The Colonial Origins of Comparative Development: An Empirical Investigation

Authors: Daron Acemoglu, Simon Johnson, and James A Robinson

Introduction

What are the fundamental causes of the large differences in income per capita across former colonies? Countries with ‘better’ institutions, more secure property rights, and less distortionary policies will invest more in physical and human capital and use these factors more efficiently to achieve a greater level of income.
The authors of this analysis sought to relate present-day institutions to colonial-era European settler mortality rates. They hypothesise that colonial-era institutions have an effect on present-day economic performance. Their theory rests on three premises:
1. In the course of European colonization, there were different types of colonial policies which created different sets of institutions. At one extreme are “extractive states”AN EXTRACTIVE STATE IS ONE RULED by an elite who extract wealth. from the populace rather than giving everyone access to prosperity. Most states. in Africa are regarded as extractive. exemplified by the Belgian colonization of the Congo. At the other are so-called “Neo-Europes,”Between 1820 and 1930, more than 50 million European people migrated to distant colonies—the United States, Canada, Australia, New Zealand, Argentina, Uruguay—which have been called the 'neo-Europes' colonies settled by European migrants that tried to replicate European institutions such as an emphasis on private property and checks on government power. Primary examples of this are Australia, New Zealand, Canada, and the United States.

Introduction (Contd.)

2. The colonization strategy of choice was influenced by the feasibility of European settlement, where mortality is low, and namely, the disease environment, where mortality was higher. Areas where mortality was low, would see a lot of capital investment into institutions, become the Neo-Europes. Whereas, areas with high mortality would see less capital investment into institutions and these areas would form the extractive states. The goal in 'extractive states' would be to take as much from them and give as little as possible. The colonial state and institutions remained after independence, and therefore, affect present-day economic performance.
3. Figure 1 plots the logarithm of GDP/capita today against the logarithm of settler mortality rates for a sample of 75 countries. It reveals a strong negative relationship. Regression analysis show that mortality rates of early settlers explain the early institutions developed in these areas. These institution persisted into the post-independence economy and determine the present-day economic performance.

Mortality Rate as an Instrument

The authors first lay-out their working hypothesis, that is: settler mortality affected the type of settlements; settlements affected early institutions; and early institutions persisted and formed the basis of present-day institutions.
The literature asserts that there is little reason to doubt that mortality rates were a key determinant of European settlements in colonial America, Africa, and Asia.

Note that the primary sources of European mortality in the colonies were Malaria and Yellow Fever—accounting for upwards of 80 percent of deaths. However, due to immunity and the nature of these diseases, they had little effect on the health and economy of indigenous people.

Results

Figure 3 illustrates the relationship between (potential) settler mortality rates and institution strength. It indicates that ex-colonies where Europeans faced higher mortality rates have substantially worse institutions today.
When using settler mortality rates as an instrument, two “typical” countries with high and low expropriation risk, Nigeria and Chile are approximately 7-fold difference in income performance. It implies that improving Nigeria's institutions to the level of Chile could, in the long run, lead to as much as a 7-fold increase in Nigeria's income (in practice Chile is over 11 times as rich as Nigeria).

Conclusion

Many economists and social scientists believe that differences in institutions and state policies are at the root of large differences in income per capita across countries. There is little agreement, however, about what determines institutions, making it difficult to isolate exogenoushaving an external cause or origin. sources of variation to estimate their effect on income performance. This analysis proposes and supports the view that in ex-colonies, contemporary European settler mortality rates played a large role in predicting the type of colonial institutions employed by European imperial states and the type of state institutions that persist today.

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