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

partnership between Europeans and natives in respect of land or the
fruits of land. All new contracts with natives must be contracts of
service. Provided there is a bona fide contract of this nature there is
nothing to prevent an employer from paying a native in kind, or by
the privilege of cultivating a defined piece of ground … But the
native cannot pay the master anything for his right to occupy the
land.”
To the development economists who visited South Africa in the
1950s and ’60s, when the academic discipline was taking shape and
the ideas of Arthur Lewis were spreading, the contrast between these

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Homelands and the prosperous modern white European economy
seemed to be exactly what the dual economy theory was about. The
European part of the economy was urban and educated, and used
modern technology. The Homelands were poor, rural, and backward;
labor there was very unproductive; people, uneducated. It seemed to
be the essence of timeless, backward Africa.
Except that the dual economy was not natural or inevitable. It had
been created by European colonialism. Yes, the Homelands were poor
and technologically backward, and the people were uneducated. But
all this was an outcome of government policy, which had forcibly
stamped out African economic growth and created the reservoir of
cheap, uneducated African labor to be employed in European-
controlled mines and lands. After 1913 vast numbers of Africans were
evicted from their lands, which were taken over by whites, and
crowded into the Homelands, which were too small for them to earn
an independent living from. As intended, therefore, they would be
forced to look for a living in the white economy, supplying their labor
cheaply. As their economic incentives collapsed, the advances that
had taken place in the preceding fifty years were all reversed. People
gave up their plows and reverted to farming with hoes—that is, if
they farmed at all. More often they were just available as cheap labor,
which the Homelands had been structured to ensure.
It was not only the economic incentives that were destroyed. The
political changes that had started to take place also went into reverse.
The power of chiefs and traditional rulers, which had previously been
in decline, was strengthened, because part of the project of creating a
cheap labor force was to remove private property in land. So the
chiefs’ control over land was reaffirmed. These measures reached
their apogee in 1951, when the government passed the Bantu
Authorities Act. As early as 1940, G. Findlay put his finger right on
the issue:
Tribal tenure is a guarantee that the land will never
properly be worked and will never really belong to the
natives. Cheap labour must have a cheap breeding place,

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and so it is furnished to the Africans at their own expense.
The dispossession of the African farmers led to their mass
impoverishment. It created not only the institutional foundations of a
backward economy, but the poor people to stock it.
The available evidence demonstrates the reversal in living
standards in the Homelands after the Natives Land Act of 1913. The
Transkei and the Ciskei went into a prolonged economic decline. The
employment records from the gold mining companies collected by the
historian Francis Wilson show that this decline was widespread in the
South African economy as a whole. Following the Natives Land Act
and other legislation, miners’ wages fell by 30 percent between 1911
and 1921. In 1961, despite relatively steady growth in the South
African economy, these wages were still 12 percent lower than they
had been in 1911. No wonder that over this period South Africa
became the most unequal country in the world.
But even in these circumstances, couldn’t black Africans have made
their way in the European, modern economy, started a business, or
have become educated and begun a career? The government made
sure these things could not happen. No African was allowed to own
property or start a business in the European part of the economy—the
87 percent of the land. The Apartheid regime also realized that
educated Africans competed with whites rather than supplying cheap
labor to the mines and to white-owned agriculture. As early as 1904 a
system of job reservation for Europeans was introduced in the mining
economy. No African was allowed to be an amalgamator, an assayer,
a banksman, a blacksmith, a boiler maker, a brass finisher, a
brassmolder, a bricklayer … and the list went on and on, all the way
to woodworking machinist. At a stroke, Africans were banned from
occupying any skilled job in the mining sector. This was the first
incarnation of the famous “colour bar,” one of the several racist
inventions of South Africa’s regime. The colour bar was extended to
the entire economy in 1926, and lasted until the 1980s. It is not
surprising that black Africans were uneducated; the South African
state not only removed the possibility of Africans benefiting

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economically from an education but also refused to invest in black
schools and discouraged black education. This policy reached its peak
in the 1950s, when, under the leadership of Hendrik Verwoerd, one of
the architects of the Apartheid regime that would last until 1994, the
government passed the Bantu Education Act. The philosophy behind
this act was bluntly spelled out by Verwoerd himself in a speech in
1954:
The Bantu must be guided to serve his own community in
all respects. There is no place for him in the European
community above the level of certain forms of
labour … For that reason it is to no avail to him to receive
a training which has as its aim absorption in the European
community while he cannot and will not be absorbed
there.
Naturally, the type of dual economy articulated in Verwoerd’s
speech is rather different from Lewis’s dual economy theory. In South
Africa the dual economy was not an inevitable outcome of the process
of development. It was created by the state. In South Africa there was
to be no seamless movement of poor people from the backward to the
modern sector as the economy developed. On the contrary, the
success of the modern sector relied on the existence of the backward
sector, which enabled white employers to make huge profits by
paying very low wages to black unskilled workers. In South Africa
there would not be a process of the unskilled workers from the
traditional sector gradually becoming educated and skilled, as Lewis’s
approach envisaged. In fact, the black workers were purposefully kept
unskilled and were barred from high-skill occupations so that skilled
white workers would not face competition and could enjoy high
wages. In South Africa black Africans were indeed “trapped” in the
traditional economy, in the Homelands. But this was not the problem
of development that growth would make good. The Homelands were
what enabled the development of the white economy.
It should also be no surprise that the type of economic development

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that white South Africa was achieving was ultimately limited, being
based on extractive institutions the whites had built to exploit the
blacks. South African whites had property rights, they invested in
education, and they were able to extract gold and diamonds and sell
them profitably in the world market. But over 80 percent of the South
African population was marginalized and excluded from the great
majority of desirable economic activities. Blacks could not use their
talents; they could not become skilled workers, businessmen,
entrepreneurs, engineers, or scientists. Economic institutions were
extractive; whites became rich by extracting from blacks. Indeed,
white South Africans shared the living standards of people of Western
European countries, while black South Africans were scarcely richer
than those in the rest of sub-Saharan Africa. This economic growth
without creative destruction, from which only the whites benefited,
continued as long as revenues from gold and diamonds increased. By
the 1970s, however, the economy had stopped growing.
And it will again be no surprise that this set of extractive economic
institutions was built on foundations laid by a set of highly extractive
political institutions. Before its overthrow in 1994, the South African
political system vested all power in whites, who were the only ones
allowed to vote and run for office. Whites dominated the police force,
the military, and all political institutions. These institutions were
structured under the military domination of white settlers. At the
time of the foundation of the Union of South Africa in 1910, the
Afrikaner polities of the Orange Free State and the Transvaal had
explicit racial franchises, barring blacks completely from political