42
feudal order in medieval Europe. It also underpinned
another strong form of absolutism under the Mughal rulers.
Most European countries had similar systems in the Middle
Ages. Modern Anglo-Saxon surnames such as Baker,
Cooper, and Smith are direct descendants of hereditary
occupational categories. Bakers baked, coopers made
barrels, and smiths forged metals. But these categories
were never as rigid as Indian caste distinctions and
gradually became meaningless as predictors of a person’s
occupation. Though Indian merchants did trade throughout
the Indian Ocean, and a major textile industry developed,
the caste system and Mughal absolutism were serious
impediments to the development of inclusive economic
institutions in India. By the nineteenth century, things were
even less hospitable for industrialization as India became
an extractive colony of the English. China was never
formally colonized by a European power, but after the
English successfully defeated the Chinese in the Opium
Wars between 1839 and 1842, and then again between
1856 and 1860, China had to sign a series of humiliating
treaties and allow European exports to enter. As China,
India, and others failed to take advantage of commercial
and industrial opportunities, Asia, except for Japan, lagged
behind as Western Europe was forging ahead.
T
HE COURSE OF
institutional development that Japan charted
in the nineteenth century again illustrates the interaction
between critical junctures and small differences created by
institutional drift. Japan, like China, was under absolutist
rule. The Tokugawa family took over in 1600 and ruled over
a feudal system that also banned international trade.
Japan, too, faced a critical juncture created by Western
intervention as four U.S. warships, commanded by Matthew
C. Perry, entered Edo Bay in July 1853, demanding trade
concessions similar to those England obtained from the
Chinese in the Opium Wars. But this critical juncture played
out very differently in Japan. Despite their proximity and
frequent interactions, by the nineteenth century China and
Japan had already drifted apart institutionally.
While Tokugawa rule in Japan was absolutist and
extractive, it had only a tenuous hold on the leaders of the
43
other major feudal domains and was susceptible to
challenge. Even though there were peasant rebellions and
civil strife, absolutism in China was stronger, and the
opposition less organized and autonomous. There were no
equivalents of the leaders of the other domains in China
who could challenge the absolutist rule of the emperor and
trace an alternative institutional path. This institutional
difference, in many ways small relative to the differences
separating China and Japan from Western Europe, had
decisive consequences during the critical juncture created
by the forceful arrival of the English and Americans. China
continued in its absolutist path after the Opium Wars, while
the U.S. threat cemented the opposition to Tokugawa rule
in Japan and led to a political revolution, the Meiji
Restoration, as we will see in chapter 10
. This Japanese
political revolution enabled more inclusive political
institutions and much more inclusive economic institutions
to develop, and laid the foundations for subsequent rapid
Japanese growth, while China languished under
absolutism.
How Japan reacted to the threat posed by U.S. warships,
by starting a process of fundamental institutional
transformation, helps us understand another aspect of the
lay of the land around us: transitions from stagnation to
rapid growth. South Korea, Taiwan, and finally China
achieved breakneck rates of economic growth since the
Second World War through a path similar to the one that
Japan took. In each of these cases, growth was preceded
by historic changes in the countries’ economic institutions
—though not always in their political institutions, as the
Chinese case highlights.
The logic of how episodes of rapid growth come to an
abrupt end and are reversed is also related. In the same
way that decisive steps toward inclusive economic
institutions can ignite rapid economic growth, a sharp turn
away from inclusive institutions can lead to economic
stagnation. But more often, collapses of rapid growth, such
as in Argentina or the Soviet Union, are a consequence of
growth under extractive institutions coming to an end. As
we have seen, this can happen either because of infighting
over the spoils of extraction, leading to the collapse of the
regime, or because the inherent lack of innovation and
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42
creative destruction under extractive institutions puts a limit
on sustained growth. How the Soviets ran hard into these
limits will be discussed in greater detail in the next chapter.
I
F THE POLITICAL
and economic institutions of Latin America
over the past five hundred years were shaped by Spanish
colonialism, those of the Middle East were shaped by
Ottoman colonialism. In 1453 the Ottomans under Sultan
Mehmet II captured Constantinople, making it their capital.
During the rest of the century, the Ottomans conquered
large parts of the Balkans and most of the rest of Turkey. In
the first half of the sixteenth century, Ottoman rule spread
throughout the Middle East and North Africa. By 1566, at
the death of Sultan Süleyman I, known as the Magnificent,
their empire stretched from Tunisia in the East, through
Egypt, all the way to Mecca in the Arabian Peninsula, and
on to what is now modern Iraq. The Ottoman state was
absolutist, with the sultan accountable to few and sharing
power with none. The economic institutions the Ottomans
imposed were highly extractive. There was no private
property in land, which all formally belonged to the state.
Taxation of land and agricultural output, together with loot
from war, was the main source of government revenues.
However, the Ottoman state did not dominate the Middle
East in the same way that it could dominate its heartland in
Anatolia or even to the extent that the Spanish state
dominated Latin American society. The Ottoman state was
continuously challenged by Bedouins and other tribal
powers in the Arabian Peninsula. It lacked not only the
ability to impose a stable order in much of the Middle East
but also the administrative capacity to collect taxes. So it
“farmed” them out to individuals, selling off the right to
others to collect taxes in whatever way they could. These
tax farmers became autonomous and powerful. Rates of
taxation in the Middle Eastern territories were very high,
varying between one-half or two-thirds of what farmers
produced. Much of this revenue was kept by the tax
farmers. Because the Ottoman state failed to establish a
stable order in these areas, property rights were far from
secure, and there was a great deal of lawlessness and
banditry as armed groups vied for local control. In
42
Palestine, for example, the situation was so dire that
starting in the late sixteenth century, peasants left the most
fertile land and moved up to mountainous areas, which
gave them greater protection against banditry.
Extractive economic institutions in the urban areas of the
Ottoman Empire were no less stifling. Commerce was
under state control, and occupations were strictly regulated
by guilds and monopolies. The consequence was that at
the time of the Industrial Revolution the economic
institutions of the Middle East were extractive. The region
stagnated economically.
By the 1840s, the Ottomans were trying to reform
institutions—for example, by reversing tax farming and
getting locally autonomous groups under control. But
absolutism persisted until the First World War, and reform
efforts were thwarted by the usual fear of creative
destruction and the anxiety among elite groups that they
would lose economically or politically. While Ottoman
reformers talked of introducing private property rights to
land in order to increase agricultural productivity, the status
quo persisted because of the desire for political control and
taxation. Ottoman colonization was followed by European
colonization after 1918. When European control ended, the
same dynamics we have seen in sub-Saharan Africa took
hold, with extractive colonial institutions taken over by
independent elites. In some cases, such as the monarchy
of Jordan, these elites were direct creations of the colonial
powers, but this, too, happened frequently in Africa, as we
will see. Middle Eastern countries without oil today have
income levels similar to poor Latin American nations. They
did not suffer from such immiserizing forces as the slave
trade, and they benefited for a longer period from flows of
technology from Europe. In the Middle Ages, the Middle
East itself was also a relatively advanced part of the world
economically. So today it is not as poor as Africa, but the
majority of its people still live in poverty.
W
E HAVE SEEN
that neither geographic- nor cultural- nor
ignorance-based theories are helpful for explaining the lay
of the land around us. They do not provide a satisfactory
account for the prominent patterns of world inequality: the
40
fact that the process of economic divergence started with
the Industrial Revolution in England during the eighteenth
and nineteenth centuries and then spread to Western
Europe and to European settler colonies; the persistent
divergence between different parts of the Americas; the
poverty of Africa or the Middle East; the divergence
between Eastern and Western Europe; and the transitions
from stagnation to growth and the sometimes abrupt end to
growth spurts. Our institutional theory does.
In the remaining chapters, we will discuss in greater
detail how this institutional theory works and illustrate the
wide range of phenomena it can account for. These range
from the origins of the Neolithic Revolution to the collapse
of several civilizations, either because of the intrinsic limits
to growth under extractive institutions or because of limited
steps toward inclusiveness being reversed.
We will see how and why decisive steps toward inclusive
political institutions were taken during the Glorious
Revolution in England. We will look more specifically at the
following:
• How inclusive institutions emerged from the interplay
of the critical juncture created by Atlantic trade and the
nature of preexisting English institutions.
• How these institutions persisted and became
strengthened to lay the foundations for the Industrial
Revolution, thanks in part to the virtuous circle and in
part to fortunate turns of contingency.
• How many regimes reigning over absolutist and
extractive institutions steadfastly resisted the spread of
new technologies unleashed by the Industrial
Revolution.
• How Europeans themselves stamped out the
possibility of economic growth in many parts of the
world that they conquered.
• How the vicious circle and the iron law of oligarchy
have created a powerful tendency for extractive
institutions to persist, and thus the lands where the
Industrial Revolution originally did not spread remain
relatively poor.
• Why the Industrial Revolution and other new
22
technologies have not spread and are unlikely to
spread to places around the world today where a
minimum degree of centralization of the state hasn’t
been achieved.
Our discussion will also show that certain areas that
managed to transform institutions in a more inclusive
direction, such as France or Japan, or that prevented the
establishment of extractive institutions, such as the United
States or Australia, were more receptive to the spread of
the Industrial Revolution and pulled ahead of the rest. As in
England, this was not always a smooth process, and along
the way, many challenges to inclusive institutions were
overcome, sometimes because of the dynamics of the
virtuous circle, sometimes thanks to the contingent path of
history.
Finally, we will also discuss how the failure of nations
today is heavily influenced by their institutional histories,
how much policy advice is informed by incorrect
hypotheses and is potentially misleading, and how nations
are still able to seize critical junctures and break the mold
to reform their institutions and embark upon a path to
greater prosperity.
48
5.
“I’VE SEEN THE FUTURE, AND IT WORKS”:
GROWTH UNDER EXTRACTIVE INSTITUTIONS
I
’VE
S
EEN THE
F
UTURE
I
NSTITUTIONAL DIFFERENCES PLAY
the critical role in explaining
economic growth throughout the ages. But if most societies
in history are based on extractive political and economic
institutions, does this imply that growth never takes place?
Obviously not. Extractive institutions, by their very logic,
must create wealth so that it can be extracted. A ruler
monopolizing political power and in control of a centralized
state can introduce some degree of law and order and a
system of rules, and stimulate economic activity.
But growth under extractive institutions differs in nature
from growth brought forth by inclusive institutions. Most
important, it will be not sustained growth that requires
technological change, but rather growth based on existing
technologies. The economic trajectory of the Soviet Union
provides a vivid illustration of how the authority and
incentives provided by the state can spearhead rapid
economic growth under extractive institutions and how this
type of growth ultimately comes to an end and collapses.
T
HE
F
IRST
W
ORLD
W
AR
had ended and the victorious and
the vanquished powers met in the great palace of
Versailles, outside Paris, to decide on the parameters of
the peace. Prominent among the attendees was Woodrow
Wilson, president of the United States. Noticeable by its
absence was any representation from Russia. The old
tsarist regime had been overthrown by the Bolsheviks in
October 1917. A civil war then raged between the Reds
(the Bolsheviks) and the Whites. The English, French, and
Americans sent an expeditionary force to fight against the
Bolsheviks. A mission led by a young diplomat, William
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