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Published: February 23, 2010
 / Spring 2010 / Issue 58

 
 

Roots of Prosperity

Though the Roman Empire was far from perfect by modern standards, it would probably have achieved a fairly high score according to the World Bank’s Doing Business criteria. The presence of slavery, the absence of true corporations, and the seizure of property would have brought the score down, but the legal and government systems helped ordinary business spread easily throughout the empire. And spread it did: Potters and glassmakers, grain and wine merchants, tailors, butchers, carpentry and metal workshop owners, bakers, dealers in pressed oil, linen and wool weavers, sellers of hides and fish, lamp makers, jewelers, ivory and ebony traders, and dozens of other entrepreneurs helped businesses spring up in the thousands of trading cities and towns that thrived wherever the Roman army kept the peace. The greatest volume of trade took place within and between the Roman provinces, back and forth across the expanding empire. The government built roads and ports where needed, first for its conquering army and then for the commerce that followed.

The Feudal Backlash

After 500 A.D., as the Roman Empire fell to wave after wave of tribal armies, its business towns died out. Other empires rose: the Byzantine, Arab, and Holy Roman empires in the West, and the various dynasties of China in the East. All of these were either despotic (enforcing absolute rule through a central army funded with taxes and plunder) or feudal (organized like a confederacy, with regional leaders supplying armies and taxation). Business suffered greatly in these systems — partly because of constant warfare and partly because the feudal model, as developed by Charlemagne, was inherently bad for business (when judged by the Doing Business criteria). Goods and money flowed up through the pyramid as taxes from a peasant’s field, to a lord, to a prince, to the king. At every level the Catholic Church oversaw the flow, took a cut, and enforced policies that helped suppress business activity. That church oversight, in fact, is what made the empire “holy.”

The most important antibusiness policy of the western European feudal empires was a religious ban on lending money with interest. This effectively banned all Catholics from the business sector, which greatly reduced its overall size and crippled it to the core. Similarly, the despotic rulers of China, Egypt, and the Ottoman Empire supplemented military rule with paid officials who kept tight control over economic life. China became more pro-business under the Tang Dynasty, starting in the seventh century A.D., as the Silk Road to the Arab, Byzantine, and European empires brought business to its doorstep. But the Tang fell to another dynasty in 907 A.D., and the bureaucracy took over again.

Historian Angus Maddison has described the outcome of this latter shift in his book Chinese Economic Performance in the Long Run (OECD Development Center, 1998). In China, he wrote:

larger undertakings were limited to the state or to publicly licensed monopolies. Potentially profitable activity in opening up world trade by exploiting China’s sophisticated shipbuilding and navigational knowledge was simply forbidden. It was a similar story in India.… Europe’s feudal bureaucracy tried just as hard as China’s and India’s to suppress the business sector. But they failed. So [Europe] was where the business sector took off, centuries after Rome fell.

Compared to business in China and India, business did flourish in Southeast Asia, where fertile river valleys combined with good ports and trade routes, beyond the direct control of the Chinese and Indian empires. Yet when kingdoms grew in these regions, they took those empires as models, including their antibusiness policies.

And it is the same story today in the impoverished countries of the world. In both tribal and feudal systems, there is an implicit assumption that the more government jobs exist, the better things are for people. In Mozambique, it takes 10 steps to start a business. That means an entrepreneur must go to 10 different government offices to fill out forms. This system provides jobs to 10 Mozambicans behind the desks. They get their small salary plus the bribes given to them in exchange for their stamps on a document. Only when entrepreneurs have these 10 stamps can they run a business without the police shutting them down.

 
 
 
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Resources

  1. R. Glenn Hubbard and William Duggan, The Aid Trap: Hard Truths about Ending Poverty (Columbia University Press, 2009): A concise look at global poverty and the optimal solution of a business-friendly climate, including perspectives on how the current government- and NGO-based foreign aid system could profitably reform.
  2. R. Glenn Hubbard and William Duggan, “The Forgotten Lessons of the Marshall Plan,” s+b, Summer 2008: The other half of the Hubbard/Duggan prescription for combating poverty, specifically in Africa: redirect foreign aid to foster local business.
  3. Art Kleiner, “The Philosopher of Progress and Prosperity,” s+b, Summer 2004: The World Bank’s Doing Business project is based in part on the “mystery of capital” uncovered by Peruvian economist Hernando de Soto; this article introduces his theory and related practices.
  4. Sylvia Solf et al., Doing Business 2010: Reforming through Difficult Times (World Bank, International Finance Corporation, and Palgrave Macmillan, 2010): The seventh edition of the influential and well-researched comparative analysis of business-friendly conditions.
  5. Muhammad Yunus, Creating a World without Poverty: Social Business and the Future of Capitalism (PublicAffairs, 2007): Recounts the founding of Grameen Danone Foods and the concept of social business.
  6. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/global_perspective
 
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