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Chapter 8
Themes
Key
LitCharts assigns a color and icon to each theme in Why Nations Fail, which you can use to track the themes throughout the work.
Global Inequality and Economic Growth
History and Institutional Change
Cycles of Wealth and Poverty
Diversity, Pluralism, and Empowerment
Summary
Analysis
Under the heading “Spice and Genocide,” Acemoglu and Robinson describe the remote Moluccan islands in Indonesia, which were long key to global commerce because they were the only sources of nutmeg, mace, and cloves. The Portuguese sailed around Africa and captured the city of Melaka in an attempt to monopolize the spice trade. But they failed because several absolutist Southeast Asian city-states were already trading spices. Later, the Dutch invaded the region with the same goals as the Portuguese. They convinced the king of Ambon to give them a monopoly on his island’s clove production.
The authors have already explained why the Industrial Revolution succeeded in England, and why it failed in absolutist monarchies throughout Europe and Asia. They now address why it also failed in most of the world. One factor explains this more than any other: European colonialism. The Portuguese and Dutch competition in Indonesia illustrates that Europeans’ primary motivation during colonization was profit (and certainly not growth in the places they colonized). Colonizers pursued this profit by imposing extractive institutions on the rest of the world, so according to the authors’ theory, colonized regions were unlikely to grow.
Themes
But in the Banda Islands, each village ruled itself, so the Dutch couldn’t take control of the region’s spices. Instead, they committed genocide, massacring everyone on the islands and then creating a system of plantation slavery in their place. Through their monopoly, the Dutch drove down spice supplies and drove up their prices. They repeated this over the entire region, crushing the prosperous states surrounding them. Many states even destroyed their spice trees instead of facing Dutch conquest.
These brutal colonial practices clearly show how extractive economic institutions like monopolies harm the majority (and the economy as a whole) in order to benefit the few. In addition to committing unconscionable violence, the Dutch also impoverished local native people by destroying their robust commercial economies.
Themes
Without this colonial violence, Acemoglu and Robinson suggest, Southeast Asian states might have become prosperous and inclusive. But it’s impossible to know. This chapter is about how European colonialism “sowed the seeds of underdevelopment” around the world by imposing highly extractive institutions on native populations.
Dutch colonialism didn’t just prevent local economies from growing and local people from thriving in Southeast Asia: it actually destroyed the relatively vibrant, centralized states that already existed. Simply put, it destroyed the region’s capacity to grow in the future. At the same time, the authors agree that there’s no way to know whether or not these states would have actually flourished, since history is contingent—it’s impossible to make such a prediction, though it’s still clear that colonialism took a devastating toll on Southeast Asia.
Themes
The section “The All-Too-Usual Institution” focuses on slavery. In the Middle Ages, Europe transitioned away from slavery to a system of feudal serfdom. But the slave trade remained alive and well within Africa and the Middle East. Then, in the 17th and 18th century, Europeans started taking millions of slaves from Africa to their American plantation colonies. Europeans paid for slaves with guns and ammunition, which accelerated war and conflict in Africa. Many African societies started focusing all their energy on capturing and trading slaves, and this eroded most existing institutions. For example, the Oyo and Asante Empires conquered most of coastal West Africa and sold their captives as slaves.
While both European and African states enthusiastically participated in the slave trade, its negative economic and political impacts were heavily concentrated in Africa (and the Americas). Of course, for Europeans, this was a plus. The primary reason for this concentration of harm was that the slave trade gave African states a strong incentive to fight more wars. In turn, this made peaceful states more likely to get attacked, which incentivized them to start arming themselves, fighting, and enslaving people, too. After all, this became the clearest path to wealth in much of coastal Africa. This is another clear example of how extractive economic institutions encourage elites to pursue harmful and politically destabilizing economic activities. Like the spice trade in Indonesia, the slave trade in Africa didn’t just suppress growth, but actually undermined and destroyed existing states.
Themes
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Slavery and warfare suppressed population growth in Africa. For instance, without warfare and the slave trade, West Africa’s population would have at least doubled between 1800 and 1850—instead, it stayed the same. After the transatlantic slave trade ended, African societies and European merchants instead started trading commodities like ivory, rubber, and palm oil. While they could no longer sell enslaved people, African societies started using them to extract these commodities. For instance, the Asante and Dahomey empires built huge slave plantations. During the 19th century, widespread warfare continued and slavery actually expanded throughout Africa. Meanwhile, European colonizers continued using slave labor within Africa well into the 20th century.
Acemoglu and Robinson see a clear link between the extractive institution of the transatlantic slave trade and the other extractive institutions that formed later on in sub-Saharan Africa. Again, their research shows that societies based on violent, extractive institutions—like the Asante Empire—were far more likely to repurpose those extractive institutions after a crisis than to abandon them and replace them with inclusive ones. Therefore, after the end of the slave trade, it was much easier for West African elites to transition their countries’ economies to plantation agriculture than to inclusive economic institutions. There is, then, a cycle of oppressive practices, as societies struggle to break out of their extractive political and economic models.
Themes
In the section “Making a Dual Economy,” Acemoglu and Robinson explain that economists still usually follow Arthur Lewis’s model to explain less-developed countries. Lewis argued that these countries have dual economies that are divided into a modern (industrial and urban) sector and a traditional (agricultural and rural) one. Economists define economic development as bringing people from the traditional sector into the modern one.
Acemoglu and Robinson will argue that Lewis correctly describes inequality in developing countries but misunderstands its source. Lewis assumes that the two sectors of the economy are independent, that workers in the modern sector started out in the traditional sector but moved up over time, and that people in both sectors benefit when workers move from the traditional one to the modern one. But the authors suggest that colonial history doesn’t support these assumptions, as economic change is much harder to achieve than Lewis’s model suggests.
Themes
South Africa is a clear example of the dual economy. For instance, the modern state of Natal is full of spectacular beachfront houses, while the more traditional neighboring state of Transkei is full of huts without gas or running water. Natal’s property rights and legal institutions are stronger than Transkei’s—but Transkei isn’t underdeveloped simply because it’s part of Africa. Rather, South Africa’s white apartheid government deliberately underdeveloped and impoverished it to give white-run businesses a source of cheap labor.
Although South Africa’s economy is rigidly divided, Acemoglu and Robinson argue that Lewis’s theory of the dual economy misidentifies the cause of South Africa’s inequality. The two sectors, the authors argue, aren’t actually independent, and the traditional sector doesn’t function the way South Africa’s entire economy did before the modern sector was created. Instead, the modern and traditional sectors are two sides of the same extractive institution. The modern sector consists of the elites who benefit by extracting wealth from the masses in the traditional sector. As a result, these elites have strong incentives to prevent people from moving into the modern sector, and anyone who wants to do so will have to win a difficult political fight against elites. Thus, politics play an extremely important role when it comes to reducing inequality and spurring growth—an idea Lewis overlooks by focusing on economic concerns.
Themes
South Africa mostly avoided the slave trade and its harmful effects. After Europeans first settled South Africa in 1652, they barely interacted with the native Xhosa people until the 19th century. But then Europeans expanded inland to take advantage of South Africa’s temperate climate and lack of tropical diseases. Along with a mining boom, these factors led to bloody conflicts between the English, Dutch, and Xhosa.
At first, South Africa resembled North America in an important way: Europeans settled and actually worked in the colony instead of just extracting wealth from local people. In theory, this could have promoted the formation of inclusive institutions. However, the settlers eventually changed course and started exploiting locals, too, so institutions quickly became extractive.
Themes
However, European colonialism also led to a brief economic boom in South Africa. Xhosa people started trading with Europeans, building better houses, and irrigating and cultivating their soil. Their institutions changed, too, as they bought and sold land. These private property rights gave non-elites the chance to build wealth and infuriated traditional chiefs, who tried to stop people from improving the land and banned all European technology.
Acemoglu and Robinson are not defending colonialism or arguing that it created truly inclusive economic institutions. However, they do highlight the benefits of some of its limited inclusive elements—the markets and property rights it temporarily extended to some people. But the local chiefs’ response to European technology is another example of how absolutists fight to stop change that threatens them.
Themes
Europeans deliberately reversed South African growth in order to eliminate competition from African farmers and create a supply of cheap labor for the mines. In 1913, the colonial government’s Natives Land Act explicitly divided South Africa in two, reserving 87 percent of the land for the white fifth of the population. This set the foundation for the apartheid system. In the mid-20th century, development economists viewed South Africa as a natural example of Arthur Lewis’s dual economy. But actually, government policy created it.
The colonial government quickly dismantled the property rights and markets that it had briefly extended to native people. Through the Natives Land Act, it set up an explicitly extractive system for the exclusive benefit of the white elite. And through the apartheid system, it gradually strengthened extractive institutions over time. Thus, rather than talking about a modern class and a traditional class in South Africa, it would be more accurate to talk about an exploitative class and the people they exploit.
Themes
The South African government’s policies inverted native Africans’ economic incentives. It led farmers to give up the new technologies they had adopted, revoked private property rights, and gave traditional rulers much more power. Most importantly, it impoverished the people, driving their wages and living standards down. This is why South Africa remains one of the world’s most unequal societies. South Africans weren’t allowed to start businesses, take up skilled occupations, or receive a quality education.
This example again supports the authors’ thesis that people work, innovate, and change in response to incentives. By revoking native people’s economic rights and freedoms, the colonial government took away all incentives to be productive. This is another classic example of extractive institutions limiting growth and prosperity and maximizing exploitation.
Themes
In South Africa’s dual economy, poor people couldn’t move from the traditional sector into the modern one. Rather, white employers’ profits in the modern sector depended on them underpaying native workers in the traditional sector. This wasn’t a development problem: it was a policy one. South Africa’s extractive economic institutions were based on extractive political institutions that reserved all political power and representation for white people. South Africa’s dual economy didn’t end through natural economic development, but rather through the political movement that ended apartheid.
The dual economy theory is entirely based on the assumption that people can move between the traditional and modern sectors. In other words, the theory doesn’t see the real-world institutional barriers that stop people from joining the modern sector. Therefore, while the dual economy theory proposed economic fixes, South Africa really needed political change. After all, as Acemoglu and Robinson have repeatedly argued throughout the entirety of this book, political institutions are more fundamental than economic ones, so changing economic institutions almost always requires first changing political ones.
Themes
Acemoglu and Robinson summarize this chapter’s argument under the heading “Development Reversed.” At home, European industrialization, colonialism, and commerce brought prosperity. But abroad, it destroyed existing societies and created highly extractive institutions in their place, which prevented those societies from building inclusive institutions. The Dutch did this in Indonesia, and the British did this in India—after the Glorious Revolution ended its monopoly on the textile trade, the East India Company dismantled India’s prosperous textile sector.
It might be helpful to think of colonialism as an extractive institution blown up to a massive, global scale: a small elite minority in Europe grew rich by extracting wealth and resources from a vulnerable minority in another part of the world. However, within many European nations, institutions were inclusive enough that the riches extracted through colonialism actually helped spur broader economic growth.
Themes
Of course, the slave trade had similar effects on Africa—it led African countries to reorganize their economies around enslaving and fight wars that destroyed their centralized institutions. European colonialism impoverished South Africa by creating a dual economy for the benefit of a small minority. All these examples show how economic development in some parts of the world often depends on underdevelopment in other parts.
Acemoglu and Robinson’s critique of European colonialism gives important context to their praise for European inclusive institutions elsewhere in the book. As they have pointed out several times, no institution is ever completely inclusive, so it’s significant that European institutions only included Europeans by excluding and extracting wealth from people around the rest of the globe. Of course, they would likely emphasize that the world did not have to develop this way. The global economy would have grown faster, smoother, and more peacefully if Europeans had let inclusive institutions grow around the world instead of constantly imposing extractive ones.
Themes
