Why Nations Fail

9.
REVERSING DEVELOPMENT
S
PICE AND
 G
ENOCIDE
T
HE
M
OLUCCAN
A
RCHIPELAGO
in modern Indonesia is
made up of three groups of islands. In the early seventeenth
century, the northern Moluccas housed the independent
kingdoms of Tidore, Ternate, and Bacan. The middle
Moluccas were home to the island kingdom of Ambon. In
the south were the Banda Islands, a small archipelago that
was not yet politically unified. Though they seem remote to
us today, the Moluccas were then central to world trade as
the only producers of the valuable spices cloves, mace, and
nutmeg. Of these, nutmeg and mace grew only in the
Banda Islands. Inhabitants of these islands produced and
exported these rare spices in exchange for food and
manufactured goods coming from the island of Java, from
the entrepôt of Melaka on the Malaysian Peninsula, and
from India, China, and Arabia.
The first contact the inhabitants had with Europeans was
in the sixteenth century, with Portuguese mariners who
came to buy spices. Before then spices had to be shipped
through the Middle East, via trade routes controlled by the
Ottoman Empire. Europeans searched for a passage
around Africa or across the Atlantic to gain direct access to
the Spice Islands and the spice trade. The Cape of Good
Hope was rounded by the Portuguese mariner Bartolomeu
Dias in 1488, and India was reached via the same route by
Vasco da Gama in 1498. For the first time the Europeans
now had their own independent route to the Spice Islands.
The Portuguese immediately set about the task of trying
to control the trade in spices. They captured Melaka in
1511. Strategically situated on the western side of the
Malaysian Peninsula, merchants from all over Southeast
Asia came there to sell their spices to other merchants,
Indian, Chinese, and Arabs, who then shipped them to the

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West. As the Portuguese traveler Tomé Pires put it in
1515: “The trade and commerce between the different
nations for a thousand leagues on every hand must come to
Melaka … Whoever is lord of Melaka has his hands at the
throat of Venice.”
With 
Melaka 
in 
their 
hands, 
the 
Portuguese
systematically tried to gain a monopoly of the valuable
spice trade. They failed.
The opponents they faced were not negligible. Between
the fourteenth and sixteenth centuries, there was a great
deal of economic development in Southeast Asia based on
trade in spices. City-states such as Aceh, Banten, Melaka,
Makassar, Pegu, and Brunei expanded rapidly, producing
and exporting spices along with other products such as
hardwoods.
These states had absolutist forms of government similar
to those in Europe in the same period. The development of

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political institutions was spurred by similar processes,
including technological change in methods of warfare and
international trade. State institutions became more
centralized, with a king at the center claiming absolute
power. Like absolutist rulers in Europe, Southeast Asian
kings relied heavily on revenues from trade, both engaging
in it themselves and granting monopolies to local and
foreign elites. As in absolutist Europe, this generated some
economic growth but was a far-from-ideal set of economic
institutions for economic prosperity, with significant entry
barriers and insecure property rights for most. But the
process of commercialization was under way even as the
Portuguese were trying to establish their dominance in the
Indian Ocean.
The presence of Europeans swelled and had a much
greater impact with the arrival of the Dutch. The Dutch
quickly realized that monopolizing the supply of the valuable
spices of the Moluccas would be much more profitable than
competing against local or other European traders. In 1600
they persuaded the ruler of Ambon to sign an exclusive
agreement that gave them the monopoly on the clove trade
in Ambon. With the founding of the Dutch East India
Company in 1602, the Dutch attempts to capture the entire
spice trade and eliminate their competitors, by hook or by
crook, took a turn for the better for the Dutch and for the
worse for Southeast Asia. The Dutch East India Company
was the second European joint stock company, following
the English East India Company, major landmarks in the
development of the modern corporation, which would
subsequently play a major role in European industrial
growth. It was also the second company that had its own
army and the power to wage war and colonize foreign
lands. With the military power of the company now brought
to bear, the Dutch proceeded to eliminate all potential
interlopers to enforce their treaty with the ruler of Ambon.
They captured a key fort held by the Portuguese in 1605
and forcibly removed all other traders. They then expanded
to the northern Moluccas, forcing the rulers of Tidore,
Ternate, and Bacan to agree that no cloves could be grown
or traded in their territories. The treaty they imposed on
Ternate even allowed the Dutch to come and destroy any
clove trees they found there.

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Ambon was ruled in a manner similar to much of Europe
and the Americas during that time. The citizens of Ambon
owed tribute to the ruler and were subject to forced labor.
The Dutch took over and intensified these systems to
extract more labor and more cloves from the island. Prior to
the arrival of the Dutch, extended families paid tribute in
cloves to the Ambonese elite. The Dutch now stipulated
that each household was tied to the soil and should
cultivate a certain number of clove trees. Households were
also obligated to deliver forced labor to the Dutch.
The Dutch also took control of the Banda Islands,
intending this time to monopolize mace and nutmeg. But
the Banda Islands were organized very differently from
Ambon. They were made up of many small autonomous
city-states, and there was no hierarchical social or political
structure. These small states, in reality no more than small
towns, were run by village meetings of citizens. There was
no central authority whom the Dutch could coerce into
signing a monopoly treaty and no system of tribute that they
could take over to capture the entire supply of nutmeg and
mace. At first this meant that the Dutch had to compete with
English, Portuguese, Indian, and Chinese merchants,
losing the spices to their competitors when they did not pay
high prices. Their initial plans of setting up a monopoly of
mace and nutmeg dashed, the Dutch governor of Batavia,
Jan Pieterszoon Coen, came up with an alternative plan.
Coen founded Batavia, on the island of Java, as the Dutch
East India Company’s new capital in 1618. In 1621 he
sailed to Banda with a fleet and proceeded to massacre
almost the entire population of the islands, probably about
fifteen thousand people. All their leaders were executed
along with the rest, and only a few were left alive, enough to
preserve the know-how necessary for mace and nutmeg
production. After this genocide was complete, Coen then
proceeded to create the political and economic structure
necessary for his plan: a plantation society. The islands
were divided into sixty-eight parcels, which were given to
sixty-eight Dutchmen, mostly former and current employees
of the Dutch East India Company. These new plantation
owners were taught how to produce the spices by the few
surviving Bandanese and could buy slaves from the East
India Company to populate the now-empty islands and to

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produce spices, which would have to be sold at fixed prices
back to the company.
The extractive institutions created by the Dutch in the
Spice Islands had the desired effects, though, in Banda this
was at the cost of fifteen thousand innocent lives and the
establishment of a set of economic and political institutions
that would condemn the islands to underdevelopment. By
the end of the seventeenth century, the Dutch had reduced
the world supply of these spices by about 60 percent and
the price of nutmeg had doubled.
The Dutch spread the strategy they perfected in the
Moluccas to the entire region, with profound implications for
the economic and political institutions of the rest of
Southeast Asia. The long commercial expansion of several
states in the area that had started in the fourteenth century
went into reverse. Even the polities which were not directly
colonized and crushed by the Dutch East India Company
turned inward and abandoned trade. The nascent
economic and political change in Southeast Asia was
halted in its tracks.
To avoid the threat of the Dutch East India Company,
several states abandoned producing crops for export and
ceased commercial activity. Autarky was safer than facing
the Dutch. In 1620 the state of Banten, on the island of
Java, cut down its pepper trees in the hope that this would
induce the Dutch to leave it in peace. When a Dutch
merchant visited Maguindanao, in the southern Philippines,
in 1686, he was told, “Nutmeg and cloves can be grown
here, just as in Malaku. They are not there now because the
old Raja had all of them ruined before his death. He was
afraid the Dutch Company would come to fight with them
about it.” What a trader heard about the ruler of
Maguindanao in 1699 was similar: “He had forbidden the
continued planting of pepper so that he could not thereby
get involved in war whether with the [Dutch] company or
with other potentates.” There was de-urbanization and even
population decline. In 1635 the Burmese moved their
capital from Pegu, on the coast, to Ava, far inland up the
Irrawaddy River.
We do not know what the path of economic and political
development of Southeast Asian states would have been
without Dutch aggression. They may have developed their

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own brand of absolutism, they may have remained in the
same state they were in at the end of the sixteenth century,
or they may have continued their commercialization by
gradually adopting more and more inclusive institutions. But
as in the Moluccas, Dutch colonialism fundamentally
changed their economic and political development. The
people in Southeast Asia stopped trading, turned inward,
and became more absolutist. In the next two centuries, they
would be in no position to take advantage of the
innovations that would spring up in the Industrial Revolution.
And ultimately their retreat from trade would not save them
from Europeans; by the end of the eighteenth century,
nearly all were part of European colonial empires.
W
E SAW IN CHAPTER
7 how European expansion into the
Atlantic fueled the rise of inclusive institutions in Britain. But
as illustrated by the experience of the Moluccas under the
Dutch, 
this 
expansion 
sowed 
the 
seeds 
of
underdevelopment in many diverse corners of the world by
imposing, or further strengthening existing, extractive
institutions. These either directly or indirectly destroyed
nascent commercial and industrial activity throughout the
globe or they perpetuated institutions that stopped
industrialization. As a result, as industrialization was
spreading in some parts of the world, places that were part
of European colonial empires stood no chance of
benefiting from these new technologies.