodernizationtheoryignoresthemajoreffectofinclusiveeconomicandpoliticalinstitutionsoneconomicgrowth.Aswehaveargued throughout thisbook, it is the societieswith inclusiveinstitutionsthathavegrownoverthepastthreehundredyearsandhavebecomerelativelyrichtoday.Thatthisaccountsforwhatweseearoundus is shown clearly if we look at the facts slightly differently: whilenationsthathavebuiltinclusiveeconomicandpoliticalinstitutionsoverthe last several centuries have achieved sustained economic growth,authoritarianregimesthathavegrownmorerapidlyoverthepastsixtyor one hundred years, contrary to what Lipset’s modernization theorywouldclaim,havenotbecomemoredemocratic.Andthisisinfactnotsurprising. Growth under extractive institutions is possible preciselybecauseitdoesn’tnecessarilyorautomaticallyimplythedemiseoftheseveryinstitutions.Infact,itisoftengeneratedbecausethoseincontrolofthe extractive institutions vieweconomic growth as not a threat but asupporttotheirregime,astheChineseCommunistPartyhasdonesince

the1980s.Itisalsonotsurprisingthatgrowthgeneratedbyincreasesinthevalueofthenaturalresourcesofanation,suchasinGabon,Russia,Saudi Arabia, and Venezuela, is unlikely to lead to a fundamentaltransformation of these authoritarian regimes toward inclusiveinstitutions.The historical record is even less generous tomodernization theory.Many relatively prosperous nations have succumbed to and supportedrepressive dictatorships and extractive institutions. Both Germany andJapan were among the richest and most industrialized nations in theworld in the firsthalfof the twentiethcentury,andhadcomparativelywell-educated citizens. This did not prevent the rise of the NationalSocialistParty inGermanyoramilitaristic regime intenton territorialexpansion via war in Japan—making both political and economicinstitutions take a sharp turn toward extractive institutions. Argentinawas also one of the richest countries in the world in the nineteenthcentury, as rich as or even richer than Britain, because it was thebeneficiary of the worldwide resource boom; it also had the mosteducated population in Latin America. But democracy and pluralismwerenomoresuccessful,andwerearguablylesssuccessful,inArgentinathaninmuchoftherestofLatinAmerica.Onecoupfollowedanother,andaswesawinchapter11,evendemocraticallyelectedleadersactedasrapaciousdictators.Evenmorerecentlytherehasbeenlittleprogresstoward inclusive economic institutions, and as we saw in chapter 13,twenty-first-centuryArgentiniangovernmentscanstillexpropriate theircitizens’wealthwithimpunity.All of this highlights several important ideas. First, growth underauthoritarian,extractivepolitical institutions inChina, thoughlikelytocontinue for a while yet, will not translate into sustained growth,supported by truly inclusive economic institutions and creativedestruction.Second,contrarytotheclaimsofmodernizationtheory,weshould not count on authoritarian growth leading to democracy orinclusive political institutions. China, Russia, and several otherauthoritarian regimescurrentlyexperiencing somegrowthare likely toreachthelimitsofextractivegrowthbeforetheytransformtheirpoliticalinstitutions inamore inclusivedirection—and in fact,probablybeforethere is any desire among the elite for such changes or any strongoppositionforcingthemtodoso.Third,authoritariangrowthisneither

desirable nor viable in the long run, and thus should not receive theendorsementoftheinternationalcommunityasatemplatefornationsinLatin America, Asia, and sub-Saharan Africa, even if it is a path thatmany nations will choose precisely because it is sometimes consistentwiththeinterestsoftheeconomicandpoliticalelitesdominatingthem.

YOUCAN’TENGINEERPROSPERITY

Unlike the theory we have developed in this book, the ignorancehypothesis comes readily with a suggestion about how to “solve” theproblemofpoverty:ifignorancegotushere,enlighteningandinformingrulers and policymakers can get us out, and we should be able to“engineer” prosperity around the world by providing the right adviceandbyconvincingpoliticiansofwhat isgoodeconomics. Inchapter2,whenwe discussed this hypothesis,we showed how the experience ofGhana’s primeminister Kofi Busia in the early 1970s underscored thefactthatthemainobstacletotheadoptionofpoliciesthatwouldreducemarketfailuresandencourageeconomicgrowthisnottheignoranceofpoliticians,buttheincentivesandconstraintstheyfacefromthepoliticalandeconomicinstitutionsintheirsocieties.Nevertheless,theignorancehypothesis still rules supreme inWestern policymaking circles, which,almost to the exclusion of anything else, focus on how to engineerprosperity.These engineering attempts come in two flavors. The first, oftenadvocated by international organizations such as the InternationalMonetary Fund, recognizes that poor development is caused by badeconomic policies and institutions, and then proposes a list ofimprovements these internationalorganizationsattempt to inducepoorcountriestoadopt.(TheWashingtonconsensusmakesuponesuchlist.)These improvements focus on sensible things such as macroeconomicstability and seemingly attractive macroeconomic goals such as areduction in thesizeof thegovernmentsector, flexibleexchangerates,and capital account liberalization. They also focus on moremicroeconomic goals, such as privatization, improvements in theefficiencyofpublicserviceprovision,andperhapsalsosuggestionsastohow to improve the functioning of the state itself by emphasizing

anticorruptionmeasures. Though on their ownmany of these reformsmight be sensible, the approach of international organizations inWashington,London,Paris,andelsewhereisstillsteepedinanincorrectperspective that fails to recognize the role of political institutions andthe constraints they place on policymaking. Attempts by internationalinstitutions to engineer economic growth by hectoring poor countriesintoadoptingbetterpoliciesandinstitutionsarenotsuccessfulbecausethey do not take place in the context of an explanation of why badpolicies and institutions are there in the first place, except that theleaders of poor countries are ignorant. The consequence is that thepolicies are not adopted and not implemented, or are implemented innameonly.For example, many economies around the world ostensibly

implementing such reforms, most notably in Latin America, stagnatedthroughout the 1980s and ’90s. In reality, such reforms were foisteduponthesecountriesincontextswherepoliticswentonasusual.Hence,even when reforms were adopted, their intent was subverted, orpoliticiansusedotherwaystoblunttheirimpact.Allthisisillustratedbythe “implementation” of one of the key recommendations ofinternational institutions aimed at achieving macroeconomic stability,central bank independence. This recommendation either wasimplementedintheorybutnotinpracticeorwasunderminedbytheuseof other policy instruments. It was quite sensible in principle. Manypoliticiansaroundtheworldwerespendingmorethantheywereraisingintaxrevenueandwerethenforcingtheircentralbankstomakeupthedifference by printing money. The resulting inflation was creatinginstability and uncertainty. The theory was that independent centralbanks, just like the Bundesbank in Germany, would resist politicalpressure and put a lid on inflation. Zimbabwe’s president Mugabedecided to heed international advice; he declared the Zimbabweancentral bank independent in 1995. Before this, the inflation rate inZimbabwewashoveringaround20percent.By2002ithadreached140percent;by2003,almost600percent;by2007,66,000percent;andby2008,230millionpercent!Ofcourse, inacountrywherethepresidentwins the lottery (this page–this page), it should surprise nobody thatpassingalawmakingthecentralbankindependentmeansnothing.Thegovernor of the Zimbabwean central bank probably knew how his

counterpartinSierraLeonehad“fallen”fromthetopfloorofthecentralbank building when he disagreed with Siaka Stevens (this page).Independent or not, complying with the president’s demands was theprudentchoiceforhispersonalhealth,evenifnotforthehealthoftheeconomy. Not all countries are like Zimbabwe. In Argentina andColombia,centralbankswerealsomadeindependentinthe1990s,andthey actually did their job of reducing inflation. But since in neithercountrywaspoliticschanged,politicalelitescoulduseotherwaystobuyvotes, maintain their interests, and reward themselves and theirfollowers.Sincetheycouldn’tdothisbyprintingmoneyanymore,theyhadtouseadifferentway.Inbothcountriestheintroductionofcentralbank independence coincided with a big expansion in governmentexpenditures,financedlargelybyborrowing.Thesecondapproachtoengineeringprosperityismuchmoreinvogue

nowadays. Itrecognizesthattherearenoeasyfixesfor liftinganationfrom poverty to prosperity overnight or even in the course of a fewdecades.Instead,itclaims,therearemany“micro-marketfailures”thatcan be redressed with good advice, and prosperity will result ifpolicymakers takeadvantageof theseopportunities—which,again, canbe achievedwith the help and vision of economists and others. Smallmarketfailuresareeverywhereinpoorcountries,thisapproachclaims—for example, in their education systems, health care delivery, and theway their markets are organized. This is undoubtedly true. But theproblem is that these smallmarket failuresmaybeonly the tipof theiceberg,thesymptomofdeeper-rootedproblemsinasocietyfunctioningunder extractive institutions. Just as it is not a coincidence that poorcountrieshavebadmacroeconomicpolicies,itisnotacoincidencethattheireducationalsystemsdonotworkwell.Thesemarket failuresmaynotbeduesolely to ignorance.Thepolicymakersandbureaucratswhoaresupposedtoactonwell-intentionedadvicemaybeasmuchapartoftheproblem,and themanyattempts to rectify these inefficienciesmaybackfire precisely because those in charge are not grappling with theinstitutionalcausesofthepovertyinthefirstplace.These problems are illustrated by intervention engineered by the

nongovernmental organization (NGO) Seva Mandir to improve healthcaredeliveryinthestateofRajasthaninIndia.Thestoryofhealthcaredelivery in India is one of deep-rooted inefficiency and failure.

Government-providedhealthcareis,atleastintheory,widelyavailableand cheap, and the personnel are generally qualified. But even thepoorest Indians do not use government health care facilities, optinginsteadforthemuchmoreexpensive,unregulated,andsometimesevendeficient private providers. This is not because of some type ofirrationality: people are unable to get any care from governmentfacilities, which are plagued by absenteeism. If an Indian visited hisgovernment-runfacility,notonlywouldtherebenonursesthere,buthewouldprobablynotevenbeabletogetinthebuilding,becausehealthcarefacilitiesareclosedmostofthetime.In2006SevaMandir, togetherwithagroupofeconomists,designed

an incentive scheme to encourage nurses to turn up for work in theUdaipur district of Rajasthan. The idea was simple: Seva Mandirintroducedtimeclocksthatwouldstampthedateandtimewhennurseswere in the facility. Nurses were supposed to stamp their time cardsthree times aday, to ensure that they arrivedon time, stayedaround,andleftontime.Ifsuchaschemeworked,andincreasedthequalityandquantityofhealthcareprovision,itwouldbeastrongillustrationofthetheorythattherewereeasysolutionstokeyproblemsindevelopment.In the event, the intervention revealed something very different.

Shortlyaftertheprogramwasimplemented,therewasasharpincreaseinnurseattendance.Butthiswasveryshortlived.Inalittlemorethanayear, the local health administration of the district deliberatelyundermined the incentive scheme introduced by Seva Mandir.Absenteeismwasbacktoitsusuallevel,yettherewasasharpincreasein“exemptdays,”whichmeantthatnurseswerenotactuallyaround—but this was officially sanctioned by the local health administration.There was also a sharp increase in “machine problems,” as the timeclocks were broken. But Seva Mandir was unable to replace thembecauselocalhealthministerswouldnotcooperate.Forcingnurses tostampa timeclock three timesadaydoesn’t seem

likesuchaninnovativeidea.Indeed,itisapracticeusedthroughouttheindustry, even Indian industry, and it must have occurred to healthadministrators as a potential solution to their problems. It seemsunlikely, then, that ignorance of such a simple incentive scheme waswhatstoppeditsbeingusedinthefirstplace.Whatoccurredduringtheprogram simply confirmed this. Health administrators sabotaged the

programbecausetheywereincahootswiththenursesandcomplicitinthe endemic absenteeism problems. They did not want an incentiveschemeforcingnursestoturnuporreducingtheirpayiftheydidnot.What this episode illustrates is a micro version of the difficulty of

implementingmeaningfulchangeswheninstitutionsarethecauseoftheproblemsinthefirstplace.Inthiscase,itwasnotcorruptpoliticiansorpowerful businesses undermining institutional reform, but rather, thelocalhealthadministrationandnurseswhowereabletosabotageSevaMandir’s and the development economists’ incentive scheme. Thissuggeststhatmanyofthemicro-marketfailuresthatareapparentlyeasyto fix may be illusory: the institutional structure that creates marketfailures will also prevent implementation of interventions to improveincentivesatthemicrolevel.Attemptingtoengineerprosperitywithoutconfronting the root causeof theproblems—extractive institutionsandthepoliticsthatkeepstheminplace—isunlikelytobearfruit.

THEFAILUREOFFOREIGNAID

FollowingtheSeptember11,2001,attacksbyAlQaeda,U.S.-ledforcesswiftlytoppledtherepressiveTalibanregimeinAfghanistan,whichwasharboring and refusing to hand over key members of Al Qaeda. TheBonn Agreement of December 2001 between leaders of the formerAfghanmujahideenwho had cooperatedwith the U.S. forces and keymembersoftheAfghandiaspora,includingHamidKarzai,createdaplanfor the establishment of a democratic regime. A first step was thenationwidegrandassembly,theLoyaJirga,whichelectedKarzaitoleadthe interim government. Things were looking up for Afghanistan. AmajorityoftheAfghanpeoplewerelongingtoleavetheTalibanbehind.The international community thought that all thatAfghanistan needednowwasalargeinfusionofforeignaid.RepresentativesfromtheUnitedNationsandseveralleadingNGOssoondescendedonthecapital,Kabul.What ensued should not have been a surprise, especially given the

failureofforeignaidtopoorcountriesandfailedstatesoverthepastfivedecades. Surprise or not, the usual ritual was repeated. Scores of aidworkersandtheirentouragesarrivedintownwiththeirownprivatejets,NGOsofallsortspouredintopursuetheirownagendas,andhigh-level

talksbeganbetweengovernmentsanddelegationsfromtheinternationalcommunity. Billions of dollars were now coming to Afghanistan. Butlittleof itwasusedforbuilding infrastructure,schools,orotherpublicservices essential for the development of inclusive institutions or evenforrestoringlawandorder.Whilemuchoftheinfrastructureremainedin tatters, the first tranche of the money was used to commission anairline to shuttlearoundUNandother internationalofficials.Thenextthing theyneededweredriversand interpreters.So theyhired the fewEnglish-speaking bureaucrats and the remaining teachers in Afghanschoolstochauffeurandchaperonethemaround,payingthemmultiplesofcurrentAfghansalaries.Asthefewskilledbureaucratswereshuntedintojobsservicingtheforeignaidcommunity,theaidflows,ratherthanbuilding infrastructure in Afghanistan, started by undermining theAfghanstatetheyweresupposedtobuilduponandstrengthen.VillagersinaremotedistrictinthecentralvalleyofAfghanistanheard

a radio announcement about a new multimillion-dollar program torestore shelter to their area.After a longwhile, a fewwoodenbeams,carriedbythetruckingcartelofIsmailKhan,famousformerwarlordandmemberof theAfghangovernment,weredelivered.But theywere toobigtobeusedforanythinginthedistrict,andthevillagersputthemtotheonlypossibleuse:firewood.Sowhathadhappenedtothemillionsofdollarspromisedtothevillagers?Ofthepromisedmoney,20percentofit was taken as UN head office costs in Geneva. The remainder wassubcontracted to an NGO, which took another 20 percent for its ownheadoffice costs inBrussels, and so on, for another three layers,witheach party taking approximately another 20 percent of what wasremaining.The littlemoney that reachedAfghanistanwasused tobuywood from western Iran, and much of it was paid to Ismail Khan’strucking cartel to cover the inflated transport prices. Itwas a bit of amiraclethatthoseoversizewoodenbeamsevenarrivedinthevillage.WhathappenedinthecentralvalleyofAfghanistanisnotanisolated

incident.Manystudiesestimatethatonlyabout10oratmost20percentof aid ever reaches its target. There are dozens of ongoing fraudinvestigations into charges of UN and local officials siphoning off aidmoney.Butmostofthewasteresultingfromforeignaidisnotfraud,justincompetence or even worse: simply business as usual for aidorganizations.

The Afghan experience with aid was in fact probably a qualifiedsuccesscomparedtoothers.Throughoutthelastfivedecades,hundredsofbillionsofdollarshavebeenpaidtogovernmentsaroundtheworldas“development” aid. Much of it has been wasted in overhead andcorruption, just as in Afghanistan.Worse, a lot of itwent to dictatorssuchasMobutu,whodependedonforeignaidfromhisWesternpatronsbothtobuysupportfromhisclientstoshoreuphisregimeandtoenrichhimself. The picture in much of the rest of sub-Saharan Africa wassimilar.Humanitarianaidgiven for temporary relief in timesof crises,for example, most recently in Haiti and Pakistan, has certainly beenmoreuseful, even though its delivery, too, has beenmarred in similarproblems.Despitethisunflatteringtrackrecordof“development”aid,foreignaid

is one of the most popular policies that Western governments,international organizations such as the United Nations, and NGOs ofdifferent ilk recommend as a way of combating poverty around theworld.Andofcourse,thecycleofthefailureofforeignaidrepeatsitselfoverandoveragain.TheideathatrichWesterncountriesshouldprovidelargeamountsof“developmentalaid” inorder tosolve theproblemofpoverty in sub-Saharan Africa, the Caribbean, Central America, andSouth Asia is based on an incorrect understanding of what causespoverty. Countries such as Afghanistan are poor because of theirextractive institutions—whichresult in lackofpropertyrights, lawandorder, or well-functioning legal systems and the stifling dominance ofnational and,more often, local elites over political and economic life.The same institutional problems mean that foreign aid will beineffective,asitwillbeplunderedandisunlikelytobedeliveredwhereit is supposed to go. In the worst-case scenario, it will prop up theregimes that are at the very root of the problems of these societies. Ifsustainedeconomicgrowthdependsoninclusiveinstitutions,givingaidtoregimespresidingoverextractiveinstitutionscannotbethesolution.This is not to deny that, even beyond humanitarian aid, considerablegood comes out of specific aid programs that build schools in areaswherenoneexistedbeforeand thatpay teacherswhowouldotherwisegounpaid.WhilemuchoftheaidcommunitythatpouredintoKabuldidlittletoimprovelifeforordinaryAfghans,therehavealsobeennotablesuccesses in building schools, particularly for girls, who were entirely

excludedfromeducationundertheTalibanandevenbefore.Onesolution—whichhasrecentlybecomemorepopular,partlybased

ontherecognitionthatinstitutionshavesomethingtodowithprosperityandeventhedeliveryofaid—istomakeaid“conditional.”Accordingtothisview,continuedforeignaidshoulddependonrecipientgovernmentsmeetingcertainconditions—forexample,liberalizingmarketsormovingtoward democracy. The GeorgeW. Bush administration undertook thebiggest step toward this type of conditional aid by starting theMillennium Challenge Accounts, which made future aid paymentsdependent on quantitative improvements in several dimensions ofeconomicandpoliticaldevelopment.Buttheeffectivenessofconditionalaid appearsnobetter than theunconditional kind.Countries failing tomeet these conditions typically receive as much aid as those that do.Thereisasimplereason:theyhaveagreaterneedforaidofeitherthedevelopmentalorhumanitariankind.Andquitepredictably,conditionalaid seems to have little effect on a nation’s institutions. After all, itwouldhavebeenquitesurprisingforsomebodysuchasSiakaStevensinSierraLeoneorMobutuintheCongosuddenlytostartdismantlingtheextractive institutions on which he depended just for a little moreforeignaid.Eveninsub-SaharanAfrica,whereforeignaidisasignificantfraction of many governments’ total budget, and even after theMillennium Challenge Accounts, which increased the extent ofconditionality, theamountofadditional foreignaid thatadictatorcanobtainbyundermininghisownpower isbothsmallandnotworththeriskeithertohiscontinueddominanceoverthecountryortohislife.Butall thisdoesnot imply that foreignaid,except thehumanitarian

kind, should cease. Putting an end to foreign aid is impractical andwouldlikelyleadtoadditionalhumansuffering.Itisimpracticalbecausecitizens of many Western nations feel guilt and unease about theeconomicandhumanitariandisastersaroundtheworld,andforeignaidmakes them believe that something is being done to combat theproblems. Even if this something is not very effective, their desire fordoingitwillcontinue,andsowillforeignaid.TheenormouscomplexofinternationalorganizationsandNGOswillalsoceaselesslydemandandmobilizeresourcestoensurethecontinuationofthestatusquo.Also,itwouldbecalloustocuttheaidgiventotheneediestnations.Yes,muchofitiswasted.Butifoutofeverydollargiventoaid,tencentsmakesit

tothepoorestpeopleintheworld,thatistencentsmorethantheyhadbefore toalleviate themostabjectpoverty,and itmight stillbebetterthannothing.Thereare twoimportant lessonshere.First, foreignaid isnotavery

effectivemeansofdealingwiththefailureofnationsaroundtheworldtoday. Far from it. Countries need inclusive economic and politicalinstitutionstobreakoutofthecycleofpoverty.Foreignaidcantypicallydo little in this respect, and certainly not with the way that it iscurrently organized. Recognizing the roots of world inequality andpovertyisimportantpreciselysothatwedonotpinourhopesonfalsepromises. As those roots lie in institutions, foreign aid, within theframeworkofgiveninstitutionsinrecipientnations,willdolittletospursustainedgrowth.Second,sincethedevelopmentofinclusiveeconomicandpoliticalinstitutionsiskey,usingtheexistingflowsofforeignaidatleastinparttofacilitatesuchdevelopmentwouldbeuseful.Aswesaw,conditionality is not the answer here, as it requires existing rulers tomakeconcessions.Instead,perhapsstructuringforeignaidsothatitsuseand administration bring groups and leaders otherwise excluded frompower into the decision-making process and empowering a broadsegmentofpopulationmightbeabetterprospect.

EMPOWERMENT

May 12, 1978, seemed as if it were going to be a normal day at theScâniatruckfactoryinthecityofSãoBernardointheBrazilianstateofSão Paulo. But the workers were restless. Strikes had been banned inBrazil since 1964, when the military overthrew the democraticgovernmentofPresidentJoãoGoulart.Butnewshadjustbrokenthatthegovernmenthadbeenfixingthenationalinflationfiguressothattherisein the cost of living had been underestimated. As the 7:00 a.m. shiftbegan,workers put down their tools. At 8:00 a.m., GilsonMenezes, aunionorganizerworkingattheplant,calledtheunion.ThepresidentoftheSãoBernardoMetalworkerswasathirty-three-year-oldactivistcalledLuiz Inácio Lula da Silva (“Lula”). By noon Lula was at the factory.Whenthecompanyaskedhimtopersuadetheemployeestogobacktowork,herefused.

TheScâniastrikewasthe first inawaveofstrikes thatsweptacrossBrazil.Onthefaceofitthesewereaboutwages,butasLulalaternoted,

I think we can’t separate economic and political factors.…The…strugglewasoverwages,butinstrugglingforwages,theworkingclasswonapoliticalvictory.

The resurgence of the Brazilian labor movement was just part of amuchbroadersocialreactiontoadecadeandahalfofmilitaryrule.Theleft-wing intellectualFernandoHenriqueCardoso, likeLuladestined tobecomepresidentofBrazilafterthere-creationofdemocracy,arguedin1973 that democracy would be created in Brazil by the many socialgroupsthatopposedthemilitarycomingtogether.Hesaidthatwhatwasneeded was a “reactivation of civil society … the professionalassociations, the tradeunions, the churches, the student organizations,the study groups and the debating circles, the social movements”—inother words, a broad coalition with the aim of re-creating democracyandchangingBraziliansociety.The Scânia factory heralded the formation of this coalition. By late

1978, Lulawas floating the idea of creating a newpolitical party, theWorkers’ Party. This was to be the party not just of trade unionists,however.Lulainsistedthatitshouldbeapartyforallwageearnersandthe poor in general. Here the attempts of union leaders to organize apolitical platform began to coalesce with the many social movementsthatwerespringingup.OnAugust18,1979,ameetingwasheldinSãoPaulo to discuss the formation of the Workers’ Party, which broughttogether former opposition politicians, union leaders, students,intellectuals, and people representing one hundred diverse socialmovements thathadbegun toorganize in the1970sacrossBrazil.TheWorkers’ Party, launched at the São Judas Tadeo restaurant in SãoBernardo in October 1979, would come to represent all these diversegroups.Thepartyquicklybegantobenefitfromthepoliticalopeningthatthe

militarywasreluctantlyorganizing.Inthelocalelectionsof1982,itrancandidatesforthefirsttime,andwontworacesformayor.Throughoutthe1980s,asdemocracywasgraduallyre-createdinBrazil,theWorkers’Partybegantotakeovermoreandmorelocalgovernments.By1988it

controlled the governments in thirty-sixmunicipalities, including largecities such as São Paulo and Porto Alegre. In 1989, in the first freepresidentialelectionssincethemilitarycoup,Lulawon16percentofthevote inthefirstroundastheparty’scandidate. IntherunoffracewithFernandoCollor,hewon44percent.Intakingovermanylocalgovernments,somethingthatacceleratedinthe 1990s, the Workers’ Party began to enter into a symbioticrelationshipwithmanylocalsocialmovements.InPortoAlegrethefirstWorkers’ Party administration after 1988 introduced “participatorybudgeting,”whichwasamechanismforbringingordinarycitizensintotheformulationofthespendingprioritiesofthecity.Itcreatedasystemthathasbecomeaworldmodelforlocalgovernmentaccountabilityandresponsiveness, and it went along with huge improvements in publicservice provision and the quality of life in the city. The successfulgovernancestructureofthepartyatthelocallevelmappedintogreaterpoliticalmobilizationandsuccessatthenationallevel.ThoughLulawasdefeatedbyFernandoHenriqueCardosointhepresidentialelectionsof1994and1998,hewaselectedpresidentofBrazilin2002.TheWorkers’Partyhasbeeninpowereversince.TheformationofabroadcoalitioninBrazilasaresultofthecomingtogether of diverse social movements and organized labor has had aremarkable impact on the Brazilian economy. Since 1990 economicgrowthhasbeenrapid,withtheproportionofthepopulationinpovertyfalling from 45 percent to 30 percent in 2006. Inequality, which roserapidly under the military, has fallen sharply, particularly after theWorkers’ Party took power, and there has been a huge expansion ofeducation, with the average years of schooling of the populationincreasingfromsixin1995toeightin2006.Brazilhasnowbecomepartof the BRIC nations (Brazil, Russia, India, and China), the first LatinAmerican country actually to have weight in international diplomaticcircles.

THE RISE OF BRAZIL since the 1970s was not engineered by economists ofinternational institutions instructing Brazilian policymakers on how todesignbetterpoliciesoravoidmarketfailures.Itwasnotachievedwithinjections of foreign aid. It was not the natural outcome of

modernization. Rather, it was the consequence of diverse groups ofpeoplecourageouslybuildinginclusiveinstitutions.Eventuallytheseledto more inclusive economic institutions. But the Braziliantransformation, like that of England in the seventeenth century, beganwiththecreationofinclusivepoliticalinstitutions.Buthowcansocietybuildinclusivepoliticalinstitutions?History, as we have seen, is littered with examples of reformmovements that succumbed to the iron law of oligarchy and replacedone set of extractive institutions with even more pernicious ones. WehaveseenthatEnglandin1688,Francein1789,andJapanduringtheMeiji Restoration of 1868 started the process of forging inclusivepolitical institutions with a political revolution. But such politicalrevolutions generally createmuch destruction and hardship, and theirsuccessisfarfromcertain.TheBolshevikRevolutionadvertiseditsaimas replacing the exploitative economic system of tsarist Russia with amorejustandefficientonethatwouldbringfreedomandprosperitytomillions of Russians. Alas, the outcome was the opposite, and muchmore repressive and extractive institutions replaced those of thegovernment theBolsheviksoverthrew.Theexperiences inChina,Cuba,andVietnamweresimilar.Manynoncommunist,top-downreformsfarednobetter.NasservowedtobuildamodernegalitariansocietyinEgypt,but this led only to Hosni Mubarak’s corrupt regime, as we saw inchapter 13. RobertMugabewas viewed bymany as a freedom fighterousting Ian Smith’s racist andhighly extractiveRhodesian regime. ButZimbabwe’s institutions became no less extractive, and its economicperformancehasbeenevenworsethanbeforeindependence.What is common among the political revolutions that successfullypaved the way for more inclusive institutions and the gradualinstitutional changes in North America, in England in the nineteenthcentury, and in Botswana after independence—which also led tosignificant strengthening of inclusive political institutions—is that theysucceeded in empowering a fairly broad cross-section of society.Pluralism, the cornerstone of inclusive political institutions, requirespoliticalpowertobewidelyheldinsociety,andstartingfromextractiveinstitutionsthatvestpowerinanarrowelite,thisrequiresaprocessofempowerment.This,asweemphasized inchapter7, iswhatsetsaparttheGloriousRevolutionfromtheoverthrowofoneelitebyanother. In

thecaseof theGloriousRevolution, the rootsofpluralismwere in theoverthrowofJamesIIbyapoliticalrevolutionledbyabroadcoalitionconsisting of merchants, industrialists, the gentry, and even manymembers of the English aristocracy not allied with the Crown. As wehave seen, the Glorious Revolution was facilitated by the priormobilization and empowerment of a broad coalition, and moreimportant,itinturnledtothefurtherempowermentofanevenbroadersegment of society than what came before—even though clearly thissegmentwasmuchlessbroadthantheentiresociety,andEnglandwouldremain far froma truedemocracy formore thananother twohundredyears. The factors leading to the emergenceof inclusive institutions intheNorth American colonieswere also similar, aswe saw in the firstchapter.Once again, the path starting inVirginia, Carolina,Maryland,andMassachusetts and leading up to the Declaration of Independenceandtotheconsolidationof inclusivepolitical institutions intheUnitedStates was one of empowerment for increasingly broader segments insociety.The French Revolution, too, is an example of empowerment of abroader segmentof society,which roseupagainst theancien régime inFrance and managed to pave the way for a more pluralistic politicalsystem.ButtheFrenchRevolution,especiallytheinterludeoftheTerrorunder Robespierre, a repressive andmurderous regime, also illustrateshowtheprocessofempowermentisnotwithoutitspitfalls.Ultimately,however, Robespierre and his Jacobin cadreswere cast aside, and themostimportantinheritancefromtheFrenchRevolutionbecamenottheguillotinebutthefar-rangingreformsthattherevolutionimplementedinFranceandotherpartsofEurope.There are many parallels between these historical processes ofempowerment and what took place in Brazil starting in the 1970s.Though one root of theWorkers’ Party is the trade unionmovement,right from its early days, leaders such as Lula, along with the manyintellectuals and opposition politicians who lent their support to theparty,soughttomakeitintoabroadcoalition.Theseimpulsesbegantofusewithlocalsocialmovementsalloverthecountry,asthepartytookover local governments, encouraging civic participation and causing asort of revolution in governance throughout the country. In Brazil, incontrastwithEnglandintheseventeenthcenturyorFranceattheturnof

the eighteenth century, there was no radical revolution igniting theprocessof transformingpolitical institutionsatone fell swoop.But theprocess of empowerment that started in the factories of São Bernardowas effective in part because it translated into fundamental politicalchange at the national level—for example, the transitioning out ofmilitaryruletodemocracy.Moreimportant,empowermentatthegrass-roots level in Brazil ensured that the transition to democracycorrespondedtoamovetowardinclusivepoliticalinstitutions,andthuswas a key factor in the emergence of a government committed to theprovision of public services, educational expansion, and a truly levelplayingfield.Aswehaveseen,democracyisnoguaranteethattherewillbepluralism.Thecontrastofthedevelopmentofpluralisticinstitutionsin Brazil to the Venezuelan experience is telling in this context.Venezuelaalsotransitionedtodemocracyafter1958,butthishappenedwithout empowerment at the grassroots level and did not create apluralistic distribution of political power. Instead, corrupt politics,patronagenetworks,andconflictpersistedinVenezuela,andinpartasaresult,whenvoterswenttothepolls,theywereevenwillingtosupportpotentialdespotssuchasHugoChávez,mostlikelybecausetheythoughthe alone could stand up to the established elites of Venezuela. Inconsequence, Venezuela still languishes under extractive institutions,whileBrazilbrokethemold.

WHAT CAN BE DONE to kick-start or perhaps just facilitate the process ofempowerment and thus the development of inclusive politicalinstitutions?Thehonest answerof course is that there isno recipe forbuildingsuchinstitutions.Naturallytherearesomeobviousfactorsthatwould make the process of empowerment more likely to get off theground.Thesewouldincludethepresenceofsomedegreeofcentralizedorder so that social movements challenging existing regimes do notimmediately descend into lawlessness; some preexisting politicalinstitutions that introduce a modicum of pluralism, such as thetraditionalpoliticalinstitutionsinBotswana,sothatbroadcoalitionscanformandendure;andthepresenceofcivilsociety institutionsthatcancoordinatethedemandsofthepopulationsothatoppositionmovementscan neither be easily crushed by the current elites nor inevitably turn

into a vehicle for another group to take control of existing extractiveinstitutions.Butmanyofthesefactorsarehistoricallypredeterminedandchange only slowly. The Brazilian case illustrates how civil societyinstitutions and associated party organizations can be built from thegroundup,butthisprocessisslow,andhowsuccessfulitcanbeunderdifferentcircumstancesisnotwellunderstood.Oneotheractor,orsetofactors,canplayatransformativeroleintheprocessofempowerment:themedia.Empowermentofsocietyatlargeisdifficult to coordinate and maintain without widespread informationabout whether there are economic and political abuses by those inpower.We saw in chapter 11 the role of the media in informing thepublic and coordinating their demands against forces undermininginclusiveinstitutionsintheUnitedStates.Themediacanalsoplayakeyroleinchannelingtheempowermentofabroadsegmentofsocietyintomoredurablepoliticalreforms,againas illustratedinourdiscussioninchapter11,particularlyinthecontextofBritishdemocratization.Pamphlets and books informing and galvanizing people played animportant role during the Glorious Revolution in England, the FrenchRevolution, and the march toward democracy in nineteenth-centuryBritain. Similarly,media, particularlynew formsbasedon advances ininformation and communication technology, such as Web blogs,anonymouschats,Facebook,andTwitter,playedacentralroleinIranianopposition against Ahmadinejad’s fraudulent election in 2009 andsubsequent repression, and they seem tobeplayinga similarly centralrole in theArabSpringprotests that areongoingas thismanuscript isbeingcompleted.Authoritarian regimes are often aware of the importance of a freemedia,anddotheirbesttofightit.AnextremeillustrationofthiscomesfromAlberto Fujimori’s rule in Peru. Thoughoriginally democraticallyelected, Fujimori soon set up a dictatorial regime inPeru,mounting acoupwhilestillinofficein1992.Thereafter,thoughelectionscontinued,Fujimori built a corrupt regime and ruled through repression andbribery. In this he relied heavily on his right-hand man, ValdimiroMontesinos, who headed the powerful national intelligence service ofPeru.Montesinoswasanorganizedman,sohekeptgoodrecordsofhowmuchtheadministrationpaiddifferent individualstobuytheir loyalty,evenvideotapingmanyactualactsofbribery.Therewasalogictothis.

Beyondjustrecordkeeping,thisevidencemadesurethattheaccompliceswerenowonrecordandwouldbeconsideredasguiltyasFujimoriandMontesinos.Afterthefalloftheregime,theserecordsfellintothehandsofjournalistsandauthorities.Theamountsarerevealingaboutthevalueof the media to a dictatorship. A Supreme Court judge was worthbetween $5,000 and $10,000 amonth, and politicians in the same ordifferent parties were paid similar amounts. But when it came tonewspapersandTVstations,thesumswereinthemillions.FujimoriandMontesinospaid$9millionononeoccasionandmorethan$10milliononanothertocontrolTVstations.Theypaidmorethan$1milliontoamainstreamnewspaper,andtoothernewspaperstheypaidanyamountbetween $3,000 and $8,000 per headline. Fujimori and Montesinosthought that controlling the media was much more important thancontrolling politicians and judges. One of Montesinos’s henchmen,GeneralBello,summedthisupinoneofthevideosbystating,“Ifwedonotcontrolthetelevisionwedonotdoanything.”The current extractive institutions in China are also cruciallydependent on Chinese authorities’ control of themedia, which, as wehave seen, has become frighteningly sophisticated. As a Chinesecommentator summarized, “To uphold the leadership of the Party inpolitical reform, three principles must be followed: that the Partycontrols the armed forces; the Party controls cadres; and the Partycontrolsthenews.”Butofcourseafreemediaandnewcommunicationtechnologiescanhelponlyatthemargins,byprovidinginformationandcoordinatingthedemandsandactionsofthosevyingformoreinclusiveinstitutions.Theirhelpwilltranslateintomeaningfulchangeonlywhenabroadsegmentofsocietymobilizesandorganizes inorder toeffectpolitical change,anddoes so not for sectarian reasons or to take control of extractiveinstitutions,but to transformextractive institutions intomore inclusiveones.Whethersuchaprocesswillgetunderwayandopenthedoortofurther empowerment, and ultimately to durable political reform, willdepend,aswehaveseen inmanydifferent instances,on thehistoryofeconomic and political institutions, on many small differences thatmatterandontheverycontingentpathofhistory.

ACKNOWLEDGMENTS

THISBOOKIStheculminationoffifteenyearsofcollaborativeresearch,andalong the way we have accumulated a great deal of practical andintellectual debts. Our greatest debt is to our long-term collaboratorSimonJohnson,whocoauthoredmanyofthekeyscientificpapersthatshapedourunderstandingofcomparativeeconomicdevelopment.Ourothercoauthors,withwhomwehaveworkedonrelatedresearch

projects,playedasignificantroleinthedevelopmentofourviews,andwe would like to particularly thank in this capacity Philippe Aghion,Jean-Marie Baland, María Angélica Bautista, Davide Cantoni, IsaíasChaves, Jonathan Conning, Melissa Dell, Georgy Egorov, LeopoldoFergusson, Camilo García-Jimeno, Tarek Hassan, Sebastián Mazzuca,Jeffrey Nugent, Neil Parsons, Steve Pincus, Pablo Querubín, RafaelSantos,KonstantinSonin,DavideTicchi,RagnarTorvik,JuanFernandoVargas,ThierryVerdier,AndreaVindigni,AlexWolitzky,PierreYared,andFabrizioZilibotti.Many other people played very important roles in encouraging,

challenging,andcritiquingusovertheyears.Wewouldparticularlyliketo thank Lee Alston, Abhijit Banerjee, Robert Bates, Timothy Besley,JohnCoatsworth,JaredDiamond,RichardEasterlin,StanleyEngerman,Peter Evans, Jeff Frieden, Peter Gourevitch, Stephen Haber, MarkHarrison, Elhanan Helpman, Peter Lindert, Karl Ove Moene, DaniRodrik,andBarryWeingast.Twopeopleplayedaparticularlysignificantroleinshapingourviews

and encouraging our research, and we would like to take thisopportunitytoexpressourintellectualdebtandoursinceregratitudetothem: Joel Mokyr, and Ken Sokoloff, who unfortunately passed awaybeforethisbookwaswritten.Kenissorelymissedbyusboth.Wearealsoverygrateful to the scholarswhoattendeda conference

we organized in February 2010 on an early version of our bookmanuscript at the Institute forQuantitative Social Science atHarvard.

Wewouldparticularlyliketothanktheco-organizers,JimAltandKenShepsle, and our discussants at the conference: Robert Allen, AbhijitBanerjee, Robert Bates, Stanley Engerman, Claudia Goldin, ElhananHelpman,JoelMokyr,IanMorris,ŞevketPamuk,StevePincus,andPeterTemin.WearealsogratefultoMelissaDell,JesúsFernández-Villaverde,SándorLászló,SureshNaidu,RogerOwen,DanTrefler,MichaelWalton,and Noam Yuchtman, who gave us extensive comments at theconferenceandatmanyothertimes.WearealsogratefultoCharlesMann,LeandroPradosdelaEscosura,andDavidWebsterfortheirexpertadvice.Duringmuchof theprocessof researchingandwriting thisbookwewere bothmembers of theCanadian Institute forAdvancedResearch’s(CIFAR) program on Institutions, Organizations, and Growth. Wepresented research related to this bookmany times atCIFARmeetingsand have benefited hugely from the support of this wonderfulorganizationandthescholarsthatitbringstogether.We also received comments from literally hundreds of people invarious seminars and conferences on the material developed in thisbook,andweapologizeforfailingtoattributeproperlyanysuggestion,idea,orinsightthatwegotfromthosepresentationsanddiscussions.WearealsoverygratefultoMaríaAngélicaBautista,MelissaDell,andLeanderHeldringfortheirsuperbresearchassistanceonthisproject.Last, but certainly not least,we have been very fortunate to have awonderful, insightful, and extremely supportive editor, JohnMahaney.John’scommentsandsuggestionshavegreatlyimprovedourbook,andhissupportandenthusiasmfortheprojectmadethelastyearandahalfmuchmorepleasantandlesstaxingthanitmighthavebeen.

BIBLIOGRAPHICALESSAYANDSOURCES

PREFACE

Mohamed ElBaradei’s views can be found attwitter.com/#!/ElBaradei.Mosaab El Shami and Noha Hamed quotes are from Yahoo! news

2/6/2011,atnews.yahoo.com/s/yblog_exclusive/20110206/ts_yblog_exclusive/egyptian-voices-from-tahrir-square.On the twelve immediatedemandspostedonWaelKhalil’sblog, see

alethonews.wordpress.com/2011/02/27/egypt-reviewing-the-demands/.Reda Metwaly is quoted on Al Jazeera, 2/1/2011, at

english.aljazeera.net/news/middleeast/2011/02/2011212597913527.html.

CHAPTER1:SoCLOSEANDYETSODIFFERENT

AgooddiscussionoftheSpanishexplorationoftheRiodeLaPlataisRock(1992),chap.1.OnthediscoveryandcolonizationoftheGuaraní,see Ganson (2003). The quotations from de Sahagún are from deSahagún (1975), pp. 47–49. Gibson (1963) is fundamental on theSpanish conquest of Mexico and the institutions they structured. Thequotations from de las Casas come from de las Casas (1992), pp. 39,117–18,and107,respectively.On Pizarro in Peru, see Hemming (1983). Chaps. 1–6 cover the

meetingatCajamarcaandthemarchsouthandthecaptureoftheIncacapital,Cuzco.SeeHemming(1983),chap.20,ondeToledo.Bakewell(1984)givesanoverviewofthefunctioningofthePotosímita,andDell(2010)providesstatisticalevidencethatshowshowithashadpersistenteffectsovertime.ThequotefromArthurYoungisreproducedfromSheridan(1973),p.

8. There are many good books that describe the early history ofJamestown: for example, Price (2003), and Kupperman (2007). OurtreatmentisheavilyinfluencedbyMorgan(1975)andGalenson(1996).Thequote fromAnasTodkill comes fromp. 38ofTodkill (1885).ThequotesfromJohnSmitharefromPrice(2003),p.77(“Victuals…”),p.93(“Ifyourking…”),andp.96(“Whenyousend…”).TheCharterofMaryland,theFundamentalConstitutionsofCarolina,andothercolonialconstitutionshavebeenputontheInternetbyYaleUniversity’sAvalonProject,atavalon.law.yale.edu/17th_century.Bakewell(2009),chap.14,discussestheindependenceofMexicoand

the constitution. See Stevens (1991) and Knight (2011) onpostindependencepoliticalinstabilityandpresidents.Coatsworth(1978)is the seminal paper on the evidence on economic decline in Mexicoafter independence. Haber (2010) presents the comparison of thedevelopment of banking in Mexico and the United States. Sokoloff(1988) and Sokoloff and Khan (1990) provide evidence on the socialbackground of innovators in the United States who filed patents. SeeIsrael (2000) for a biography of Thomas Edison. Haber, Maurer, andRazo(2003)proposesan interpretationof thepoliticaleconomyof the

regimeofPorfirioDíazverymuchinthespiritofourdiscussion.Haber,Klein, Maurer, and Middlebrook (2008) extend this treatment ofMexico’s political economy into the twentieth century. On thedifferentialallocationof frontier lands inNorthandLatinAmerica,seeNugentandRobinson (2010)andGarcía-JimenoandRobinson (2011).Hu-DeHart(1984)discussesthedeportationoftheYaquipeopleinchap.6.OnthefortuneofCarlosSlimandhowitwasmade,seeRelea(2007)andMartinez(2002).Our interpretation of comparative economic development of theAmericas builds on our own previous research with Simon Johnson,particularly Acemoglu, Johnson, and Robinson (2001, 2002), and hasalsobeenheavilyinfluencedbyCoatsworth(1978,2008)andEngermanandSokoloff(1997).

CHAPTER2:THEORIESTHATDON’TWORK

JaredDiamond’s views onworld inequality are laid out in his bookGuns,GermsandSteel (1997).Sachs(2006)setsouthisownversionofgeographical determinism. Views about culture are widely spreadthroughout the academic literature but have never been broughttogether in onework.Weber (2002) argued that itwas the ProtestantReformation that explainedwhy itwas Europe that had the IndustrialRevolution.Landes(1999)proposedthatNorthernEuropeansdevelopedauniquesetofculturalattitudesthatledthemtoworkhard,save,andbe innovative. Harrison and Huntington, eds. (2000), is a forcefulstatement of the importance of culture for comparative economicdevelopment. The notion that there is some sort of superior Britishcultureor superior setofBritish institutions iswidespreadandused toexplain U.S. exceptionalism (Fisher, 1989) and also patterns ofcomparative development more generally (La Porta, Lopez-de-Silanes,andShleifer,2008).TheworksofBanfield(1958)andPutnam,Leonardi,andNanetti (1994) are very influential cultural interpretations of howoneaspectofculture,or“socialcapital,”astheycallit,makesthesouthofItalypoor.Forasurveyofhoweconomistsusenotionsofculture,seeGuiso, Sapienza, and Zingales (2006). Tabellini (2010) examines thecorrelation between the extent to which people trust each other inWestern Europe and levels of annual income per capita. Nunn andWantchekon (2010) show how the lack of trust and social capital inAfricaiscorrelatedwiththehistoricalintensityoftheslavetrade.The relevanthistoryof theKongo is presented inHilton (1985) and

Thornton(1983).OnthehistoricalbackwardnessofAfricantechnology,see theworksofGoody (1971),Law (1980), andAustenandHeadrick(1983).The definition of economics proposed by Robbins is from Robbins

(1935),p.16.ThequotefromAbbaLernerisinLerner(1972),p.259.Theideathat

ignorance explains comparative development is implicit in mosteconomic analyses of economic development and policy reform: forexample,Williamson(1990);Perkins,Radelet,andLindauer(2006);and

Aghion and Howitt (2009). A recent, forceful version of this view isdevelopedinBanerjeeandDuflo(2011).Acemoglu, Johnson, andRobinson (2001,2002)provide a statisticalanalysis of the relative role of institutions, geography, and culture,showing that institutionsdominate theother two typesofexplanationsinaccountingfordifferencesinpercapitaincometoday.

CHAPTER3:THEMAKINGOFPROSPERITYANDPOVERTY

ThereconstructionofthemeetingbetweenHwangPyŏng-Wŏnandhisbrother is taken fromJamesA.Foley’s interviewofHwang transcribedinFoley(2003),pp.197–203.The notion of extractive institutions originates from Acemoglu,

Johnson,andRobinson(2001).TheterminologyofinclusiveinstitutionswassuggestedtousbyTimBesley.Theterminologyofeconomiclosersand the distinction between them and political losers comes fromAcemoglu and Robinson (2000b). The data on Barbados comes fromDunn (1969). Our treatment of the Soviet economy relies on Nove(1992) and Davies (1998). Allen (2003) provides an alternative andmorepositiveinterpretationofSovieteconomichistory.Inthesocialscienceliteraturethereisagreatdealofresearchrelated

to our theory and argument. See Acemoglu, Johnson, and Robinson(2005b)foranoverviewofthisliteratureandourcontributiontoit.Theinstitutional view of comparative development builds on a number ofimportantworks. Particularly notable is thework of North; see Northand Thomas (1973), North (1982), North and Weingast (1989), andNorth,Wallis,andWeingast(2009).Olson(1984)alsoprovidedaveryinfluentialaccountofthepoliticaleconomyofeconomicgrowth.Mokyr(1990)isafundamentalbookthatlinkseconomicloserstocomparativetechnologicalchangeinworldhistory.Thenotionofeconomiclosersisvery widespread in social science as an explanation for why efficientinstitutional and policy outcomes do not occur. Our interpretation,whichbuildsonRobinson(1998)andAcemogluandRobinson(2000b,2006b),differsbyemphasizingtheideathatthemostimportantbarriertotheemergenceofinclusiveinstitutionsiselites’fearthattheywilllosetheirpoliticalpower.Jones(2003)providesarichcomparativehistoryemphasizing similar themes, and Engerman and Sokoloff’s (1997)importantworkontheAmericasalsoemphasizestheseideas.Aseminalpolitical economy interpretation of African underdevelopment wasdevelopedbyBates(1981,1983,1989),whoseworkheavilyinfluencedours.SeminalstudiesbyDalton(1965)andKillick(1978)emphasizetheroleofpoliticsinAfricandevelopmentandparticularlyhowthefearof

losingpoliticalpowerinfluenceseconomicpolicy.Thenotionofpoliticallosers was previously implicit in other theoretical work in politicaleconomy, for instance, Besley and Coate (1998) and Bourguignon andVerdier(2000).Theroleofpoliticalcentralizationandstateinstitutionsin development has been most heavily emphasized by historicalsociologists following theworkbyMaxWeber.Notable is theworkofMann (1986,1993),Migdal (1988),andEvans (1995). InAfrica,workontheconnectionbetweenthestateanddevelopmentisemphasizedbyHerbst (2000) and Bates (2001). Economists have recently begun tocontribute to this literature; for example,Acemoglu (2005) andBesleyand Persson (2011). Finally, Johnson (1982), Haggard (1990), Wade(1990), and Amsden (1992) emphasized how it was the particularpolitical economy of East Asian nations that allowed them to be soeconomically successful. Finley (1965) made a seminal argument thatslaverywas responsible for the lack of technological dynamism in theclassicalworld.The idea that growth under extractive institutions is possible but isalsolikelytorunoutofsteamisemphasizedinAcemoglu(2008).

CHAPTER4:SMALLDIFFERENCESANDCRITICALJUNCTURES

Benedictow(2004)providesadefinitiveoverviewoftheBlackDeath,though his assessments of how many people the plague killed arecontroversial.Thequotations fromBoccaccioandRalphofShrewsburyare reproduced from Horrox (1994). Hatcher (2008) provides acompelling account of the anticipation and arrival of the plague inEngland.ThetextoftheStatuteofLaborersisavailableonlinefromtheAvalonProject,atavalon.law.yale.edu/medieval/statlab.aspThe fundamental works on the impact of the Black Death on the

divergenceofEasternandWesternEuropeareNorthandThomas(1973)and particularly Brenner (1976), whose analysis of how the initialdistribution of political power affected the consequences of the plaguehasgreatlyinfluencedourthinking.SeeDuPlessis(1997)ontheSecondSerfdominEasternEurope.Conning(2010)andAcemogluandWolitzky(2011)developformalizationsofBrenner’sthesis.ThequotefromJamesWattisreproducedfromRobinson(1964),pp.223–24.InAcemoglu, Johnson, andRobinson (2005a)we first presented the

argumentthat itwas the interactionbetweenAtlantic tradeand initialinstitutionaldifferencesthatledtothedivergenceofEnglishinstitutionsandultimately the IndustrialRevolution.Thenotionof the iron lawofoligarchyisduetoMichels(1962).ThenotionofacriticaljuncturewasfirstdevelopedbyLipsetandRokkan(1967).Ontheroleofinstitutionsinthelong-rundevelopmentoftheOttoman

Empire, the research of Owen (1981), Owen and Pamuk (1999), andPamuk(2006)isfundamental.

CHAPTER5:“I’VESEENTHEFUTURE,ANDITWORKS”

OnSteffens’smissiontoRussiaandhiswordstoBaruch,seeSteffens(1931),chap.18,pp.790–802.Forthenumberofpeoplewhostarvedinthe1930s,weusethefiguresofDaviesandWheatcroft(2004).Onthe1937censusnumbers, seeWheatcroft andDavies (1994a,1994b).ThenatureofinnovationintheSovieteconomyisstudiedinBerliner(1976).Our discussion of how Stalinism, and particularly economic planning,reallyworkedisbasedonGregoryandHarrison(2005).Onhowwritersof U.S. economics textbooks continually got Soviet economic growthwrong,seeLevyandPeart(2009).OurtreatmentandinterpretationoftheLeleandtheBushongisbased

ontheresearchofDouglas(1962,1963)andVansina(1978).OntheconceptoftheLongSummer,seeFagan(2003).Anaccessible

introductiontotheNatufiansandarchaeologicalsiteswementioncanbefound inMithen (2006) andBarker (2006). The seminalwork onAbuHureyra is Moore, Hillman, and Legge (2000), which documents howsedentarylifeandinstitutionalinnovationappearedpriortofarming.SeeSmith(1998)forageneraloverviewoftheevidencethatsedentarylifepreceded farming, and see Bar-Yosef and Belfer-Cohen (1992) for thecase of the Natufians. Our approach to the Neolithic Revolution isinspired by Sahlins (1972),which also has the anecdote about theYirYoront.OurdiscussionofMayahistoryfollowsMartinandGrube(2000)and

Webster (2002).The reconstructionof thepopulationhistoryofCopáncomes fromWebster, Freter, andGonlin (2000). The number of datedmonumentsisfromSidrysandBerger(1979).

CHAPTER6:DRIFTINGAPART

Thediscussionof theVenetiancasefollowsPugaandTrefler(2010),andchaps.8and9ofLane(1973).The material on Rome is contained in any standard history. Our

interpretationofRomaneconomicinstitutionsfollowsFinlay(1999)andBang (2008). Our account of Roman decline follows Ward-Perkins(2006) and Goldsworthy (2009). On institutional changes in the lateRoman Empire, see Jones (1964). The anecdotes about Tiberius andHadrianarefromFinley(1999).TheevidencefromshipwreckswasfirstusedbyHopkins(1980).See

DeCallataǿ(2005)andJongman(2007)foranoverviewofthisandtheGreenlandIceCoreProject.The Vindolanda tablets are available online at

vindolanda.csad.ox.ac.uk/.ThequoteweusecomesfromTVIIPub.no.:343.ThediscussionofthefactorsthatledtothedeclineofRomanBritain

followsCleary (1989),chap.4;Faulkner (2000), chap.7;Dark (1994),chap.2.On Aksum, see Munro-Hay (1991). The seminal work on European

feudalism and its origins is Bloch (1961); see Crummey (2000) onEthiopian feudalism. Phillipson (1998)makes the comparison betweenthecollapseofAksumandthecollapseoftheRomanEmpire.

CHAPTER7:THETURNINGPOINT

The story of Lee’s machine and meeting with Queen Elizabeth I isavailableatcalverton.homestead.com/willlee.html.Allen(2009b)presentsthedataonrealwagesusingDiocletian’sEdict

onMaximumPrices.OurargumentaboutthecausesoftheIndustrialRevolutionishighly

influencedbytheargumentsmadeinNorthandThomas(1973),NorthandWeingast (1989), Brenner (1993), Pincus (2009), and Pincus andRobinson(2010).ThesescholarsinturnwereinspiredbyearlierMarxistinterpretations of British institutional change and the emergence ofcapitalism;seeDobb(1963)andHill (1961,1980).SeealsoTawney’s(1941)thesisabout

howthestatebuildingprojectofHenryVIIIchangedtheEnglishsocialstructure.ThetextoftheMagnaCartaisavailableonlineattheAvalonProject,

atavalon.law.yale.edu/medieval/magframe.asp.Elton (1953) is the seminal work on the development of state

institutions under Henry VIII, and Neale (1971) relates these to theevolutionofparliament.On the Peasants’ Revolt, see Hilton (2003). The quote fromHill on

monopoliesisfromHill(1961),p.25.OnCharlesI’speriodof“personalrule,” we follow Sharp (1992). Our evidence on how different groupsandregionssidedeither fororagainstParliamentcomes fromBruntonandPennington(1954),Hill(1961),andStone(2001).Pincus(2009)isfundamental on the Glorious Revolution and discusses many of thespecificchanges inpoliciesandeconomic institutions; forexample, therepealof theHearthTaxand thecreationof theBankofEngland.SeealsoPincusandRobinson(2010).Pettigrew(2007,2009)discusses theattack on monopolies, including the Royal African Company, and ourdata on petitioning comes fromhis papers. Knights (2010) emphasizesthepoliticalimportanceofpetitioning.OurinformationonHoare’sBankcomesfromTeminandVoth(2008).Our information about Superviser Cowperthwaite and the excise tax

bureaucracycomesfromBrewer(1988).

Our overview of the economic history of the Industrial Revolutionrests on Mantoux (1961), Daunton (1995), Allen (2009a), and Mokyr(1990, 2009), who provide details on the famous inventors andinventions we discuss. The story about the Baldwyn family is fromBogartandRichardson(2009,2011),whostresstheconnectionbetweentheGloriousRevolution, the reorganizationofproperty rights, and theconstruction of roads and canals.On the CalicoeActs andManchesterActs,seeO’Brien,Griffiths,andHunt(1991),whichisthesourceofthequotesfromthelegislation.Onthedominanceofnewpeopleinindustry,seeDaunton(1995),chap.7,andCrouzet(1985).OuraccountofwhythemajorinstitutionalchangesfirsttookplaceinEngland is based on Acemoglu, Johnson, and Robinson (2005a) andBrenner(1976).ThedataonthenumberofindependentmerchantsandtheirpoliticalpreferencescomefromZahedieh(2010).

CHAPTER8:NOTONOURTURF

On the opposition to the printing press in the Ottoman Empire, seeSavage-Smith(2003)pp.656–59.ComparativehistoricalliteracycomesfromEasterlin(1981).Our discussion of political institutions of Spain follows Thompson

(1994a,1994b).ForevidenceontheeconomicdeclineofSpainoverthisperiod,seeNogalandPradosdelaEscosura(2007).Our discussion of the impediments to economic development in

Austria-HungaryfollowsBlum(1943),Freudenberger(1967),andGross(1973).ThequotationfromMariaTheresacomesfromFreudenberger,p.495. All other quotations from Count Hartig and Francis I are fromBlum.Francis’sreplytothedelegatesfromtheTyrolisquotedfromJászi(1929),pp.80–81.ThecommentofFriedrichvonGentztoRobertOwenis also quoted from Jászi (1929), p. 80. The experience of theRothschildsinAustriaisdiscussedinchap.2ofCorti(1928).Our analysis of Russia follows Gerschenkron (1970). The quotation

from Kropotkin is from p. 60 of the 2009 edition of his book. Theconversation between Nicholas and Mikhail is quoted from Saunders(1992),p.117.Kankrin’squoteonrailwaysisinOwen(1991),pp.15–16.The speech by Nicholas to the manufacturers is reproduced from

Pintner967),p.100.ThequotefromA.A.ZakrevskiiisfromPintner(1967),p.235.OnAdmiralZheng,seeDreyer(2007).Theeconomichistoryofearly

ModernChina is covered byMyers andWang (2002). The quote fromT’angChenisquotedfromMyersandWang,pp.564–65.SeeZewde (2002) foranoverviewof the relevantEthiopianhistory.

The data on how extractive Ethiopia has been historically come fromPankhurst(1961),asdoallthequoteswereproducehere.OurdescriptionofSomaliinstitutionsandhistoryfollowsLewis(1961,

2002). Theheer of theHassanUgaas is reproduced on p.177 of Lewis(1961);ourdescriptionofa feudcomes fromchap.8ofLewis (1961),wherehereportsmanyotherexamples.OntheKingdomofTaqaliandwriting,seeEwald(1988).

CHAPTER9:REVERSINGDEVELOPMENT

OurdiscussionofthetakeoverofAmbonandBandabytheDutchEastIndiaCompanyandthecompany’snegativeeffectonthedevelopmentofSoutheastAsiafollowsHanna(1978)andparticularlyReid(1993),chap.5.ThequotesfromReidonToméPiresarefromp.271;theDutchfactorinMaguindanao,p.299;thesultanofMaguindanao,pp.299–300.Dataon the impactof theDutchEast IndiaCompanyon thepriceof spicescomefromO’RourkeandWilliamson(2002).Adefinitiveoverviewofslavery inAfricansocietyandthe impactof

the slave trade is Lovejoy (2000). Lovejoy, p. 47, Table 31, reportsconsensus estimates of the extent of the slave trade. Nunn (2008)providedthefirstquantitativeestimatesoftheimpactoftheslavetradeon African economic institutions and economic growth. The data onfirearmsandgunpowderimportsarefromInikori(1977).ThetestimonyofFrancisMooreisquotedfromLovejoy(2000),pp.89–90.Law(1977)isaseminalstudyoftheexpansionoftheOyostate.Theestimatesoftheimpact of the slave trade on population in Africa are taken fromManning(1990).Lovejoy(2000),chap.8,theessaysinLaw(1995),andtheimportantbookofAustin(2005)arethebasisforourdiscussionofthe analysis of the period of “legitimate commerce.” Data on theproportion of Africans whowere slaves in Africa comes from Lovejoy(2000),e.g.,p.192,Table9.2.DataonlaborinLiberiaisfromClower,Dalton,Harwitz,andWalters

(1966).The dual economy idea was developed by Lewis (1954). Fergusson

(2010)developsamathematicalmodelofthedualeconomy.ThenotionthatthiswasacreationofcolonialismwasfirstproposedintheseminalcollectionofessayseditedbyPalmerandParsons(1977).OuraccountofSouthAfricaisbasedonBundy(1979)andFeinstein(2005).TheMoravianmissionaryisquotedinBundy(1979),p.46,andJohn

Hemming is quoted in Bundy, p. 72. The spread of land ownership inGriqualandEastisfromBundy,p.89;theexploitsofStephenSonjicaarefromBundy,p.94;thequotefromMatthewBlythisfromp.97;andthequote fromaEuropeanobserver inFingoland1884 is fromBundy,pp.

100–101.GeorgeAlbuisquotedinFeinstein(2005),p.63;secretaryfornative affairs is quoted fromFeinstein, p. 45; andVerwoerd is quotedfromFeinstein,p.159.DataontherealwagesofAfricangoldminersarefromp.66ofWilson (1972).G.Findlay isquoted inBundy (1979),p.242.Thenotion that thedevelopmentof therichcountriesof theWest isthemirrorimageoftheunderdevelopmentoftherestoftheworldwasoriginallydevelopedbyWallertsein(1974–2011),thoughheemphasizesverydifferentmechanismsthanwedo.

CHAPTER10:THEDIFFUSIONOFPROSPERITY

This chapter builds heavily on our previous research with SimonJohnsonandDavideCantoni:Acemoglu,Johnson,andRobinson(2002)andAcemoglu,Cantoni,Johnson,andRobinson(2010,2011).Our discussion of the development of early institutions in Australia

followstheseminalworkofHirst(1983,1988,2003)andNeal(1991).Theoriginalmanuscriptof thewrit issuedtoJudgeCollins isavailable(thanks to the Macquarie University Law School in Australia) atwww.law.mq.edu.au/scnsw/html/Cable%20v%20Sinclair,%201788.htm.Macarthur’scharacterizationofWentworth’ssupportersisquotedfrom

Melbourne(1963),pp.131–32.Our discussion of the origins of the Rothschilds follows Ferguson

(1998); Mayer Rothschild’s remark to his son is reproduced fromFerguson,p.76.OurdiscussionoftheimpactoftheFrenchonEuropeaninstitutionsis

takenfromAcemoglu,Cantoni,Johnson,andRobinson(2010,2011)andthereferencestherein.SeeDoyle(2002)forastandardoverviewoftheFrenchRevolution.InformationonthefeudalduesinNassau-Usingenisfrom Lenger (2004), p. 96. Ogilivie (2011) overviews the historicalimpactofguildsonEuropeandevelopment.For a treatment of the life of (Ōkubo Toshimichi, see Iwata (1964).

SakamotoRyūma’seight-pointplanisreproducedfromJansen(2000),p.310.

CHAPTER11:THEVIRTUOUSCIRCLE

Our discussion of the Black Act follows Thompson (1975). BaptistNunn’s report of June 27 is from Thompson (1975), pp. 65–66. TheotherquotesarefromThompson’ssectionontheruleof law,pp.258–69,whichiswellworthreadinginitsentirety.Our approach to democratization in England is based on Acemoglu

andRobinson (2000a, 2001, and 2006a). Earl Grey’s speech is quotedfrom Evans (1996), p. 223. Stephens’s comment about democracy isquoted in Briggs (1959), p. 34. Thompson’s quote is from Thompson(1975),p.269.TheentiretextofthePeople’sChartercanbefoundinColeandFilson

(1951)andatweb.bham.ac.uk/1848/document/peoplech.htm.ThequotefromBurkeistakenfromBurke(1790/1969),p.152.Lindert (2004, 2009) is a seminal treatment of the coevolution of

democracyandpublicpolicyoverthepasttwohundredyears.Keyssar(2009) isaseminal introductionto theevolutionofpolitical

rightsintheUnitedStates.VanderbiltisquotedinJosephson(1934),p.15. The text of Roosevelt’s address is at www.theodore-roosevelt.com/sotu1.html.ThequotefromWoodrowWilsonisfromWilson(1913),p.286.ThetextofPresidentRoosevelt’sFiresideChatcanbefoundatmiller-

center.org/scripps/archive/speeches/detail/3309.DataontherelativetenureofSupremeCourtjusticesinArgentinaand

the United States is presented in Iaryczower, Spiller, and Tommasi(2002). Helmke (2004) discusses the history of court packing inArgentinaandquotesJusticeCarlosFayt.

CHAPTER12:THEVICIOUSCIRCLE

This chapterheavily reliesonour theoretical andempirical researchon institutional persistence, particularly Acemoglu, Johnson, andRobinson (2005b) andAcemoglu andRobinson (2008a).Heath (1972)andKelleyandKlein(1980)madeaseminalapplicationoftheironlawofoligarchytothe1952BolivianRevolution.ThequotefromtheBritishparliamentarypapersisreproducedfromp.

15 of House of Commons (1904). The early political history ofpostindependenceSierraLeoneiswelltoldinCartwright(1970).ThoughinterpretationsdifferastowhySiakaStevenspulleduptherailwayline,thesalientoneisthathedidthistoisolateMendeland.InthiswefollowAbraham and Sesay (1993), p. 120; Richards (1996), pp. 42–43; andDavies(2007),pp.684–85.Reno(1995,2003)arethebesttreatmentsofStevens’s regime.Thedataon theagriculturalmarketingboardscomesfromDavies (2007).On themurderofSamBangurabydefenestration,seeReno(1995),pp.137–41.Jackson(2004),p.63,andKeen(2005),p.17,discusstheacronymsISUandSSD.Bates (1981) is the seminal analysis of how marketing boards

destroyed agricultural productivity in postindependence Africa, seeGoldstein and Udry (2009) on how political connections to chiefsdeterminepropertyrightstolandinGhana.Ontherelationbetweenpoliticiansin1993andtheconquistadors,see

Dosal (1995), chap. 1, and Casaús Arzú (2007). Our discussion of thepolicies of theConsulado deComercio followsWoodward (1966). ThequotefromPresidentBarriosisfromMcCreery(1994),pp.187–88.OurdiscussionoftheregimeofJorgeUbicofollowsGrieb(1979).Our discussion of the underdevelopment of the U.S. South follows

Acemoglu and Robinson (2008b). SeeWright (1978) on the pre–CivilWardevelopmentoftheslaveeconomy,andBatemanandWeiss(1981)on thedearthof industry.FogelandEngerman (1974)giveadifferentandcontroversial interpretation.Wright (1986)andRansomandSutch(2001)giveoverviewsoftheextenttowhichthesoutherneconomyafter1865reallychanged.CongressmanGeorgeWashingtonJulianisquotedin Wiener (1978), p. 6. The same book contains the analysis of the

persistenceofthesouthernlandedeliteaftertheCivilWar.Naidu(2009)examinestheimpactoftheintroductionofpolltaxesandliteracytestsinthe1890sinsouthernstates.ThequotationfromW.E.B.DuBoisisinhisbookDuBois(1903),p.88.Clause256oftheAlabamaconstitutioncanbefoundatwww.legislature.state.al.us/CodeOfAlabama/Constitution/1901/CA-245806.htm.Alston and Ferrie (1999) discuss how southern politicians blockedfederal legislation they thought would disrupt the South’s economy.Woodward(1955)givesaseminaloverviewofthecreationofJimCrow.Overviews of the Ethiopian revolution are provided inHalliday andMolyneux (1981). On the Emperor’s cushions, see Kapuściński (1983).The quotes from Dawit Wolde Giorgis are from Dawit Wolde Giorgis(1989),pp.49and48,respectively.

CHAPTER13:WHYNATIONSFAILTODAY

For theBBCreportonMugabe’s lotterysuccess, including thepublicstatementofZimbank,seenews.bbc.co.uk/2/hi/africa/621895.stm.OurtreatmentofthecreationofwhiteruleinRhodesiafollowsPalmer

(1977) and Alexander (2006). Meredith (2007) provides a goodoverviewofmorerecentZimbabweanpolitics.OuraccountofthecivilwarinSierraLeonefollowsRichards(1996),

Truth and Reconciliation Commission (2004), and Keen (2005). TheanalysispublishedinanewspaperinthecapitalcityofFreetownin1995isquotedfromKeen(2005),p.34.ThetextoftheRUF’s“FootpathstoDemocracy” can we found at www.sierra-leone.org/AFRC-RUF/footpaths.html.ThequotationfromtheteenagerfromGeomaisfromKeen(2005),p.

42.Our discussion of the Colombian paramilitaries follows Acemoglu,

Robinson,andSantos(2010)andChavesandRobinson(2010),whichinturn heavily rely on the extensive work by Colombian scholars,particularly Romero (2003), the essays in Romero (2007), and López(2010).León(2009)isanaccessibleandbalancedaccountofthenatureofcontemporaryconflictsinColombia.AlsofundamentalistheWebsiterunbytheweeklynewspaperSemana,www.verdadabierta.com/.AllthequotescomefromAcemoglu,Robinson,andSantos(2010).Thecontractbetween Martín Llanos and the mayors in Casanare is available inSpanish at www.verdadabierta.com/victimarios/los-jefes/714-perfil-hector-german-buitrago-alias-martin-llanos.TheoriginsandconsequencesofElCorralitoarewellpresented ina

series of articles in The Economist magazine, available atwww.economist.com/search/apachesolr_search/corralito.On the role of the interior in Argentine development, see Sawers

(1996).HassigandOh(2009)providesanexcellent,valuableaccountoflifein

NorthKorea.Chap.2coverstheluxuriouslifestyleoftheleadership,andchaps.3 and4, the economic realities thatmostpeople face.TheBBCcoverage of the currency reform can be found at

news.bbc.co.uk/2/hi/8500017.stm. On the pleasure palace and brandyconsumption,seechap.12ofPost(2004).Our discussion of child labor and its use for picking cotton inUzbeksitan follows Kandiyoti (2008), available atwww.soas.ac.uk/cccac/events/cotton-sector-in-central-asia-2005/file49842.pdf.ThequotefromGulnazisonp.20ofKandiyoti.Onthe Andijon uprising, see International Crisis Group (2005). Thedescription of the election of Joseph Stalin in the Soviet Union isreproducedfromDenny(1937).Our analysis of “crony capitalism” in Egypt follows Sfakianakis(2004).

CHAPTER14:BREAKINGTHEMOLD

OurtreatmentofBotswanafollowsAcemoglu,Johnson,andRobinson(2003); Robinson and Parsons (2006); and Leith (2005). Schapera(1970) and Parsons, Henderson, and Tlou (1995) are fundamentalworks. High Commissioner Rey is quoted in Acemoglu, Johnson, andRobinson (2003), p. 96. The discussion of the three chiefs’ visit toEngland follows Parsons (1998), and all quotes relating to this comefromhisbook:Chamberlain,pp.206–7;Fairfield,p.209;andRhodes,p.223. Schapera is quoted fromSchapera (1940), p. 72. The quote fromQuettMasireisfromMasire(2006),p.43.OntheethniccompositionoftheTswanatribes,seeSchapera(1952).Our treatment of change in the U.S. South follows Acemoglu and

Robinson(2008b).Onthepopulationmovementoutof theU.S.South,see Wright (1999); on the mechanization of cotton picking, Heinicke(1994).“FRDUMFOOFSPETGH”isquotedfromMickey(2008),p.50.Thurmond’s 1948 speech is taken from www.slate.com/id/2075151/,where you also can listen to the audio recording. On JamesMeredithand Oxford, Mississippi, see Doyle (2001). See Wright (1999) on theimpactofcivilrightslegislationonblackvotingintheSouth.On the nature and politics of China’s political transition after the

death of Mao, see Harding (1987) and MacFarquhar and Schoenhals(2008).Deng’squoteaboutthecatisfromHarding,p.58.Thefirstpointof the Cultural Revolution is from Schoenhals (1996), p. 33; Mao onHitler is fromMacFarquhar and Schoenhals, p. 102;Hua on the “TwoWhatevers”isfromHarding,p.56.

CHAPTER15:UNDERSTANDINGPROSPERITYANDPOVERTY

ForthestoryofDaiGuofang,seeMcGregor(2010),pp.219–26.ThestoryofredtelephonesisalsofromMcGregor,chap.1.Onthecontrolofthepartyovermedia,seePan(2008),chap.9,andMcGregor(2010),pp.64–69 and 235–62. The quotes on the party’s attitudes towardentrepreneurs are from McGregor (2010), pp. 200–201 and 223. ForWen Jiabao’s comments on political reforms in China, seewww.guardian.co.uk/world/2010/aug/29/wen-jiabao-china-reform.Themodernizationhypothesis is clearly articulated in Lipset (1959).

The evidence against it is discussed in detail in Acemoglu, Johnson,Robinson,andYared (2008,2009).GeorgeH.W.Bush’squote is fromnews.bbc.co.uk/2/hi/business/752224.stm.Our discussion of NGO activity and foreign aid in Afghanistan after

December2001drawsonGhaniandLockhart(2008).SeealsoReinikkaandSvensson(2004)andEasterly(2006)onproblemsofforeignaid.Ourdiscussionofproblemsofmacroeconomicreformandinflationin

ZimbabweisfromAcemoglu,Johnson,Robinson,andQuerubín(2008).The Seva Mandir discussion is drawn from Banerjee, Duflo, andGlennerster(2008).The formation of the Workers’ Party in Brazil is covered in Keck

(1992);ontheScâniastrike,seechap.4.ThequotefromCardosoisfromKeck,pp.44–45;thequotefromLulaisonKeck,p.65.ThediscussionoftheeffortsofFujimoriandMontesinostocontrolthe

mediaisfromMcMillanandZoido(2004),andthequoteontheChineseCommunistParty’scontrolisfromMcGregor(2010),p.69.

SOURCESFORTHEMAPS

Map1:The IncaEmpire and road systemare adapted fromJohnV.Murra(1984),“AndeanSocietiesbefore1532,”inLeslieBethell,ed.,TheCambridge History of Latin America, vol. 1 (New York: CambridgeUniversity Press). The map of themita catchment area is taken fromMelissa Dell (2010), “The Persistent Effects of Peru’s Mining Mita,”Econometrica78:6,1863–1903.

Map2:Drawnusingdata fromMiriamBruhnandFranciscoGallego(2010),“TheGood,theBad,andtheUgly:DoTheyMatterforEconomicDevelopment?”forthcomingintheReviewofEconomicsandStatistics.Map3:DrawnusingdatafromWorldDevelopmentIndicators(2008),theWorldBank.Map4:Mapofwildpigsadapted fromW.L.R.Oliver; I.L.Brisbin,Jr.;andS.Takahashi(1993),“TheEurasianWildPig(Susscrofa),”inW.L.R.Oliver,ed.,Pigs,Peccaries,andHippos:StatusSurveyandActionPlan(Gland,Switzerland:IUCN),pp.112–21.Wildcattleadaptedfrommapof aurochs from Cis van Vuure (2005), Retracing the Aurochs (Sofia:PensoftPublishers),p.41.Map 5: Adapted from Daniel Zohary and Maria Hopf (2001), TheDomesticationofPlants in theOldWorld,3rdedition(NewYork:OxfordUniversityPress),wheatmap4,p.56;barleymap5,p.55.MapofricedistributionadaptedfromTe-TzuChang(1976),“TheOrigin,Evolution,Cultivation, Dissemination, and Diversification of Asian and AfricanRices,”Euphytica25,425–41,figure2,p.433.Map 6: The Kuba Kingdom is based on Jan Vansina (1978), TheChildrenofWoot(Madison:UniversityofWisconsinPress),map2,p.8.Kongo based on Jan Vansina (1995), “Equatorial Africa Before theNineteenth Century,” in Philip Curtin, Steven Feierman, LeonardThompson, and Jan Vansina, African History: From Earliest Times toIndependence(NewYork:Longman),map8.4,p.228.Map 7: Drawn using data from the DefenseMeteorological SatelliteProgram’s Operational Linescan System (DMSP-OLS), which reportsimages of the Earth at night captured from 20:00 to 21:30 local timefrom an altitude of 830 km(http://www.ngdc.noaa.gov/dmsp/sensors/ols.html).Map8:ConstructedfromdatainJeromeBlum(1998),TheEndoftheOldOrderinRuralEurope(Princeton:PrincetonUniversityPress).Map9:Adapted from themaps inColinMartin andGeoffreyParker(1988),TheSpanishArmada(London:Hamilton),pp.i–ii,243.Map 10: Adapted from Simon Martin and Nikolai Gribe (2000),Chronicle of theMayaKings andQueens:Deciphering theDynasties of theAncientMaya(London:ThamesandHudson),p.21.Map 11:Map adapted fromMark A. Kishlansky, Patrick Geary, andPatriciaO’Brien(1991),CivilizationintheWest(NewYork:HarperCollins

Publishers),p.151.Map12:Somali clan familiesadapted from IoanM.Lewis (2002),AModernHistoryofSomalia(Oxford:JamesCurrey),mapof“Somaliethnicandclan-familydistribution2002”;mapofAksumadapted fromKevinShillington(1995),HistoryofAfrica,2ndedition(NewYork:St.Martin’sPress),map5.4,p.69.Map 13: J. R. Walton (1998), “Changing Patterns of Trade andInteraction Since 1500,” in R. A. Butlin and R. A. Dodgshon, eds.,AnHistoricalGeographyofEurope (Oxford:OxfordUniversityPress), figure15.2,p.326.Map14:AdaptedfromAnthonyReid(1988),SoutheastAsiaintheAgeof Commerce, 1450–1680: Volume 1, The Land Below the Winds (NewHaven:YaleUniversityPress),map2,p.9.Map15:DrawnfromdatatakenfromNathanNunn(2008),“TheLongTerm Effects of Africa’s Slave Trades,” Quarterly Journal of Economics123,no.1,139–76.Map 16:Maps based on the followingmaps: for South Africa, A. J.Christopher (2001), The Atlas of Changing South Africa (London:Routledge),figure1.19,p.31;forZimbabwe,RobinPalmer(1977),Landand Racial Domination in Rhodesia (Berkeley: University of CaliforniaPress),map5,p.245.Map 17: Adapted from Alexander Grab (2003), Napoleon and theTransformation of Europe (London: PalgraveMacmillan),map 1, p. 17;map2,p.91.Map18:Drawnusingdatafromthe1840U.S.Census,downloadableat the National Historical Geographic Information System:http://www.nhgis.org/.Map19:Drawnusingdatafromthe1880U.S.Census,downloadableat the National Historical Geographic Information System:http://www.nhgis.org/.Map 20: Daron Acemoglu, James A. Robinson, and Rafael J. Santos(2010), “The Monopoly of Violence: Evidence from Colombia,” athttp://scholar.harvard.edu/jrobinson/files/jr_formationofstate.pdf.

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