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strategy and business
 / Spring 2010 / Issue 58(originally published by Booz & Company)


Roots of Prosperity

Local corruption merges nicely with national socialism and despotism. In Bolivia, for example, the elected president, Evo Morales, installed socialism in 2006; he nationalized the main industries of natural gas and mineral processing. That created more government jobs, with much more money passing through the hands of whoever got those jobs. But it was bad for business overall, and therefore bad for the country’s prosperity. Equally bad for business has been the situation in Myanmar (Burma), where army despots keep business at bay with an iron fist. They know that as soon as they open up, Chinese traders will return. And who knows what balance of power will result from that?

History shows that the best check on despotism is a thriving business class. This often means democracy, but not always. As of 1890, the British cabinet still looked a lot like the House of Lords, and Queen Victoria was still the official head of government. Yet the business class had won enough freedom and rights to operate without harm or fear. No one knows if China will become a democracy, but already we see that the new business class is the only effective check on government power.

The Pro-business Long Wave

How, then, can the poorest countries of the world create a business class large enough to enable them to escape their problems? Here, too, we can look to the experience of Europe for answers. Europe’s feudal bureaucracy may have tried hard to suppress the business sector, as Maddison suggests, but in the end it failed — in part because Europe’s rivers and mountain borders made the whole continent more difficult to manage centrally.

The new European commercial system started in the 1100s in Venice, just beyond the borders of the Arab Empire to the south, the Byzantine Empire to the east, and the Holy Roman Empire to the north. Venice traded with all three. The merchants of this city-state essentially reconstructed the Roman business system, with improvements. Early Venice had innovated the “fraternity,” in which brothers kept their family business together after the death of the father. In the 1100s this evolved into a “company,” in which nonfamily could join in too. The company came together under contract to take on specific activities for a specific time, usually a trading voyage by a single ship, with a specific return for each member. The partners then renewed the contract for the next voyage, changing as needed the list of contributors, but keeping decision-making control, while outsiders just put in money. That outsider contribution was essentially an interest-bearing deposit, much like a modern bond.

The key to the new Venetian system was the dominant role that these companies played. The business owners elected a Great Assembly, a Senate, and a doge as chief official. There was no hereditary king, no role for the church, and no ban on Christians charging interest. Pawnbrokers, deposit banks, and merchant banks gave loans large and small to individuals and companies. Low taxes on a large volume of trade paid for a strong army and navy to protect the system from marauding pirates, tribes, kingdoms, and empires.

As the Venetian system spread up the fertile Po Valley and across northern Italy, it began to look like the business sector we know today. Large numbers of ordinary people prospered as never before. The cities and towns — from Venice in the east to Turin in the west — were centers of craft and commerce, and in the countryside between, feudal lords and independent farmers sold crops, livestock, and land. Those lords began to invest in banks and factories in the towns. By the end of the 15th century, the Venetian business system dominated all of northern Italy. Three features of the Venetian system were still thoroughly unmodern: slavery, the exclusion of women from business life, and religious discrimination. These would not end for several hundred more years. But for the first time in history, business centers and their surrounding farmland were no longer islands of prosperity in a sea of larger despotic empires.

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  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:
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