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

M
AKING A
 D
UAL
 E
CONOMY
The “dual economy” paradigm, originally proposed in 1955 by Sir
Arthur Lewis, still shapes the way that most social scientists think
about the economic problems of less-developed countries. According
to Lewis, many less-developed or underdeveloped economies have a
dual structure and are divided into a modern sector and a traditional
sector. The modern sector, which corresponds to the more developed
part of the economy, is associated with urban life, modern industry,
and the use of advanced technologies. The traditional sector is
associated with rural life, agriculture, and “backward” institutions
and technologies. Backward agricultural institutions include the
communal ownership of land, which implies the absence of private
property rights on land. Labor was used so inefficiently in the
traditional sector, according to Lewis, that it could be reallocated to
the modern sector without reducing the amount the rural sector could
produce. For generations of development economists building on
Lewis’s insights, the “problem of development” has come to mean
moving people and resources out of the traditional sector, agriculture
and the countryside, and into the modern sector, industry and cities.
In 1979 Lewis received the Nobel Prize for his work on economic
development.
Lewis and development economists building on his work were
certainly right in identifying dual economies. South Africa was one of
the clearest examples, split into a traditional sector that was
backward and poor and a modern one that was vibrant and
prosperous. Even today the dual economy Lewis identified is
everywhere in South Africa. One of the most dramatic ways to see
this is by driving across the border between the state of KwaZulu-
Natal, formerly Natal, and the state of the Transkei. The border
follows the Great Kei River. To the east of the river in Natal, along
the coast, are wealthy beachfront properties on wide expanses of
glorious sandy beaches. The interior is covered with lush green

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sugarcane plantations. The roads are beautiful; the whole area reeks
of prosperity. Across the river, it is as if it were a different time and a
different country. The area is largely devastated. The land is not
green, but brown and heavily deforested. Instead of affluent modern
houses with running water, toilets, and all the modern conveniences,
people live in makeshift huts and cook on open fires. Life is certainly
traditional, far from the modern existence to the east of the river. By
now you will not be surprised that these differences are linked with
major differences in economic institutions between the two sides of
the river.
To the east, in Natal, we have private property rights, functioning
legal systems, markets, commercial agriculture, and industry. To the
west, the Transkei had communal property in land and all-powerful
traditional chiefs until recently. Looked at through the lens of Lewis’s
theory of dual economy, the contrast between the Transkei and Natal
illustrates the problems of African development. In fact, we can go
further, and note that, historically, all of Africa was like the Transkei,
poor with premodern economic institutions, backward technology,
and rule by chiefs. According to this perspective, then, economic
development should simply be about ensuring that the Transkei
eventually turns into Natal.
This perspective has much truth to it but misses the entire logic of
how the dual economy came into existence and its relationship to the
modern economy. The backwardness of the Transkei is not just a
historic remnant of the natural backwardness of Africa. The dual
economy between the Transkei and Natal is in fact quite recent, and
is anything but natural. It was created by the South African white
elites in order to produce a reservoir of cheap labor for their
businesses and reduce competition from black Africans. The dual
economy is another example of underdevelopment created, not of
underdevelopment as it naturally emerged and persisted over
centuries.
South Africa and Botswana, as we will see later, did avoid most of
the adverse effects of the slave trade and the wars it wrought. South
Africans’ first major interaction with Europeans came when the Dutch

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East India Company founded a base in Table Bay, now the harbor of
Cape Town, in 1652. At this time the western part of South Africa
was sparsely settled, mostly by hunter-gatherers called the Khoikhoi
people. Farther east, in what is now the Ciskei and Transkei, there
were densely populated African societies specializing in agriculture.
They did not initially interact heavily with the new colony of the
Dutch, nor did they become involved in slaving. The South African
coast was far removed from slave markets, and the inhabitants of the
Ciskei and Transkei, known as the Xhosa, were just far enough inland
not to attract anyone’s attention. As a consequence, these societies did
not feel the brunt of many of the adverse currents that hit West and
Central Africa.
The isolation of these places changed in the nineteenth century. For
the Europeans there was something very attractive about the climate
and the disease environment of South Africa. Unlike West Africa, for
example, South Africa had a temperate climate that was free of the
tropical diseases such as malaria and yellow fever that had turned
much of Africa into the “white man’s graveyard” and prevented
Europeans from settling or even setting up permanent outposts. South
Africa was a much better prospect for European settlement. European
expansion into the interior began soon after the British took over
Cape Town from the Dutch during the Napoleonic Wars. This
precipitated a long series of Xhosa wars as the settlement frontier
expanded further inland. The penetration into the South African
interior was intensified in 1835, when the remaining Europeans of
Dutch descent, who would become known as Afrikaners or Boers,
started their famous mass migration known as the Great Trek away
from the British control of the coast and the Cape Town area. The
Afrikaners subsequently founded two independent states in the
interior of Africa, the Orange Free State and the Transvaal.
The next stage in the development of South Africa came with the
discovery of vast diamond reserves in Kimberly in 1867 and of rich
gold mines in Johannesburg in 1886. This huge mineral wealth in the
interior immediately convinced the British to extend their control
over all of South Africa. The resistance of the Orange Free State and

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the Transvaal led to the famous Boer Wars in 1880–1881 and 1899–
1902. After initial unexpected defeat, the British managed to merge
the Afrikaner states with the Cape Province and Natal, to found the
Union of South Africa in 1910. Beyond the fighting between
Afrikaners and the British, the development of the mining economy
and the expansion of European settlement had other implications for
the development of the area. Most notably, they generated demand
for food and other agricultural products and created new economic
opportunities for native Africans both in agriculture and trade.
The Xhosa, in the Ciskei and Transkei, reacted quickly to these
economic opportunities, as the historian Colin Bundy documented. As
early as 1832, even before the mining boom, a Moravian missionary
in the Transkei observed the new economic dynamism in these areas
and noted the demand from the Africans for the new consumer goods
that the spread of Europeans had begun to reveal to them. He wrote,
“To obtain these objects, they look … to get money by the labour of
their hands, and purchase clothes, spades, ploughs, wagons and other
useful articles.”
The civil commissioner John Hemming’s description of his visit to
Fingoland in the Ciskei in 1876 is equally revealing. He wrote that he
was
struck with the very great advancement made by the
Fingoes in a few years … Wherever I went I found
substantial huts and brick or stone tenements. In many
cases, substantial brick houses had been erected … and
fruit trees had been planted; wherever a stream of water
could be made available it had been led out and the soil
cultivated as far as it could be irrigated; the slopes of the
hills and even the summits of the mountains were
cultivated wherever a plough could be introduced. The
extent of the land turned over surprised me; I have not
seen such a large area of cultivated land for years.
As in other parts of sub-Saharan Africa, the use of the plow was

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new in agriculture, but when given the opportunity, African farmers
seemed to have been quite ready to adopt the technology. They were
also prepared to invest in wagons and irrigation works.
As the agricultural economy developed, the rigid tribal institutions
started to give way. There is a great deal of evidence that changes in
property rights to land took place. In 1879 the magistrate in
Umzimkulu of Griqualand East, in the Transkei, noted “the growing
desire of the part of natives to become proprietors of land—they have
purchased 38,000 acres.” Three years later he recorded that around
eight thousand African farmers in the district had bought and started
to work on ninety thousand acres of land.
Africa was certainly not on the verge of an Industrial Revolution,
but real change was under way. Private property in land had
weakened the chiefs and enabled new men to buy land and make
their wealth, something that was unthinkable just decades earlier.
This also illustrates how quickly the weakening of extractive
institutions and absolutist control systems can lead to newfound
economic dynamism. One of the success stories was Stephen Sonjica
in the Ciskei, a self-made farmer from a poor background. In an
address in 1911, Sonjica noted how when he first expressed to his
father his desire to buy land, his father had responded: “Buy land?
How can you want to buy land? Don’t you know that all land is God’s,
and he gave it to the chiefs only?” Sonjica’s father’s reaction was
understandable. But Sonjica was not deterred. He got a job in King
William’s Town and noted:
I cunningly opened a private bank account into which I
diverted a portion of my savings … This went only until I
had saved eighty pounds … [I bought] a span of oxen with
yokes, gear, plough and the rest of agricultural
paraphernalia … I now purchased a small farm … I cannot
too strongly recommend [farming] as a profession to my
fellow man … They should however adopt modern
methods of profit making.

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An extraordinary piece of evidence supporting the economic
dynamism and prosperity of African farmers in this period is revealed
in a letter sent in 1869 by a Methodist missionary, W. J. Davis.
Writing to England, he recorded with pleasure that he had collected
forty-six pounds in cash “for the Lancashire Cotton Relief Fund.” In
this period the prosperous African farmers were donating money for
relief of the poor English textile workers!
This new economic dynamism, not surprisingly, did not please the
traditional chiefs, who, in a pattern that is by now familiar to us, saw
this as eroding their wealth and power. In 1879 Matthew Blyth, the
chief magistrate of the Transkei, observed that there was opposition
to surveying the land so that it could be divided into private property.
He recorded that “some of the chiefs … objected, but most of the
people were pleased … the chiefs see that the granting of individual
titles will destroy their influence among the headmen.”
Chiefs also resisted improvements made on the lands, such as the
digging of irrigation ditches or the building of fences. They
recognized that these improvements were just a prelude to individual
property rights to the land, the beginning of the end for them.
European observers even noted that chiefs and other traditional
authorities, such as witch doctors, attempted to prohibit all
“European ways,” which included new crops, tools such as plows, and
items of trade. But the integration of the Ciskei and the Transkei into
the British colonial state weakened the power of the traditional chiefs
and authorities, and their resistance would not be enough to stop the
new economic dynamism in South Africa. In Fingoland in 1884, a
European observer noted that the people had
transferred their allegiance to us. Their chiefs have been
changed to a sort of titled landowner … without political
power. No longer afraid of the jealousy of the chief or of
the deadly weapon … the witchdoctor, which strikes down
the wealthy cattle owner, the able counsellor, the
introduction of novel customs, the skilful agriculturalist,
reducing them all to the uniform level of mediocrity—no

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longer apprehensive of this, the Fingo clansman … is a
progressive man. Still remaining a peasant farmer … he
owns wagons and ploughs; he opens water furroughs for
irrigation; he is the owner of a flock of sheep.
Even a modicum of inclusive institutions and the erosion of the
powers of the chiefs and their restrictions were sufficient to start a
vigorous African economic boom. Alas, it would be short lived.
Between 1890 and 1913 it would come to an abrupt end and go into
reverse. During this period two forces worked to destroy the rural
prosperity and dynamism that Africans had created in the previous
fifty years. The first was antagonism by European farmers who were
competing with Africans. Successful African farmers drove down the
price of crops that Europeans also produced. The response of
Europeans was to drive the Africans out of business. The second force
was even more sinister. The Europeans wanted a cheap labor force to
employ in the burgeoning mining economy, and they could ensure
this cheap supply only by impoverishing the Africans. This they went
about methodically over the next several decades.
The 1897 testimony of George Albu, the chairman of the
Association of Mines, given to a Commission of Inquiry pithily
describes the logic of impoverishing Africans so as to obtain cheap
labor. He explained how he proposed to cheapen labor by “simply
telling the boys that their wages are reduced.” His testimony goes as
follows: