. 4
( 21)


the reasonable possibility of higher levels of output and income per person without increases
in population or other resources. Output and income did not depend predominantly upon the
availability of resources with intensive production and industrial capitalism, as they had in
pre-capitalist forms of production, including feudalism. Now, the level of output depended
upon the efficiency with which available resources were used and upon the application of
technology to save on the use of such resources, so that more output and income could be
produced from what was available. In Figure 3.1, the trend line of income per person (Line
A) begins to rise after 1750 or so, when the capitalist system, with its factories and machines,
began to triumph in some Western European countries. Due to those nations where capitalism
did not become firmly planted, thus failing to displace traditional pre-capitalist methods of
production, as in most of the less-developed world, the trend line of world income per person
(Line B) does not show the sharp upward trend that characterized income growth in the
developed capitalist world along the path of Line A.1
It is important to keep in mind, then, that the possibility of sustained increases in income
per person, that is, in economic growth and development, is a relatively recent historical
phenomenon, dating back only some 270 years. Further, high levels of economic success
have been, to date at any rate, strongly associated with the spread of capitalist methods
of production and the displacement of pre-capitalist methods, in both agriculture and
industry. Why have such methods of production, and the ways of thinking and doing
that are associated with such production, developed so strongly in some regions of the
world “ the developed nations “ and apparently so weakly in others “ the less-developed

As noted in the last chapter, most of the less-developed nations today were colonies of one
or, sometimes, more than one powerful capitalist country during their history. The period of
imperial expansion after the “discovery” of the Americas by Columbus in the late fifteenth
century led to a scramble by the European powers for land around the globe. Parts of Asia,
Africa, and the Americas fell into the hands of incipient capitalist nations bent on winning
the competitive race by controlling as much of the world™s resources as possible. Not only
British colonies, on which, truly, “the sun never set,” but Dutch, French, Belgian, German,
Spanish, Portuguese, and Italian colonial possessions multiplied, sometimes changing
Development in historical perspective 77
hands, but always attained and held in the interests of what, charmingly if inaccurately, was
called the “mother country.” The good of the native peoples of the colonies was of little
concern to the colonizers, except in so far as they might best serve to the advantage of the
As a consequence, during the long epoch of European colonialism (until the 1930s),
little thought was given to the question of economic development per se in the colonies.
The colonizing powers repeatedly referred to their “civilizing” and often “Christianizing”
missions in the colonial regions. Political leaders in the colonies occasionally commented
upon their willingness to uplift natives through the introduction of Western education and
modern science. It was almost taken as a truism by the colonizing powers that their presence
in those “uncivilized” countries could not help but be beneficial to the natives, who so often
seemed to be ungrateful for the sacrifices made by the colonizers. The colonial powers even
defended european involvement in the nefarious slave trade on the grounds that slavery was
widespread in Africa anyway, that Africa not Europe had invented it, and that life on a West
Indian or Brazilian plantation often was preferable to death in an African tribal war or to a
lifetime of slavery in Africa.
Even Karl Marx seemed to believe that the processes which European colonialism
unleashed in the underdeveloped regions ultimately would be beneficial and were undoubt-
edly necessary if these regions were ever to make any substantial progress. For Marx, it was
both inevitable and desirable, as part of his stages view of human progress (see Chapter 4),
that pre-capitalist societies be swept away. The capitalism introduced by the colonial powers
had a destructive and regenerative function. Antiquated, backward cultures and patterns of
behavior in the colonies needed to be eliminated if development was to occur, and the intro-
duction of the capitalist, market society would lead to a higher standard of living and an
all-round better life for the natives. As difficult and brutal as the colonial process might be,
the inevitability of such progress was not called into question by Marx, as his writings on
British colonialism in India clearly demonstrated. Nor did there seem to be any doubt that
the destruction of the old societies brought on by colonialism, traumatic as that might be, was
desirable in the final calculation.
Unlike the early apologists for European colonialism, or those who emphasized the
destructive and regenerative nature of a process largely regarded as inevitable, many modern
development economists, particularly in the 1950s, were careful to emphasize that the devel-
opment process and development policy should be critically aware of the need to preserve
and constructively alter elements of the post-colonial societies which were, in the view
of the particular less-developed country, worthy of retention. Many Westerners, including
perhaps surprisingly Marx, might have found this perspective incomprehensible. Yet in the
areas of art, literature, handicrafts, music and dance, herbal medicine, the nurturing of chil-
dren, cuisine, and attitudes toward mutual support among the family, the so-called backward
cultures may be imbued with valuable social institutions worthy of preserving and adapting
within more modern social and productive societies.
As developing societies evolve, a fusion of old but still functional societal elements
with new forces and processes should be the goal; development does not have to mean the
complete destruction of what makes any people and culture special and unique. In Latin
America, the contradictions of pursuing modern development are sometimes summarized
as follows: “Americans know how to work, and Latin Americans know how to play.” The
limits of a one-dimensional society are well-drawn in this saying. There are positive lessons
that less-developed societies can learn from the already developed nations, but the obverse
also is true.
78 The Process of Economic Development
The lasting effects of colonialism and path dependency
To some observers, the era of colonialism might seem, on first glance, to be merely a subject
of historical import, devoid of any apparent immediacy as regards the problems of develop-
ment in the less-developed nations today.3 Colonialism, however, entailed more than the
plundering of a militarily and economically weaker culture by a more powerful nation. Colo-
nialism often resulted in severe demographic crises. This was particularly the case with the
Spanish in Mexico and Peru, and with the British, Dutch, French, Portuguese, and Spanish
in Africa.4 Although demographers and anthropologists dispute the magnitude of the demo-
graphic crisis in Latin America between 1540 and 1640, there is no question that the indig-
enous population was drastically reduced in a labor draft system which sent millions into the
gold and silver mines to finance Spain™s Siglo de Oro. Spain™s forced labor system disrupted
traditional Indian village systems of production, sent men and boys into the mines to toil
without pay and then die, and left women and children to plant and harvest crops which had
to support the males working in the mines.
In his fascinating account of the history of Spain in the New World, Eduardo Galeano
(1973: 50) refers to research that suggests that Latin America™s population declined from
an estimated 70“90 million in 1540 to 3.5 million by 1690. Others question these figures,
placing the original indigenous population figure at a lower level. But whatever the numbers,
the sheer loss of life, whether from overwork, disease, or from struggle against better-armed
adversaries, is stupefying. What consequences did this demographic crisis impose upon the
Indians? To what degree was their culture decimated? What were the lasting effects upon the
indigenous people who survived? How did these terrible events shape social attitudes in the
region toward change in future generations? (See Focus 3.1.)
In Africa, a demographic crisis of similar proportions was spread over a period of nearly
400 years. The slave trade furnished one part of the colonial world with labor to fill the
vast lands acquired by the colonial powers, at the cost of depopulating Africa. Between
1600 and 1900, approximately 12 million Africans were sold into slavery and brought to
the Western hemisphere, with an additional 36 million dying as a result of constant warfare
throughout Africa, or on the long march to the coast, or in the slave pens awaiting shipment
across the Atlantic (Stavrianos 1981: 109). From 1650 to 1850, Africa™s share of world
population fell from 18 per cent to 8 per cent, as a result, at least partly, of the effects of
the slave trade.
The slave trade had other effects that illustrate the lasting impact of colonialism: a new
economic role for African chieftains was created, that of facilitator and regional beneficiary
of the slave trade. Authoritarianism was strengthened and resistance to the status quo made
more difficult by the new gains to be made from warfare on neighboring tribes. Furthermore,
the constant wars encouraged by the slave traders, but perpetrated by the tribal chiefs in order
to realize the potential gains of selling conquered tribes into slavery, tended to impede the
emergence of inter-regional trade patterns, while at the same time it encouraged the importa-
tion of european manufactured products. Thus to the effects of depopulation through slavery,
one should add the partial destruction of native manufactures and the hardening of authori-
tarian rule in Africa brought on by colonialism. Vertical trading patterns between Africa
and Europe were often substituted for horizontal trade patterns across Africa, which could
have contributed to the more robust development of linkages between the local economies.
Such trade patterns might have acted as a check on tensions between tribes and regions in
Africa which would have depended more on one another rather than on trade relations with
Development in historical perspective 79

The term “path dependence” has been used to describe the important role which histor-
ical events and historically formed institutions have in determining the future range of
possibilities for a nation. Once institutions have been formed, they tend to lock-in a certain
evolutionary path for the nation.
If the previously formed institutions are socially constructive, then the evolutionary path
of the economy can be virtuous; the process of cumulative causation leads to an upward
spiral of social progress. But if the institutional basis of a society has been formed through
a long process whereby inhibiting institutions and social practices have become deeply
entrenched, then it is more likely that the future evolutionary path will be one of vicious
circles of cumulative causation leading to low levels of income and achievement.
Institutions may come into existence because they are desirable and superior to what
has gone before. But retarding institutions may be imposed, if they serve the interests
of powerful groups or nations. Even historians who are hesitant to fault colonial policies,
such as David Fieldhouse, acknowledge that under colonialism only the ability to produce
and export agricultural products or raw materials, such as minerals and forestry products,
mattered. Colonial industry was ignored, as was any supporting matrix for industry, such
as education, a financial system, or technical training.
With rare exceptions,

colonial states constituted an arbitrary break in the historical process, sometimes
splitting regions with some natural connection, elsewhere bringing together socie-
ties which had no capacity to co-operate; and in either case doing so at a speed
that made it impossible for forces to operate satisfactorily. In this respect colonialism
bequeathed an impossible heritage to the rulers of the new states.

History matters, then, according to path dependence theory. And, in the case of the
underdeveloped nations, once free of colonialism, the weight of history continued to play
a role in shaping the path of economic and social change of the future. This is not to argue
that nations, once burdened by inhibiting institutions, are condemned mechanistically to
repeat the processes and behavioral patterns established in the past. Rather, it is to argue
that the past must be carefully understood, including the colonial past, in order to compre-
hend the nature of the challenges and limits which developing societies now confront.
Path dependency helps us to understand why and where countries are today in their
process of evolution. The concept is also helpful in beginning to grasp what is required to
alter adverse path dependency by decisions that can lead to a higher level of growth and
development in the future.
Sources: Fieldhouse 1981: 15, 68; Acemoglu 2003; Acemoglu, Johnson, and
Robinson 2001

Forms of European colonialism

Spain: a case of absolute depredation
The earliest colonial empires, those of Spain and Portugal, while imposing devastating social
and economic changes on the colonial regions, were, ironically, of no lasting benefit to the
imperial powers either. As gold and, later, silver poured into Seville for roughly 200 years
after 1500, Spain™s quasi-feudal economy became steadily less cohesive. As these precious
metals circulated as money, the rapid inflow of gold and silver resulted in severe inflation
which undermined domestic Spanish industry, handicrafts, and agriculture. Conspicuous
80 The Process of Economic Development
consumption among the Spanish elite, however, was enabled to reach new heights as a
result of the flow of wealth emanating from the overseas colonies. Unproductive invest-
ments in government buildings and private villas and castles soared, and cheaper luxury
goods and manufactures were increasingly imported from Holland and england rather than
being produced in Spain. The tremendous economic surplus transferred from the mines of
Mexico and Peru led to virtually no expansion of the productive capacities of Spain; techno-
logical development was restricted to addressing the most immediate necessities in mining
and shipping, labor skills were not enhanced, corruption was not addressed, and authoritarian
management techniques were never questioned.
A popular saying well described the economic process which vitiated both Latin American
and Spanish progress: “Spain held the cow, and the Dutch milked it.” The “cow” was Latin
America, and its wealth of gold and silver passed quickly to Holland and England from
Spain to pay for the goods the Spanish elite coveted. But, when the last of the mining
booms was exhausted in the 1700s, Spain™s economy imploded, as did the economies of
Mexico and Peru, now saddled with the backward institutions which Spain had imposed.
However, the other economies of europe, which had been providing the manufactured
goods which the Spanish devoured, flush with plundered wealth, could only get gold
and silver by producing things Spain wished to buy, so their economies flourished and
continued to do so. Ironically, then, the wealth of Spain, based on colonial plunder, was
illusory; the real “wealth” was that created by production, and that wealth was being built
in the emerging and expanding factory system in an increasingly capitalist europe which
traded with Spain.

Merchant capital: from old colonialism to new colonialism
Spain™s economy in the sixteenth century had been dominated by semi-feudal interests,
hence the emphasis on war, plunder, slavery, and short-term gain. Because there was as yet
no capitalist logic of maximum profit at work, Spanish policies in the Western hemisphere
epitomized the old colonial system. While Spain and its colonies sunk into a morass of back-
wardness, European colonial policy continued to evolve. As new powers were drawn to colo-
nial adventures, a complex half-way transition between feudalism and capitalism emerged.
This transitionary period in europe is sometimes known as the era of merchant capitalism,
which gave rise to the new colonial system.5
The Dutch system, in particular, exhibited the characteristics of merchant capitalism,
beginning roughly in the mid-seventeenth century and spreading rapidly in the early eight-
eenth century. The Dutch established the first sugar plantation systems in Latin America and
later in the East Indies. The plantation system sought to maximize agricultural yields from
a given amount of land, using slave labor, and the goal of production was clearly profit. The
earliest plantation systems, prior to 1750, intentionally set such a demanding pace of work
for the slaves that they survived, on average, perhaps no more than ten to fifteen years. (At
that time, African slaves were cheap and readily available, since the drain on Africa™s popu-
lation was small relative to the late eighteenth and nineteenth centuries.) Thus the Dutch
plantation system combined capitalist-type behavior, such as expanded production, as repre-
sented by the maintenance of a fixed investment in plantation lands, and the profit motive,
with quasi-feudal attitudes toward labor.
The Dutch, and others who followed the Dutch plantation model, were quick to respond
when slave prices soared in the mid-eighteenth century.6 Labor conditions improved, the
pace of work was made less arduous, and slaves lived longer. While the colonial powers
Development in historical perspective 81
under the sway of merchant capitalism took into account the necessity of maintaining the
productive capacity of their colonial systems, the primary emphasis of merchant capitalism
was on the short-term gains of trade and finance. The ethos of merchant capital was, above
all, that of speculative gains. Adjustments toward economic rationality, including the intro-
duction of technical change, were intermittent and limited to attempting to maintain the
basis of social wealth for the colonizer. Extensive investments and training of workers were
out of the question, as these would have absorbed current returns. The colonies were to
be plundered at the lowest cost possible; they were not places in which to invest for the

British rule in India: the transition from merchant capital to
industrial capital
Spain™s and Holland™s colonial legacy can be contrasted with that of the British in India.
Britain, like many other powers, had gained access to coastal trading cities in India prior
to the eighteenth century. In 1757 the British won a determinate military victory in India.
In 1763, as a result of major military victories over France, Britain began to expand its
sphere of control in India, eventually dominating much of the subcontinent in the course of
the nineteenth century. When formal colonial status descended on India in the nineteenth
century the British sought to “rationalize” the system of production by eliminating complex
customary concepts of landed property that commonly allowed for overlapping claims
(Kaiwar 1994). Instead, the British sought the one-owner rule, even over water that had
been used collectively for millennia. Small peasant farmers were often those who held the
new land titles, and they, in turn were the main target of Britain™s land revenue tax. Over
the course of Britain™s rule from 1757 to 1947 per capita income likely never grew, and
life expectancy declined. During the last half of the nineteenth century per capita income
may have fallen by 50 percent (Hyndman 1919: 22). In addition, calculations of per capita
income do not capture many forms of depredation, such as the British tax system that raised
funds to support the British military and police (25 percent of India™s public expenditures)
that maintained Britain™s rule and to finance international expeditionary forces (Hobson
1993: 480). Famously, the British restructured agriculture, forcing specialization in indigo
(synthetic dyes eventually destroyed this crop), cotton “ which could be used as inputs into
the British textile industry “ and wheat to keep workers™ wages down in England. (Opium
poppies were another specialization, bought by the colonial government and then profitably
shipped to China.) British rule imposed heavy taxes on agriculture that led to small farmers
abandoning subsistence agriculture such as rice cultivation for indigo, or to take up cotton
and grain cash-crop cultivation in order to gain income for tax payments. This system, plus
the functioning of market forces in grain production, resulted in sizeable grain exports from
India to europe, even during the several devastating famines that swept India in the latter
half of the nineteenth century (Davis 2001: 311“40). The opening of the Suez canal in 1869
was a watershed event as it drove down the transport costs of India™s exports, making them
much more profitable for British merchants and financers. Thus the wheat boom began “ the
value of annual average wheat exports from the Central Provinces (today roughly the large
state of Madhya Pradesh) increased by 500 percent from the 1871“6 period to the peak years
1886“91, while for India as a whole the volume of grain exports went up over 300 percent
from 1875 to 1900 (Davis 2001: 299).
Specialization meant the near-absence of crop rotation, which, combined with over-
expansion into marginal lands, set the stage for erosion, soil depletion, and eventual
82 The Process of Economic Development
collapsing yields. Meanwhile the British privatized the common lands of the villages
to expand their tax base. No improvements of significance in techniques of agricultural
production occurred; necessary investments were never made either by British or Indian
merchant capital or the British colonial state “ which spent less than 2 percent of its budget
on agriculture and education (Stein 1998: 263). As is common in commodity booms, over-
production occurred in India (in the northern state of Punjab cultivators had access to
canals), and Argentina began to push massive amounts of wheat onto the world market
in the 1890s, causing prices to collapse. But the peasants still had to pay “average” taxes
based upon high yield years, and interest payments to moneylenders. This tax system had
several variants, such as that of south-western India, where the British forced payments
under extreme conditions:

In the late nineteenth-century Bombay Deccan ¦ the annual process of revenue collec-
tion began with the impounding of grain in village stockyards. In order to eat from their
own harvest, the [peasants] had to immediately borrow money to pay off the taxes.
Typically the moneylenders bought the crop at half the current market value but lent
money at a usurious 38 percent interest. If the peasant was unable to promptly repay the
principle, the exorbitant rates ballooned to astronomical dimensions.
When [peasants] balked at payment, Indian courts applied English civil law with the
deadly efficiency of a Maxim gun.
(Davis 2001: 325)

When, in the 1890s, the monsoon rains disappeared, wheat exports from the mostly
un-irrigated Central Provinces continued at slightly above levels achieved at the opening of
the Suez canal. But the fact that they continued was remarkable as famine spread across west
and central India (an area of 420,000 square miles) and yields fell in broad areas by 66 to 88
percent. There was practically no public agency to distribute food to the starving because the
British laissez-faire colonial state largely refused such a role (Davis 2001: 141“75). Britain
had built a “Famine Fund” but much of it had been drained off to fight an expeditionary war
in Afghanistan. The famines allowed Indian moneylenders and grain merchants to acquire
vast tracts of peasant lands. A new parasitic stratum of Indian absentee landlords arose from
the process of opening up the interior of India to the British market in commodities, and the
rapidly expanding colonial rail system served as the wedge in the process. Indeed, in the
process of building some 9,000 miles of state-owned railroads the British began to deplete
the supply of lumber (used for ties and fuel). This resulted in the colonial state in the 1870s
taking over all forest areas that heretofore had been vital “commons” areas for the peasantry,
providing lumber (for carts and ploughs), fuel, medicinal plants, and many other necessi-
ties. As British rule proceeded, the social structure was transformed, and everywhere the
peasantry was squeezed. Although British rule in India was without doubt harsh, the extent
of British transgression in India never reached the depths attained by the Spanish in Latin
British policy toward India changed during the course of the late eighteenth and early
nineteenth centuries, as merchant capital and mercantilist ideas steadily lost ground to
industrial capital and capitalist views within Britain, with the triumph of the Industrial
Revolution and the steady rise of the factory system. Yet the process of pushing aside
merchant capital and mercantilist policies was exceedingly complex. even in the nine-
teenth century, British policy toward India clearly failed to conform to the axioms of
free trade championed by the industrial capitalists and classical economists in Britain
Development in historical perspective 83
of the period. The precepts which underlay merchant capitalism, beliefs that basically
assumed that the wealth of a nation depended upon its control over trade, were radically
different from those of the classical economists like Adam Smith and David Ricardo (see
Chapter 4).
Merchant capital, by contrast, emphasized the relative terms under which exchange
took place. Controlling trade and controlling wages either through slavery or by decree
meant that the relative terms of exchange would be extremely advantageous to Dutch and
British merchants, and thus, it was assumed, the economic wealth and power of these
nations would be augmented. By way of contrast, classical economists analyzed trade
relationships upon the premise that each participant in a market, both buyer and seller,
had sufficient resources to withdraw from the market if the price was not to their liking.
Slaves, uprooted natives, and colonial regions, by contrast, had no ability to withdraw
from the colonial system, and merchant capitalists were not to be swayed by the logic of
the classical economists (see Focus 3.2). To understand the developmental consequences
of the rise to cash-crop cultivation in India in the late nineteenth century, for example, a
volatile mixture of factors, rarely if ever carefully examined by the classical economists,
needs to be considered:

the forcible incorporation of smallholder production into commodity and financial
circuits controlled from overseas tended to undermine traditional food security. Recent
scholarship confirms that it was subsistence adversity (high taxes, chronic indebtedness,
inadequate acreage, loss of subsidiary employment opportunities, enclosures of common
resources, dissolution of patrimonial obligations, and so on) not entrepreneurial oppor-
tunity, that typically promoted the turn to cash-crop cultivation. Rural capital, in turn,
tended to be parasitic rather than productivist as rich landowners redeployed fortunes that
they built during the export booms into usury, [exorbitant rents] and crop brokerage. ¦
Whether farmers were directly engaged by foreign capital ¦ or were simply producing
for the domestic market subject to international competition ¦ commercialization went
hand in hand with pauperization without any silver lining of technical change or agrarian
(Davis 2001: 289“90)

Britain developed a colonial system which combined elements of merchant and indus-
trial capitalism. For some twentieth-century observers, such as the Austrian economist
Joseph Schumpeter, this blending of the precepts of merchant capital and industrial
capital in the British colonies was a glaring contradiction, an anomaly which could only
be explained as a throwback to an earlier pre-capitalist era (Schumpeter 1951). The
American economist Thorstein Veblen, by contrast, maintained that whatever the stage
of capitalist development, residual elements of earlier economic eras tended to maintain
a foothold, both physically and ideologically, and “recrudescences” were likely to arise,
particularly during periods of prolonged economic stagnation or cyclical downturn (Hunt
1979: Chapter 13).
Politically, the planters of the West Indies and the merchants operating in India were
able to exercise a quotient of power, even when the industrial capitalists and their ideology
dominated British policy-making. Merchant capital was able to maintain a certain limited
autonomy regarding policy within the colonial system; policies that might have been increas-
ingly anachronistic in Britian continued to coexist in the colonies, which lived a divided and
incomplete existence, pulled in different and contradictory directions.
84 The Process of Economic Development

Sometimes the following question is posed by those skeptical of the force of colonial rule:
If colonialism imposed such a burden, why did some nations seem to shrug off the legacy
of colonialism, while others languished after independence? A comparison of the United
States and Mexico may help to answer this question.
Just prior to independence, the estimated net burden of colonial rule in the thirteen
colonies of North America came to 0.3 percent of their national income. In contrast, the
estimated annual burden of Spanish colonialism, measured in terms of the taxes paid to
Madrid and the cost of being prevented from trading freely with other nations, has been
estimated to be 7.2 percent of annual income during the last twenty-four years of Spanish
rule over Mexico. Thus, in this method of measuring the net drain imposed by colonialism,
the relative burden of Spanish rule was twenty-five times greater than that of British rule!
In 1800, Mexico™s per capita income was 44 percent of that of the United States. By
1910, the gap had widened; Mexico™s per capita income was a mere 13 percent of that of
the US! Why did the gap widen so rapidly? John Coatsworth™s comparative research points
to two factors: first, the United States had a relatively good river system which allowed
bulky goods to be transported cheaply. A similar transport system in Mexico would have
reduced the difference between each nation™s growth rate by about one-third.
The remaining differential Coatsworth attributes to Spanish feudalism. In theory, inde-
pendence in Mexico in 1821 could have begun to dissolve the rigid institutions of Spanish
rule. In fact, internal and international social and political conflicts left Mexico exhausted
and directionless for more than fifty years. Reform of the colonial fiscal system was only
completed in the 1890s, while new legislation regarding commerce, mining, foreign trade,
and banking came into existence in the 1884“1908 period. These long-awaited reforms,
unfortunately, largely served to facilitate an expansion of foreign ownership and control
over the Mexican economy, rather than contributing to local development.
In the US, the institutions of British rule were only rarely feudal, such as the acceptance
of slavery, the slave trade, and the plantation system. A costly civil war, which also stimu-
lated industrialization in the North, had to be fought to rid the United States of its colonial
legacy, and its neocolonial links with Great Britain.
Spanish colonialism of an essentially feudal nature thus lasted longer, penetrated deeper
into the behavioral dynamics of Mexican society, and was more difficult to eradicate than
British rule in the North American colonies. Elsewhere in the British Empire, however,
the systematic colonialism of white-settler rule championed by John Stuart Mill was
replaced by a more retarding blend of British institutions, such as the plantation economy
of Jamaica. There and in India and other colonies under the Union Jack, the burden of
British control was much heavier than in North America.
Sources: Coatsworth 1978: 84; Thomas 1965

The functional role of colonialism
Merchant capital and industrial capital are indeed distinct forms. Yet, in the colonial system
they could be complementary. In analyzing the history of the less-developed regions, it is
important to understand that they played a notable, if sometimes overlooked, role in contrib-
uting to the British Industrial Revolution. For example, recent estimates place the mass of
profits deriving from the British slave trade in the eighteenth century at £50 million. Profits
from the British West Indian sugar plantations were between £200 and £300 million in the
same period (Crow and Thorpe 1988: 16). Between 1757 and 1812, the inflow of profits
from India was estimated at between £500 million and £1 billion (Digby 1969: 33). Digby™s
Development in historical perspective 85
estimate, originally published in 1901, has been viewed as an exaggeration by some, but a
more recent analysis estimated that the British imposed a drain on India equivalent to 5“6
percent of GNP during the period (Bagchi 1984: 81; see Focus 3.3).
While these capital flows from the colonies were exceedingly large, the fortunes acquired
in the British colonies were often squandered in conspicuous consumption in England. None-
theless, there can be no doubt that a portion of these funds entered the British banking system,
thereby adding to liquidity, driving down interest rates, and releasing a flow of investment
funds which could be tapped by the early British industrialists for their industrialization

The Dutch ruled Indonesia for more than 300 years, beginning in the early 1600s, making
substantial investments over this period. But Angus Maddison™s research reveals that
though “there had been a consistent and substantial trade surplus for 300 years, it is clear
there was never any net transfer of funds from the metropole and that foreign claims on
Indonesia arose from reinvested earnings of the colonists.”
How does a colonizing nation assure a net outward transfer? In the 1700s, coffee was
a major export crop. The Dutch guaranteed a net drain of income from their colony by
forcing delivery of coffee from native cultivators and then “paying” the cultivators for only
a fraction of the total. One practice was to receive delivery of 240 lb of coffee but pay the
cultivator for only 14 lb. The remainder the Dutch simply appropriated!
How much income did the Dutch drain off from Indonesia in a given year? Maddison
calculated that the drain amounted to 15.6 percent of the net domestic product of Indonesia
in 1930. That is, 15.6 percent of Indonesia™s net output went to either Dutch corporations,
Dutch nationals living in Indonesia, or to the Dutch government. In all, he estimates that
the total income of the Dutch increased by 12.8 percent as a result of their ability to control
Indonesia. What would have happened if Indonesia could have used much of the 15.6
percent of net income to increase its own productive base? Clearly, a drain of this magnitude
would be sufficient to undermine the development prospects of any nation.
For comparison, Maddison calculated the drain from India to the British in 1931. India
lost approximately 5 percent of its net income, while British incomes were increased by 3.3
percent. At this time, India was the “Jewel in the Crown” of the British empire, but Britain
was also in a position to drain colonial income from roughly 50 smaller colonies in 1931.
Had the Dutch in Indonesia, or the British in India, invested heavily in infrastructure,
technology, and labor-training, and struggled to improve the social and economic organi-
zation of their colonies, this drain might not have been of fundamental, determining
importance. This is so because the drain would have constituted a less significant net
flow from an ever-expanding productive base. The expansion of the productive base
would have benefited the colonial region after independence and might have altered the
nature of path dependency.
But the evidence in the case of Indonesia, India, and many other colonies indicates that
the colonial rulers, except in the rarest of instances, never made sufficient investments in
infrastructure, industrial production, technologically sophisticated agriculture, or in any
of the other areas which would have served to expand the productive base sufficiently to
more than offset the drain resulting from colonial control.
The colonial drain constituted lost income, caused by the institutions of colonialism.
It quantified a national humiliation of major proportions, arising, in many instances, from
land which had been appropriated and/or monopoly incomes attributable solely to the
power of colonial domination.
Sources: Furnivall 1967: 40; Maddison 1990: 360, 364, 369
86 The Process of Economic Development
projects. Colonialism also added to aggregate demand, without driving up British wage
rates. An external market for ships and for traded goods in Africa, such as woolens, guns,
iron and steel products, and a market for sugar refining equipment in the West Indies further
stimulated British investments, production, and employment. Such a chain of events had not
occurred in Spain in the sixteenth century, because Spain had lacked an industrial base and
industrialists, both destroyed by raging price inflation with the massive inflows of gold and
silver from the colonies; Spain also lacked a sophisticated banking system which might have
functioned as an efficient intermediary between savers and investors.

The colonial elite: the enduring significance of collaboration
At the same time that merchant capital and industrial capital were establishing a basis for
complementary interaction in Britain, and to a lesser degree in Holland, merchant capi-
talism was consolidating its hold over the indigenous elite in the colonies which served as
the medium of colonial dominion. Colonial rule was based upon a system of collaboration
between the indigenous elite and the colonial power, as the case of India illustrates.

British rule consolidated itself by creating new classes and vested interests who were
tied up with that rule and whose privileges depended on its continuance. There were
the landowners and the princes, and there were a large number of subordinate members
of the services in various departments of the government, from the patwari, the village
headman, upward. ¦ To all these methods must be added the deliberate policy, pursued
throughout the period of British rule, of creating divisions among Indians, of encour-
aging one group at the cost of the other.
(Nehru 1960: 304)

Ronald Robinson sketched the pivotal role also played by the indigenous elite in Africa
and Asia in the nineteenth century:

Although potentially the power was there in Europe, in reality only a tiny fraction of
it was ever committed to Africa or Asia. Europe™s policy normally was that if empire
could not be had on the cheap, it was not worth having at all. The financial sinew, the
military and administrative muscle of imperialism was drawn through the mediation of
indigenous elite from the invaded countries themselves.
Its central mechanism, therefore, may be found in the systems of this collaboration set
up in the pre-industrial societies, which succeeded (or failed) in meshing the incoming
process of european expansion into indigenous social politics and in achieving some
kind of evolving equilibrium between the two.
(Robinson 1976: 131)

It is important to note that this process of elite formation was conditioned by the behav-
ioral parameters and norms of merchant capital rather than industrial capital. Speculative
behavior, monopoly practices, favoritism, and patronage in employment, corruption within
government, intermittent changes in technology, the absence of labor rights and labor
norms, authoritarian governments, and profits based upon cunning trading of commodities
and usurious banking practices, were all constituent elements of merchant capitalism. All
were transplanted to the colonial regions where they thrived, grew, and became entrenched,
even as they were being surmounted in europe by emerging capitalist methods. The new
Development in historical perspective 87
collaborative elite in the colonies became consummate masters of the artifices of merchant
capital at the same time that their colonial masters were abandoning such systems at

De-industrialization in the colonies
Once this new indigenous elite was consolidated and corrupted by colonial rule, there
were few social forces which could emerge within the social formation of the less-de-
veloped regions to challenge the sway of merchant capital and mercantilist ideas. Two
case-studies illustrate this point. In the late eighteenth century, Britain accelerated its
expansion in India, which then had a thriving textile industry that had for centuries sold
high-quality cotton products throughout India, in much of Africa, and in the Middle East.
Large factory towns existed where skilled laborers were able to produce cloth so cheaply
that the British east India Company could buy from native industrialists, ship the product
to England, and still sell their cargoes at a full 100 percent mark-up over cost. Thus,
Indian manufacturing early on had the capability of successfully challenging the leading
sector of the British economy at the very moment when the British “take-off” into indus-
trialization was under way.
The British reacted to this potential challenge both economically and politically. The two
reactions combined illustrate the political economy of British policy at a pivotal moment in
both British and Indian history. On the purely economic terrain, British textile industrialists
reacted to the challenge of Indian manufactures by increasing their investments in produc-
tive equipment, by raising the amount of capital that each worker utilized and by increasing
the complexity and productivity of the production process by using ever-more mechanized
forms of production. These changes helped to drive down their unit costs of production,
making them more competitive with Indian producers.
At the political level, British textile industrialists demanded and received protection from
imported Indian textiles. By 1814, textile interests in Britain had placed a tariff of 70 to 80
percent on all imported Indian textiles, thereby pricing them out of the British market. At the
same time, they forced open the Indian market to British-made textile exports. On the other
hand, Britain accepted the import of raw cotton from India to be used in British production,
without any tariffs being applied. The east India Company and British merchants in India
then switched from textile exporting to the exporting of raw cotton to Britain. As a conse-
quence, the Indian textile industry, which had exported to england in large part so that the
British could re-export their products to the world market, lost one of its largest markets, and
began to deteriorate.
At the same time, cheaper made machino-factured textiles from Britain were pouring
into India, underselling the higher-cost manu-factured textiles of India. By the mid-nine-
teenth century, India™s industrial base in textiles had been decimated, and India had been
de-industrialized as a result of British policy. India no longer produced its own textiles,
but now exported raw cotton to Britain only to import British-made cotton textiles, which
soared from 1 million yards in 1814 to 53 million yards in 1844 (Stavrianos 1981: 247).
As a result, the number of Indian textile workers (spinners and weavers) fell from an esti-
mated 6.3 million to only 2.4 million between 1800 and 1913. While the spinners declined
the handloom weavers sought to remain competitive through a precipitous drop in their
wages. They “survived” by executing their own ruin, while their pauperization deprived the
internal market of much-needed purchasing power, driving down further the Indian economy
(Amsden 2001: 34, 37, 50).
88 The Process of Economic Development
India ceased to be a leading manufacturing country of the precapitalist era and was
reduced to the position of a supplier of agricultural goods and raw materials to the indus-
trializing economies of the West, particularly Britain.
The long process of deindustrialization of India started with the catastrophic disap-
pearance of cotton manufactures from the list of exports of India ¦ For more than
seventy-five years up to 1913, India remained the major importer of cotton goods from
Britain, often taking more than forty percent of the British exports. ¦ Other rural or
urban manufactures were ruined partly by the rise of alternative sources of supply and
by government restrictions.
(Bagchi 1984: 82)7

Britain™s anti-industrialization policies toward India changed after 1930, when passive
support for industrialization began as part of a larger effort to forestall rising nation-
alist opposition to colonial domination. But upon independence in 1947 manufacturing
accounted for only 7 percent of the national product and a mere 2 percent of the labor force
were employed in factories (Kohli 2004: 248, 251). The First and Second World Wars
allowed for some resurfacing of the textile industry, the jute export industry expanded,
a steel industry began in 1907, and several other industrial areas responded to the rise in
the import tariff from 5 percent in 1900 to 25 percent in 1930. The tariff was seen as a
way of keeping Japanese and German manufactures out of India and as a means of raising
revenues for the colonial state. While all this led to the creation of a new stratum of Indian
industrialist the economy at large continued to languish, with per capita income falling
from 1900 to 1947.
A somewhat similar situation occurred in Egypt between 1820 and 1840 under the leader-
ship of Muhammed Ali. Ali sought to develop Egypt through industrialization. He borrowed
extensively, developed a new strain of cotton called egyptian long-staple, and advanced
seeds to peasants to encourage cotton cultivation. Ali then constructed a series of textile
factories and attempted to export high-quality textiles to the world market. The British, while
championing modernization in the pre-capitalist regions, and officially wedded to a free-
trade ideology, were appalled by this emerging challenge to their dominance in the global
textile market.
Ali had other major enemies beside the British; his civil service worked against his
dreams of a powerful and modern egypt by appropriating whatever they could of an
increasing national income through corruption and other means of skimming income.
Meanwhile, Ali™s plans to “hothouse” industrialization compelled the artisan class into
the new factories, where hours were long and extremely onerous working conditions led
to theft, sabotage, and low morale. Peasants were forced to sell cotton to the government
purchasing monopoly at a very low price, while Ali™s state-owned factories sought the
highest price on world markets for their excellent manufactured products. Internal forces
of opposition and resistance certainly hindered the potential of Ali™s experiment, but Ali
also was undone when the British encouraged the Turks to make war on egypt. The Turks
were defeated, so the British intervened, and Ali was forced to grant free-trade access to
British products, foreigners were granted free access to land, and egypt became a typical
raw material exporter rather than an industrial country, at least partly as a consequence of
British opposition.

Under the protection of the capitulatory treaties [of the war with Turkey and Britain]
european speculators and adventurers were free to operate in egypt outside the
Development in historical perspective 89
jurisdiction of the native courts and subject only to consular control. Many grew rich by
smuggling opium and tobacco and invariably were protected by the foreign consuls. ¦
These foreigners, who were completely exempt from taxation, also served as agents in
arranging for loans and contracts on extortionist terms. In 1873, for example, the [Egyp-
tian Government] accepted a loan at face value of £32 million, but after heavy commis-
sions and discounts received only £9 million.
(Stavrianos 1981: 221)

Colonial industrialization?
Why not manufacture textiles in India or refine minerals and petroleum products in the less-
developed nations where they originate? In analyzing international trade and production
patterns, it is important to recognize that the colonial powers encouraged the production
of tropical products, and often contributed to increases in the efficiency of the processes
of production in these goods. At the same time, they also actively discouraged the produc-
tion of those goods in the colonies which might have competed with their own exports.
This created patterns of distorted development, serving to internally disarticulate the less-
developed economies, while contributing to the internal articulation and further develop-
ment of the colonial power. Neighboring nations, if they were dominated by different
colonial powers, were deprived of whatever natural complementarities existed between
them, as regional trade patterns were prevented from emerging. The colonies themselves
had infrastructural systems which primarily served the interests of the colonial power (see
Focus 3.4). Often major cities and regions within the colonies were not well connected
with one another, and what infrastructure there was had been designed to facilitate the move-
ment of tropical commodities to the coast and onward to europe to be consumed. In the
course of the nineteenth century, an increasing number of colonies became mono-exporters,
or exported, at best, a very limited range of primary products, such as agricultural goods and
raw, unprocessed minerals, because that is what the colonial powers wanted, not because that
was the optimal productive structure.
The process of internal disarticulation in the colonies could often be found in the disparate
tendencies of peasant agriculture and export agriculture, the latter carefully stimulated by
colonial policies. In India, commercial export agriculture benefited via improved organiza-
tion, mechanization, enhanced infrastructure, bank credits, and ready access to the sophis-
ticated talents of primarily British exporters. Peasant agriculture, by contrast, languished.
Peasants were shunted off to poorer lands, where cultivation practices deteriorated, and
where labor-intensive methods were unable to compensate for lower-quality land and the
lack of financing and knowledge needed to increase worker productivity on the land. Table
3.1 records the divergent tendencies of agricultural production under colonial rule in India,
reflecting the neglect of indigenous small producers and the benefits extended to exporters.

Table 3.1 Peasant versus commercial export agriculture in India, 1891“1941 (annual average
Peasant agriculture (food grains) % Commercial export agriculture (cash crops) %

Output ’0.11 +0.67
’0.18 +0.86

Source: Fieldhouse 1981: 89.
90 The Process of Economic Development

Huge outlays, often supported with forced labor, were necessary to build an infrastructure
of highways, irrigation and flood control systems, communication systems and railways in
the colonies. But, as can be readily illustrated in Africa, this infrastructure lacked a devel-
opmental rationality for colonies. The purpose of colonial infrastructure was to facilitate
the movement of tropical products and minerals from the colony to the ports and then on
to Europe.

[The railways] were not laid down to facilitate the internal trade in African commodi-
ties. There were no roads connecting different colonies and different parts of the
same colony in a manner that made sense with regard to Africa™s needs and develop-
ment. All roads and railways led down to the sea. They were built to make business
possible for the timber companies, trading companies, and agricultural concession
firms, and for white settlers. ¦ In Europe and America, railway building required huge
inputs of capital. Great wage bills were incurred during construction, and added
bonus payments were made to workers to get the job done as quickly as possible. In
most parts of Africa, the Europeans who wanted to see a railroad built offered lashes
as the ordinary wage and more lashes for extra effort.

As a result of the Berlin Conference to partition Africa in 1884, Belgium™s King Leopold II
seized the vast territory of the Congo Free State in Central Africa. To draw out the coveted
red mahogany, ivory, and rubber of the Congo, Leopold built a 241-mile railway from the
mouth of the Congo river to Stanley Pool, eliminating a three-week porterage. In the first
two years of the construction project an estimated 3,600 of the 60,000 workers died.

The railway was a modest engineering success and a major human disaster. Men
succumbed to accidents, dysentery, smallpox, beriberi, and malaria, all exacerbated
by bad food and relentless floggings by the two-hundred-man railway militia force.
Engines ran off tracks; freight cars full of dynamite exploded, blowing workers to
bits. ¦ Sometimes there were no shelters for the people to sleep in, and recalcitrant
laborers were led to work in chains. ¦ When bugles sounded in the morning, crowds
of angry laborers laid at the feet of European supervisors the bodies of their comrades
who had died during the night.

On the use of forced labor, historian Walter Rodney wrote:

The French got Africans to start building the Brazzaville to Point-Noire railway in 1921,
and it was not completed until 1933. Every year of its construction, some ten thousand
people were driven to the site “ sometimes from more than a thousand kilometers
away. At least 25 per cent of the labor force died annually from starvation and disease,
the worst period being from 1922 to 1929.

The infrastructure was necessary to convert resources into plantation land and
mines. That is “resources” were transformed into privately-owned assets “ production
arrangements that would generate income and allow for wealth accumulation. But few
Africans found much benefit in this process of conversion. By 1958 the Belgian colo-
nists (and other foreigners) were a mere one percent of the population of the Congo,
but they received 42 percent of the national income as a result of owning 95 percent of
the Congo™s assets.
Sources: Hochschild 1999: 170“1; Peemans 1975: 181; Rodney 1974: 209, 166
Development in historical perspective 91
Measuring the impact of colonialism
Colonialism took an often bewildering number of forms, yielding various effects and
outcomes difficult to gauge and combine. No one test, or set of quantitative tests, could
measure the complex economic impact of colonialism. Nonetheless, a comprehensive study
sheds some light on an issue which has received less attention than it deserves. In his study
“Colonialism, Decolonisation and Growth Rates,” Alam (1994) measured the average annual
growth rates of eleven politically independent nations, which he classified as either “sover-
eign lagging countries” or “dependencies.” Sovereign lagging countries were those which
were able to some degree to resist subordination to the Great Powers of europe. Dependen-
cies were either nations which were independent through history, or former colonial nations.
These nations, while independent, operated with considerable constraints because of the
influence of either disadvantageous trade treaties or the presence of foreign capital with a
strong influence over trade and investment activities.
The sovereign nations were compared with a group of colonies or quasi-colonies (such
as China). The test included the Group I countries (sovereign nations which had income
per capita of less than half that of the United States in 1900), and the Group II colonies for
which data were available. Together the sample included 59 percent of the world™s popu-
lation for 1980.8 For the period 1900“50, prior to the independence of all the Group II
countries, the Group I countries had an average annual rate of growth of per capita income
of 1.6 percent. The Group II countries had an average per capita growth rate of 0.0 percent
per year (Alam 1994: 250). After colonial rule had ended for all the countries in the study,
early in the 1950“73 period, the Group I countries achieved a 3.5 percent annual growth
rate of per capita income, while the Group II rate of growth rose to 2.8 percent. The results,
then, tend to confirm that colonialism mattered in a negative way. First, the dramatic differ-
ence between absolute stagnation of the Group II colonial nations and the growth of the
independent Group I economies is a notable result of the 1900“50 period. Second, Group I
nations grew at a 25 percent faster rate in the 1950“73 period, which tends to confirm the
idea that after formal independence the institutions and path dependence established by
colonialism continued to exert an influence which constrained growth. Alam™s thesis has
recently been broadened and further strengthened with the publication of his book-length
treatment of these issues (Alam 2000).

The terms of trade and comparative advantage
While colonialism and neocolonialism9 played a dominant role in imposing a particular global
pattern of production and trade on the less-developed nations in the course of the 100-year
period 1780“1880, so too did global market forces. The result was an international division
of labor in which the less-developed countries emerged as exporters of primary products to
world markets and importers of manufactured goods; the more-developed nations exported
manufactured goods and imported primary products. From the late eighteenth century to
the 1880s, the terms of trade, measured as the quantity of imports which will exchange for
a given quantity of exports, moved steadily in favor of the colonial regions as the prices of
primary exports relative to manufactured imports rose, leading to an increase in the value of
the terms of trade index for colonial exports.10 This was the consequence of technological
progress and competition among the powerful nations of Europe and the United States,
which pushed the prices of manufactured products downward, while the demand for tropical
products and minerals rapidly expanded, but without commensurate increases in production
92 The Process of Economic Development
efficiency in the less-developed regions producing these goods, leading to rising prices
for these commodities in international exchange (Spraos 1983; Singer 1989). Increasing
competition for raw materials and the relatively low level of technical change in agricul-
ture meant that a given quantity of exports from the colonial regions was able to purchase
more imported manufactures from the more developed nations. On the other hand, Britain,
whose terms of trade were moving in the opposite direction, had to export roughly two and
a half times more manufactured products, on average, in 1880 than it had in 1800 in order
to obtain the same quantity of tropical products and raw materials from the less-developed
As a result of this upward movement of the terms of trade for tropical commodities,
it appeared to many in the less-developed regions that a primary export economy was a
viable vehicle for enhancing their nation™s income and wealth. Little, if any, diversification
of production for export was encouraged. Investment in primary production remained low,
because of technological stasis in agro-export and mineral export activities, and because
high profits could be made by producing more using extensive techniques. At the same time,
as wealth was acquired rapidly and easily in colonial agriculture and mining without the
need for massive investments, any profits generated tended to be squandered in ostentatious
displays of conspicuous consumption. The financing and distribution of imports and exports,
in particular, became an active arena for quick profit-making. Argentina became a particu-
larly notable example; the nation seemed to have mushroomed into a developed nation by the
beginning of the twentieth century with virtually no additional effort. A small cadre of cattle
ranchers, meat packers, grain growers, bankers, and traders dominated Argentine society.
The ships transporting Argentine beef were made in Europe, however, as were the meat-
packing facilities, the rails, freight cars, and engines which carried Argentine commodities
to the ports for shipment to europe, a pattern of external reliance that would not bode well
for future development.
Argentina™s economic miracle lasted somewhat longer than did the general commodities
boom of the nineteenth century, but it too foundered when the terms of trade began to turn
down sharply. From the 1880s onward, the terms of trade moved against commodity and
mineral producers, with the exception of the periods of world war. The dangers and pitfalls
of a global trading system and export production focused on a limited array of primary
products became all too apparent, too late, to many in the less-developed nations. What had
once appeared to be a successful process of natural selection, whereby the economy of a
given colony tended to be centered on the basic production and export of one or two primary
commodities, now was revealed to be a flawed strategy. With declining terms of trade,
mono-exporters were on a treadmill which they had few means of getting off. They had to
export more and more in order to buy the increasingly more expensive imported machinery
and equipment if they were to maintain the production base of their agro-export or mineral-
export economies and to sustain the consumption of the elites (see Focus 3.5).
In thinking about the concept of comparative advantage (analyzed more fully in the next
chapter), it is important to recall that in Britain, France, Germany, and the US, the leading
trade sectors were forged through conscious state involvement such as subsidies, tariffs,
selective construction of infrastructure, labor training, and prohibitive trade restrictions. As
we shall see in later chapters, this too has been at the base of the successful development
experiences of South Korea, Taiwan, Japan, and a handful of other East Asian countries. In
contrast, colonialism imposed a pattern of production and trade on the pre-capitalist, less-
developed regions, a pattern that did not reflect the actual, potential, or conceivable dynamic
comparative advantages of those nations. Their trade patterns reflected the needs, desires,
Development in historical perspective 93

There is a large literature which attempts to measure trends in the terms of trade, some of
which we shall consider again in Chapter 6. However, the following estimates give some
idea of the direction of change of the terms of trade for primary product producers.

% change per year, primary export nations

1 1801“1881 0.87
2 1882“1913 ’0.42
3 1876“1938 ’0.95
’0.52 to ’0.84a
4 1900“1986
5 1979“1993 ’4.00
a The Grilli and Yang (1988) study breaks down the trend in the terms of trade for various sub-categories
of primary product exports (for example, raw material; fuels; cereals; foodstuffs). They find a long-term
downward trend for the terms of trade for all primary products in international trade with the exception of
tropical drinks, which had a trend of 0.63.

Line 1 shows that over the early to late nineteenth century, the terms of trade for primary
product producers were moving upward at the rate of 0.87 percent per annum. In effect,
each unit of primary product export was able to purchase 0.87 percent more imports
each year. Over the entire period, 1801“81, the purchasing power of the average primary
producer doubled in terms of ability to purchase imports with the same quantity of exports.
This was the period over which it appeared that the primary product export focus of many
of the now less-developed nations, and hence the productive structure created by colonial
powers, was validated.
However, lines 2 to 5, based on estimates of the terms of trade of primary product
exporters derived from different sources, tend to confirm that the longer-term, and certainly
the modern, trend of the terms of trade for primary product producers is downward. Thus,
the path dependency created by a primary product export focus turned out to be a long-
term burden for economies which remained with such exports. (Note that the fall since
1979 (through 1993) was the most severe since the Great Depression, with real commodity
prices 45 percent below their 1980 level by 1990!)
Sources: Grilli and Yang 1988; Maizels, Palaskas, and Crowe 1998;
Sarkar 1986; Spraos 1983

and (sometimes) whims of the colonizer. Later, as these patterns became ingrained, altering
adverse path dependence was made more difficult even after political independence.

Credit and underdevelopment
In Latin America, once formal colonialism had been ended by the wars of independence in
the 1820s, neocolonial mechanisms of credit allocation and debt financing replaced overt
political domination, but they contributed no less to the distorted patterns of production and
trade implanted several hundred years earlier by the Spanish and the Portuguese. In the nine-
teenth century, abundant credit became readily available to the colonial regions of Africa and
Asia and to the neocolonial regions of Latin America for several interrelated reasons.11

1 As the scale of modern industry increased in the late nineteenth century, large US, German,
British, and French manufacturers, working closely with major banks, often extended
credit to finance the exportation of their products bought by elites in the less-developed
94 The Process of Economic Development
regions. Financial markets increased both in size and sophistication, thereby enabling
major banks to shift from regional and national markets to global markets.
2 The second industrial revolution, in the latter part of the nineteenth century, which saw the
application of chemistry to the industrial process, the adaptation of steam power to ships
and agricultural machinery, electricity, the telephone and telegraph, the internal combus-
tion engine, time-and-motion studies in the factories, and so on, created new demands
for tropical products and raw materials produced by less-developed nations and colonies.
This was particularly true for rubber, for example, the demand for which grew rapidly for
production and consumption purposes in the developed nations. Better and faster shipping
meant that tropical commodities, such as bananas and pineapples, could become part of
the diet in the developed nations. Increasing quantities of minerals were needed to furnish
the demands of the industrial sectors of the great powers. Railways penetrated deeper into
the hinterlands of the less-developed regions as new geological discoveries were made,
and cheaply produced mining products from the less-developed nations flooded the world
market. In order to sustain these new activities, massive investments were typically neces-
sary to build ports, railway systems, communication systems, and roads. Credits were
readily extended to private, often foreign, firms by colonial governments and the inde-
pendent governments of Latin America to create such infrastructure.
3 Government entities in the less-developed regions often borrowed large sums in order
to build needed infrastructure, loans that would presumably be paid from the increased
output the country could expect from a more productive infrastructure. However, the
borrowing entity, imbued as it was with the ethos of merchant capital, was rarely willing
or capable of making a sound economic calculation of the costs, benefits, and risks
of new loans. Such loans often were squandered by a corrupt governmental elite. But
borrowing had another important function; it could mask economic downturns and
extend a faltering boom period for the primary-product-exporting colonial or newly
independent economy.

Borrowing from abroad was a seductive choice for many less-developed nations, in the past
as now (see Chapter 17); it promised an immediate benefit, while the costs could be deferred.
Lord Cromer, the British Consul-General in Egypt from 1883 to 1907, aptly sketched the
attractions of credit, which often formed the basis for extended control by the european
powers over the less-developed areas when loans could not be repaid.

The maximum amount of harm is probably done when an Oriental ruler is for the first
time brought in contact with the European system of credit. He thus finds that he can
obtain large sums of money with the utmost apparent facility. His personal wishes can
thus be easily gratified. He is dazzled by the ingenious and often fallacious schemes for
developing his country which european adventurers will not fail to lay before him in the
most attractive light. He is too wanting in foresight to appreciate the nature of the future
difficulties which he is creating for himself. The temptation to avail himself to the full
of the benefits which a reckless use of credit seems to offer to him are too strong to be
resisted. He will rush into the gulf which lies open before him, and inflict injury on his
country from which not only his contemporaries but future generations will suffer.
(Cromer 1908: 58“9)

The growing sophistication of international banking extended the power of the
advanced nations over the less-developed regions, even after the end of formal colonialism,
Development in historical perspective 95
often leading to new and more subtle forms of control and influence. Tied loans became
commonplace; credits were extended to the less-developed areas on the condition that the
bulk of the loan be used to purchase equipment from the lending nation. This often meant
not only higher prices for the borrower, but possibly inferior equipment as a consequence.
Tied loans also discouraged the development of indigenous suppliers of such products and
other inputs. even semi-skilled labor was normally imported to complete major projects.
The economic stimulus from the construction stage provided by external borrowing thus
was exceedingly limited, and it was usually restricted to a modest and brief tightening of
the casual labor market. Meanwhile, much of the downstream benefit of the loan in terms
of the increased future production of tropical commodities or minerals was forgone because
of the drain of future interest payments and special loan fees attached to the loans.

The new imperialism: 1870“1914
The nineteenth century was fascinating not merely because new processes of control vis-
à-vis the less-developed nations were being forged through the medium of credit. Much more
startling was the revival of wars of conquest and seizure at the very time when virtually all
the political leaders of the great powers were singing the virtues of free trade. Colonies multi-
plied at a stupefying rate during the so-called “Century of Free Trade.” In 1800, the European
powers effectively controlled 55 per cent of the total global land mass, including former
European colonies. By 1878, this control had increased to 67 per cent, and by 1914, colonial
holdings stood at 84.4 per cent! As David Fieldhouse emphasized: “Expansion continued; by
1939 the only significant countries which had never been under European rule were Turkey,
some parts of Arabia, Persia, China, Tibet, Mongolia and Siam. In addition to new colonies,
there were new colonial powers: Italy, Belgium, USA, and Russia” (Fieldhouse 1967: 178).
Table 3.2 records the magnitude of some of the major colonial systems holdings of the Euro-
pean powers and the United States at the outset of the First World War. The ranking is in terms
of the population in the colonies. Of the total subjugated population under the dominance of
the Europeans and the US, some 530 million in 1914, nearly 100 million had been added over
the period 1870“1914, when the scramble to take control of Africa peaked. Almost half of the
territory controlled by the colonial powers in 1914 had been acquired in Africa after 1879.
How does one account for the widespread acceptance of the precepts of free trade between
sovereign nations at the very moment when colonialism was reinvigorated? The answer, it

Table 3.2 Selected colonial systems in 1914
Colonial power Number of Population of Size (sq. miles) Colonial pop./ Colonial territory/
colonies colonies National pop. National territory

United Kingdom 55 391,583,000 12,044,000 8.52 99.20
29 62,350,000 4,111,000 1.57 19.90
Netherlands 37,410,000 762,863 6.13 59.80
1 15,000,000 910,000 1.98 79.80
10 13,075,000 1,231,000 5.90
Germany 0.20
USa 6 10,545,000 172,091 0.14 0.05
9,680,000 804,440 1.12
Portugal 8 22.70
4 1,397,000 591,250 0.04 5.30

Sources: Hobson 1965: 23; Stavrianos 1981: 264.
a Data from 1905.
96 The Process of Economic Development
seems, is that free-trade theory was only to be applied to relations between the powerful
nations. As for the colonial regions, the most charitable interpretation, often utilized by
supporters of colonialism, was that the less-developed nations were being readied for free
trade, as enlightened colonial rule would “uplift” the colonial peoples and their economic
system and prepare them for participation in the global economy.

Mature colonialism and progressive colonialism
Colonialism was an uneven institution; different colonial powers encountered different regions
at different moments in history. The outcome, while perhaps never unique, was sufficiently
varied, thereby making sweeping generalizations about colonialism difficult to establish and
support. Throughout its long history, many came forward to sing the praises of the so-called
colonizing mission. And, viewed carefully, there seems to be some support in two instances
for the notion that colonialism could be somewhat benign, at least in some respects.

British and French colonialism in West africa: 1945“65
The European powers faced a new set of relationships after the Second World War, and this
led to a fundamentally new approach to the issue of colonial rule. By then most of the colo-
nial regions had engendered an emerging nationalist element which began to exert consider-
able pressure on the colonial powers. The nationalists™ aspirations to political independence
and national autonomy resonated in the capitals of europe, where many of the new nation-
alist leaders in the colonies had lived, studied, and learned to aspire to ideals of political
independence championed by a pantheon of european philosophers and political thinkers.
The colonizers responded to this pressure by attempting to address issues which heretofore
had been ignored.
First, money was poured into infrastructure, industry, and, more generally, economic devel-
opment projects. In many West African nations, the colonial governments formed marketing
boards to purchase the production of native cultivators and ship their output to the world
market. Additional funds came via governmental outlays derived from the colonial powers,
with the bulk of these outlays being used to develop a system of paved roads. From 1945 to
1960, the paved road system of West Africa increased by a factor of ten (Hopkins 1973: 282).
In the nine-year period 1947“56, the French invested twice as much in West Africa as they
had over the previous fifty years. Similarly, British expenditures for 1946“60 exceeded those
for 1900“45 (ibid.: 280).
During this period, sometimes known as “mature colonialism,” colonial administrators
practiced a new policy, known as “indigenization,” which involved the hiring of Africans
in the mining industry and on the staffs of the large trading companies which dominated
economic activity in the colonies. Indigenization was broadly aimed at involving colonial
peoples in a wider range of economic activities. The policy extended to the promotion of
export agriculture for native cultivators. At the same time, the colonial governments became
alert to the need to diversify and balance the economic activity of the region. They thus began
to promote some industrialization, and local firms were granted relief from taxes, provided
with tariff protection from imports, were guaranteed state purchases of their output, and were
extended bank loans at subsidized interest rates; occasionally outright grants were provided.
As a result, many of the large trading companies began to produce a range of light consumer
products. As impressive as this volte-face may appear, the overall results were far from suffi-
cient to reverse the structural biases and adverse path dependence created by colonialism.
Development in historical perspective 97
In 1955, for example, only 0.09 percent of Nigerians were employed in manufacturing; in
the Gold Coast (Ghana), the figure stood at 0.44 percent; in Kenya, 0.7 percent; and in the
Congo, 0.87 percent of the labor force was employed in manufacturing (Fieldhouse 1981:
102). Reviewing in some detail the period of mature colonialism in French West Africa,
historian David Fieldhouse concluded:

At the end of the colonial period French West Africa had hardly begun to industrialize
and the great majority of even those industries that did exist were owned and run by
expatriates. Such facts provide strong arguments for those who hold that colonialism
was incompatible with “balanced” economic growth in the dependencies.
(Fieldhouse 1981: 102)

Progressive colonialism
Could colonialism ever confer net benefits on a nation? It would be difficult to answer this
question in the affirmative, because of the complex array of factors which would have to be
considered and weighted to derive an answer. In most instances, it would appear that the list
of advantages of being colonized would be quite short. However, it is common to accord
some progressivity to Japanese colonial rule among all the colonial powers. The overall pres-
ence of the Japanese was greater in their occupation of Taiwan and Korea than was Dutch
colonial power in Indonesia, but the Japanese brought technological improvement to agricul-
ture in their colonies, and they injected a skilled technical labor force into Korean industry.
Japan also invested heavily in colonial industry, and as a consequence skills were transferred
to the colonies and their educational level was advanced. The colonial state left a legacy of “a
rationalized currency system, banks and other institutions that the state controlled, long-and
short-term economic plans, production oriented new technology and a variety of direct and
indirect subsides” (Kohli 1999: 133). There was no drain on Korea™s balance of payments,
as was the norm for other colonies; in fact, Japan was a net provider of capital (Madd-
ison 1990: 365). Over the period 1929“38, the annual rate of real GDP growth in Taiwan
and Korea was 1.8 percent and 3.5 percent, respectively. Industrial growth averaged nearly
10 percent per year from 1910 to 1940 in Korea (Kohli 2004: 48). By comparison, the rate
of growth of GDP in India over the same period was a mere 0.5 percent, and in Indonesia it
was 1.6 percent (Maddison 1985: 19). In making this comparison, it is important to recognize
that in India, at least, the British were then pursuing a “dual mandate,” which entailed the
idea that the purpose of colonial policy was to pursue economic development, including an
attempt to industrialize India. It would appear that Japan™s colonial policies, on the surface,
were more successful in this regard.

[T]he Japanese were late developers who on their own had perfected a state-led model of
development ¦ This was the model they transmitted to Korea ¦ A state-led economy
at home also enabled the Japanese in Korea to coordinate the interests of those Japanese
firms mainly interested in exporting manufactured goods to Korea as well as of those
mainly interested in exporting capital and establishing manufacturing in Korea. The
Japanese pattern of colonialism was thus considerably more transformative, leaving
in its wake a state that was simultaneously brutal and capable of introducing socioeco-
nomic change, on the one hand, and a growing economy with an industrial base, on the
other hand.
(Kohli 2004: 410)
98 The Process of Economic Development
While the contrast of the Japanese empire to other colonial powers is interesting, it is
important to keep in mind that a larger portion of the growth in Taiwan and Korea in the
period cited above was enjoyed by Japanese nationals, not the colonized subjects. And the
loss of national identity and the imposition of alien and often arbitrary and cruel colonial
practices by the Japanese raises serious questions regarding the extent to which colonialism
was ever progressive in an overall sense anywhere.

Only in the closing years of the Second World War was it clear that the colonial regions,
“readied” or not, would be released from their formal bonds of domination. Part of the
impetus for this abrupt change came from the United States. Having won its independence
from Britain via armed struggle, the United States had long declared its willingness to uphold
the concept of national self-determination. President Woodrow Wilson had been particularly
eager to impose this ideal on Europe™s colonial system immediately after the First World
War, but the United States had been too weak then to achieve it.
In the closing days of the Second World War, the United States faced weakened European
powers, unable to maintain their colonies without US financial assistance. In some instances,
the United States was willing to prolong European dominance over colonial areas, particu-
larly where Cold War considerations tipped the scales, but the basic thrust of US policy was
clear: the colonial systems would have to be dismantled relatively quickly. Altruistic motives
may have driven US policy to some degree. But the United States also was anxious to see
the end of British dominance in much of the Middle East, where American oil companies
were keen to extend their leases and exploratory activities. Likewise in Asia and Africa,
US-owned mining companies expected to have equal access to resources, something the
colonial powers had resisted granting their global economic competitors. Furthermore, the
United States was haunted still by the image of the Great Depression; virtually every major
American economist held that the end of the Second World War would mean the onset of
economic stagnation or, worse, another depression. Hence there was a widespread apprecia-
tion of the possibilities of selling US products to former colonial regions, if only they could
be opened to American products by being released from European colonial dominance.
Another part of the impetus toward the break-up of colonialism came from within the
colonies themselves, particularly from India. The Indian anti-colonial struggle was care-
fully observed, giving rise to new hopes, and suggesting tactics to opposition leaders in
other colonies. Indian nationalists had long struggled for independence prior to the Second
World War, and during the war the British were forced to borrow heavily from the Indian
treasury. Indian military forces also were extensively used to aid the British war effort,
fighting valiantly and nobly. The quid pro quo for such compliance, reluctantly agreed to
by the British, was Indian independence after the war. India™s example helped other colonial
areas in their determined resistance to colonialism. Still, decolonization was far from an
orderly or peaceful process. The French, in particular, bitterly resisted national independence
in Algeria and Vietnam, with disastrous consequences and costs for the economic develop-
ment prospects of the colonies.

Point Four aid
From the end of the Second World War until 1949, the colonial regions were not the focus of
attention of the great powers. For the US, in particular, the postwar economic breakdown of
Development in historical perspective 99
Europe, the presumed truculence of the Soviet Union, and the question of the future role of
atomic weapons crowded out the issue of colonialism. Largely unnoticed, as early as 1939,
with the world falling into war, the US-based Council on Foreign Relations began to raise
the theme of an international long-term bank, the need for technology and learning transfers,
and the creation of infrastructure as part of a “world development program.” In England in
1941 Paul Rosenstein-Rodan began work on his classic study of development discussed in
Chapter 6 (Arndt 1987: 26“8).
In 1949, the less-developed regions were suddenly brought into the foreground again with
President Harry S. Truman™s inaugural address. Truman stated that he had “four points” to
make; in the fourth point:

He called for a “bold new program” for making the benefits of American science and
industrial progress available to “underdeveloped” countries ¦
The old imperialism “ exploitation for profit “ had no place in the plan, Truman said.
Half the people in the world were living in conditions close to misery, and for the first
time in history the knowledge and skill were available to relieve such suffering. The
emphasis would be on the distribution of knowledge rather than money.
(McCullough 1992: 730“1)

Truman™s speech suggested that the United States could “supply the vitalizing force to stir
the peoples of the world into triumphant action ¦ against ¦ hunger, misery and despair.”
The main thrust of US activity, however, placed “particular emphasis ¦ (on) the stimula-
tion of a greatly expanded flow of private investment” (US Department of State 1949: 4).
The State Department, in articulating the policy initiatives which had given rise to Truman™s
speech, emphasized that the chief concern of the United States would not be private invest-
ment in general, but investment in resources:

Location, development and economical processing of mineral and fuel resources is a
major aspect of the program of a technical cooperation for economic development of
underdeveloped countries.
(US Department of State 1949: 20)

In the more sober, calculating terms of the State Department, the ostensible global struggle
against misery appeared to be as much in the self-interest of the developed nations as it
was an act of magnanimity on the part of a great power: “many underdeveloped mineral
resources in the areas which will participate in the cooperative effort are of considerable
importance to the more highly developed nations of the world including the United States”
(US Department of State 1949: 20).
Whatever the conceptual and policy limits of Point Four Aid, the shift in US policy was of
fundamental importance. It marked the concrete beginning of a move away from an almost
exclusive concern over European recovery after the Second World War. It brought to life
a new consensus that: “By 1945, economic development of underdeveloped nations had
become an accepted objective of national and international policy of the developed coun-
tries” (Arndt 1987: 25). Not only were US funds and research now to be directed toward
economic development in the less-developed world, but more importantly, the International
Monetary Fund (IMF) and the World Bank (see Chapter 17 for a discussion of these institu-
tions) began to restructure themselves in the early 1950s as a result of Point Four. From the
early 1950s onward, these multinational institutions would grow in power and prestige, and
100 The Process of Economic Development
their policies toward the underdeveloped regions would become of the utmost importance.
Furthermore, the european powers followed the lead of Point Four, particularly in the policy
formulations of the Organization for European Economic Co-operation. Economists who
had been concerned with recovery in europe now found new careers open to them as devel-
opment economists within government, in institutions such as the IMF and World Bank, with
major foundations, and in the universities.

Economic dualism
There can be no doubt that colonialism fundamentally altered the economies of the under-
developed areas. Having endured for centuries in many areas, the path-dependence effects
of colonialism were not to be swept away in a matter of years, or a Decade of Development.
One of the worst features of colonialism, as it evolved in Africa, Asia and Latin America,
was the creation of what economists have termed the “dual economy.” The Dutch economist
J.H. Boeke was one of the earliest economists to make this distinction. Boeke, after decades
of research in Asia, maintained that:

Social Dualism is the clashing of an imported social system with an indigenous social
system of another style. Most frequently the imported social system is high capitalism.
(Boeke 1953: 4)

Professor Boeke regarded dualism as a form of disintegration, which would last intermi-
nably and would undercut all prospects for development. Others have employed the concept
without adopting either Boeke™s pessimism or many of his assumptions regarding the imper-
meable nature of the pre-capitalist social system. After subjecting Boeke™s general analysis
to a withering critique, Benjamin Higgins stated:

there can be no question about the phenomenon of dualism; it is one of the distinguishing
features of underdeveloped countries. Virtually all of them have two clearly differenti-
ated sectors: one confined mainly to peasant agriculture and handicrafts or very small
industry, and the trading activities associated with them; the other consisting of planta-
tions, mines, petroleum fields and refineries, large-scale industries, and the transport and
trading activities associated with these operations. Levels of technique, productivity and
income are low in the first sector and high in the second.
(Higgins 1959: 281)

Thus dualism posited a “two-sector model” where a pre-capitalist, transitional form of
production was juxtaposed with a modern, capitalist sector. These two sectors had nothing in
common other than the fact that they existed side-by-side within one social formation, and
that the pre-capitalist sector provided labor to the modern capitalist enterprises. The modern
sector exists as a virtual enclave within the larger pre-capitalist and semi-capitalist sector,
operating within the same overall social and economic structure, but also somewhat distanced
from it.13 The modern capitalist sector does not fully supplant this semi-capitalist sector; rather
the pre-capitalist sector is slowly dissolved over an intermediate, and indeterminate, time
period, as both the pre-capitalist and semi-capitalist sectors exhibit a determined capacity to
resist the forces of change that capitalist methods of production attempt to implant. Peasants
struggle to maintain their grip on marginal plots of land, mercilessly working themselves and
their families to eke out an existence that is often near, or even below, subsistence. Landless
Development in historical perspective 101
agricultural workers struggle to acquire land, while those pushed into the cities often send a
part of their meager wages to their families in the countryside.
Governments in colonial dual societies often exhibited a profound urban bias (see Chapter
11 for further discussion). Taxes taken from throughout the social formation tended to be
spent close to the capital city and on the highest cadre of “public servants,” who often lived
like potentates, and only then on the public facilities of the cities. The best infrastructure was
and remains to be found in the major cities. The countryside remained starved of irrigation,
roads, transportation, schools, and health clinics. Without roads, water, technical assistance,
capital investment, training, and education, the countryside atrophied, further sharpening the
dualist nature of colonial society.
everett Hagen was one of the early development economists who found the dualistic
framework useful to analyze economic underdevelopment. For Hagen, the social“psycho-
logical distinctions to be made between the two sectors were profound: “In a psychological
sense, the elite [i.e. the ˜modern™ sector] and the villagers of the peasant society live literally
in different worlds and have extremely few interests in common” (Hagen 1957: 28). Hagen
maintained that in the pre-capitalist and semi-capitalist sectors, one found the dominance
of crude concepts of the physical world, primitive production methods, and extremely low
literacy rates that affected the possibilities for future progress in these rural sectors.
even in the modern sector, Hagen found fundamental weaknesses. In particular, he noted
that the social elite tended to be self-reproducing and isolated. The lack of a “middle” class
was notable and troubling: “In a technologically progressive society, ¦ there is a more
rapid circulation of the elite, more social mobility through economic success, and a substan-
tial middle class” (ibid.: 28). These elements were missing in most less-developed nations.
Hagen also noted that in both the modern and traditional sectors there was a pervasive disdain
for both modern business practices and forms of labor which entailed physical effort.
Summarizing Hagen™s conclusions regarding the necessary changes to be made for develop-
ment to occur in less-developed nations, Higgins emphasized that “The individual™s view of
his relationship with the world must change radically, scientific knowledge and the scope of
experience must widen, occupational values must undergo basic alteration, class relation-
ships must alter in their social, economic and political aspects” (Higgins 1959: 306). Hagen
emphasized that “drastic change in any one variable in the peasant society while the others
remain at their peasant society level seems unlikely [to be able to foster development]”
(Hagen 1957: 59). Yet he nonetheless believed that, while quite difficult, a completion of the
transition to a technologically dynamic society could be achieved in one generation.
In analyzing the modern or capitalist sector of the dual society, Paul Baran emphasized
that it would be a grave mistake to believe that this sector always functioned precisely in
the manner one might expect. The capitalist sector in less-developed nations continues to
manifest distinct structural characteristics which reveal the continued influence of merchant
capital and pre-capitalist ideas. For example, Baran noted that one would expect that large-
scale investments in public goods such as railways, highways, electrification projects, and
so on would generate external economies by lowering the cost of production of a variety of
branches of the economy. Under pure capitalism such social investments create a virtuous-
circle effect: more social investment ’ lower costs for private producers ’ greater incen-
tive to invest ’ increases in construction activity ’ increases in employment ’ increases
in consumption ’ increases in GDP ’ increases in tax revenues ’ increases in social
investments, and so on. This fortuitous relationship, however, is not normally to be found in
the dualist less-developed regions, given the weakness of the modern sector and the size of
the pre-capitalist sector:
102 The Process of Economic Development
it is not railways, roads and power stations that give rise to industrial capitalism: it
is the emergence of industrial capitalism that leads to the building of railways, to the
construction of roads, and to the establishment of power stations. The identical sources
of external economies, if appearing in a country going through the mercantile phase of
capitalism, will provide, if anything, “external economies” to merchant capital. Thus the
modern banks established by the British during the second half of the nineteenth century
in India, in Egypt, in Latin America, and elsewhere in the underdeveloped world became
not fountains of industrial credit but large-scale clearing houses of mercantile finance
vying in their interest charges with the local usurers. In the same way, the harbors and
cities that sprang up in many underdeveloped countries in connection with their briskly
expanding exports did not turn into centres of industrial activity but snowballed into
vast market places providing the necessary “living space” to wealthy compradors and
crowded by a motley population of petty traders, agents and commissionmen. Nor did
the railways, trunk roads, and canals built for the purpose of foreign enterprise evolve
into pulsing arteries of productive activities; they merely accelerated the disintegration
of the peasant economy and provided additional means for a more intensive and more
thorough mercantile exploitation of rural interiors.
(Baran 1957: 193“4)

Baran™s insight into the modern capitalist sector of the dual society serves to clarify the
magnitude of the embedded distortions within the modern sector deriving from colonialism.
This sector is modern or capitalist in relation to the pre-capitalist and semi-capitalist sector
within the less-developed country, but it remains backward when compared to the advanced
economies. One of the weakest and most debilitating components of the modern sector in the
less-developed world is a continuing pervasiveness of merchant capital within the circuits of
banking and finance. Rather than serving as a complementary force supporting industrializa-
tion and development, banking and finance are the locus of widespread speculative activities
which absorb a large portion of the potentially loanable funds which could be used to support
socially useful public and private investments.

Summary and conclusions
For many former colonies, the lingering effects of colonial control are not quickly or even
easily cast off. Colonization created productive structures designed not to exploit the poten-
tial comparative advantage of the dominated economy and its people. Rather, the colonizer
organized production, particularly export production, around an extremely narrow array
of tropical agricultural products, minerals, and other primary commodities to supply the
colonizer™s needs. Cost considerations were not particularly important, since production
did not take place within a free-market context, but rather within a framework of domi-
nation and control. Thus, colonial regions acquired productive structures, skills, education
systems, infrastructure, institutions, and organizations shaped to the interests of the colo-
nizer. Created as mono-exporters of agricultural, mining, and other primary products, these
path-dependent structures, including their embedded power structures, were carried over
into independence.
One of the difficulties faced by former colonies, then, is that of altering past path depend-
ence in ways that can lead to economic growth and human development. Countries, then,
do not start as open books, as tabulae rasae. Rather, they begin with a complex past that has
brought them to the present and will take them to the future. Making changes to the array of
Development in historical perspective 103
factors contributing to past path dependence, through proper policies, can establish a new
path dependence promising a better future.

Questions for review
1 How did merchant capitalism function to retard and distort the developmental potential
in the colonial regions? How is it different from industrial capitalism?
2 How did the movement in the terms of trade in the nineteenth century lead to the widely
held view that a primary product export economy was both desirable and, in some sense,
good economics? What has happened to the terms of trade for tropical commodities in
the twentieth century? How does this affect the conclusion that a primary product export
focus can contribute to economic development?
3 Does it make sense for any country to have a majority of its export income derived from
one or two exports, that is, to be a mono-exporter? Why, or why not? Do developed
countries have a limited array of exports? Why do most less-developed countries have
such a limited array of exports?
4 Why and how were dualist structures fostered in the colonial regions, and how did they
create barriers to further economic development?
5 In the era of industrial capitalism, how did institutions introduced under colonial rule
act as a brake on economic development and constitute a schism with the historical
pattern of evolution in the colonized areas? What role did de-industrialization play in
this process? Why did the colonizers require de-industrialization in their colonies? Who
benefited and who lost?
6 All countries are subject to path dependence. This simply means that past decisions,
and past history, affect the present conditions and possibilities for the future. What is
meant by adverse path dependence? What role did colonialism play in creating adverse
path dependence? How can countries that were former colonies overcome adverse path
dependence? What specific changes would you suggest be undertaken by now-inde-
pendent countries with economic structures shaped by colonialism?

1 In the developed capitalist and industrial nations, variations in income and output were increasingly
the result of business cycles, that is, they were due to factors that affected the profits of producers
and their willingness to produce. Variations in income and output due to purely exogenous forces, like
the weather, became much less powerful as industrial production increasingly replaced agriculture
as the motor force of society (as discussed in Chapter 9). Of course, some exogenous factors, such as
wars and plagues, did from time to time adversely affect income levels, but the control exercised over
the environment in which humans reproduced themselves via production was remarkable after the
Industrial Revolution and the spread of the factory system of production.
2 Later, at and after the turn of the twentieth century, both the United States and Japan, relative late-
comers to the capitalist revolution, also joined the ranks of the colonizers.
3 The wave of decolonization that created most of today™s less-developed nations, with exceptions,
like China, occurred after 1945. Many of today™s independent nations in Africa and the Caribbean
did not win freedom from colonialism until the 1960s and in some instances not until the 1970s.
4 There were notable exceptions. First, in relatively unpopulated areas such as the United States,
Canada, Australia, and New Zealand virtual extermination of the native peoples was achieved
quickly, and the subsequent “white settler” societies achieved self-governance and positive
economic stimulus from the international economy. Second, Japan took control of Korea and
Taiwan early in the twentieth century with results that, in many respects, diverge from that found
throughout Africa, Asia, Latin America, and the Middle East.
104 The Process of Economic Development
5 Maddison (1982: 4, 13) dates the period of merchant capitalism from 1700 to 1820. It is during this
period, he notes, that plunder is important to the progress of the colonizing nations.
6 In contrast, adaptation was never part of the old colonial system. Thus, the Spanish did not
readily utilize the new plantation system, nor were there fundamental adjustments in colonial
policy in light of the depopulation of Mexico and Peru brought about by the liquidation of indige-
nous labor. Rather, as trade and commerce collapsed following the breakdown of the mining boom,
the great latifundio system of the hacienda, which had been subordinate to the mining economy
in the Spanish colonies, came to dominate the Latin American economy. As Francois Chevalier
pointed out:

The return to the soil helped revive in Mexico certain medieval institutions and customs
recalling the patriarchal existence of Biblical times “ the [hacendado™s] peculiar mentality was
not conducive to thinking in terms of efficient production. He acquired land, not to increase
his earnings, but to eliminate rivals and hold sway over an entire region. His scorn for extra
profits sometimes went to such lengths that he destroyed perfectly good equipment on land
recently purchased.
(Chevalier 1970: 307, 311)

John Coatsworth (1978: 86“93) has maintained that the generalizations of Chevalier, and
many others, are not supported by a broad range of studies conducted in the 1970s which indicate
that given the existing institutional structure of Latin America, the haciendas were economically
rational. The institutional structure, however, was not.
7 Others, it must be noted, have argued that British rule regenerated India. Proponents of this perspec-
tive often stress the restoration of several canals and the renovation and expansion of major irriga-
tion systems by the British, starting in the 1820s. Further, by 1914, India had obtained 34,000 miles
of railways, and 25 million acres of land, including Burma, were under irrigation. Moreover, the
agrarian plantation economy was diversified in the course of the nineteenth century, with major
investments in tea and coffee, indigo and sugar plantations, a sizeable jute mill industry, as well as
coal and mica mines.
Commenting on this more favorable evaluation of British colonialism in India, Tom Kemp has
argued that:

although India was perhaps unique among underdeveloped countries in having an organized
sector (factories) partly under native ownership, as well as railways, ports, banks and other
attributes of a modern economy these remained localized in their influence. To put it another
way, they had not initiated a genuine process of industrialization or fundamentally transformed
the agrarian structure.
Indeed, although part of agriculture production was hinged to the market, there was no shift
of population out of agriculture; if anything the proportion of the population dependent on
the land tended to rise. The existence of some advanced industries did little to raise per capita
income or to initiate economic growth.
(Kemp 1989: 93)

8 Group I countries were Finland, Italy, Norway, Sweden, Japan, Argentina, Brazil, Chile, Colombia,
Mexico, and Peru. Group II countries were Bangladesh, China, India, Indonesia, Pakistan, the
Philippines, South Korea, Taiwan, and Thailand.
9 Colonialism involves both political and economic domination. The colonial power administers
the political structure of the economy. Neocolonialism is economic domination of one nation by
another, without the necessity of direct, political control.
10 Technically, the terms of trade is a composite index defined by the ratio of two price indices. Taking
PM as the price index of imported goods and PX as the price index of exported goods, then the terms
of trade index (TOT) can be defined as TOT = (PX/PM) — 100.
11 For an excellent account of the role of British finance in Latin America and India, see Cain and
Hopkins (1993: Chapters 9 and 10).
12 The United Nations was also an important forum for the decolonization movement, and the growth
in membership in that body is due to the end of colonization.
13 It is not unusual, however, to find home workers and small artisan-style workshops with a direct
Development in historical perspective 105
link to large national and even transnational corporations. It therefore may appear that there is
little basis on which a strict separation can be made between the semi-capitalist sector and the
capitalist sector.
It is important to realize that the distinction between two sectors in the dualistic models is
based upon an interpretation of the motives and behavioral patterns characteristic of the distinct
forms of production and not on formal interaction. A home worker or contract artisan workshop,
while possibly linked to a world-straddling web of production and distribution, nonetheless may
operate on a survival basis, using the labor of family members, with little mastery of technology,
little or no access to credit, no power in dealing with the company it supplies, no strategy regarding
cost minimization or production efficiency, and, most likely, little effective recourse to the legal
system in the event that basic contract agreements are violated. While such producers may be an
appendage of the capitalist system of production, they do not exist as capitalist producers them-
selves, but rather as semi-capitalist artisan workers. This is a question of symbiosis, not a case of
fusion between the two sectors.

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