The Economic Impact of Colonialism

Drain of wealth

The main arguments regarding the economic impact of colonialism are the ‘drain of wealth’, expropriation (mainly of land), the control over production and trade, the exploitation of natural resources, and the improvement of infrastructure. As Tomlinson (1993) summarizes for India:

„By the last quarter of the nineteenth century India was the largest purchaser of British exports, a major employer of British civil servants at high salaries, the provider of half of the Empire’s military might, all paid for from local revenues, and a significant recipient of British capital.“ (Tomlinson 1993: 13)

Colonialism led to a substantial outflow of financial resources. It is best documented in the case of British India, where a controversy between Indian historians and defenders of British colonialism still has not been settled. The economic historian Maddison (1971: 20) concludes that there was „a substantial outflow which lasted for 190 years“, and: „If these funds had been invested in India they could have made a significant contribution to raising income levels.“

The so-called “Home Charges”, the official transfers of funds by the colonial government to Britain between 1858 and 1947, consisted mainly of debt service, pensions, India Office expenses in Britain, purchases of military items and railway equipment. Debt service occurred not only because of investment in infrastructure, but also due to costly wars and architectural extravagances like the building of New Delhi. Government procurement of civilian goods, armaments and shipping was carried out almost exclusively in the metropole country; there were no efforts at developing industrial entreprises in India which could have delivered these goods at probably lower prices. Of these official payments, therefore, service charges on non-productive debt, pensions and furlough payments can be considered as a balance of payment drain due to colonialism. For the 1930s, Maddison (1971: 21) estimates these home charges in the range of £40 to £50 million a year. In addition, there were private remittances, probably about £10 million a year, and dividend and interest remittances by shipping and banking interests, plantations, and other British investors. This kind of financial flows and “the colonial reserves in Britain, France and Belgium represented African loans to and capital investment in Europe“ (Rodney 1972: 229). According to the ‘drain of wealth’ argument,

“most of the colonial surplus was extracted by the metropolitan countries (in the form of interest payments on loans, repatriated profits, salaries and pensions) and this, by reducing the indigenous capital accu¬mulation process, had a nega-tive effect on the colonies’ growth prospects. Direct exploitation also included taxes, tariffs, restrictions on trade and foreign investment, forced labor, and even enslavement of the indigenous population.” (Bertocchi/Canova 2002: 1852f)

For a sample limited to African countries this “drain” is measured as the GNP/GDP ratio in 1960 as this “reflects repatriated profits on foreign investment, royalties and direct exploitation activities” roughly at the end of the colonial period (ibid.: 1853).

Colonialism and Trade

Diamond (1988) emphasizes the establishment of monopolistic state control of cash crop production and exportation as an important impact of colonialism, as well as the exclusive control over the mining of minerals and the development of infrastructure. Thereby, „it discouraged the development of an indigenous capitalist class by favoring the metropole’s industrial exports and foreign firms, and (…) by curtailing individual access to the land” (Diamond 1988: 7).

The effect of colonialism on trade is assessed by Mitchener and Weidenmier (2008: 1). They argue that “empires increased trade by lowering transactions costs and by establishing trade policies that promoted trade within empires. In particular, the use of a common language, the establishment of currency unions, the monetizing of recently acquired colonies, preferential trade arrangements, and customs unions help to account for the observed increase in trade associated with empire”. Trade between the colonial power and its colonies was regulated in different ways: with tariff assimilation/customs union, with preferential tariff policies and/or with “open door” policies. Chase-Dunn (1989: 276) sees the impact of colonial trade policy in a shift towards a more “bilateral (colonial) structure”, typically occurring in phases of global economic slow-down and increasing competition. Fieldhouse (1971) discusses long-term change in colonial trade policies, but – with some exceptions – a stronger protectionism of French colonialism compared to British. Grier (1999: 320) supports this argument and suggests for Spanish colonies a strong mercantilist approach. In cases in which industrially manufactured products from the metropole economy were cheaper, as in the case of British textile exports to India, a ‘desindustrialization’ in the colony was the consequence (Chase-Dunn 1989: 227; cf. Frank 1998: 267ff).

Plantation economy

Plantations were core elements of the colonial economy. In general, a plantation „is owned by a legal entity or individual with substantial capital resources, the production techniques are based on industrial processing machinery, and the labor force consists of wage laborers resident on the estate“ (Paige 1975: 4). The development of a plantation economy required expropriation, which took place in different forms, implying more or less displacement of indigenous population. For example, in British-Ceylon (Sri Lanka), the plantation boom of the „coffee era“ (1830-1880) was enabled through a combination of a special land-sales policy and financial control through banks and agency houses:

„In 1815 the colonial government assumed ownership of all uncultivated land. In 1844, the price on Crown land was raised high enough that buying was effectively limited to Europeans with sufficient capital. Since banking was British controlled, the banks perpetuated British policy by making almost all their loans to European planters and export-import-traders and not to Ceylonese peasants. As a results, most export production remained in British hands.“ (Birn¬berg/Resnick 1975: 18).

Plantations were a world different from the surrounding land, not only because of the comparatively modern equipment and facilities, but also because of the related work immigration. Working and living conditions on plantations were in general bad. Many plantation owners used a long-term debt strategy to bind workers to their enterprise. Tropical diseases were widespread and accidents common. Especially migratory estates in colonial areas have been subject to frequent resistance movements; according to Paige (1975: 68) „major rural revolts against the colonial regime were based in large part on migratory wage laborers“, e.g. in Algeria, Kenya, and Angola. In general, „the more highly industrialized sugar, tea, rubber, and sisal plantations were considerably more likely to generate labor movements than were less industrialized tree crop plantations in rubber, plam, or copra“ (ibid. 350).

Sugar, tea, sisal, and oil palm were typical plantation products, while wet rice, coffee, rubber, tobacco and cacao were also or mainly produced by small farmers. While in some colonies, governments assisted actively in setting up large estates, in others they favored small production units, “encapsulated in a colonial rhetoric of the nobility of peasant cultivators or, in the Philippines, the ideal of the yeoman farmer” (Huff 2007: i131). The production of cash crops by peasants need not necessarily to be less exploitive than plantation work. Especially in the case of agricultural monopsonies via marketing boards, traders and/or state officials could gain huge rents by underpaying peasants for their produce. According to Lange et al. (2006: 1443), this “promoted an unproductive economic elite, weak peasant production, and the preeminence of dysfunctional markets”.

While they were not based on migrant labor and modern equipment, concessions granting the exclusive rights of exploiting forests was often even more exploitative than plantations. In the Belgian Congo, the collection of wild rubber on the huge private concessions “resulted in the depopulation of entire villages and the perpetration of heinous crimes against humanity (…). Villages unwilling or unable to meet the assigned daily quotas of production were subject to rape, arson, bodily mutilation and murder” (Nzongola-Ntalaja 2002: 22). The situation on the private domain of King Leopold and in the neighboring French Congo was similar.

Colonial investment

Opening up plantations in the interior depended on adequate means of transport and communication to get the produce to the ports. This was a challenge especially in the mountainous areas where coffee and tea was produced, e.g. in Ceylon or Assam, but also the linking of the Indian cotton- and jute-producing “hinterland” with the mills of Bombay and Calcutta required significant investment in infrastructure.

The main transportation technology in 19th century Europe were railways, and they were to built in the colonies as well. They were also instruments of imperial control, because the technology and much of the capital came from the metropole country. Between 1865 and 1914, railway expansion absorbed 42% of British capital exports (Huff 2007: i134). There were purely military and strategic reasons behind certain railway projects, e.g. in British-India the line leading up to the Khyber Pass to Afghanistan or the Mombasa-Uganda railway intended to ensure British claims on eastern Sudan against the progressing French. While Indian nationalists argued that rail¬ways were an expensive military asset rather than an appropriate piece of developmental infrastructure (cf. Tomlinson 1993: 14), Fieldhouse (1996: 118) attributes to the railway system in India “a huge impact on the Indian economy“, mainly by generating „an engineering industry that was to provide the basis for much of India’s economic development and created for the first time something approaching an integrated economy.”

Compared with the huge land masses of the Indian peninsula and Central and South Africa, the situation in Southeast Asia (and to a certain degree in West Africa) was different: In the archipelago, the plantations were never far from the coast, and the most of the rice for export was grown in the deltas of the rivers Irrawaddy (Burma) and Mekong (Indochina). Here, investment in canals and irrigation systems were at least as important as railways. In North and West India, a huge canal system was built mainly to reclaim land for agriculture. The French railway following the long Vietnamese coastline has been criticized not only as too expensive and as not really necessary for North-South trans¬porta¬tion (Albertini 1982). However, these projects had an economic impact even before concluded, through the modification of the structure of economic incentives, the spread of paid labor, work migration, and changes in the colonial administration (suppression of revolts, management of famines). Murray (1980) concludes for French Indochina that „official efforts of the colonial state administration were instrumental in initiating an accelerated process of primitive accumulation“:

Roads were also important for the exertion of colonial authority, bringing profound changes even to remoter villages. Herbst (2000) calculated the average road density for a number of African colonies:

“When comparing the different colonial empires, it becomes apparent that the French (…) were in general less successful in extending their administrative net than the British, and, perhaps more surprisingly, probably about as good as the Portu-guese in their major colonies. The Belgian effort to extend roads in the Congo, however, is statistically more impressive than what France achieved.” (Herbst 2000: 86)

However, his data also show considerable differences between British colonies. According to Kerbo (2005a, b), the different levels of colonial infrastructure development during colonialism contribute to explaining the post-colonial socio-economic disparities in Southeast Asia.

In general, the building of the colonial infrastructure was often labor-intense and capital-extensive and furthermore conceived with regard to colonial economic and political needs:

„Means of communication were not constructed in the colonial period so that Africans could visit their friends. More important still, there were not laid down to facilitate internal trade in African commodities. (...) All roads and railways led down to the sea. They were built to extract gold or manganese or coffee or cotton. They were built to make business possible for the timber companies, trading companies and agricultural concession firms, and for white settlers. Any cate-ring to African interests was purely coincidental. Yet in Africa, labour rather than capital, took the lion’s share in getting things done.“ (Rodney 1972: 228)


Stories about gold in distant, remote countries were causing fascination among medieval sailors from Portugal and other European areas. One part of the West African Coastline was soon to be known as the “Gold Coast”, a name adopted subsequently for the British colony there. The Gold Coast became one of the world’s biggest gold producers, but ranked behind another area of the British Empire: South Africa, from where, around 1910, nearly half of the world’s gold came, and nearly all its diamonds (Walshe and Roberts 1986: 545).

The control of mining was one of the key interests of colonial powers, and large-scale mining had a huge impact on the local population. Migrant wage labor, the need for housing, food and entertainment triggered considerable urbanization, social distortion and the advent of new forms of sociability and political activity. Mining took a heavy toll on the workers, due to accidents, but also because of the unhealthy living conditions which contributed to spreading diseases.