“The Colonial Origins of Comparative Development: An Empirical Investigation”, Daron

Acemoglu, Simon Johnson, James A. Robinson (2001)

INSTITUTIONS

(Property rights)

ECONOMIC

PERFORMANCE

?

THE DIRECTION OF CAUSALITY?

INSTITUTIONS

(Property rights)

ECONOMIC

PERFORMANCE

MORTALITY RATES FACED BY EUROPEAN SETTLERS

WANTED: AN INSTRUMENT

The argument

• Different types of colonization policies led to different types of institutions

• Extractive states (e.g. Belgium in Congo) -> No property rights, no check and balances

against government expropriation• Neo-Europes (Australia, US) -> Property rights• The choice of what institutions to set up was in

part determined by the feasibility of settlements– E.g., in the presence of diseases, europeans were

unlikely to settle• This choice of institutions PERSISTED over time

Instrument = mortality rates

• They use data on the mortality rates of soldiers, bishops, and sailors stationed in the colonies between the 17th and 19th centuries

• Give a good indication of the mortality rates faced by settlers

Extractive institutions

• “the colonies should be exploited, not by the operation of a market economy, but by state intervention and compulsory cultivation of cash crops to be sold to and distributed by the state at controlled prices.”, King Leopold of Belgium, talking of Congo

Neo-Europes

• “But, the majority of settlers wanted institutions and political rights like those prevailing in England at the time. They demanded jury trials, freedom from arbitrary arrest, and electoral representation. Although the British government resisted at first, the settlers argued that they were British and deserved the same rights as in the home country.”, AJR (2001)

Institutional persistence

• Costly to change institutions

• There is always someone who would lose from changing institutions, and thus opposes it

• There is strong evidence of institutional persistence

The data

• Economic performance: GDP in 1995• Institutions: index of protection against

expropriation, from Political Risk Services, averaged over 1985-1995

• Past institutions: – Constraints on the executive in 1900– Index of democracy in 1900

• Measure of european settlement: fraction of the population of european descent in 1900

• Mortality rates: data available for soldiers in the 19th century

INSTITUTIONS

(Property rights)

ECONOMIC

PERFORMANCE

MORTALITY RATES FACED BY EUROPEAN SETTLERS

SUMMARY

POSITIVE

NEGATIVE

“Reversal of Fortune: Geography and Institutions in the Making of the Modern World Distribution”,

Daron Acemoglu, Simon Johnson, James A. Robinson

(2002)

Reversal of fortune

• Nations rich in 1500 are poor today– E.g the Incas, the Aztecs were rich in 1500– E.g. the US, Australia were poor in 1500

• FACT: negative correlation between prosperity today and in 1500

• Measures of prosperity in 1500: – Urbanization– Population density– Both are highly correlated with income per capita

The geography hypothesis

• Geography → prosperity

• BUT, geography is constant

• Inconsistent with the observed reversal of fortune

The institutions hypothesis

• Institutions are chosen by the politically powerful• Two types of institutions: “extractive” and

“private property”• Extractive institutions are more likely to be

implemented in previously RICH colonies• Private property institutions are more likely to be

implemented in previously POOR colonies• Institutions are persistent

The argument

• Europeans set up extractive institutions in densely populated areas because:– 1. They could enslave the local population– 2. It was easier for them to settle in sparsely

populated areas

Institutions and the reversal

• Once we control for institutions, the reversal should disappear

• Colonized countries that were poor in 1500 are rich today because Europeans set up good institutions there.

How to test the argument?

• If we regress GDP on institutions and past GDP, the coeff. on past GDP should be non significant

• As before, problem of endogeneity of the variable institutions– As before, we use the mortality rate as an

instrument

Summary

• A reversal of fortune occured between 1500 and today among colonized countries because worse institutions were set up in richer colonies