Why Nations Fail: The Origins of Power, Prosperity, and Poverty

9.
REVERSING DEVELOPMENT
S
PICE AND
 G
ENOCIDE
T
HE
M
OLUCCAN
A
RCHIPELAGO
in modern Indonesia is made up of three
groups of islands. In the early seventeenth century, the northern
Moluccas housed the independent kingdoms of Tidore, Ternate, and
Bacan. The middle Moluccas were home to the island kingdom of
Ambon. In the south were the Banda Islands, a small archipelago that
was not yet politically unified. Though they seem remote to us today,
the Moluccas were then central to world trade as the only producers
of the valuable spices cloves, mace, and nutmeg. Of these, nutmeg
and mace grew only in the Banda Islands. Inhabitants of these islands
produced and exported these rare spices in exchange for food and
manufactured goods coming from the island of Java, from the
entrepôt of Melaka on the Malaysian Peninsula, and from India,
China, and Arabia.
The first contact the inhabitants had with Europeans was in the
sixteenth century, with Portuguese mariners who came to buy spices.
Before then spices had to be shipped through the Middle East, via
trade routes controlled by the Ottoman Empire. Europeans searched
for a passage around Africa or across the Atlantic to gain direct access
to the Spice Islands and the spice trade. The Cape of Good Hope was
rounded by the Portuguese mariner Bartolomeu Dias in 1488, and
India was reached via the same route by Vasco da Gama in 1498. For
the first time the Europeans now had their own independent route to
the Spice Islands.
The Portuguese immediately set about the task of trying to control
the trade in spices. They captured Melaka in 1511. Strategically

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situated on the western side of the Malaysian Peninsula, merchants
from all over Southeast Asia came there to sell their spices to other
merchants, Indian, Chinese, and Arabs, who then shipped them to the
West. As the Portuguese traveler Tomé Pires put it in 1515: “The
trade and commerce between the different nations for a thousand
leagues on every hand must come to Melaka … Whoever is lord of
Melaka has his hands at the throat of Venice.”
With Melaka in their hands, the Portuguese systematically tried to
gain a monopoly of the valuable spice trade. They failed.
The opponents they faced were not negligible. Between the
fourteenth and sixteenth centuries, there was a great deal of economic
development in 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 as hardwoods.

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These states had absolutist forms of government similar to those in
Europe in the same period. The development of political institutions
was spurred by similar processes, including technological change in
methods of warfare and international trade. State institutions became
more centralized, with a king at the center claiming absolute power.
Like absolutist rulers in Europe, Southeast Asian kings relied heavily
on revenues from trade, both engaging in it themselves and granting
monopolies to local and foreign elites. As in absolutist Europe, this
generated some economic growth but was a far-from-ideal set of
economic institutions for economic prosperity, with significant entry
barriers and insecure property rights for most. But the process of
commercialization was under way even as the Portuguese were trying
to establish their dominance in the Indian Ocean.
The presence of Europeans swelled and had a much greater impact
with the arrival of the Dutch. The Dutch quickly realized that
monopolizing the supply of the valuable spices of the Moluccas would
be much more profitable than competing against local or other
European traders. In 1600 they persuaded the ruler of Ambon to sign
an exclusive agreement that gave them the monopoly on the clove
trade in Ambon. With the founding of the Dutch East India Company
in 1602, the Dutch attempts to capture the entire spice trade and
eliminate their competitors, by hook or by crook, took a turn for the
better for the Dutch and for the worse for Southeast Asia. The Dutch
East India Company was the second European joint stock company,
following the English East India Company, major landmarks in the
development of the modern corporation, which would subsequently
play a major role in European industrial growth. It was also the
second company that had its own army and the power to wage war
and colonize foreign lands. With the military power of the company
now brought to bear, the Dutch proceeded to eliminate all potential
interlopers to enforce their treaty with the ruler of Ambon. They
captured a key fort held by the Portuguese in 1605 and forcibly
removed all other traders. They then expanded to the northern
Moluccas, forcing the rulers of Tidore, Ternate, and Bacan to agree
that no cloves could be grown or traded in their territories. The treaty

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they imposed on Ternate even allowed the Dutch to come and destroy
any clove trees they found there.
Ambon was ruled in a manner similar to much of Europe and the
Americas during that time. The citizens of Ambon owed tribute to the
ruler and were subject to forced labor. The Dutch took over and
intensified these systems to extract more labor and more cloves from
the island. Prior to the arrival of the Dutch, extended families paid
tribute in cloves to the Ambonese elite. The Dutch now stipulated that
each household was tied to the soil and should cultivate a certain
number of clove trees. Households were also obligated to deliver
forced labor to the Dutch.
The Dutch also took control of the Banda Islands, intending this
time to monopolize mace and nutmeg. But the Banda Islands were
organized very differently from Ambon. They were made up of many
small autonomous city-states, and there was no hierarchical social or
political structure. These small states, in reality no more than small
towns, were run by village meetings of citizens. There was no central
authority whom the Dutch could coerce into signing a monopoly
treaty and no system of tribute that they could take over to capture
the entire supply of nutmeg and mace. At first this meant that the
Dutch had to compete with English, Portuguese, Indian, and Chinese
merchants, losing the spices to their competitors when they did not
pay high prices. Their initial plans of setting up a monopoly of mace
and nutmeg dashed, the Dutch governor of Batavia, Jan Pieterszoon
Coen, came up with an alternative plan. Coen founded Batavia, on the
island of Java, as the Dutch East India Company’s new capital in
1618. In 1621 he sailed to Banda with a fleet and proceeded to
massacre almost the entire population of the islands, probably about
fifteen thousand people. All their leaders were executed along with
the rest, and only a few were left alive, enough to preserve the know-
how necessary for mace and nutmeg production. After this genocide
was complete, Coen then proceeded to create the political and
economic structure necessary for his plan: a plantation society. The
islands were divided into sixty-eight parcels, which were given to
sixty-eight Dutchmen, mostly former and current employees of the

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Dutch East India Company. These new plantation owners were taught
how to produce the spices by the few surviving Bandanese and could
buy slaves from the East India Company to populate the now-empty
islands and to produce spices, which would have to be sold at fixed
prices back to the company.
The extractive institutions created by the Dutch in the Spice Islands
had the desired effects, though, in Banda this was at the cost of
fifteen thousand innocent lives and the establishment of a set of
economic and political institutions that would condemn the islands to
underdevelopment. By the end of the seventeenth century, the Dutch
had reduced the world supply of these spices by about 60 percent and
the price of nutmeg had doubled.
The Dutch spread the strategy they perfected in the Moluccas to the
entire region, with profound implications for the economic and
political institutions of the rest of Southeast Asia. The long
commercial expansion of several states in the area that had started in
the fourteenth century went into reverse. Even the polities which
were not directly colonized and crushed by the Dutch East India
Company turned inward and abandoned trade. The nascent economic
and political change in Southeast Asia was halted in its tracks.
To avoid the threat of the Dutch East India Company, several states
abandoned producing crops for export and ceased commercial
activity. Autarky was safer than facing the Dutch. In 1620 the state of
Banten, on the island of Java, cut down its pepper trees in the hope
that this would induce the Dutch to leave it in peace. When a Dutch
merchant visited Maguindanao, in the southern Philippines, in 1686,
he was told, “Nutmeg and cloves can be grown here, just as in
Malaku. They are not there now because the old Raja had all of them
ruined before his death. He was afraid the Dutch Company would
come to fight with them about it.” What a trader heard about the
ruler of Maguindanao in 1699 was similar: “He had forbidden the
continued planting of pepper so that he could not thereby get
involved in war whether with the [Dutch] company or with other
potentates.” There was de-urbanization and even population decline.
In 1635 the Burmese moved their capital from Pegu, on the coast, to

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Ava, far inland up the Irrawaddy River.
We do not know what the path of economic and political
development of Southeast Asian states would have been without
Dutch aggression. They may have developed their own brand of
absolutism, they may have remained in the same state they were in at
the end of the sixteenth century, or they may have continued their
commercialization by gradually adopting more and more inclusive
institutions. But as in the Moluccas, Dutch colonialism fundamentally
changed their economic and political development. The people in
Southeast Asia stopped trading, turned inward, and became more
absolutist. In the next two centuries, they would be in no position to
take advantage of the innovations that would spring up in the
Industrial Revolution. And ultimately their retreat from trade would
not save them from Europeans; by the end of the eighteenth century,
nearly all were part of European colonial empires.
W
E SAW IN CHAPTER
7 how European expansion into the Atlantic fueled
the rise of inclusive institutions in Britain. But as illustrated by the
experience of the Moluccas under the Dutch, this expansion sowed
the seeds of underdevelopment in many diverse corners of the world
by imposing, or further strengthening existing, extractive institutions.
These either directly or indirectly destroyed nascent commercial and
industrial activity throughout the globe or they perpetuated
institutions that stopped industrialization. As a result, as
industrialization was spreading in some parts of the world, places that
were part of European colonial empires stood no chance of benefiting
from these new technologies.