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Why do nations succeed?

1.
SO CLOSE AND YET SO DIFFERENT
THE ECONOMICS OF THE RIO GRANDE
THE CITY OF NOGALES is cut in half by a fence. If you stand by it
and look north, you’ll see Nogales, Arizona, located in Santa Cruz
County. The income of the average household there is about $30,000
a year. Most teenagers are in school, and the majority of the adults
are high school graduates. Despite all the arguments people make
about how deficient the U.S. health care system is, the population is
relatively healthy, with high life expectancy by global standards.
Many of the residents are above age sixty-five and have access to
Medicare. It’s just one of the many services the government provides
that most take for granted, such as electricity, telephones, a sewage
system, public health, a road network linking them to other cities in
the area and to the rest of the United States, and, last but not least,
law and order. The people of Nogales, Arizona, can go about their
daily activities without fear for life or safety and not constantly afraid
of theft, expropriation, or other things that might jeopardize their
investments in their businesses and houses. Equally important, the
residents of Nogales, Arizona, take it for granted that, with all its
inefficiency and occasional corruption, the government is their
agent. They can vote to replace their mayor, congressmen, and
senators; they vote in the presidential elections that determine who
will lead their country. Democracy is second nature to them.
Life south of the fence, just a few feet away, is rather different.
While the residents of Nogales, Sonora, live in a relatively
prosperous part of Mexico, the income of the average household
there is about one-third that in Nogales, Arizona. Most adults in
Nogales, Sonora, do not have a high school degree, and many
teenagers are not in school. Mothers have to worry about high rates
of infant mortality. Poor public health conditions mean it’s no
surprise that the residents of Nogales, Sonora, do not live as long as
their northern neighbors. They also don’t have access to many public
amenities. Roads are in bad condition south of the fence. Law and
order is in worse condition. Crime is high, and opening a business is
a risky activity. Not only do you risk robbery, but getting all the
permissions and greasing all the palms just to open is no easy
endeavor. Residents of Nogales, Sonora, live with politicians’
corruption and ineptitude every day.
In contrast to their northern neighbors, democracy is a very recent
experience for them. Until the political reforms of 2000, Nogales,
Sonora, just like the rest of Mexico, was under the corrupt control of
the Institutional Revolutionary Party, or Partido Revolucionario
Institucional (PRI).
How could the two halves of what is essentially the same city be so
different? There is no difference in geography, climate, or the types
of diseases prevalent in the area, since germs do not face any
restrictions crossing back and forth between the United States and
Mexico. Of course, health conditions are very different, but this has
nothing to do with the disease environment; it is because the people
south of the border live with inferior sanitary conditions and lack
decent health care.
But perhaps the residents are very different. Could it be that the
residents of Nogales, Arizona, are grandchildren of migrants from
Europe, while those in the south are descendants of Aztecs? Not so.
The backgrounds of people on both sides of the border are quite
similar. After Mexico became independent from Spain in 1821, the
area around “Los dos Nogales” was part of the Mexican state of Vieja
California and remained so even after the Mexican-American War of
1846–1848. Indeed, it was only after the Gadsden Purchase of 1853
that the U.S. border was extended into this area. It was Lieutenant N.
Michler who, while surveying the border, noted the presence of the
“pretty little valley of Los Nogales.” Here, on either side of the
border, the two cities rose up. The inhabitants of Nogales, Arizona,
and Nogales, Sonora, share ancestors, enjoy the same food and the
same music, and, we would hazard to say, have the same “culture.”
Of course, there is a very simple and obvious explanation for the
differences between the two halves of Nogales that you’ve probably
long since guessed: the very border that defines the two halves.
Nogales, Arizona, is in the United States. Its inhabitants have access
to the economic institutions of the United States, which enable them
to choose their occupations freely, acquire schooling and skills, and
encourage their employers to invest in the best technology, which
leads to higher wages for them. They also have access to political
institutions that allow them to take part in the democratic process, to
elect their representatives, and replace them if they misbehave. In
consequence, politicians provide the basic services (ranging from
public health to roads to law and order) that the citizens demand.
Those of Nogales, Sonora, are not so lucky. They live in a different
world shaped by different institutions. These different institutions
create very disparate incentives for the inhabitants of the two
Nogaleses and for the entrepreneurs and businesses willing to invest
there. These incentives created by the different institutions of the
Nogaleses and the countries in which they are situated are the main
reason for the differences in economic prosperity on the two sides of
the border.
Why are the institutions of the United States so much more
conducive to economic success than those of Mexico or, for that
matter, the rest of Latin America? The answer to this question lies in
the way the different societies formed during the early colonial
period. An institutional divergence took place then, with implications
lasting into the present day. To understand this divergence we must
begin right at the foundation of the colonies in North and Latin
America.
THE FOUNDING OF BUENOS AIRES
Early in 1516 the Spanish navigator Juan Díaz de Solís sailed into a
wide estuary on the Eastern Seaboard of South America. Wading
ashore, de Solís claimed the land for Spain, naming the river the Río
de la Plata, “River of Silver,” since the local people possessed silver.
The indigenous peoples on either side of the estuary—the Charrúas
in what is now Uruguay, and the Querandí on the plains that were to
be known as the Pampas in modern Argentina—regarded the
newcomers with hostility. These locals were hunter-gatherers who
lived in small groups without strong centralized political authorities.
Indeed it was such a band of Charrúas who clubbed de Solís to death
as he explored the new domains he had attemped to occupy for
Spain.
In 1534 the Spanish, still optimistic, sent out a first mission of
settlers from Spain under the leadership of Pedro de Mendoza. They
founded a town on the site of Buenos Aires in the same year. It
should have been an ideal place for Europeans. Buenos Aires,
literally meaning “good airs,” had a hospitable, temperate climate.
Yet the first stay of the Spaniards there was short lived. They were
not after good airs, but resources to extract and labor to coerce. The
Charrúas and the Querandí were not obliging, however. They refused
to provide food to the Spaniards, and refused to work when caught.
They attacked the new settlement with their bows and arrows. The
Spaniards grew hungry, since they had not anticipated having to
provide food for themselves. Buenos Aires was not what they had
dreamed of. The local people could not be forced into providing
labor. The area had no silver or gold to exploit, and the silver that de
Solís found had actually come all the way from the Inca state in the
Andes, far to the west.
The Spaniards, while trying to survive, started sending out
expeditions to find a new place that would offer greater riches and
populations easier to coerce. In 1537 one of these expeditions, under
the leadership of Juan de Ayolas, penetrated up the Paraná River,
searching for a route to the Incas. On its way, it made contact with
the Guaraní, a sedentary people with an agricultural economy based
on maize and cassava. De Ayolas immediately realized that the
Guaraní were a completely different proposition from the Charrúas
and the Querandí. After a brief conflict, the Spanish overcame
Guaraní resistance and founded a town, Nuestra Señora de Santa
María de la Asunción, which remains the capital of Paraguay today.
The conquistadors married the Guaraní princesses and quickly set
themselves up as a new aristocracy. They adapted the existing
systems of forced labor and tribute of the Guaraní, with themselves
at the helm. This was the kind of colony they wanted to set up, and
within four years Buenos Aires was abandoned as all the Spaniards
who’d settled there moved to the new town.
Buenos Aires, the “Paris of South America,” a city of wide
European-style boulevards based on the great agricultural wealth of
the Pampas, was not resettled until 1580. The abandonment of
Buenos Aires and the conquest of the Guaraní reveals the logic of
European colonization of the Americas. Early Spanish and, as we will
see, English colonists were not interested in tilling the soil
themselves; they wanted others to do it for them, and they wanted
riches, gold and silver, to plunder.
FROM CAJAMARCA . . .
The expeditions of de Solís, de Mendoza, and de Ayolas came in the
wake of more famous ones that followed Christopher Columbus’s
sighting of one of the islands of the Bahamas on October 12, 1492.
Spanish expansion and colonization of the Americas began in earnest
with the invasion of Mexico by Hernán Cortés in 1519, the expedition
of Francisco Pizarro to Peru a decade and a half later, and the
expedition of Pedro de Mendoza to the Río de la Plata just two years
after that. Over the next century, Spain conquered and colonized
most of central, western, and southern South America, while
Portugal claimed Brazil to the east.
The Spanish strategy of colonization was highly effective. First
perfected by Cortés in Mexico, it was based on the observation that
the best way for the Spanish to subdue opposition was to capture the
indigenous leader. This strategy enabled the Spanish to claim the
accumulated wealth of the leader and coerce the indigenous peoples
to give tribute and food. The next step was setting themselves up as
the new elite of the indigenous society and taking control of the
existing methods of taxation, tribute, and, particularly, forced labor.
When Cortés and his men arrived at the great Aztec capital of
Tenochtitlan on November 8, 1519, they were welcomed by
Moctezuma, the Aztec emperor, who had decided, in the face of
much advice from his counselors, to welcome the Spaniards
peacefully. What happened next is well described by the account
compiled after 1545 by the Franciscan priest Bernardino de Sahagún
in his famous Florentine Codices.
[At] once they [the Spanish] firmly seized Moctezuma .
. . then each of the guns shot off . . . Fear prevailed. It
was as if everyone had swallowed his heart. Even
before it had grown dark, there was terror, there was
astonishment, there was apprehension, there was a
stunning of the people.
And when it dawned thereupon were proclaimed all
the things which [the Spaniards] required: white
tortillas, roasted turkey hens, eggs, fresh water, wood,
firewood, charcoal . . . This had Moctezuma indeed
commanded.
And when the Spaniards were well settled, they
thereupon inquired of Moctezuma as to all the city’s
treasure . . . with great zeal they sought gold. And
Moctezuma thereupon went leading the Spaniards.
They went surrounding him . . . each holding him, each
grasping him.
And when they reached the storehouse, a place
called Teocalco, thereupon they brought forth all the
brilliant things; the quetzal feather head fan, the
devices, the shields, the golden discs . . . the golden
nose crescents, the golden leg bands, the golden arm
bands, the golden forehead bands.
Thereupon was detached the gold . . . at once they
ignited, set fire to . . . all the precious things. They all
burned. And the gold the Spaniards formed into
separate bars . . . And the Spanish walked everywhere .
. . They took all, all that they saw which they saw to be
good.
Thereupon they went to Moctezuma’s own storehouse . . . at the place called Totocalco . . . they brought
forth [Moctezuma’s] own property . . . precious things
all; the necklaces with pendants, the arm bands with
tufts of quetzal feathers, the golden arm bands, the
bracelets, the golden bands with shells . . . and the
turquoise diadem, the attribute of the ruler. They took
it all.
The military conquest of the Aztecs was completed by 1521.
Cortés, as governor of the province of New Spain, then began
dividing up the most valuable resource, the indigenous population,
through the institution of the encomienda. The encomienda had first
appeared in fifteenth-century Spain as part of the reconquest of the
south of the country from the Moors, Arabs who had settled during
and after the eighth century. In the New World, it took on a much
more pernicious form: it was a grant of indigenous peoples to a
Spaniard, known as the encomendero. The indigenous peoples had
to give the encomendero tribute and labor services, in exchange for
which the encomendero was charged with converting them to
Christianity.
A vivid early account of the workings of the encomienda has come
down to us from Bartolomé de las Casas, a Dominican priest who
formulated the earliest and one of the most devastating critiques of
the Spanish colonial system. De las Casas arrived on the Spanish
island of Hispaniola in 1502 with a fleet of ships led by the new
governor, Nicolás de Ovando. He became increasingly disillusioned
and disturbed by the cruel and exploitative treatment of the
indigenous peoples he witnessed every day. In 1513 he took part as a
chaplain in the Spanish conquest of Cuba, even being granted an
encomienda for his service. However, he renounced the grant and
began a long campaign to reform Spanish colonial institutions. His
efforts culminated in his book A Short Account of the Destruction of
the Indies, written in 1542, a withering attack on the barbarity of
Spanish rule. On the encomienda he has this to say in the case of
Nicaragua:
Each of the settlers took up residence in the town
allotted to him (or encommended to him, as the legal
phrase has it), put the inhabitants to work for him,
stole their already scarce foodstuffs for himself and
took over the lands owned and worked by the natives
and on which they traditionally grew their own
produce. The settler would treat the whole of the native
population—dignitaries, old men, women and children
—as members of his household and, as such, make
them labor night and day in his own interests, without
any rest whatsoever.
For the conquest of New Granada, modern Colombia, de las Casas
reports the whole Spanish strategy in action:
To realize their long-term purpose of seizing all the
available gold, the Spaniards employed their usual
strategy of apportioning among themselves (or
encommending, as they have it) the towns and their
inhabitants . . . and then, as ever, treating them as
common slaves. The man in overall command of the
expedition seized the King of the whole territory for
himself and held him prisoner for six or seven months,
quite illicitly demanding more and more gold and
emeralds from him. This King, one Bogotá, was so
terrified that, in his anxiety to free himself from the
clutches of his tormentors, he consented to the demand
that he fill an entire house with gold and hand it over;
to this end he sent his people off in search of gold, and
bit by bit they brought it along with many precious
stones. But still the house was not filled and the
Spaniards eventually declared that they would put him
to death for breaking his promise. The commander
suggested they should bring the case before him, as a
representative of the law, and when they did so,
entering formal accusations against the King, he
sentenced him to torture should he persist in not
honoring the bargain. They tortured him with the
strappado, put burning tallow on his belly, pinned both
his legs to poles with iron hoops and his neck with
another and then, with two men holding his hands,
proceeded to burn the soles of his feet. From time to
time, the commander would look in and repeat that
they would torture him to death slowly unless he
produced more gold, and this is what they did, the King
eventually succumbing to the agonies they inflicted on
him.
The strategy and institutions of conquest perfected in Mexico were
eagerly adopted elsewhere in the Spanish Empire. Nowhere was this
done more effectively than in Pizarro’s conquest of Peru. As de las
Casas begins his account:
In 1531 another great villain journeyed with a number
of men to the kingdom of Peru. He set out with every
intention of imitating the strategy and tactics of his
fellow adventurers in other parts of the New World.
Pizarro began on the coast near the Peruvian town of Tumbes and
marched south. On November 15, 1532, he reached the mountain
town of Cajamarca, where the Inca emperor Atahualpa was
encamped with his army. The next day, Atahualpa, who had just
vanquished his brother Huáscar in a contest over who would succeed
their deceased father, Huayna Capac, came with his retinue to where
the Spanish were camped. Atahualpa was irritated because news of
atrocities that the Spanish had already committed, such as violating
a temple of the Sun God Inti, had reached him. What transpired next
is well known. The Spanish laid a trap and sprang it. They killed
Atahualpa’s guards and retainers, possibly as many as two thousand
people, and captured the king. To gain his freedom, Atahualpa had to
promise to fill one room with gold and two more of the same size
with silver. He did this, but the Spanish, reneging on their promises,
strangled him in July 1533. That November, the Spanish captured
the Inca capital of Cusco, where the Incan aristocracy received the
same treatment as Atahualpa, being imprisoned until they produced
gold and silver. When they did not satisfy Spanish demands, they
were burned alive. The great artistic treasures of Cusco, such as the
Temple of the Sun, had their gold stripped from them and melted
down into ingots.
At this point the Spanish focused on the people of the Inca
Empire. As in Mexico, citizens were divided into encomiendas, with
one going to each of the conquistadors who had accompanied
Pizarro. The encomienda was the main institution used for the
control and organization of labor in the early colonial period, but it
soon faced a vigorous contender. In 1545 a local named Diego Gualpa
was searching for an indigenous shrine high in the Andes in what is
today Bolivia. He was thrown to the ground by a sudden gust of wind
and in front of him appeared a cache of silver ore. This was part of a
vast mountain of silver, which the Spanish baptized El Cerro Rico,
“The Rich Hill.” Around it grew the city of Potosí, which at its height
in 1650 had a population of 160,000 people, larger than Lisbon or
Venice in this period.
To exploit the silver, the Spanish needed miners—a lot of miners.
They sent a new viceroy, the chief Spanish colonial official, Francisco
de Toledo, whose main mission was to solve the labor problem. De
Toledo, arriving in Peru in 1569, first spent five years traveling
around and investigating his new charge. He also commissioned a
massive survey of the entire adult population. To find the labor he
needed, de Toledo first moved almost the entire indigenous
population, concentrating them in new towns called reducciones—
literally “reductions”—which would facilitate the exploitation of labor
by the Spanish Crown. Then he revived and adapted an Inca labor
institution known as the mita, which, in the Incas’ language,
Quechua, means “a turn.” Under their mita system, the Incas had
used forced labor to run plantations designed to provide food for
temples, the aristocracy, and the army. In return, the Inca elite
provided famine relief and security. In de Toledo’s hands the mita,
especially the Potosí mita, was to become the largest and most
onerous scheme of labor exploitation in the Spanish colonial period.
De Toledo defined a huge catchment area, running from the middle
of modern-day Peru and encompassing most of modern Bolivia. It
covered about two hundred thousand square miles. In this area, oneseventh of the male inhabitants, newly arrived in their reducciones,
were required to work in the mines at Potosí. The Potosí mita
endured throughout the entire colonial period and was abolished
only in 1825. Map 1 shows the catchment area of the mita
superimposed on the extent of the Inca empire at the time of the
Spanish conquest. It illustrates the extent to which the mita
overlapped with the heartland of the empire, encompassing the
capital Cusco.
Map 1: The Inca Empire, the Inca road network, and the mining mita
catchment area
Remarkably, you still see the legacy of the mita in Peru today.
Take the differences between the provinces of Calca and nearby
Acomayo. There appears to be few differences among these
provinces. Both are high in the mountains, and each is inhabited by
the Quechua-speaking descendants of the Incas. Yet Acomayo is
much poorer, with its inhabitants consuming about one-third less
than those in Calca. The people know this. In Acomayo they ask
intrepid foreigners, “Don’t you know that the people here are poorer
than the people over there in Calca? Why would you ever want to
come here?” Intrepid because it is much harder to get to Acomayo
from the regional capital of Cusco, ancient center of the Inca Empire,
than it is to get to Calca. The road to Calca is surfaced, the one to
Acomayo is in a terrible state of disrepair. To get beyond Acomayo,
you need a horse or a mule. In Calca and Acomayo, people grow the
same crops, but in Calca they sell them on the market for money. In
Acomayo they grow food for their own subsistence. These
inequalities, apparent to the eye and to the people who live there, can
be understood in terms of the institutional differences between these
departments—institutional differences with historical roots going
back to de Toledo and his plan for effective exploitation of
indigenous labor. The major historical difference between Acomayo
and Calca is that Acomayo was in the catchment area of the Potosí
mita. Calca was not.
In addition to the concentration of labor and the mita, de Toledo
consolidated the encomienda into a head tax, a fixed sum payable by
each adult male every year in silver. This was another scheme
designed to force people into the labor market and reduce wages for
Spanish landowners. Another institution, the repartimiento de
mercancias, also became widespread during de Toledo’s tenure.
Derived from the Spanish verb repartir, to distribute, this
repartimiento, literally “the distribution of goods,” involved the
forced sale of goods to locals at prices determined by Spaniards.
Finally, de Toledo introduced the trajin—meaning, literally, “the
burden”—which used the indigenous people to carry heavy loads of
goods, such as wine or coca leaves or textiles, as a substitute for pack
animals, for the business ventures of the Spanish elite.
Throughout the Spanish colonial world in the Americas, similar
institutions and social structures emerged. After an initial phase of
looting, and gold and silver lust, the Spanish created a web of
institutions designed to exploit the indigenous peoples. The full
gamut of encomienda, mita, repartimiento, and trajin was designed
to force indigenous people’s living standards down to a subsistence
level and thus extract all income in excess of this for Spaniards. This
was achieved by expropriating their land, forcing them to work,
offering low wages for labor services, imposing high taxes, and
charging high prices for goods that were not even voluntarily bought.
Though these institutions generated a lot of wealth for the Spanish
Crown and made the conquistadors and their descendants very rich,
they also turned Latin America into the most unequal continent in
the world and sapped much of its economic potential.
. . . TO JAMESTOWN
As the Spanish began their conquest of the Americas in the 1490s,
England was a minor European power recovering from the
devastating effects of a civil war, the Wars of the Roses. She was in
no state to take advantage of the scramble for loot and gold and the
opportunity to exploit the indigenous peoples of the Americas.
Nearly one hundred years later, in 1588, the lucky rout of the
Spanish Armada, an attempt by King Philip II of Spain to invade
England, sent political shockwaves around Europe. Fortunate though
England’s victory was, it was also a sign of growing English
assertiveness on the seas that would enable them to finally take part
in the quest for colonial empire.
It is thus no coincidence that the English began their colonization
of North America at exactly the same time. But they were already
latecomers. They chose North America not because it was attractive,
but because it was all that was available. The “desirable” parts of the
Americas, where the indigenous population to exploit was plentiful
and where the gold and silver mines were located, had already been
occupied. The English got the leftovers. When the eighteenth-century
English writer and agriculturalist Arthur Young discussed where
profitable “staple products,” by which he meant exportable
agricultural goods, were produced, he noted:
It appears upon the whole, that the staple productions
of our colonies decrease in value in proportion to their
distance from the sun. In the West Indies, which are
the hottest of all, they make to the amount of 8l. 12s.
1d. per head. In the southern continental ones, to the
amount of 5l. 10s. In the central ones, to the amount of
9s. 6 1/2d. In the northern settlements, to that of 2s.
6d. This scale surely suggests a most important lesson
—to avoid colonizing in northern latitudes.
The first English attempt to plant a colony, at Roanoke, in North
Carolina, between 1585 and 1587, was a complete failure. In 1607
they tried again. Shortly before the end of 1606, three vessels, Susan
Constant, Godspeed, and Discovery, under the command of Captain
Christopher Newport, set off for Virginia. The colonists, under the
auspices of the Virginia Company, sailed into Chesapeake Bay and up
a river they named the James, after the ruling English monarch,
James I. On May 14, 1607, they founded the settlement of
Jamestown.
Though the settlers on board the ships owned by the Virginia
Company were English, they had a model of colonization heavily
influenced by the template set up by Cortés, Pizarro, and de Toledo.
Their first plan was to capture the local chief and use him as a way to
get provisions and to coerce the population into producing food and
wealth for them.
When they first landed in Jamestown, the English colonists did
not know that they were within the territory claimed by the
Powhatan Confederacy, a coalition of some thirty polities owing
allegiance to a king called Wahunsunacock. Wahunsunacock’s capital
was at the town of Werowocomoco, a mere twenty miles from
Jamestown. The plan of the colonists was to learn more about the lay
of the land. If the locals could not be induced to provide food and
labor, the colonists might at least be able to trade with them. The
notion that the settlers themselves would work and grow their own
food seems not to have crossed their minds. That is not what
conquerors of the New World did.
Wahunsunacock quickly became aware of the colonists’ presence
and viewed their intentions with great suspicion. He was in charge of
what for North America was quite a large empire. But he had many
enemies and lacked the overwhelming centralized political control of
the Incas. Wahunsunacock decided to see what the intentions of the
English were, initially sending messengers saying that he desired
friendly relations with them.
As the winter of 1607 closed in, the settlers in Jamestown began to
run low on food, and the appointed leader of the colony’s ruling
council, Edward Marie Wingfield, dithered indecisively. The
situation was rescued by Captain John Smith. Smith, whose writings
provide one of our main sources of information about the early
development of the colony, was a larger-than-life character. Born in
England, in rural Lincolnshire, he disregarded his father’s desires for
him to go into business and instead became a soldier of fortune. He
first fought with English armies in the Netherlands, after which he
joined Austrian forces serving in Hungary fighting against the armies
of the Ottoman Empire. Captured in Romania, he was sold as a slave
and put to work as a field hand. He managed one day to overcome
his master and, stealing his clothes and his horse, escape back into
Austrian territory. Smith had got himself into trouble on the voyage
to Virginia and was imprisoned on the Susan Constant for mutiny
after defying the orders of Wingfield. When the ships reached the
New World, the plan was to put him on trial. To the immense horror
of Wingfield, Newport, and other elite colonists, however, when they
opened their sealed orders, they discovered that the Virginia
Company had nominated Smith to be a member of the ruling council
that was to govern Jamestown.
With Newport sailing back to England for supplies and more
colonists, and Wingfield uncertain about what to do, it was Smith
who saved the colony. He initiated a series of trading missions that
secured vital food supplies. On one of these he was captured by
Opechancanough, one of Wahunsunacock’s younger brothers, and
was brought before the king at Werowocomoco. He was the first
Englishman to meet Wahunsunacock, and it was at this initial
meeting that according to some accounts Smith’s life was saved only
at the intervention of Wahunsunacock’s young daughter Pocahontas.
Freed on January 2, 1608, Smith returned to Jamestown, which was
still perilously low on food, until the timely return of Newport from
England later on the same day.
The colonists of Jamestown learned little from this initial
experience. As 1608 proceeded, they continued their quest for gold
and precious metals. They still did not seem to understand that to
survive, they could not rely on the locals to feed them through either
coercion or trade. It was Smith who was the first to realize that the
model of colonization that had worked so well for Cortés and Pizarro
simply would not work in North America. The underlying
circumstances were just too different. Smith noted that, unlike the
Aztecs and Incas, the peoples of Virginia did not have gold. Indeed,
he noted in his diary, “Victuals you must know is all their wealth.”
Anas Todkill, one of the early settlers who left an extensive diary,
expressed well the frustrations of Smith and the few others on which
this recognition dawned:
“There was no talke, no hope, no worke, but dig gold,
refine gold, load gold.”
When Newport sailed for England in April 1608 he took a cargo of
pyrite, fool’s gold. He returned at the end of September with orders
from the Virginia Company to take firmer control over the locals.
Their plan was to crown Wahunsunacock, hoping this would render
him subservient to the English king James I. They invited him to
Jamestown, but Wahunsunacock, still deeply suspicious of the
colonists, had no intention of risking capture. John Smith recorded
Wahunsunacock’s reply: “If your King have sent me presents, I also
am a King, and this is my land . . . Your father is to come to me, not I
to him, nor yet to your fort, neither will I bite at such a bait.”
If Wahunsunacock would not “bite at such a bait,” Newport and
Smith would have to go to Werowocomoco to undertake the
coronation. The whole event appears to have been a complete fiasco,
with the only thing coming out of it a resolve on the part of
Wahunsunacock that it was time to get rid of the colony. He imposed
a trade embargo. Jamestown could no longer trade for supplies.
Wahunsunacock would starve them out.
Newport set sail once more for England, in December 1608. He
took with him a letter written by Smith pleading with the directors of
the Virginia Company to change the way they thought about the
colony. There was no possibility of a get-rich-quick exploitation of
Virginia along the lines of Mexico and Peru. There were no gold or
precious metals, and the indigenous people could not be forced to
work or provide food. Smith realized that if there were going to be a
viable colony, it was the colonists who would have to work. He
therefore pleaded with the directors to send the right sort of people:
“When you send againe I entreat you rather to send some thirty
carpenters, husbandmen, gardeners, fishermen, blacksmiths,
masons, and diggers up of trees, roots, well provided, then a
thousand of such as we have.”
Smith did not want any more useless goldsmiths. Once more
Jamestown survived only because of his resourcefulness. He
managed to cajole and bully local indigenous groups to trade with
him, and when they wouldn’t, he took what he could. Back in the
settlement, Smith was completely in charge and imposed the rule
that “he that will not worke shall not eat.” Jamestown survived a
second winter.
The Virginia Company was intended to be a moneymaking
enterprise, and after two disastrous years, there was no whiff of
profit. The directors of the company decided that they needed a new
model of governance, replacing the ruling council with a single
governor. The first man appointed to this position was Sir Thomas
Gates. Heeding some aspects of Smith’s warning, the company
realized that they had to try something new. This realization was
driven home by the events of the winter of 1609/1610—the so-called
“starving time.” The new mode of governance left no room for Smith,
who, disgruntled, returned to England in the autumn of 1609.
Without his resourcefulness, and with Wahunsunacock throttling the
food supply, the colonists in Jamestown perished. Of the five
hundred who entered the winter, only sixty were alive by March. The
situation was so desperate that they resorted to cannibalism.
The “something new” that was imposed on the colony by Gates
and his deputy, Sir Thomas Dale, was a work regime of draconian
severity for English settlers—though not of course for the elite
running the colony. It was Dale who propagated the “Lawes Divine,
Morall and Martiall.” This included the clauses
Map 2: Population density in 1500 in the Americas
No man or woman shall run away from the colony to the
Indians, upon pain of death.
Anyone who robs a garden, public or private, or a
vineyard, or who steals ears of corn shall be punished
with death.
No member of the colony will sell or give any commodity
of this country to a captain, mariner, master or sailor to
transport out of the colony, for his own private uses,
upon pain of death.
If the indigenous peoples could not be exploited, reasoned the
Virginia Company, perhaps the colonists could. The new model of
colonial development entailed the Virginia Company owning all the
land. Men were housed in barracks, and given company-determined
rations. Work gangs were chosen, each one overseen by an agent of
the company. It was close to martial law, with execution as the
punishment of first resort. As part of the new institutions for the
colony, the first clause just given is significant. The company
threatened with death those who ran away. Given the new work
regime, running away to live with the locals became more and more
of an attractive option for the colonists who had to do the work. Also
available, given the low density of even indigenous populations in
Virginia at that time, was the prospect of going it alone on the
frontier beyond the control of the Virginia Company. The power of
the company in the face of these options was limited. It could not
coerce the English settlers into hard work at subsistence rations.
Map 2 (opposite) shows an estimate of the population density of
different regions of the Americas at the time on the Spanish
conquest. The population density of the United States, outside of a
few pockets, was at most three-quarters of a person per square mile.
In central Mexico or Andean Peru, the population density was as
high as four hundred people per square mile, more than five hundred
times higher. What was possible in Mexico or Peru was not feasible
in Virginia.
It took the Virginia Company some time to recognize that its
initial model of colonization did not work in Virginia, and it took a
while, too, for the failure of the “Lawes Divine, Morall and Martiall”
to sink in. Starting in 1618, a dramatically new strategy was adopted.
Since it was possible to coerce neither the locals nor the settlers, the
only alternative was to give the settlers incentives. In 1618 the
company began the “headright system,” which gave each male settler
fifty acres of land and fifty more acres for each member of his family
and for all servants that a family could bring to Virginia. Settlers
were given their houses and freed from their contracts, and in 1619 a
General Assembly was introduced that effectively gave all adult men
a say in the laws and institutions governing the colony. It was the
start of democracy in the United States.
It took the Virginia Company twelve years to learn its first lesson
that what had worked for the Spanish in Mexico and in Central and
South America would not work in the north. The rest of the
seventeenth century saw a long series of struggles over the second
lesson: that the only option for an economically viable colony was to
create institutions that gave the colonists incentives to invest and to
work hard.
As North America developed, English elites tried time and time
again to set up institutions that would heavily restrict the economic
and political rights for all but a privileged few of the inhabitants of
the colony, just as the Spanish did. Yet in each case this model broke
down, as it had in Virginia.
One of the most ambitious attempts began soon after the change
in strategy of the Virginia Company. In 1632 ten million acres of land
on the upper Chesapeake Bay were granted by the English king
Charles I to Cecilius Calvert, Lord Baltimore. The Charter of
Maryland gave Lord Baltimore complete freedom to create a
government along any lines he wished, with clause VII noting that
Baltimore had “for the good and happy Government of the said
Province, free, full, and absolute Power, by the Tenor of these
Presents, to Ordain, Make, and Enact Laws, of what Kind soever.”
Baltimore drew up a detailed plan for creating a manorial society,
a North American variant of an idealized version of seventeenthcentury rural England. It entailed dividing the land into plots of
thousands of acres, which would be run by lords. The lords would
recruit tenants, who would work the lands and pay rents to the
privileged elite controlling the land. Another similar attempt was
made later in 1663, with the founding of Carolina by eight
proprietors, including Sir Anthony Ashley-Cooper. Ashley-Cooper,
along with his secretary, the great English philosopher John Locke,
formulated the Fundamental Constitutions of Carolina. This
document, like the Charter of Maryland before it, provided a
blueprint for an elitist, hierarchical society based on control by a
landed elite. The preamble noted that “the government of this
province may be made most agreeable to the monarchy under which
we live and of which this province is a part; and that we may avoid
erecting a numerous democracy.”
The clauses of the Fundamental Constitutions laid out a rigid
social structure. At the bottom were the “leet-men,” with clause 23
noting, “All the children of leet-men shall be leet-men, and so to all
generations.” Above the leet-men, who had no political power, were
the landgraves and caziques, who were to form the aristocracy.
Landgraves were to be allocated forty-eight thousand acres of land
each, and caziques twenty-four thousand acres. There was to be a
parliament, in which landgraves and caziques were represented, but
it would be permitted to debate only those measures that had
previously been approved by the eight proprietors.
Just as the attempt to impose draconian rule in Virginia failed, so
did the plans for the same type of institutions in Maryland and
Carolina. The reasons were similar. In all cases it proved to be
impossible to force settlers into a rigid hierarchical society, because
there were simply too many options open to them in the New World.
Instead, they had to be provided with incentives for them to want to
work. And soon they were demanding more economic freedom and
further political rights. In Maryland, too, settlers insisted on getting
their own land, and they forced Lord Baltimore into creating an
assembly. In 1691 the assembly induced the king to declare Maryland
a Crown colony, thus removing the political privileges of Baltimore
and his great lords. A similar protracted struggle took place in the
Carolinas, again with the proprietors losing. South Carolina became
a royal colony in 1729.
By the 1720s, all the thirteen colonies of what was to become the
United States had similar structures of government. In all cases there
was a governor, and an assembly based on a franchise of male
property holders. They were not democracies; women, slaves, and
the propertyless could not vote. But political rights were very broad
compared with contemporary societies elsewhere. It was these
assemblies and their leaders that coalesced to form the First
Continental Congress in 1774, the prelude to the independence of the
United States. The assemblies believed they had the right to
determine both their own membership and the right to taxation.
This, as we know, created problems for the English colonial
government.
A TALE OF TWO CONSTITUTIONS
It should now be apparent that it is not a coincidence that the United
States, and not Mexico, adopted and enforced a constitution that
espoused democratic principles, created limitations on the use of
political power, and distributed that power broadly in society. The
document that the delegates sat down to write in Philadelphia in May
1787 was the outcome of a long process initiated by the formation of
the General Assembly in Jamestown in 1619.
The contrast between the constitutional process that took place at
the time of the independence of the United States and the one that
took place a little afterward in Mexico is stark. In February 1808,
Napoleon Bonaparte’s French armies invaded Spain. By May they
had taken Madrid, the Spanish capital. By September the Spanish
king Ferdinand had been captured and had abdicated. A national
junta, the Junta Central, took his place, taking the torch in the fight
against the French. The Junta met first at Aranjuez, but retreated
south in the face of the French armies. Finally it reached the port of
Cádiz, which, though besieged by Napoleonic forces, held out. Here
the Junta formed a parliament, called the Cortes. In 1812 the Cortes
produced what became known as the Cádiz Constitution, which
called for the introduction of a constitutional monarchy based on
notions of popular sovereignty. It also called for the end of special
privileges and the introduction of equality before the law. These
demands were all anathema to the elites of South America, who were
still ruling an institutional environment shaped by the encomienda,
forced labor, and absolute power vested in them and the colonial
state.
The collapse of the Spanish state with the Napoleonic invasion
created a constitutional crisis throughout colonial Latin America.
There was much dispute about whether to recognize the authority of
the Junta Central, and in response, many Latin Americans began to
form their own juntas. It was only a matter of time before they began
to sense the possibility of becoming truly independent from Spain.
The first declaration of independence took place in La Paz, Bolivia, in
1809, though it was quickly crushed by Spanish troops sent from
Peru. In Mexico the political attitudes of the elite had been shaped by
the 1810 Hidalgo Revolt, led by a priest, Father Miguel Hidalgo.
When Hidalgo’s army sacked Guanajuato on September 23, they
killed the intendant, the senior colonial official, and then started
indiscriminately to kill white people. It was more like class or even
ethnic warfare than an independence movement, and it united all the
elites in opposition. If independence allowed popular participation in
politics, the local elites, not just Spaniards, were against it.
Consequentially, Mexican elites viewed the Cádiz Constitution, which
opened the way to popular participation, with extreme skepticism;
they would never recognize its legitimacy.
In 1815, as Napoleon’s European empire collapsed, King
Ferdinand VII returned to power and the Cádiz Constitution was
abrogated. As the Spanish Crown began trying to reclaim its
American colonies, it did not face a problem with loyalist Mexico.
Yet, in 1820, a Spanish army that had assembled in Cádiz to sail to
the Americas to help restore Spanish authority mutinied against
Ferdinand VII. They were soon joined by army units throughout the
country, and Ferdinand was forced to restore the Cádiz Constitution
and recall the Cortes. This Cortes was even more radical than the one
that had written the Cádiz Constitution, and it proposed abolishing
all forms of labor coercion. It also attacked special privileges—for
example, the right of the military to be tried for crimes in their own
courts. Faced finally with the imposition of this document in Mexico,
the elites there decided that it was better to go it alone and declare
independence.
This independence movement was led by Augustín de Iturbide,
who had been an officer in the Spanish army. On February 24, 1821,
he published the Plan de Iguala, his vision for an independent
Mexico. The plan featured a constitutional monarchy with a Mexican
emperor, and removed the provisions of the Cádiz Constitution that
Mexican elites found so threatening to their status and privileges. It
received instantaneous support, and Spain quickly realized that it
could not stop the inevitable. But Iturbide did not just organize
Mexican secession. Recognizing the power vacuum, he quickly took
advantage of his military backing to have himself declared emperor,
a position that the great leader of South American independence
Simón Bolivar described as “by the grace of God and of bayonets.”
Iturbide was not constrained by the same political institutions that
constrained presidents of the United States; he quickly made himself
a dictator, and by October 1822 he had dismissed the constitutionally
sanctioned congress and replaced it with a junta of his choosing.
Though Iturbide did not last long, this pattern of events was to be
repeated time and time again in nineteenth-century Mexico.
The Constitution of the United States did not create a democracy
by modern standards. Who could vote in elections was left up to the
individual states to determine. While northern states quickly
conceded the vote to all white men irrespective of how much income
they earned or property they owned, southern states did so only
gradually. No state enfranchised women or slaves, and as property
and wealth restrictions were lifted on white men, racial franchises
explicitly disenfranchising black men were introduced. Slavery, of
course, was deemed constitutional when the Constitution of the
United States was written in Philadelphia, and the most sordid
negotiation concerned the division of the seats in the House of
Representatives among the states. These were to be allocated on the
basis of a state’s population, but the congressional representatives of
southern states then demanded that the slaves be counted.
Northerners objected. The compromise was that in apportioning
seats to the House of Representatives, a slave would count as threefifths of a free person. The conflicts between the North and South of
the United States were repressed during the constitutional process as
the three-fifths rule and other compromises were worked out. New
fixes were added over time—for example, the Missouri Compromise,
an arrangement where one proslavery and one antislavery state were
always added to the union together, to keep the balance in the Senate
between those for and those against slavery. These fudges kept the
political institutions of the United States working peacefully until the
Civil War finally resolved the conflicts in favor of the North.
The Civil War was bloody and destructive. But both before and
after it there were ample economic opportunities for a large fraction
of the population, especially in the northern and western United
States. The situation in Mexico was very different. If the United
States experienced five years of political instability between 1860 and
1865, Mexico experienced almost nonstop instability for the first fifty
years of independence. This is best illustrated via the career of
Antonio López de Santa Ana.
Santa Ana, son of a colonial official in Veracruz, came to
prominence as a soldier fighting for the Spanish in the independence
wars. In 1821 he switched sides with Iturbide and never looked back.
He became president of Mexico for the first time in May of 1833,
though he exercised power for less than a month, preferring to let
Valentín Gómez Farías act as president. Gómez Farías’s presidency
lasted fifteen days, after which Santa Ana retook power. This was as
brief as his first spell, however, and he was again replaced by Gómez
Farías, in early July. Santa Ana and Gómez Farías continued this
dance until the middle of 1835, when Santa Ana was replaced by
Miguel Barragán. But Santa Ana was not a quitter. He was back as
president in 1839, 1841, 1844, 1847, and, finally, between 1853 and
1855. In all, he was president eleven times, during which he presided
over the loss of the Alamo and Texas and the disastrous MexicanAmerican War, which led to the loss of what became New Mexico
and Arizona. Between 1824 and 1867 there were fifty-two presidents
in Mexico, few of whom assumed power according to any
constitutionally sanctioned procedure.
The consequence of this unprecedented political instability for
economic institutions and incentives should be obvious. Such
instability led to highly insecure property rights. It also led to a
severe weakening of the Mexican state, which now had little
authority and little ability to raise taxes or provide public services.
Indeed, even though Santa Ana was president in Mexico, large parts
of the country were not under his control, which enabled the
annexation of Texas by the United States. In addition, as we just saw,
the motivation behind the Mexican declaration of independence was
to protect the set of economic institutions developed during the
colonial period, which had made Mexico, in the words of the great
German explorer and geographer of Latin America Alexander von
Humbolt, “the country of inequality.” These institutions, by basing
the society on the exploitation of indigenous people and the creation
of monopolies, blocked the economic incentives and initiatives of the
great mass of the population. As the United States began to
experience the Industrial Revolution in the first half of the
nineteenth century, Mexico got poorer.
HAVING AN IDEA, STARTING A FIRM, AND GETTING A LOAN
The Industrial Revolution started in England. Its first success was to
revolutionize the production of cotton cloth using new machines
powered by water wheels and later by steam engines. Mechanization
of cotton production massively increased the productivity of workers
in, first, textiles and, subsequently, other industries. The engine of
technological breakthroughs throughout the economy was
innovation, spearheaded by new entrepreneurs and businessmen
eager to apply their new ideas. This initial flowering soon spread
across the North Atlantic to the United States. People saw the great
economic opportunities available in adopting the new technologies
developed in England. They were also inspired to develop their own
inventions.
We can try to understand the nature of these inventions by
looking at who was granted patents. The patent system, which
protects property rights in ideas, was systematized in the Statute of
Monopolies legislated by the English Parliament in 1623, partially as
an attempt to stop the king from arbitrarily granting “letters patent”
to whomever he wanted—effectively granting exclusive rights to
undertake certain activities or businesses. The striking thing about
the evidence on patenting in the United States is that people who
were granted patents came from all sorts of backgrounds and all
walks of life, not just the rich and the elite. Many made fortunes
based on their patents. Take Thomas Edison, the inventor of the
phonogram and the lightbulb and the founder of General Electric,
still one of the world’s largest companies. Edison was the last of
seven children. His father, Samuel Edison, followed many
occupations, from splitting shingles for roofs to tailoring to keeping a
tavern. Thomas had little formal schooling but was homeschooled by
his mother.
Between 1820 and 1845, only 19 percent of patentees in the
United States had parents who were professionals or were from
recognizable major landowning families. During the same period, 40
percent of those who took out patents had only primary schooling or
less, just like Edison. Moreover, they often exploited their patent by
starting a firm, again like Edison. Just as the United States in the
nineteenth century was more democratic politically than almost any
other nation in the world at the time, it was also more democratic
than others when it came to innovation. This was critical to its path
to becoming the most economically innovative nation in the world.
If you were poor with a good idea, it was one thing to take out a
patent, which was not so expensive, after all. It was another thing
entirely to use that patent to make money. One way, of course, was to
sell the patent to someone else. This is what Edison did early on, to
raise some capital, when he sold his Quadruplex telegraph to
Western Union for $10,000. But selling patents was a good idea only
for someone like Edison, who had ideas faster than he could put
them to practice. (He had a world-record 1,093 patents issued to him
in the United States and 1,500 worldwide.) The real way to make
money from a patent was to start your own business. But to start a
business, you need capital, and you need banks to lend the capital to
you.
Inventors in the United States were once again fortunate. During
the nineteenth century there was a rapid expansion of financial
intermediation and banking that was a crucial facilitator of the rapid
growth and industrialization that the economy experienced. While in
1818 there were 338 banks in operation in the United States, with
total assets of $160 million, by 1914 there were 27,864 banks, with
total assets of $27.3 billion. Potential inventors in the United States
had ready access to capital to start their businesses. Moreover, the
intense competition among banks and financial institutions in the
United States meant that this capital was available at fairly low
interest rates.
The same was not true in Mexico. In fact, in 1910, the year in
which the Mexican Revolution started, there were only forty-two
banks in Mexico, and two of these controlled 60 percent of total
banking assets. Unlike in the United States, where competition was
fierce, there was practically no competition among Mexican banks.
This lack of competition meant that the banks were able to charge
their customers very high interest rates, and typically confined
lending to the privileged and the already wealthy, who would then
use their access to credit to increase their grip over the various
sectors of the economy.
The form that the Mexican banking industry took in the
nineteenth and twentieth centuries was a direct result of the
postindependence political institutions of the country. The chaos of
the Santa Ana era was followed by an abortive attempt by the French
government of Emperor Napoleon II to create a colonial regime in
Mexico under Emperor Maximilian between 1864 and 1867. The
French were expelled, and a new constitution was written. But the
government formed first by Benito Juárez and, after his death, by
Sebastián Lerdo de Tejada was soon challenged by a young military
man named Porfirio Díaz. Díaz had been a victorious general in the
war against the French and had developed aspirations of power. He
formed a rebel army and, in November of 1876, defeated the army of
the government at the Battle of Tecoac. In May of the next year, he
had himself elected president. He went on to rule Mexico in a more
or less unbroken and increasingly authoritarian fashion until his
overthrow at the outbreak of the revolution thirty-four years later.
Like Iturbide and Santa Ana before him, Díaz started life as a
military commander. Such a career path into politics was certainly
known in the United States. The first president of the United States,
George Washington, was also a successful general in the War of
Independence. Ulysses S. Grant, one of the victorious Union generals
of the Civil War, became president in 1869, and Dwight D.
Eisenhower, the supreme commander of the Allied Forces in Europe
during the Second World War, was president of the United States
between 1953 and 1961. Unlike Iturbide, Santa Ana, and Díaz,
however, none of these military men used force to get into power.
Nor did they use force to avoid having to relinquish power. They
abided by the Constitution. Though Mexico had constitutions in the
nineteenth century, they put few constraints on what Iturbide, Santa
Ana, and Díaz could do. These men could be removed from power
only the same way they had attained it: by the use of force.
Díaz violated people’s property rights, facilitating the
expropriation of vast amounts of land, and he granted monopolies
and favors to his supporters in all lines of business, including
banking. There was nothing new about this behavior. This is exactly
what Spanish conquistadors had done, and what Santa Ana did in
their footsteps.
The reason that the United States had a banking industry that was
radically better for the economic prosperity of the country had
nothing to do with differences in the motivation of those who owned
the banks. Indeed, the profit motive, which underpinned the
monopolistic nature of the banking industry in Mexico, was present
in the United States, too. But this profit motive was channeled
differently because of the radically different U.S. institutions. The
bankers faced different economic institutions, institutions that
subjected them to much greater competition. And this was largely
because the politicians who wrote the rules for the bankers faced
very different incentives themselves, forged by different political
institutions. Indeed, in the late eighteenth century, shortly after the
Constitution of the United States came into operation, a banking
system looking similar to that which subsequently dominated Mexico
began to emerge. Politicians tried to set up state banking
monopolies, which they could give to their friends and partners in
exchange for part of the monopoly profits. The banks also quickly got
into the business of lending money to the politicians who regulated
them, just as in Mexico. But this situation was not sustainable in the
United States, because the politicians who attempted to create these
banking monopolies, unlike their Mexican counterparts, were subject
to election and reelection. Creating banking monopolies and giving
loans to politicians is good business for politicians, if they can get
away with it. It is not particularly good for the citizens, however.
Unlike in Mexico, in the United States the citizens could keep
politicians in check and get rid of ones who would use their offices to
enrich themselves or create monopolies for their cronies. In
consequence, the banking monopolies crumbled. The broad
distribution of political rights in the United States, especially when
compared to Mexico, guaranteed equal access to finance and loans.
This in turn ensured that those with ideas and inventions could
benefit from them.
PATH-DEPENDENT CHANGE
The world was changing in the 1870s and ’80s. Latin America was no
exception. The institutions that Porfirio Díaz established were not
identical to those of Santa Ana or the Spanish colonial state. The
world economy boomed in the second half of the nineteenth century,
and innovations in transportation such as the steamship and the
railway led to a huge expansion of international trade. This wave of
globalization meant that resource-rich countries such as Mexico—or,
more appropriately, the elites in such countries—could enrich
themselves by exporting raw materials and natural resources to
industrializing North America or Western Europe. Díaz and his
cronies thus found themselves in a different and rapidly evolving
world. They realized that Mexico had to change, too. But this didn’t
mean uprooting the colonial institutions and replacing them with
institutions similar to those in the United States. Instead, theirs was
“path-dependent” change leading only to the next stage of the
institutions that had already made much of Latin America poor and
unequal.
Globalization made the large open spaces of the Americas, its
“open frontiers,” valuable. Often these frontiers were only mythically
open, since they were inhabited by indigenous peoples who were
brutally dispossessed. All the same, the scramble for this newly
valuable resource was one of the defining processes of the Americas
in the second half of the nineteenth century. The sudden opening of
this valuable frontier led not to parallel processes in the United
States and Latin America, but to a further divergence, shaped by the
existing institutional differences, especially those concerning who
had access to the land. In the United States a long series of legislative
acts, ranging from the Land Ordinance of 1785 to the Homestead Act
of 1862, gave broad access to frontier lands. Though indigenous
peoples had been sidelined, this created an egalitarian and
economically dynamic frontier. In most Latin American countries,
however, the political institutions there created a very different
outcome. Frontier lands were allocated to the politically powerful
and those with wealth and contacts, making such people even more
powerful.
Díaz also started to dismantle many of the specific colonial
institutional legacies preventing international trade, which he
anticipated could greatly enrich him and his supporters. His model,
however, continued to be not the type of economic development he
saw north of the Rio Grande but that of Cortés, Pizarro, and de
Toledo, where the elite would make huge fortunes while the rest were
excluded. When the elite invested, the economy would grow a little,
but such economic growth was always going to be disappointing. It
also came at the expense of those lacking rights in this new order,
such as the Yaqui people of Sonora, in the hinterland of Nogales.
Between 1900 and 1910, possibly thirty thousand Yaqui were
deported, essentially enslaved, and sent to work in the henequen
plantations of Yucatán. (The fibers of the henequen plant were a
valuable export, since they could be used to make rope and twine.)
The persistence into the twentieth century of a specific
institutional pattern inimical to growth in Mexico and Latin America
is well illustrated by the fact that, just as in the nineteenth century,
the pattern generated economic stagnation and political instability,
civil wars and coups, as groups struggled for the benefits of power.
Díaz finally lost power to revolutionary forces in 1910. The Mexican
Revolution was followed by others in Bolivia in 1952, Cuba in 1959,
and Nicaragua in 1979. Meanwhile, sustained civil wars raged in
Colombia, El Salvador, Guatemala, and Peru. Expropriation or the
threat of expropriation of assets continued apace, with mass agrarian
reforms (or attempted reforms) in Bolivia, Brazil, Chile, Colombia,
Guatemala, Peru, and Venezuela. Revolutions, expropriations, and
political instability came along with military governments and
various types of dictatorships. Though there was also a gradual drift
toward greater political rights, it was only in the 1990s that most
Latin American countries became democracies, and even then they
remain mired in instability.
This instability was accompanied by mass repression and murder.
The 1991 National Commission for Truth and Reconciliation Report
in Chile determined that 2,279 persons were killed for political
reasons during the Pinochet dictatorship between 1973 and 1990.
Possibly 50,000 were imprisoned and tortured, and hundreds of
thousands of people were fired from their jobs. The Guatemalan
Commission for Historical Clarification Report in 1999 identified a
total of 42,275 named victims, though others have claimed that as
many as 200,000 were murdered in Guatemala between 1962 and
1996, 70,000 during the regime of General Efrain Ríos Montt, who
was able to commit these crimes with such impunity that he could
run for president in 2003; fortunately he did not win. The National
Commission on the Disappearance of Persons in Argentina put the
number of people murdered by the military there at 9,000 persons
from 1976 to 1983, although it noted that the actual number could be
higher. (Estimates by human rights organizations usually place it at
30,000.)
MAKING A BILLION OR TWO
The enduring implications of the organization of colonial society and
those societies’ institutional legacies shape the modern differences
between the United States and Mexico, and thus the two parts of
Nogales. The contrast between how Bill Gates and Carlos Slim
became the two richest men in the world—Warren Buffett is also a
contender—illustrates the forces at work. The rise of Gates and
Microsoft is well known, but Gates’s status as the world’s richest
person and the founder of one of the most technologically innovative
companies did not stop the U.S. Department of Justice from filing
civil actions against the Microsoft Corporation on May 8, 1998,
claiming that Microsoft had abused monopoly power. Particularly at
issue was the way that Microsoft had tied its Web browser, Internet
Explorer, to its Windows operating system. The government had
been keeping an eye on Gates for quite some time, and as early as
1991, the Federal Trade Commission had launched an inquiry into
whether Microsoft was abusing its monopoly on PC operating
systems. In November 2001, Microsoft reached a deal with the
Justice Department. It had its wings clipped, even if the penalties
were less than many demanded.
In Mexico, Carlos Slim did not make his money by innovation.
Initially he excelled in stock market deals, and in buying and
revamping unprofitable firms. His major coup was the acquisition of
Telmex, the Mexican telecommunications monopoly that was
privatized by President Carlos Salinas in 1990. The government
announced its intention to sell 51 percent of the voting stock (20.4
percent of total stock) in the company in September 1989 and
received bids in November 1990. Even though Slim did not put in the
highest bid, a consortium led by his Grupo Corso won the auction.
Instead of paying for the shares right away, Slim managed to delay
payment, using the dividends of Telmex itself to pay for the stock.
What was once a public monopoly now became Slim’s monopoly, and
it was hugely profitable.
The economic institutions that made Carlos Slim who he is are
very different from those in the United States. If you’re a Mexican
entrepreneur, entry barriers will play a crucial role at every stage of
your career. These barriers include expensive licenses you have to
obtain, red tape you have to cut through, politicians and incumbents
who will stand in your way, and the difficulty of getting funding from
a financial sector often in cahoots with the incumbents you’re trying
to compete against. These barriers can be either insurmountable,
keeping you out of lucrative areas, or your greatest friend, keeping
your competitors at bay. The difference between the two scenarios is
of course whom you know and whom you can influence—and yes,
whom you can bribe. Carlos Slim, a talented, ambitious man from a
relatively modest background of Lebanese immigrants, has been a
master at obtaining exclusive contracts; he managed to monopolize
the lucrative telecommunications market in Mexico, and then to
extend his reach to the rest of Latin America.
There have been challenges to Slim’s Telmex monopoly. But they
have not been successful. In 1996 Avantel, a long-distance phone
provider, petitioned the Mexican Competition Commission to check
whether Telmex had a dominant position in the telecommunications
market. In 1997 the commission declared that Telmex had
substantial monopoly power with respect to local telephony, national
longdistance calls, and international long-distance calls, among
other things. But attempts by the regulatory authorities in Mexico to
limit these monopolies have come to nothing. One reason is that
Slim and Telmex can use what is known as a recurso de amparo,
literally an “appeal for protection.” An amparo is in effect a petition
to argue that a particular law does not apply to you. The idea of the
amparo dates back to the Mexican constitution of 1857 and was
originally intended as a safeguard of individual rights and freedoms.
In the hands of Telmex and other Mexican monopolies, however, it
has become a formidable tool for cementing monopoly power.
Rather than protecting people’s rights, the amparo provides a
loophole in equality before the law.
Slim has made his money in the Mexican economy in large part
thanks to his political connections. When he has ventured into the
United States, he has not been successful. In 1999 his Grupo Curso
bought the computer retailer CompUSA. At the time, CompUSA had
given a franchise to a firm called COC Services to sell its merchandise
in Mexico. Slim immediately violated this contract with the intention
of setting up his own chain of stores, without any competition from
COC. But COC sued CompUSA in a Dallas court. There are no
amparos in Dallas, so Slim lost, and was fined $454 million. The
lawyer for COC, Mark Werner, noted afterward that “the message of
this verdict is that in this global economy, firms have to respect the
rules of the United States if they want to come here.” When Slim was
subject to the institutions of the United States, his usual tactics for
making money didn’t work.
TOWARD A THEORY OF WORLD INEQUALITY
We live in an unequal world. The differences among nations are
similar to those between the two parts of Nogales, just on a larger
scale. In rich countries, individuals are healthier, live longer, and are
much better educated. They also have access to a range of amenities
and options in life, from vacations to career paths, that people in
poor countries can only dream of. People in rich countries also drive
on roads without potholes, and enjoy toilets, electricity, and running
water in their houses. They also typically have governments that do
not arbitrarily arrest or harass them; on the contrary, the
governments provide services, including education, health care,
roads, and law and order. Notable, too, is the fact that the citizens
vote in elections and have some voice in the political direction their
countries take.
The great differences in world inequality are evident to everyone,
even to those in poor countries, though many lack access to
television or the Internet. It is the perception and reality of these
differences that drive people to cross the Rio Grande or the
Mediterranean Sea illegally to have the chance to experience richcountry living standards and opportunities. This inequality doesn’t
just have consequences for the lives of individual people in poor
countries; it also causes grievances and resentment, with huge
political consequences in the United States and elsewhere.
Understanding why these differences exist and what causes them is
our focus in this book. Developing such an understanding is not just
an end in itself, but also a first step toward generating better ideas
about how to improve the lives of billions who still live in poverty.
The disparities on the two sides of the fence in Nogales are just the
tip of the iceberg. As in the rest of northern Mexico, which benefits
from trade with the United States, even if not all of it is legal, the
residents of Nogales are more prosperous than other Mexicans,
whose average annual household income is around $5,000. This
greater relative prosperity of Nogales, Sonora, comes from
maquiladora manufacturing plants centered in industrial parks, the
first of which was started by Richard Campbell, Jr., a California
basket manufacturer. The first tenant was Coin-Art, a musical
instrument company owned by Richard Bosse, owner of the Artley
flute and saxophone company in Nogales, Arizona. Coin-Art was
followed by Memorex (computer wiring); Avent (hospital clothing);
Grant (sunglasses); Chamberlain (a manufacturer of garage door
openers for Sears); and Samsonite (suitcases). Significantly, all are
U.S.-based businesses and businessmen, using U.S. capital and
know-how. The greater prosperity of Nogales, Sonora, relative to the
rest of Mexico, therefore, comes from outside.
The differences between the United States and Mexico are in turn
small compared with those across the entire globe. The average
citizen of the United States is seven times as prosperous as the
average Mexican and more than ten times as the resident of Peru or
Central America. She is about twenty times as prosperous as the
average inhabitant of sub-Saharan Africa, and almost forty times as
those living in the poorest African countries such as Mali, Ethiopia,
and Sierra Leone. And it’s not just the United States. There is a small
but growing group of rich countries—mostly in Europe and North
America, joined by Australia, Japan, New Zealand, Singapore, South
Korea, and Taiwan—whose citizens enjoy very different lives from
those of the inhabitants of the rest of the globe.
The reason that Nogales, Arizona, is much richer than Nogales,
Sonora, is simple; it is because of the very different institutions on
the two sides of the border, which create very different incentives for
the inhabitants of Nogales, Arizona, versus Nogales, Sonora. The
United States is also far richer today than either Mexico or Peru
because of the way its institutions, both economic and political,
shape the incentives of businesses, individuals, and politicians. Each
society functions with a set of economic and political rules created
and enforced by the state and the citizens collectively. Economic
institutions shape economic incentives: the incentives to become
educated, to save and invest, to innovate and adopt new
technologies, and so on. It is the political process that determines
what economic institutions people live under, and it is the political
institutions that determine how this process works. For example, it is
the political institutions of a nation that determine the ability of
citizens to control politicians and influence how they behave. This in
turn determines whether politicians are agents of the citizens, albeit
imperfect, or are able to abuse the power entrusted to them, or that
they have usurped, to amass their own fortunes and to pursue their
own agendas, ones detrimental to those of the citizens. Political
institutions include but are not limited to written constitutions and
to whether the society is a democracy. They include the power and
capacity of the state to regulate and govern society. It is also
necessary to consider more broadly the factors that determine how
political power is distributed in society, particularly the ability of
different groups to act collectively to pursue their objectives or to
stop other people from pursuing theirs.
As institutions influence behavior and incentives in real life, they
forge the success or failure of nations. Individual talent matters at
every level of society, but even that needs an institutional framework
to transform it into a positive force. Bill Gates, like other legendary
figures in the information technology industry (such as Paul Allen,
Steve Ballmer, Steve Jobs, Larry Page, Sergey Brin, and Jeff Bezos),
had immense talent and ambition. But he ultimately responded to
incentives. The schooling system in the United States enabled Gates
and others like him to acquire a unique set of skills to complement
their talents. The economic institutions in the United States enabled
these men to start companies with ease, without facing
insurmountable barriers. Those institutions also made the financing
of their projects feasible. The U.S. labor markets enabled them to
hire qualified personnel, and the relatively competitive market
environment enabled them to expand their companies and market
their products. These entrepreneurs were confident from the
beginning that their dream projects could be implemented: they
trusted the institutions and the rule of law that these generated and
they did not worry about the security of their property rights. Finally,
the political institutions ensured stability and continuity. For one
thing, they made sure that there was no risk of a dictator taking
power and changing the rules of the game, expropriating their
wealth, imprisoning them, or threatening their lives and livelihoods.
They also made sure that no particular interest in society could warp
the government in an economically disastrous direction, because
political power was both limited and distributed sufficiently broadly
that a set of economic institutions that created the incentives for
prosperity could emerge.
This book will show that while economic institutions are critical
for determining whether a country is poor or prosperous, it is politics
and political institutions that determine what economic institutions
a country has. Ultimately the good economic institutions of the
United States resulted from the political institutions that gradually
emerged after 1619. Our theory for world inequality shows how
political and economic institutions interact in causing poverty or
prosperity, and how different parts of the world ended up with such
different sets of institutions. Our brief review of the history of the
Americas begins to give a sense of the forces that shape political and
economic institutions. Different patterns of institutions today are
deeply rooted in the past because once society gets organized in a
particular way, this tends to persist. We’ll show that this fact comes
from the way that political and economic institutions interact.
This persistence and the forces that create it also explain why it is
so difficult to remove world inequality and to make poor countries
prosperous. Though institutions are the key to the differences
between the two Nogaleses and between Mexico and the United
States, that doesn’t mean there will be a consensus in Mexico to
change institutions. There is no necessity for a society to develop or
adopt the institutions that are best for economic growth or the
welfare of its citizens, because other institutions may be even better
for those who control politics and political institutions. The powerful
and the rest of society will often disagree about which set of
institutions should remain in place and which ones should be
changed. Carlos Slim would not have been happy to see his political
connections disappear and the entry barriers protecting his
businesses fizzle—no matter that the entry of new businesses would
enrich millions of Mexicans. Because there is no such consensus,
what rules society ends up with is determined by politics: who has
power and how this power can be exercised. Carlos Slim has the
power to get what he wants. Bill Gates’s power is far more limited.
That’s why our theory is about not just economics but also politics. It
is about the effects of institutions on the success and failure of
nations—thus the economics of poverty and prosperity; it is also
about how institutions are determined and change over time, and
how they fail to change even when they create poverty and misery for
millions—thus the politics of poverty and prosperity.
2.
THEORIES THAT DON’T WORK
THE LAY OF THE LAND
THE FOCUS OF our book is on explaining world inequality and also
some of the easily visible broad patterns that nest within it. The first
country to experience sustained economic growth was England—or
Great Britain, usually just Britain, as the union of England, Wales,
and Scotland after 1707 is known. Growth emerged slowly in the
second half of the eighteenth century as the Industrial Revolution,
based on major technological breakthroughs and their application in
industry, took root. Industrialization in England was soon followed
by industrialization in most of Western Europe and the United
States. English prosperity also spread rapidly to Britain’s “settler
colonies” of Canada, Australia, and New Zealand. A list of the thirty
richest countries today would include them, plus Japan, Singapore,
and South Korea. The prosperity of these latter three is in turn part
of a broader pattern in which many East Asian nations, including
Taiwan and subsequently China, have experienced recent rapid
growth.
The bottom of the world income distribution paints as sharp and
as distinctive a picture as the top. If you instead make a list of the
poorest thirty countries in the world today, you will find almost all of
them in sub-Saharan Africa. They are joined by countries such as
Afghanistan, Haiti, and Nepal, which, though not in Africa, all share
something critical with African nations, as we’ll explain. If you went
back fifty years, the countries in the top and bottom thirty wouldn’t
be greatly different. Singapore and South Korea would not be among
the richest countries, and there would be several different countries

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