A History of Wealth and Poverty: Why a Few Nations are Rich and Many Poor, by John P. Powelson.


Novgorod, Italy, and the Four Dragons

Four "dragons" — Hong Kong, Singapore, South Korea, and Taiwan — seem to defy the power-diffusion process. All have experienced rapid economic growth under autocratic governments with concentrated power. They are hardly pluralist societies. Their market freedoms are the first choices of their rulers, not the last choices after centuries of compromise and negotiation. Contrasted with the disasters of economic planning and socialism in other countries, the four dragons reinforce the belief that market freedom, whether commanded or negotiated, lies at the heart of economic growth.

Whether their economic development is durable, however, remains to be seen. The four dragons as independent states are still young. To predict their future, we turn again to the past. In Novgorod and the Italian city-states of the Middle Ages, we find common features with the four dragons. We also have the hindsight of history.

Each of these small-state economies, including the four dragons, was shaped by an administrative aristocracy under the loose tutelage of a sponsor or ruling state. The sponsor or formal ruler intervened but little. The aristocracy composed the laws, regulated the monetary system and banks, enforced justice, and often controlled prices, wages, and other economic transactions. It did all this through an "old-boy" network, with favors for favorites and little regard for impartial law or justice.

For Novgorod the formal ruler was the Prince of Kiev (later of Novgorod). For the Italian city-states, the Holy Roman Emperors or popes or kings of Spain were the formal rulers. When these cities became their own sponsors, they were gobbled up by European powers. For Hong Kong and Singapore, Britain was the imperial power. For South Korea and Taiwan, the sponsor was the United States after World War II. In each case, the ruler or sponsor prevented other powers from emasculating its client. For example, China could not capture Taiwan. [1]

Each of these small states possessed some elements of the power-diffusion process. In Italy that process advanced farther than in the others considered here. But in each case, it did not advance far enough for sustained, high-level economic development. Whereas the ruling elite of most less-developed countries have milked agriculture and industry through state ownership, price controls, and forced purchases and sales, the aristocracy of the city-states of this chapter could not do so. With limited "backyards" for agriculture (Singapore has none) and with a small domestic market for home industry, they had no other source of prosperity than to export. To survive, they were forced to deal with the international market, which they could not control. Hence liberal international investment and market policies were their only options. [2]

The power positions occupied by the rulers of Novgorod and the Italian city-states were not checked by the countervailing powers of other groups. As a potential source of wealth, power was a plum to be seized when the ruler or sponsor weakened or lost interest. The ensuing wars or civil unrest damaged or destroyed the institutions of trust on which the free market was based. Is this the future for the four dragons?

Often a neighboring power seized the small state. For Novgorod, this was Muscovy in 1478. For the Italian city-states it was Spain, France, the German and Austrian emperors, the pope, and finally the unified state of Italy. For Hong Kong and Taiwan, it threatens to be China; for Singapore and perhaps Korea, a widened Asian common market. In each case, the small state's economy would end up no more nor less advanced than that of its absorber. With some modifications, this history extends to other small states, that are not considered here. Belgium, Luxembourg, and the Netherlands were fought over by greater powers — England, France, Spain, and the Habsburgs. Their independence was a second choice for each of these powers, acceptable only because the tutelage of any one of them was unacceptable to its rivals. These small states also participated in the power-diffusion process by which the northwestern European economy was formed, and their prosperity and freedom ended up being about equal to that of their neighbors. The Swiss and German city-states, independent in the sixteenth century, are now about as prosperous as the rest of Switzerland and Germany. Ancient city-states, such as the Greek and Mesopotamian, also became absorbed into their neighbors, whose economic affluence or lack of it they mirrored. The Hausa city-states, sadly underdeveloped, are now part of Nigeria. [3]


From its ninth-century beginnings, Novgorod was a trading city. A class of boyars (landed nobility) sprang probably from peasants and craftsmen, to wrest control from the distant Kievan prince. The prince granted them self-government in 1019, [4] and an uprising in 1136 gave them the right to choose or expel the prince. [5] Boyar government regulated trade.

During the twelfth and thirteenth centuries Novgorod acquired a vast fur-trading empire, with political control to the White Sea in the north and the borders of Vladimir-Suzdal in the east. Under its own prince Alexander, it defeated the Swedes and the German Teutonic Knights. By paying tribute to the Mongol khan, it escaped the destruction wrought upon Muscovy and Kiev.

Astride the Baltic-Black Sea route, Novgorod became one of the greatest trading centers of eastern Europe in the thirteenth century. It was a hub with spokes radiating to the Baltic, Byzantium, Central Asia, and Russia. As the easternmost station (Kontor) of the Hanseatic League until 1494, it lodged thousands of foreign merchants. From the seventeenth century on, it is hardly mentioned.

No explanation is needed for Novgorod's importance as a trading center. Early societies have always traded when geographic and other conditions were favorable. The question is why Novgorod and surrounding territory did not move on to become an advanced industrial economy, replete with the institutions of economic growth.

The city was divided into five "ends," each under an administrative officer and each controlling one fifth of the outlying empire. No one knows whether the end administrators and other officials were independent powers or were accountable to the boyars; whether merchants influenced the officers of the ends or the boyars; whether the veche, or general assembly, was subject to the people or a tool of the boyars; or whether the people through mass meetings affected economic and political policy. [6] Any citizen group could constitute a veche merely by ringing a bell.

Probably the struggles between prince and boyar did not supply opportunities to the peasants or merchants for leverage. The prince lost handily, retaining formal dignity but forfeiting authority. Archaeology has shown that in some quarters — not all have been excavated — merchants lived on the property of the boyars. Probably they were subject to them. The boyars also had co-opted the church, offering land and perquisites to both clergy and monasteries in exchange for loyalty.

Whenever a new office was created, such as tysyatskiya (mayor of each of the five ends), it was ultimately controlled by the boyars. Vertical alliances and leverage for merchants or peasants probably did not arise out of the bitter power struggles among the boyars representing the different ends. The boyars compromised finally, forming a Council of Lords in the thirteenth century, as an aristocratic parliament. [7] After sifting the evidence of different historians, Birnbaum concludes that merchants and tradesmen did influence public policy by sheer numbers and economic weight. [8] But this is conjecture. Nothing in the literature suggests that guilds or other associations bargained for trading rules, a monetary system, or commercial law.

With a hierarchical rather than a pluralist order, no serious challenge to boyar power arose, so the power-diffusion process would have been weak. Possibly the threat of invasion by Poland-Lithuania, Suzdal, and Muscovy cowed the lower classes into yielding more power to the boyars, just as the Turkish threat later compromised the power of the estates in Germany. Whether the Russian tsar Ivan III viewed Novgorod as a plum for its great wealth, or whether his appetite for conquest would have led him to take it anyway, is not known. Novgorod was taken, and its rebellions against conquering Muscovy led to massacre by Ivan IV in 1570.

From the seventeenth century on, Novgorod's wealth and power dwindled, as a result of numerous forces: its earlier wars with Muscovy; its capture by the Swedes, 1611-19; the decline of the Hanseatic League; and the Thirty Years' and Great Northern wars. The balance of economic power in a pluralist society had failed, not only in Novgorod, but also in the territories surrounding it: Russia, Sweden, Poland-Lithuania, and eastern Germany.

So long as the administrative aristocracy remained in power, Novgorod prospered. But free markets, mobility of labor, and a welcome for investment were the choice of the boyars and were not culturally ingrained in the surrounding communities nor sustained by a balance of power among groups. When the boyars lost control, the basis for economic growth crumbled.

The lesson from Novgorod is not that economic development requires governments of liberal tendency, such as the boyars. Instead, the lesson learned elsewhere is that sustained liberal tendency comes not from the presence of a power endorsing it but from countervailing forces whose balance tends toward it, even if no one group would choose it independently.

The Italian City States


In the fourteenth and fifteenth centuries, city-states in northern Italy — such as Florence, Genoa, Milan, and Venice — were the leaders in European economic development. They traded in all corners of the European-explored world and created the most advanced laws, financial instruments including money, and commercial contracts outside the Islamic countries. Their money exchanges and banks extended throughout Europe; they financed kings and governments as well as traders. Yet the Industrial Revolution did not take place in Italy. While these cities are today more prosperous than those in Sicily and the south, nevertheless they have long been outperformed — as money markets, industrialists, and traders — by northern states such as England, Holland, and Germany.

The city-states passed through four periods between the eclipse of the Roman Empire and the unification of Italy. In the first, from the sixth to the late eleventh century, they were mainly under the tutelage of bishops or other feudal lords.

A second period began when the Holy Roman Emperors invaded them from the eleventh to the thirteenth centuries but ran into opposition from the pope. [9] By playing off pope against emperor, the city-states gained leverage that brought them functional if not formal independence. [10] They became communes ruled by consuls of their own selection. They expanded their suzerainty over surrounding agricultural areas, from which they acquired food. Instead of opening the way for growing alliances and leverage, however, the power contest of local magnates versus the Popolo — merchants, guilds, and other commoners — and the church brought instability. Wars damaged trade. The rivalry between supporters of the pope (Guelfs) and those of the emperor (Ghibellines) widened into bitter personal feuds. The only way a city could keep order was to appoint a podestà from another city, free of local rivalries, to rule, with a term of six months or a year. Rivalry was too extreme, mistrust too great, for vertical alliances and leverage.

Bringing on the third period, in the thirteenth century, the city-states invited landed lordships (Signorías) to contain their violence by ruling them. These noble families perceived that outward-oriented trade and finance were their quickest route to wealth. Despite wars among these families and with outside powers, this period, which lasted until the sixteenth century, brought on the Renaissance: Italy's greatest florescence economically, financially, and culturally. Besides the great painters and inventors, notable individuals and achievements included Machiavelli, the Medici family in Florence, the first book on double-entry accounting since the ancient Egyptians, insurance, and the commenda and other financial instruments.

In the fourth period, from the sixteenth to nineteenth centuries, industry and trade declined as the city-states lost their competitive advantages vis-à-vis northern Europe. Their hierarchical societies, with concentrated wealth, left little possibility for a broad consumer market. [11] They switched "ownership" from one European power to another many times. Finally, in the nineteenth century, they were absorbed into an Italy that is now one of the weaker members of the European Union.

Pluralism, Compromise, and Leverage

During the second and third periods, elements of the power-diffusion process were at work. Corporate groups of many types [12] emerged: church, family and lineage, magnates, civil servants of the commune, neighborhood associations, merchants and artisans including guilds, money changers, notaries and lawyers, business partnerships, university students, professors, outlaws, youth gangs, artificial kinship groups through baptism, organizations of cities such as the Lombard League, and many more. Some of these combined into larger groups with corporate identities, such as the Popolo. Occasionally groups of workers would be gathered, normally for some specific grievance, but they were usually suppressed. [13] "Everyone in the highly urbanized and sociable Italy of this period had the opportunity, the obligation, or desire to join one or another informal group." [14]

Probably these groups were formed for protection. "Beyond the limits of the home and the family there existed a strange world that many people considered too dangerous to confront alone. Confraternities, corporations, and other structured institutions offered the necessary support." [15] But the groups were not always clearly bounded. Clients hung on to powerful patrons, supporting them and drawing on them when either of these was opportune. So how did this particular complex of groups arise, and why were they not brutally suppressed as groups have been in other cultures, such as in South Africa during most of the twentieth century?

The answer would seem to be that the relative power of the groups represented their relative abilities to threaten other groups or to cooperate with them for mutual benefit, and that some kind of tenuous, ever-changing equilibrium of tensions kept them alive. This balance probably arose out of geographic and historical conditions in which contending parties could not benefit from either escaping each other or stonewalling each other, so they decided on a precarious modus vivendi.

Examples of cooperation and compromise abound. The Peace of Constance in 1183 marked a compromise with the emperor, which yielded greater independence for the Lombard League of cities. The Venetians did a juggling act, keeping on good terms with the Western and Eastern Empires and (sometimes) with the Turks once the latter had taken Constantinople in 1453. [16] The consuls of the communes frequently mediated quarrels over restrictive rights claimed by different groups. [17]

Examples of vertical alliances and leverage are also found. After 888, both bishops and cities obtained rights by supporting one contending king rather than another. [18] After the Magyar-Saracen attacks of the tenth century, none of the four great aristocratic families could prevail over the others without the support of bishops, who must have made concessions for the families' patronage. [19] "Emperor Henry IV [a foe of Pope Gregory VII] gave charters of liberty and self-government to the Tuscan cities of Lucca and Pisa in order to help them win their freedom from Gregory's friend and supporter, the Countess Matilda." [20]

Italian kings and Ottoman emperors granted licenses to merchants to open markets in towns or beneath their walls, [21] thereby promoting free trade. To gain their support in a contest with the Holy Roman Emperor, early in the twelfth century the bishop of Milan granted nonnoble citizens their own place in the feudal hierarchy, and thus began the commune of Milan. [22] Venice, Genoa, and Pisa helped the armies of the First Crusade, and "with each new victory they demanded and obtained new privileges." [23] In Genoa, a "disturbance in 1265 shows that the Popolo was able to play a role in politics only when summoned to do so by one of the city's most prominent families." [24] The actions of the signori "always conformed to the fundamental principle of strengthening the weakest classes, weakening the most powerful, and maintaining themselves by machiavellian balance of power between the various classes and the various groups in the state." [25]

In all these actions, and many more, it would appear that the power-diffusion process was at work. It did not advance far enough, however, to prevent the city-states from being still ruled by powerful families when the fourth period began. That fact, along with their prosperity and the absence of strong defenders other than themselves, made them targets for the European conquerors.

Decline of the Italian City States

By the seventeenth century, both commerce and manufacturing were declining. Economic historians point to these causes: inability to compete with Dutch manufactures in price or quality; high wages that inhibited competition; price, production, and trading controls imposed by guilds; monopolies that raised raw materials costs; failure to keep up with textile fashions such as the new draperies in northern Europe; heavy and irrational taxes; wars in Europe; Andrea Doria linking Genoese finance to the Spanish monarchy, which soon became bankrupt; and invasions and occupations of the city-states by European powers. [26]

Having located the "causes" and illustrated them, economic historians usually stop. But all these "reasons" must have been symptoms and not ultimate causes of decline. Why did the rulers of the seventeenth century allow the Dutch to out-compete them when those of the fifteenth century had not? Why were guild restrictions more severe than earlier? Why did monopolies develop? Why were taxes, wages, and materials costs too high? Why did not Italian artisans invent the new fabrics? How did Andrea Doria obtain so much power?

Despite their pluralism, leverage, and tendency toward compromise, the Italian city-states had not yet met the crisis in which groups such as labor, merchants, and patricians must cooperate with each other to survive. Patricians such as the Medicis had enacted liberal economic policies vis-à-vis foreigners (though not for the home market) because they perceived these to be in their best interests, not because they were forced to do so by tensions from other groups. They had promoted contracts and a more advanced financial system for the same reason, and they had shared some of the resulting wealth with merchants, laborers, and farmers because that was the least costly policy. Although some merchants joined the inner circle, at no point did laborers and farmers acquire a piece of the political action. Their demands were voiced only through a few unsuccessful rebellions and rioting.

If an elite group has charge of all the important governmental and economic processes — the laws, the monetary system, price and production quotas or controls, the military and war making — with no countervailing authority, then the outcome depends on the personal wills of the rulers. If they want the free market, so be it. If they do not, so be that! A change in rulers will bring capricious changes, even though the new policies may come about only over centuries. Finally, if some small group is able to extort product from another, through control of the market, either it or some successor will ultimately do so.

The imaginative thinking of the fourteenth- and fifteenth-century rulers, which made the city-states the most modern economies in the world, did not erect the interlocking society that would maintain the same policies over ensuing centuries. When foreign conquerors and ultimately the government of a unified Italy, not so clear-thinking as their forbears, decided that their best opportunities lay in anti-market controls, they enacted them. From these ensued all the "causes" of decline that economic historians have perceived.

The Four Dragons

The twentieth century may turn out to have been for the four dragons what the thirteenth was for Novgorod and the fifteenth was for the Italian city-states.

The success of the four dragons is legendary. [27] Especially from 1960 to 1990, their gross national products increased enormously by world comparisons; their income distributions have come closer to equality than anywhere else in the world; and their poor have been better served than have the poor of any state-organized society. Their miracle has also spread to Indonesia, Malaysia, and Thailand. If Japan is added to this group, their collective gross domestic product has grown by an average annual rate of 5½ percent from 1965 to 1992. [28]

All this has been achieved in relatively free-market economies, open to foreign investment, with few price and wage controls or supports, and relatively low taxes. Adam Smith, come home to southeast Asia! Monetary and fiscal policy has been expansive. A few investments have been subsidized, sometimes with inexpensive credit. Exchange rates have been slightly biased toward exporting, not for mercantilist reasons but in the belief — apparently correct — that exports are an engine of economic growth. [29] This small degree of government intervention in the economy contrasts with a far greater kind in Latin America, Africa, and south Asia. The four dragons — plus Indonesia, Malaysia, and Thailand — therefore demonstrate once again the power of the market and of sound policies: "they got the economic fundamentals right, with low inflation, sound fiscal policies, high levels of domestic saving, heavy investment in education; and they kept their economies more open to foreign technology than most other developing countries." [30]

Why did they do all this? Without any structural pressures forcing them, these policies were chosen by extraordinary individuals — farseeing, civic-minded, and with little corruption. Their main economic-political pressure was a negative one: they did not have a "backyard" to milk. But these same individuals have created paternalistic, authoritarian societies. Labor unions, though tolerated, are discouraged and powerless. [31] For the most part, laws were not composed by democratic forum; the monetary system was not designed by compromise between lenders and borrowers; no equilibrium of power emerged among groups. Hsiao and Hsiao have described the highly-authoritarian nature of the Chinese refugee government in Taiwan and how it sorely paternalized the native Taiwanese, with whom communication was sparse and whose language they could not speak. [32] Indeed, the four dragons are not nearly so pluralist as were the Italian city-states. Does their success disprove the power of the power-diffusion process?

No. The power-diffusion process is one of centuries, not decades. So, do we predict that the four dragons and other southeast Asian states will go the way of Novgorod and the Italian city-states? The argument against this is that unlike the thirteenth and fifteenth, the twenty-first century will be one of global economy. The pluralist society of the four dragons is the world, not just their own territories. The countervailing forces to keep them "straight" are the industrial powers, their suppliers, and their customers. Would this contrast lead to different parameters for the four dragons from those of Novgorod and the Italian city-states? It might, if the rulers of the four dragons are forced into negotiation with the surrounding community of southeast Asian states, to open a wider free-trade area. The competition from each power might hold the others accountable for efficient use of resources. The advantages of large-scale technology in both industry and services and the need for more labor would be the motivating forces. The process of creating this association might even be one of power diffusion as new interest groups vie for authority and influence.

But the idea that we are a global economy and they — Novgorod and the Italian city-states — were not is chronocentric. [33] Novgorod and the Italian city-states existed in their globes, not ours, with mutual benefits possible through free-trade associations. Only mistrust, jealousy, and power hunger prevented Muscovy, Poland-Lithuania, and Germany from forming an economic association with Novgorod, or the Turks or Austrians from forming one with Venice. In all these cases, no checks and balances limited the administrators of home or neighboring territories. The same is so in the four dragons today. Would the holder of power in Singapore share it with his counterpart in Taiwan or South Korea, if necessary to form a free-trade union? Do they trust each other? Historically, the holder of such power relinquishes it, or cautiously begins to trust others, only when survival is otherwise at stake.

Contemporary occupants of power in the four dragons may perceive that their interest lies in the free market and export promotion, provided they command it. But the balanced forces to maintain this are not present. Successors — for no predictable reason — might initiate opposite policies, such as those found in most African countries today. And if they might do so, some successor ultimately will.

A happy long-range outcome is therefore not necessarily in store for the four dragons. If their success continues over centuries, it will be only because they become absorbed into wider areas of balanced tensions and more equalized power, as happened to the Benelux countries and the Swiss and German city-states. It is into all of southeast Asia that one must look to predict the future of the dragons. Perhaps Beijing will soon reach the survival crisis; perhaps its southern provinces will mix with Hong Kong, and ultimately Taiwan, to spread the liberal ethic. Taiwan already shows signs of liberalizing its polity, even though the Chinese have opposed some of these steps. These areas might reflect upon each other. This is the optimistic scenario, and it might happen.

In the meantime, however, Western economists and policymakers who take a centuries-long view would do well to be concerned about the authoritarian natures of the four-dragon governments instead of supporting them just because they have momentarily chosen policies approved by the West.


  1. But it will capture Hong Kong, because Britain did not consider the benefits of retaining this colony to be worth the cost. Prediction: the same will happen to Taiwan, for similar reasons.
  2. But not at home. For the most part, they retained controls over the domestic market.
  3. See Griffeth and Thomas (1981) for a description of premodern city-states.
  4. Bobrick 1987:241.
  5. Birnbaum 1981:86.
  6. Birnbaum (1981) sets forth these unclarities clearly.
  7. Birnbaum 1981:86.
  8. Birnbaum 1981:77
  9. Venice is an exception, free from the empire earlier.
  10. Barber 1992:253.
  11. Herlihy 1977:15.
  12. More information on groups in the Italian city-states is found in Berman 1983, Black 1984, Blomquist 1979, de la Roncière 1988, Duby 1988b, Epstein 1991, Herr 1988, Lopez 1979, Luzzatto 1961, and Tuchman 1978.
  13. For example, the revolt of the Ciompi in 1378 (Epstein 1991:232; Tuchman 1978:366). Also: "Around Siena (ca. 1400) sharecropper families appear to have been organized as small corporations, with labor, debts, harvests, and stores all managed, controlled, and divided up by the father" (de la Roncière 1988:208).
  14. de la Roncière 1988:167.
  15. de la Roncière 1988:165.
  16. Luzzatto 1961:51.
  17. For example, a dispute over fishing rights between the monastery of Morimond and the fishermen's guild in 1179 (Epstein 1991:66).
  18. Barraclough 1976:102.
  19. Barraclough 1976:102-3.
  20. Berman 1983:388.
  21. Luzzatto 1961:57.
  22. Luzzatto 1961:67.
  23. Luzzatto 1961:73.
  24. Epstein 1991:195.
  25. Cipolla 1971:428.
  26. Wilson 1977:33; de Vries 1976:26.
  27. For details on the economic successes of the four dragons, see Balassa and Williamson (1987), Corbo et al. (1985). Many other sources treat individual countries, of which the following are only a partial list. For Hong Kong, see Hong Kong Institute of Economic Science (1984); Leeming (1975); Rabushka (1979). For Korea see Amsden (1989); Burmeister (1987); Cole (1971); Hamilton (1986); Hasan (1976); Haejoang (1981); Hayami (1979); Hou (1983); Kim Kwang Suk (1979); Kim Hyong Chun (1971); Lee (1979); Lim (1988); Mason (1980); Suh (1975); and Park (1980). For Singapore see Mirza (1986); Rodan (1989); and Ong (1978). For Taiwan see Fei (1979); Hayami (1979); Gold (1986); Ka (1986); Kuo (1981, 1983); Li (1988); Simon (1983).
  28. World Bank 1993, cited in The Economist, 10/2-8/93.
  29. Balassa and Williamson 1987:7.
  30. The Economist, 10/2-8/93.
  31. Balassa and Williamson 1987:16.
  32. Hsiao and Hsiao, in Kuark, 1994.
  33. "Chronocentric," not in the dictionary, means "placing undue emphasis on one's own time period."

Copyright © 1994 by the University of Michigan. First published in the USA by the University of Michigan Press, 1994.

Published on the World Wide Web by The Quaker Economist with permission from the University of Michigan Press, 2005.

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