Vulture Institutions or Eagle Institutions…The choice is ours

I fear that what I consider a rather colorful title might need some explanation. By vulture institutions, I mean societal rules of the game that have been explicitly set up to favor a narrow elite at the expense of the rest of society, like vultures feeding on a carcass. Social scientists call them extractive institutions. In contrast, eagle institutions are those that give broad access to society’s opportunities; that explicitly set up policies to improve and harness human potential; that seek to create broad based wealth through innovation of the kind driven by science and technology, in short, institutions that make societies soar like eagles. These are formally referred to as pluralistic or inclusive institutions.

Unfortunately, for most of human history and in most parts of the world, extractive institutions have been the default. It should prove instructive to take a look at some examples from history. Our first example will be the Kingdom of Kongo from precolonial Africa.

The Kingdom of Kongo, despite having some really forward looking political traditions for its time that I briefly touched on in a previous post, was not an inclusive society. It had highly extractive political and economic institutions explicitly set up to serve the interests of the Kongo elite. As a result, there was widespread poverty in the Kongo as far back as the 16th century. Unfortunately, the extractive institutions of Kongo society were typical across precolonial Africa. The wealth of the Kongo elite was built on the business of the slave trade and predatory taxation and much of this wealth was used to import European luxury goods (some things never seem to change) and weapons to conduct slave raids. The taxation was so bad that ordinary citizens of the Kongo moved their villages as far away from the markets and roads as possible in order to escape the clutches of the elite and their propensity for plunder. They also did this to escape the slave traders working for the elite. I strongly feel the need to point out here that the governing elite couldn’t even secure the most fundamental of rights of the people, namely the security of person and property. Instead, they were actually the biggest violators of these rights. Such extractive institutions generally remained in place up until colonial times.

The next example we will look at will be that of ancient Rome. The Roman Republic (which later became the Roman Empire shortly before the birth of Jesus Christ) was founded around 510 BC. The republic cleverly designed institutions with many inclusive elements. The republic’s institutions had a system of checks and balances that reduced the ability of anyone person to concentrate power and that distributed power fairly widely. All was not well though, as the Republic had significant extractive components, the vastly unequal ownership of land being one a prominent one. Hence, the republic was inherently unstable. Citizens did not have equal rights and slaves had no rights at all.

Things took a decided turn for the worse, when Julius Caesar (I once came across an estimate of Julius Caesar’s net worth in today’s money, inflation adjusted. The figure was $4.9 trillion) overthrew the Roman Republic in 49 BC, Julius Caesar himself was murdered in the aftermath and after a series of rounds of infighting, one of his supporters named Octavian ultimately emerged victorious. Octavian would transform the Roman Republic into the Roman Empire. He would do away with all of the somewhat egalitarian features of the Republic and concentrate all power in himself. He would also adopt the title Augustus Caesar in 28 BC (He was Caesar at the time Jesus Christ was born). The Roman Empire would progressively decline in the following centuries, experiencing a civil war or coup almost every decade during its last 300 years (scary, I know), until around 500 AD, when the Western Roman Empire (The Eastern half had already been lost and was now referred to as Byzantium) was overrun by various foreign groups which had previously been Roman subjects most notably the Goths, Huns and the Vandals (The English word that is derived from the name of this group should give you an idea of what they were like), an event popularly referred to as “Barbarians at the gate”. Other notable former Roman subjects include the English and the Gauls (ancestors of modern France).

Yet another example would be the city-state of Venice (today a part of modern Italy). Roughly around the 10th century, it was arguably the richest place in the world, with the most advanced set of inclusive economic institutions underpinned by nascent political inclusiveness. Venice made its wealth from long distance trading as it was positioned advantageously between the Muslim and Christian worlds.

One of the key bases for the economic expansion of Venice was a series of contractual innovations making economic institutions much more inclusive. The most famous was the commenda, a crude form of joint-stock company, which formed only for the duration of a single trading mission (an innovation borrowed from the Islamic world). A commenda involved 2 partners, one who stayed at home and one who travelled. The sedentary partner put capital into the venture, while the travelling partner accompanied the cargo. The sedentary partner usually put in the lion’s share of the money. Young entrepreneurs who didn’t have wealth themselves could get into the trading business by travelling with the merchandise. It was a key channel of upward mobility.

This economic inclusiveness and the rise of new families through trade forced the political system to be more open. This would lead to further reforms like the creation of independent magistrates, courts, a court of appeals, and new private contract and bankruptcy laws. These new Venetian economic institutions allowed the creation of new legal business forms and new types of contracts. There was rapid financial innovation and we see the beginning of a modern banking system around this time in Venice.

Unfortunately, it would not last, there were always established elites who resented the rise of new elites because their trading activities ate into the profits of the established elites. This shows the dangers of an economic expansion program based solely on trade, and neglecting the harnessing of human creativity, aided by science and technology to create new products, new markets which ultimately create new streams of wealth. The established elites whenever they had the chance, would try to rewrite the rules of the game (i.e. replace inclusive with extractive institutions) in order to restrict access to economic opportunity. They would ultimately be successful. Among the many mechanisms the established elites used to restrict access was the banning of the commenda, which we saw was a key channel of upward mobility. All this would lead to Venice’s eventual and irreversible decline. Today Venice, once richer than the whole of France, is little more than a tourist attraction, where foreigners come to admire Venice’s illustrious past.

I had mentioned previously that extractive institutions were experienced all over Africa in precolonial times. Sadly, this would continue under the colonial masters, sometimes even more viciously. The Belgian Congo is a particularly extreme example. I had mentioned in a previous post that during the “Scramble for Africa”, the Kingdom of Kongo was divided amongst the French, the Belgians, and the Portuguese. The French got what is today the Republic of Congo (Congo Brazzaville) and parts of Gabon, the Belgians what is today, Democratic Republic of Congo (former Zaire), and the Portuguese, Angola.

The rainforests of the Congo were rich in wild rubber. Until the 1890s, rubber sap had little value. But the invention of the pneumatic tire, fitted first to bicycles and then to motor cars, and the increasing use of rubber for industrial products such as electrical wiring, hoses and tubing, led to soaring demand. At this point, I feel the need to reiterate a point I made in a previous article. These things that we somewhat misleadingly refer to as “natural resources” have little or no intrinsic value in themselves. They only become valuable to the degree that industry can find a use for them. What goes for rubber, also goes for oil. Oil had relatively little value until the invention of the Internal Combustion Engine (ICE) in the late 19th century, which serves as the engine for most vehicles on the road. This leads to the illusion that the African continent is overflowing with boundless wealth. The real wealth comes from the industrial process that converts the natural resources into manufactured goods. Yes, natural resources can bring some wealth, but all too often, it does so in the form of natural resource rents for an elite few, who control access to the resources. Even in the rare case of having an elite that deeply cares for the rest of the people (Yes, this is possible, even in Africa, Botswana is an example, more on that later), you can’t just say that you will divide the resource wealth equally among the people and hand it out in the form of cash transfers. That will only stoke up inflation, because handing out cash does NOT improve the productivity of the people, which is where true wealth comes from. What is supposed to be done is that to the extent that it can (natural resource wealth has limits), natural resource wealth should be invested in human capital, in the form of solid education systems (particularly in science and technology) and public services. These two more than anything increase the capacity of people to be productive citizens.

With this new found opportunity of wild rubber in the Belgian Congo, King Leopold II decided to exploit the opportunity to fullest before other plantations in Asia came on stream. What followed is arguably one of the most egregious examples of human exploitation and cruelty. The native indigenes of the Belgian Congo were given quotas for rubber which they had to meet or risking losing a hand, foot or even life. Many did lose all of the above for failing to meet up with their quotas. It was only tireless efforts a few Europeans to bring the scandal to light that eventually forced the hand of European governments to put an end to King Leopold’s scheme but not before Leopold had become one of Europe’s richest men from it and the Belgian Congo had lost about 10 million people, estimated to be roughly half of the population at the time.

Sadly, the exploitation of the Belgian Congo did not end with Leopold’s brutal colonial rule. The Belgian Congo would suffer another round of extreme exploitation after independence under Mobutu Sese Seko. By then it had renamed itself Zaire. That is the story of another post. In that post, we shall also take a look at the life of Seretse Khama, first Prime Minister of Botswana, a man as different from Mobutu as a man could possibly be. We will also look at how some western societies were able to build (not without effort and serious resistance, mind you) inclusive institutions.

BEFORE YOU GO: Please share this post with as many people as possible and check out my book Why Africa is not rich like America and Europe on Amazon.

Bibliography

Acemoglu, Daron et al. 2012 Why Nations Fail: The Origins of Power, Prosperity and Poverty. London: Profile Books Ltd

Meredith, Martin. 2014 The Fortunes of Africa: A 5,000-year History of Wealth, Greed and Endeavour. New York: Public Affairs

Koehler, Benedikt et al. Apr 2015 ‘An Introduction to the History of Capitalism 600–1900 AD’ Legatum Institute