The Origins of Poverty in the Transkei and the Making of a Dual Economy

The Origins of Poverty in the Transkei and the Making of a Dual Economy
Dr. Ariel Lashansky

The following historical account is adapted from the superb book “The Origins of Power, Prosperity, and Poverty” written by Daron Acemoglu and James Robinson. The book deftly examines global historical developments through the lens of how ‘inclusive’ (as opposed to extractive) any society’s primary institutions are and the flow on effect it has for their ability to accumulate wealth and demonstrate innovation.

It gives an ethnographic and economic backdrop to the work of Africa’s Healthiest Village in helping promote the agency of rural communities in South Africa in all aspects of their own development. We are aiming to do this through the release of a local community currency which will utilise the Bancor protocol.

See www.healthiestvillage.org for more info :)

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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, the 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, 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 modern one that was vibrant and prosperous. Even today the dual economy Lewish identified is everywhere in South Africa. One of the most dramatic ways to see this is by driving across the border from 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 covered with 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 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. These differences can largely be traced to the major differences in the economic institutions that evolved on 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. Looked at through the lens of Lewis’s theory of the dual economy, the contrast between the Transkei and Natal illustrates the problem 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 it missed 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 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 witnessed here is an example of underdevelopment created, not of underdevelopment as it naturally emerged and persisted over centuries.

South Africa and Botswana avoided most of the adverse effects of the slave trade and the wars it wrought. South Africa’s first major interaction with Europeans came when the Dutch East India Company founded a base in the 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. Further east, in what is now called the Ciskei and Transkei, there were many densely populated African societies specialising 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 19th 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 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 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 the two independent states in the interior of Africa, the Orange Free State and Transvaal.

The next stage in the development of South Africa came with the discovery of vast diamond reserves in Kimberly in 1867 of rich gold mines in Johannesburg in 1886. This huge mineral wealth in their interior immediately convinced the British to extend their control of all 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 Afrikaaner states with the Cape Province and Natal, to found the Union of South Africa in 1910. Beyond the fighting between the Afrikaners and the British, the development of the mining economy and the expansion 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, as in the Ciskei and the 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...Whereever 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 irrigated; the slopes of the hills and even the summits of the mountains were cultivated whereever a plough could be introduced. The exent of the land over surprised me; I have not seen such a large area of cultivated land for years”

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 the Methodist missionary, W.J Davis. Writing to England, he recorded with pleasure that he collected forty-six pounds in cash “for the Lancashire Cottom Relief Fund.” In this period the prosperous African farmer were donating money for the 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 Mathew 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 granting of individual titles will destroy their influence amongst the headmen.”

Chiefs also resisted improvements made on the lands, such as the digging of irrigation ditches or the building of fences. They recognised that their 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 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 people had:

“Transferred their allegiance to us. The chiefs have been changed to a sort of titled landowners...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 skillful 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 new prosperity and dynamism that Africans had created in the previous 50 years. The first was antagonism by the European farmers who were competing with Africans. Succesful African farmers drove down the price of crops that Europeans also produced. The response of the Europeans was to drive the Africans out of business.

The second force was even more sinister. The Europeans wanted a cheap labour 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 labour. He explained how he proposed to cheapen labor by “simply telling the boys that their wages were reduced.” His testimony goes as follows:

"Commision: Suppose the kaffirs [black Africans] retire back to their kraal [cattle pen]? Would you be in favour of asking the Government to enforce labour?

Albu: Certainly...I would make it compulsory...Why should a nigger be allowed to do nothing? I think a kaffir should be compelled to work in order earn his living

Commision: If a man can live without work, how would you force him to work?
Albu: Tax him, then...

Commision: Then you would not allow the kaffir to hold land in the country, but he must work for the white man to enrich him?

Albu: He must do his part of the work of helping his neighbors."

Both of the goals of removing competition with white farmers and developed a large low-wage labor force where simultaneously accomplished by the Natives Land Act of 1913. The act, anticipating Lewis’s notion of dual economy, divided South Africa into two parts, a modern prosperous part and a traditional poor part. Except that the prosperity and poverty were actually being created by the act itself. It stated that 87 percent of the land was to be given to the Europeans, who represented about 20 percent of the population. The remaining 13 percent was to go to the Africans. The Land Act had many predecessors, of course, because gradually Europeans had been confining Africans onto smaller and smaller reserves.

But it was the act of 1913 that definitively institutionalised the situation and set the stage for the formation of the Apartheid regime, with the white majority having both the political and economic rights and the black majority being excluded from both. The act specified that several land reserves, including the Transkei and the Ciskei, were to become known as the Bantustans, another part of the rhetoric of the Apartheid regime, since it claimed that the African peoples of Southern Africa were not natives of the area but were descended from the Bantu people who had migrated out of Eastern Nigeria about a 1000 years before. Thus they had now more – and of course, in practice less – entitlement to the land than the European settlers.

The map below shows the derisory amount of land allocated to Africans by the 1913 Land Act

The 1913 legislation also included provisions intended to stop black sharecroppers and squatters from farming on white-owned land in any other capacity other than labor tenants. As the secretary for native affairs explained. “The effect of the act was to put a stop, for the future, to all transactions involving anything in the nature of the partnership between Europeans and natives in respect of land or the fruits of the land. All new contracts with natives must be contracts of service. Provided there is a bona-fide construct of this nature there is nothing to prevent an employer from paying a native in kind, or by the privilege of cultivating a defined piece of ground...But the native cannot pay the master anything for his right to occupy the land.”

To the development economists who visited South Africa in the 1950s and ‘60s, when the academic discipline was taking shape and the ideas of Arthur Lewis were spreading, the contrast between these Homelands and the prosperous modern white European economy seemed to be exactly what the dual economy theory was about. The European part of the economy was urban and educated, and used modern technology. The Homelands were poor, rural, and backward; labor there was very unproductive; people, uneducated. It seemed to be the sense of timeless, backward Africa.

Except that the dual economy was not natural, or inevitable. It had been created by European colonialism. Yes, the homelands were poor and technologically backward, and the people were uneducated. But all this was an outcome of government policy, which had forcibly stamped out African growth and created the reservoir of cheap, uneducated African labor to be employed to be employed in European controlled mines and lands. After 1913 vast numbers of Africans were evicted from their lands, which were taken over by whites, and crowded into Homelands, which were too small for them to earn an independent living from. As intended, therefore, they would be forced to look for a living in the white economy, supplying their labour cheaply. As their economic incentives collapsed, the advances that had taken place in the proceeding fifty years were all reversed. People gave up their plows and reverted to farming with hoes – That is, if they farmed at all – More often they were just available as cheap labor, which the Homelands had been structured to ensure.

It was not only the economic incentives that were destroyed. The political changes that had started to take place also went into reverse. The power of the chiefs and traditional rulers, which had previously been in decline, was strengthened, because part of the project of creating a cheap labor force was to remove private property in land. So the Chiefs’ control over land was reaffirmed. These measures reached their apogee in 1951, when the government passed the Bantu Authorities Act. As early as 1940, G Findlay put his finger right on the issue:

“Tribal Tenure is a garuntee that the land will never properly be worked and will never really belong to the natives. Cheap labour must have a cheap breeding place, and so it is furnished to the Africans at their own expense”

The dispossession of the African farmers led to their mass impoverishment. It created not only the institutional foundations of a backward economy, but the poor people to stock it.

The available evidence demonstrates the reversal in living standards in the Homelands after the Natives Land Act of 1913. The Transkei and the Ciskei went into prolonged economic decline. The employment records from the gold mining companies collected by a historian Francis Wilson show that this decline was widespread in the South African economy as a whole. Following the Natives Land Act and other legislation, miners’ wages fell by 30 percent between 1911 and 1921. In 1961, despite relatively steady growth in the South African economy, these wages were still 12 percent lower than they had been in 1911. No wonder over this period South Africa became the most unequal country in the world.

But even in these circumstances, couldn’t black Africans have made their way in the European, modern economy, started a business, or have become educated and begun a career? The government made sure these things could not happen. No African was allowed to own property or start a business in the European part of the economy – the 87 percent of the land. The Apartheid regime also realised that educated Africans competed with the whites rather than supplying cheap labor to the mines and to white-owned agriculture. As early as 1904 a system of job reservation for Europeans was introduced in the mining economy. No African was allowed to be an amalgamator, an assayer, a banksman, a blacksmith, a boiler maker, a brass finisher, a brass molder, a bricklayer...the list went on and on, all the way to woodworking mechanist. At a stroke, Africans were banned from occupying any skilled job in the mining sector. This was the first incarnation of the famous “colour bar,” one of the several rascist interventions of South Africa’s regime. The colour bar was extended to the entire economy in 1926 and lasted until the 1980s. It is not suprising that black Africans were uneducated; the South African state not only removed the possibility of Africans benefitting economically from an education but also refused to invest in black schools and discouraged black education. This policy reached its peak in the 1950s, when, under the leadership of Hendrik Verwoerd, one of the architects of the Apartheid regime that would last until 1994, the government passed the Bantu Education Act. The philosophy behind this act was bluntly spelled out by Verwoerd himself in a speech in 1954:

"The Bantu must be guided to serve his own community in all respects. There is no place for him in the European community above the level of certain forms of labour...For that reason it is to no avail to him to receive a training which has its aim absorption in the European community while he cannot and will not be absorbed there."

Naturally, the type of dual economy articulated in Verwoerd’s speech is rather different from Lewis’s dual economy theory. In South Africa the dual economy was not an inevitable outcome of the process of development. It was created by the state. In South Africa, there was to be no seamless movement of poor people from the backward to the modern sector as the economy developed. On the contrary, the success of the modern sector relied on the existence of the backward sector, which enabled white employers to make huge profits by paying very low wages to black unskilled workers. In South Africa there would not be the process of unskilled workers from the traditional sector gradually becoming educated and skilled, as Lewis’s approach envisaged. In fact, the black workers were purposefully kept unskilled and were barred from high-skill occupations so that skilled white workers would not face competition and could enjoy high wages. In South Africa, black Africans were indeed “trapped” in the traditional economy, in the Homelands. But this was not the problem of development that growth would make good. The homelands were what enabled the development of the white economy.

I should also be no surprise that the type of economic development that white South Africa was achieving was ultimately limited, being based on extractive institutions the whites had built to exploit the blacks. South African whites had property rights, they invested in education, and they were able to extract gold and diamonds and them profitably in the world market. But over 80 percent of the South African population was marginalised and excluded from the great majority of desirable economic activities. Blacks could not use their talents; they could not become skilled workers, businessmen, entrepreneurs, engineers or scientists. Economic institutions were extractive; whites became rich by extracting from blacks. Indeed, white South Africans shared the living standards of people of Western European countries, while black South Africans were scarcely richer than those in the rest of sub-Saharan Africa. This economic growth without creative destruction, from which only the whites benefited, continued as long as revenues from gold and diamonds increased. By the 1970’s however, the economy had stopped growing.

And it will again be no surprise that this set of extractive economic insitutions was built on foundations laid by a set of highly extractive political institutions. Before its overthrow in 1994, the South African political system vested all power in whites, who were the only ones allowed to vote and run for office. Whites dominated the police force, the milatary, and all political institutions. These institutions were structurally under the military domination of white settlers. At the time of the foundation of the Union of South Africa in 1910, the Afrikaner polities of the Orange Free State and the Transvaal had explicit racial franchises, barring blacks completely from political participation. Natal and the Cape Colony was kept in 1910, but by the 1930s, blacks had been explicitly disenfranchised everywhere in South Africa.

The dual economy of South Africa did come to an end in 1994. But not because of the reasons that Sir Arthur Lewis theorized about. It was not the natural course of economic development that had ended the color bar and the Homelands. Black South Africans protested and rose up against the regime that did not recognise their basic rights and did not share the gains of economic growth with them. After the Soweto uprising of 1976, the protests became more organised and stronger, ultimately bringing down the Apartheid state. It was the empowerment of blacks who managed to organise and rise up that ultimately ended South Africa’s dual economy in the same way that South African whites political force had created it in the first place.