Reading Snippet - Why Nations Fail (8)

How to create a modern extractive state

To illustrate how vulnerable the modern inclusive states are to a reversal of fortune, the authors raised the example of South Africa.

When slave trading was made illegal, the African colonial governments encouraged the locals to turn to farming and manufacturing as a substitute. Education was encouraged and property rights were reformed so that the locals could privatise lands from collective tribal ownership. The policies went well and the local community started to thrive through more productive private lands, skilled workforce and entrepreneurship. The impact was direct competition to the white community in skilled work, rising costs of unskilled work (as supply decreased) and lower prices fetched for merchandise as supply increased. This posed issues with the white settlers - their farms were not as profitable, while their mines could not operate cheaply.

To resolve these two issues, the white government decided to create a two-tier society, allowing the white settlers to extract from the local communities. To achieve this goal, policies were implemented to push the locals from prosperity to subsistence. Education was banned (except for elementary education so that they had the basic skills to survive) and land was confiscated and re-distributed to white settlers. The black accounted for 80% of population but was only given 20% of land, which was barely enough to keep people alive. Furthermore, property rights was discouraged and the land reverted to tribal ownership which lessened incentives to improve productivity. The locals were not allowed to operate business in the 'white' land while any service provision could only result in wage but not dividend or productivity-related bonus.

These policies had a string of impacts - the locals were forced to leave their land and seek employment in the white areas, but they could only work in the unskilled sector. This means there is a burst of supply of unskilled labour, suppressing their salaries. They could only earn productivity-unrelated wages and so their incentive to produce was lessened, justifying their low wages. For any black lucky enough to accumulate a small fortune, he/she could not set up business in the more profitable white area and could only sell to the blacks, meaning a low return on capital and thus low incentive to invest in entrepreneurship. Overall, incentives to participate in creative destruction or to invest productivity were wiped out. They were therefore condemned to poverty.

The main message of this story is that governments do not need to enslave the population out-right to be extractive. They can create a set of economic policies that alters people's incentives, thereby moving them from investment & creative destruction into low-incentive subsistence lifestyles. People are not poor because they are lazy, they were forced to be lazy as industry & creativity would only lead to fruitless outcomes.