Why Nations Fail: The Origins of Power, Prosperity, and Poverty (14 page)

The aristocracy was not the only loser from industrialization. Artisans whose manual skills were being replaced by mechanization likewise opposed the spread of industry. Many organized against it, rioting and destroying the machines they saw as responsible for the decline of their livelihood. They were the Luddites, a word that has today become synonymous with resistance to technological change. John Kay, English inventor of the “flying shuttle” in 1733, one of the first significant improvements in the mechanization of weaving, had his house burned down by Luddites in 1753. James Hargreaves, inventor of the “spinning jenny,” a complementary revolutionary improvement in spinning, got similar treatment.

In reality, the artisans were much less effective than the landowners and elites in opposing industrialization. The Luddites did not possess the political power—the ability to affect political outcomes against the wishes of other groups—of the landed aristocracy. In England, industrialization marched on, despite the Luddites’ opposition, because aristocratic opposition, though real, was muted. In the Austro-Hungarian
and the Russian empires, where the absolutist monarchs and aristocrats had far more to lose, industrialization was blocked. In consequence, the economies of Austria-Hungary and Russia stalled. They fell behind other European nations, where economic growth took off during the nineteenth century.

The success and failure of specific groups notwithstanding, one lesson is clear: powerful groups often stand against economic progress and against the engines of prosperity. Economic growth is not just a process of more and better machines, and more and better educated people, but also a transformative and destabilizing process associated with widespread creative destruction. Growth thus moves forward only if not blocked by the economic losers who anticipate that their economic privileges will be lost and by the political losers who fear that their political power will be eroded.

Conflict over scarce resources, income and power, translates into conflict over the rules of the game, the economic institutions, which will determine the economic activities and who will benefit from them. When there is a conflict, the wishes of all parties cannot be simultaneously met. Some will be defeated and frustrated, while others will succeed in securing outcomes they like. Who the winners of this conflict are has fundamental implications for a nation’s economic trajectory. If the groups standing against growth are the winners, they can successfully block economic growth, and the economy will stagnate.

The logic of why the powerful would not necessarily want to set up the economic institutions that promote economic success extends easily to the choice of political institutions. In an absolutist regime, some elites can wield power to set up economic institutions they prefer. Would they be interested in changing political institutions to make them more pluralistic? In general not, since this would only dilute their political power, making it more difficult, maybe impossible, for them to structure economic institutions to further their own interests. Here again we see a ready source of conflict. The people who suffer from the extractive economic institutions cannot hope for absolutist rulers to voluntarily change political institutions and redistribute power in
society. The only way to change these political institutions is to force the elite to create more pluralistic institutions.

In the same way that there is no reason why political institutions should automatically become pluralistic, there is no natural tendency toward political centralization. There would certainly be incentives to create more centralized state institutions in any society, particularly in those with no such centralization whatsoever. For example, in Somalia, if one clan created a centralized state capable of imposing order on the country, this could lead to economic benefits and make this clan richer. What stops this? The main barrier to political centralization is again a form of fear from change: any clan, group, or politician attempting to centralize power in the state will also be centralizing power in their own hands, and this is likely to meet the ire of other clans, groups, and individuals, who would be the political losers of this process. Lack of political centralization means not only lack of law and order in much of a territory but also there being many actors with sufficient powers to block or disrupt things, and the fear of their opposition and violent reaction will often deter many would-be centralizers. Political centralization is likely only when one group of people is sufficiently more powerful than others to build a state. In Somalia, power is evenly balanced, and no one clan can impose its will on any other. Therefore, the lack of political centralization persists.

There are few better, or more depressing, examples of the forces that explain the logic of why economic prosperity is so persistently rare under extractive institutions or that illustrate the synergy between extractive economic and political institutions than the Congo. Portuguese and Dutch visitors to Kongo in the fifteenth and sixteenth centuries remarked on the “miserable poverty” there. Technology was rudimentary by European standards, with the Kongolese having neither writing, the wheel, nor the plow. The reason for this poverty, and the reluctance of Kongolese farmers to adopt better technologies
when they learned of them, is clear from existing historical accounts. It was due to the extractive nature of the country’s economic institutions.

As we have seen, the Kingdom of Kongo was governed by the king in Mbanza, subsequently São Salvador. Areas away from the capital were ruled by an elite who played the roles of governors of different parts of the kingdom. The wealth of this elite was based on slave plantations around São Salvador and the extraction of taxes from the rest of the country. Slavery was central to the economy, used by the elite to supply their own plantations and by Europeans on the coast. Taxes were arbitrary; one tax was even collected every time the king’s beret fell off. To become more prosperous, the Kongolese people would have had to save and invest—for example, by buying plows. But it would not have been worthwhile, since any extra output that they produced using better technology would have been subject to expropriation by the king and his elite. Instead of investing to increase their productivity and selling their products in markets, the Kongolese moved their villages away from the market; they were trying to be as far away from the roads as possible, in order to reduce the incidence of plunder and to escape the reach of slave traders.

The poverty of the Kongo was therefore the result of extractive economic institutions that blocked all the engines of prosperity or even made them work in reverse. The Kongo’s government provided very few public services to its citizens, not even basic ones, such as secure property rights or law and order. On the contrary, the government was itself the biggest threat to its subjects’ property and human rights. The institution of slavery meant that the most fundamental market of all, an inclusive labor market where people can choose their occupation or jobs in ways that are so crucial for a prosperous economy, did not exist. Moreover, long-distance trade and mercantile activities were controlled by the king and were open only to those associated with him. Though the elite quickly became literate after the Portuguese introduced writing, the king made no attempt to spread literacy to the great mass of the population.

Nevertheless, though “miserable poverty” was widespread, the Kongolese extractive institutions had their own impeccable logic:
they made a few people, those with political power, very rich. In the sixteenth century, the king of Kongo and the aristocracy were able to import European luxury goods and were surrounded by servants and slaves.

The roots of the economic institutions of Kongolese society flowed from the distribution of political power in society and thus from the nature of political institutions. There was nothing to stop the king from taking people’s possessions or bodies, other than the threat of revolt. Though this threat was real, it was not enough to make people or their wealth secure. The political institutions of Kongo were truly absolutist, making the king and the elite subject to essentially no constraints, and it gave no say to the citizens in the way their society was organized.

Of course, it is not difficult to see that the political institutions of Kongo contrast sharply with inclusive political institutions where power is constrained and broadly distributed. The absolutist institutions of Kongo were kept in place by the army. The king had a standing army of five thousand troops in the mid-seventeenth century, with a core of five hundred musketeers—a formidable force for its time. Why the king and the aristocracy so eagerly adopted European firearms is thus easy to understand.

There was no chance of sustained economic growth under this set of economic institutions and even incentives for generating temporary growth were highly limited. Reforming economic institutions to improve individual property rights would have made the Kongolese society at large more prosperous. But it is unlikely that the elite would have benefited from this wider prosperity. First, such reforms would have made the elite economic losers, by undermining the wealth that the slave trade and slave plantations brought them. Second, such reforms would have been possible only if the political power of the king and the elite were curtailed. For instance, if the king continued to command his five hundred musketeers, who would have believed an announcement that slavery had been abolished? What would have stopped the king from changing his mind later on? The only real guarantee would have been a change in political institutions so that citizens gained some countervailing political power, giving them some
say over taxation or what the musketeers did. But in this case it is dubious that sustaining the consumption and lifestyle of the king and the elite would have been high on their list of priorities. In this scenario, changes that would have created better economic institutions in society would have made the king and aristocracy political as well as economic losers.

The interaction of economic and political institutions five hundred years ago is still relevant for understanding why the modern state of Congo is still miserably poor today. The advent of European rule in this area, and deeper into the basin of the River Congo at the time of the “scramble for Africa” in the late nineteenth century, led to an insecurity of human and property rights even more egregious than that which characterized the precolonial Kongo. In addition, it reproduced the pattern of extractive institutions and political absolutism that empowered and enriched a few at the expense of the masses, though the few now were Belgian colonialists, most notably King Leopold II.

When Congo became independent in 1960, the same pattern of economic institutions, incentives, and performance reproduced itself. These Congolese extractive economic institutions were again supported by highly extractive political institutions. The situation was worsened because European colonialism created a polity, Congo, made up of many different precolonial states and societies that the national state, run from Kinshasa, had little control over. Though President Mobutu used the state to enrich himself and his cronies—for example, through the Zairianization program of 1973, which involved the mass expropriation of foreign economic interests—he presided over a noncentralized state with little authority over much of the country, and had to appeal to foreign assistance to stop the provinces of Katanga and Kasai from seceding in the 1960s. This lack of political centralization, almost to the point of total collapse of the state, is a feature that Congo shares with much of sub-Saharan Africa.

The modern Democratic Republic of Congo remains poor because its citizens still lack the economic institutions that create the basic incentives that make a society prosperous. It is not geography, culture, or the ignorance of its citizens or politicians that keep the Congo poor, but its extractive economic institutions. These are still in place
after all these centuries because political power continues to be narrowly concentrated in the hands of an elite who have little incentive to enforce secure property rights for the people, to provide the basic public services that would improve the quality of life, or to encourage economic progress. Rather, their interests are to extract income and sustain their power. They have not used this power to build a centralized state, for to do so would create the same problems of opposition and political challenges that promoting economic growth would. Moreover, as in much of the rest of sub-Saharan Africa, infighting triggered by rival groups attempting to take control of extractive institutions destroyed any tendency for state centralization that might have existed.

The history of the Kingdom of Kongo, and the more recent history of the Congo, vividly illustrates how political institutions determine economic institutions and, through these, the economic incentives and the scope for economic growth. It also illustrates the symbiotic relationship between political absolutism and economic institutions that empower and enrich a few at the expense of many.

Congo today is an extreme example, with lawlessness and highly insecure property rights. However, in most cases such extremism would not serve the interest of the elite, since it would destroy all economic incentives and generate few resources to be extracted. The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty. But this implies neither that extractive institutions can never generate growth nor that all extractive institutions are created equal.

There are two distinct but complementary ways in which growth under extractive political institutions can emerge. First, even if economic institutions are extractive, growth is possible when elites can directly allocate resources to high-productivity activities that they themselves control. A prominent example of this type of growth under
extractive institutions was the Caribbean Islands between the sixteenth and eighteenth centuries. Most people were slaves, working under gruesome conditions in plantations, living barely above subsistence level. Many died from malnutrition and exhaustion. In Barbados, Cuba, Haiti, and Jamaica in the seventeenth and eighteenth centuries, a small minority, the planter elite, controlled all political power and owned all the assets, including all the slaves. While the majority had no rights, the planter elite’s property and assets were well protected. Despite the extractive economic institutions that savagely exploited the majority of the population, these islands were among the richest places in the world, because they could produce sugar and sell it in world markets. The economy of the islands stagnated only when there was a need to shift to new economic activities, which threatened both the incomes and the political power of the planter elite.