Why Nations Fail

M
AKING A
 D
UAL
 E
CONOMY

---

The “dual economy” paradigm, originally proposed in 1955
by Sir Arthur Lewis, still shapes the way that most social
scientists think about the economic problems of less-
developed countries. According to Lewis, many less-
developed or underdeveloped economies have a dual
structure and are divided into a modern sector and a
traditional sector. The modern sector, which corresponds to
the more developed part of the economy, is associated
with urban life, modern industry, and the use of advanced
technologies. The traditional sector is associated with rural
life, 
agriculture, 
and 
“backward” 
institutions 
and
technologies. Backward agricultural institutions include the
communal ownership of land, which implies the absence of
private property rights on land. Labor was used so
inefficiently in the traditional sector, according to Lewis, that
it could be reallocated to the modern sector without
reducing the amount the rural sector could produce. For
generations of development economists building on
Lewis’s insights, the “problem of development” has come
to mean moving people and resources out of the traditional
sector, agriculture and the countryside, and into the modern
sector, industry and cities. In 1979 Lewis received the
Nobel Prize for his work on economic development.
Lewis and development economists building on his work
were certainly right in identifying dual economies. South
Africa was one of the clearest examples, split into a
traditional sector that was backward and poor and a
modern one that was vibrant and prosperous. Even today
the dual economy Lewis identified is everywhere in South
Africa. One of the most dramatic ways to see this is by
driving across the border between the state of KwaZulu-
Natal, formerly Natal, and the state of the Transkei. The
border follows the Great Kei River. To the east of the river
in Natal, along the coast, are wealthy beachfront properties
on wide expanses of glorious sandy beaches. The interior
is covered with lush green sugarcane plantations. The
roads are beautiful; the whole area reeks of prosperity.
Across the river, it is as if it were a different time and a
different country. The area is largely devastated. The land is
not green, but brown and heavily deforested. Instead of
affluent modern houses with running water, toilets, and all
the modern conveniences, people live in makeshift huts

---

and cook on open fires. Life is certainly traditional, far from
the modern existence to the east of the river. By now you
will not be surprised that these differences are linked with
major differences in economic institutions between the two
sides of the river.
To the east, in Natal, we have private property rights,
functioning legal systems, markets, commercial agriculture,
and industry. To the west, the Transkei had communal
property in land and all-powerful traditional chiefs until
recently. Looked at through the lens of Lewis’s theory of
dual economy, the contrast between the Transkei and Natal
illustrates the problems of African development. In fact, we
can go further, and note that, historically, all of Africa was
like the Transkei, poor with premodern economic
institutions, backward technology, and rule by chiefs.
According to this perspective, then, economic development
should simply be about ensuring that the Transkei
eventually turns into Natal.
This perspective has much truth to it but misses the
entire logic of how the dual economy came into existence
and its relationship to the modern economy. The
backwardness of the Transkei is not just a historic remnant
of the natural backwardness of Africa. The dual economy
between the Transkei and Natal is in fact quite recent, and
is anything but natural. It was created by the South African
white elites in order to produce a reservoir of cheap labor
for their businesses and reduce competition from black
Africans. The dual economy is another example of
underdevelopment created, not of underdevelopment as it
naturally emerged and persisted over centuries.
South Africa and Botswana, as we will see later, did
avoid most of the adverse effects of the slave trade and the
wars it wrought. South Africans’ first major interaction with
Europeans came when the Dutch East India Company
founded a base in Table Bay, now the harbor of Cape
Town, in 1652. At this time the western part of South Africa
was sparsely settled, mostly by hunter-gatherers called the
Khoikhoi people. Farther east, in what is now the Ciskei
and Transkei, there were densely populated African
societies specializing in agriculture. They did not initially
interact heavily with the new colony of the Dutch, nor did
they become involved in slaving. The South African coast

---

was far removed from slave markets, and the inhabitants of
the Ciskei and Transkei, known as the Xhosa, were just far
enough inland not to attract anyone’s attention. As a
consequence, these societies did not feel the brunt of many
of the adverse currents that hit West and Central Africa.
The isolation of these places changed in the nineteenth
century. For the Europeans there was something very
attractive about the climate and the disease environment of
South Africa. Unlike West Africa, for example, South Africa
had a temperate climate that was free of the tropical
diseases such as malaria and yellow fever that had turned
much of Africa into the “white man’s graveyard” and
prevented Europeans from settling or even setting up
permanent outposts. South Africa was a much better
prospect for European settlement. European expansion
into the interior began soon after the British took over Cape
Town from the Dutch during the Napoleonic Wars. This
precipitated a long series of Xhosa wars as the settlement
frontier expanded further inland. The penetration into the
South African interior was intensified in 1835, when the
remaining Europeans of Dutch descent, who would
become known as Afrikaners or Boers, started their
famous mass migration known as the Great Trek away
from the British control of the coast and the Cape Town
area. 
The 
Afrikaners 
subsequently 
founded 
two
independent states in the interior of Africa, the Orange
Free State and the Transvaal.
The next stage in the development of South Africa came
with the discovery of vast diamond reserves in Kimberly in
1867 and of rich gold mines in Johannesburg in 1886. This
huge mineral wealth in the interior immediately convinced
the British to extend their control over all of South Africa.
The resistance of the Orange Free State and the Transvaal
led to the famous Boer Wars in 1880–1881 and 1899–
1902. After initial unexpected defeat, the British managed
to merge the Afrikaner states with the Cape Province and
Natal, to found the Union of South Africa in 1910. Beyond
the fighting between Afrikaners and the British, the
development of the mining economy and the expansion of
European settlement had other implications for the
development of the area. Most notably, they generated
demand for food and other agricultural products and

---

created new economic opportunities for native Africans
both in agriculture and trade.
The Xhosa, in the Ciskei and Transkei, reacted quickly to
these economic opportunities, as the historian Colin Bundy
documented. As early as 1832, even before the mining
boom, a Moravian missionary in the Transkei observed the
new economic dynamism in these areas and noted the
demand from the Africans for the new consumer goods that
the spread of Europeans had begun to reveal to them. He
wrote, “To obtain these objects, they look … to get money
by the labour of their hands, and purchase clothes, spades,
ploughs, wagons and other useful articles.”
The civil commissioner John Hemming’s description of
his visit to Fingoland in the Ciskei in 1876 is equally
revealing. He wrote that he was
struck with the very great advancement made
by the Fingoes in a few years … Wherever I
went I found substantial huts and brick or
stone tenements. In many cases, substantial
brick houses had been erected … and fruit
trees had been planted; wherever a stream of
water could be made available it had been
led out and the soil cultivated as far as it
could be irrigated; the slopes of the hills and
even the summits of the mountains were
cultivated wherever a plough could be
introduced. The extent of the land turned over
surprised me; I have not seen such a large
area of cultivated land for years.
As in other parts of sub-Saharan Africa, the use of the
plow was new in agriculture, but when given the opportunity,
African farmers seemed to have been quite ready to adopt
the technology. They were also prepared to invest in
wagons and irrigation works.
As the agricultural economy developed, the rigid tribal
institutions started to give way. There is a great deal of
evidence that changes in property rights to land took place.
In 1879 the magistrate in Umzimkulu of Griqualand East, in
the Transkei, noted “the growing desire of the part of
natives to become proprietors of land—they have

---

purchased 38,000 acres.” Three years later he recorded
that around eight thousand African farmers in the district
had bought and started to work on ninety thousand acres of
land.
Africa was certainly not on the verge of an Industrial
Revolution, but real change was under way. Private
property in land had weakened the chiefs and enabled new
men to buy land and make their wealth, something that was
unthinkable just decades earlier. This also illustrates how
quickly the weakening of extractive institutions and
absolutist control systems can lead to newfound economic
dynamism. One of the success stories was Stephen
Sonjica in the Ciskei, a self-made farmer from a poor
background. In an address in 1911, Sonjica noted how
when he first expressed to his father his desire to buy land,
his father had responded: “Buy land? How can you want to
buy land? Don’t you know that all land is God’s, and he
gave it to the chiefs only?” Sonjica’s father’s reaction was
understandable. But Sonjica was not deterred. He got a job
in King William’s Town and noted:
I cunningly opened a private bank account
into which I diverted a portion of my
savings … This went only until I had saved
eighty pounds … [I bought] a span of oxen
with yokes, gear, plough and the rest of
agricultural paraphernalia … I now purchased
a small farm … I cannot too strongly
recommend [farming] as a profession to my
fellow man … They should however adopt
modern methods of profit making.
An extraordinary piece of evidence supporting the
economic dynamism and prosperity of African farmers in
this period is revealed in a letter sent in 1869 by a
Methodist missionary, W. J. Davis. Writing to England, he
recorded with pleasure that he had collected forty-six
pounds in cash “for the Lancashire Cotton Relief Fund.” In
this period the prosperous African farmers were donating
money for relief of the poor English textile workers!
This new economic dynamism, not surprisingly, did not
please the traditional chiefs, who, in a pattern that is by now

---

familiar to us, saw this as eroding their wealth and power. In
1879 Matthew Blyth, the chief magistrate of the Transkei,
observed that there was opposition to surveying the land so
that it could be divided into private property. He recorded
that “some of the chiefs … objected, but most of the people
were pleased … the chiefs see that the granting of
individual titles will destroy their influence among the
headmen.”
Chiefs also resisted improvements made on the lands,
such as the digging of irrigation ditches or the building of
fences. They recognized that these improvements were just
a prelude to individual property rights to the land, the
beginning of the end for them. European observers even
noted that chiefs and other traditional authorities, such as
witch doctors, attempted to prohibit all “European ways,”
which included new crops, tools such as plows, and items
of trade. But the integration of the Ciskei and the Transkei
into the British colonial state weakened the power of the
traditional chiefs and authorities, and their resistance would
not be enough to stop the new economic dynamism in
South Africa. In Fingoland in 1884, a European observer
noted that the people had
transferred their allegiance to us. Their chiefs
have been changed to a sort of titled
landowner … without political power. No
longer afraid of the jealousy of the chief or of
the deadly weapon … the witchdoctor, which
strikes down the wealthy cattle owner, the
able counsellor, the introduction of novel
customs, the skilful agriculturalist, reducing
them all to the uniform level of mediocrity—no
longer apprehensive of this, the Fingo
clansman … is a progressive man. Still
remaining a peasant farmer … he owns
wagons and ploughs; he opens water
furroughs for irrigation; he is the owner of a
flock of sheep.
Even a modicum of inclusive institutions and the erosion
of the powers of the chiefs and their restrictions were
sufficient to start a vigorous African economic boom. Alas,

---

it would be short lived. Between 1890 and 1913 it would
come to an abrupt end and go into reverse. During this
period two forces worked to destroy the rural prosperity
and dynamism that Africans had created in the previous
fifty years. The first was antagonism by European farmers
who were competing with Africans. Successful African
farmers drove down the price of crops that Europeans also
produced. The response of Europeans was to drive the
Africans out of business. The second force was even more
sinister. The Europeans wanted a cheap labor force to
employ in the burgeoning mining economy, and they could
ensure this cheap supply only by impoverishing the
Africans. This they went about methodically over the next
several decades.
The 1897 testimony of George Albu, the chairman of the
Association of Mines, given to a Commission of Inquiry
pithily describes the logic of impoverishing Africans so as
to obtain cheap labor. He explained how he proposed to
cheapen labor by “simply telling the boys that their wages
are reduced.” His testimony goes as follows: