1. Presented by Arjun Ghosh
The Colonial Origins of Comparative Development: An Empirical Investigation By Daron Acemoglu, Simon Johnson, and James A. Robinson, 2001
Presented by Arjun Ghosh

2. Introduction
Question: What causes large income per capita differences across countries?
Institutions and property rights have received considerable attention in recent years.
What constitutes ‘Institutions’?
Why are they important?
Nature of institutions, property rights, distortionary policies cause differences in investment in physical and human capital and hence differences in factor efficiencies and income.

3. Institutions definition
Douglas North: ”Institutions are the humanly devised constraints that structure human interaction. They are made up of formal constraints1, informal constraints2 and their enforcement characteristics. Together they define the incentive structure of societies and specificially economies”.
1) rules, laws, constitutions
2) norms, behavior, conventions
… or simply ’the rules of the game

4. Introduction …
This view is supported by cross country correlations between measures of property rights and economic development.
Stephen Knack and Philip Keefer(1995)
Micro studies that investigate relationship between property rights and investment/output.
Timothy Besley (1995)
Institutions matter. Examples
North and South Korea
East and West Germany

5. Potential problems Lack of reliable estimates for income.
Rich economies choose or can afford better institutions.
Fundamental differences.
Thus to estimate impact of institutions on economic performance, we need a source of exogeneous variation in institutions.
Propose a theory of institutional differences among European colonies.
Exploit it to derive a possible source of exogeneous variation

6. Background and Argument
European colonies with high mortality rates are more likely to set up extractive institutions
Institutions are persistent and make a difference.
Goal: to estimate the effect of institutions on economic performance based on differences in European mortality rates

7. Background Information
No prior research on settler mortality and institutions link
However, research on colonial experience and institutions.
British common law vs French civil law - Von Hayek(1960)
Colonial origin and legal origin-La Porta(1998)
Authors here focus on conditions of the colonies rather than identity of the colonizer
Engerman and Sokoloff (1997)
Institutions via factor endowments and inequality

8. Similar approaches
Empirically the paper’s approach is similar to the following studies-
Effect of being a colony on post war growth
Canova(1996) & Grier(1999)
Endogeneity of institutions using instrumental variables.
Corruption using ethnolinguistic fragmentation
Mauro(1995)
Distance from equator as IV for social infrastructure.
Hall & Jones(1999)

9. World Empires and Colonies (1914)

10. British Empire

11. Assumptions of the Theory
Different colonization policies created different sets of institutions.
Extractive states
“Neo-Europes” (Alfred Crosby, 1986)
Feasibility of settlement influenced policy.
Higher mortality rates led to lower settlements.
The colonial state and institutions persisted even after independence.

12. Theory Potential settler mortality settlements early institutions current institutions current performance

13. Per capita Income and Settler mortality

14. Methodology Regress current performance on current institutions
Instrument institutions by settler mortality rates
Protection against “risk of expropriation” index as proxy for institutions
Robustness and overidentification tests

15. Schematic Flow

16. The Hypothesis and Historical Background
Mortality and settlements
Mortality rates key determinant of European settlement (Curtin)
Empirical historical evidence on early European expeditions which were terminated due to high mortality rates.
Sierra Leone(72%), Gambia(87%)
Sending British convicts to Australia instead of south-west Africa.
Beachamp committee(1795)

17. Hypothesis (continued)
Types of colonization and settlements
Neo Europes or settler colonies
Protection of private property, electoral representation.
Australia, New Zealand, Canada
Extractive states
Extraction of resources main goal.
High taxation, royalties.
Mercantilist system of monopolies,trade regulations.
Congo, Latin America.

18. Institutional Persistence
Sunk costs of establishing institutions may prevent elites from switching to extractive institutions, and vice versa
Forced labour(Gautemala,El Savador)
Inverse relationship between size of elite and size of revenue shares from an extractive strategy
Irreversible investments complementary to a set of institutions make them persist.
Investment in human/physical capital leads to preference for propert rights

19. Institutions and Performance
Protection against expropriation index from Political Risk Services – proxy for institutions
It measures differences in istitutions arising from different types of state and state policies.(0-10)
Constraint on Executive
Measures authority of executive.(1-7)
Democracy in 1900
Measure of eletoral participation & executive recruitment

20. OLS Estimators

23. This relationship between institutions and per capita income should not interpreted as causal.
Rich economies may be able to afford better institutions.
Omitted determinants of income differences which are correlated with institutions.
Bias in seeing better institutions in richer places.
Measurement error.
Cluster of institutions

24. Strengths and Weaknesses
Strong, statistically significant, positive institution- performance relationship
Weaknesses
Predictive failure
Nigeria and Chile
Latitude significance
Other continent dummies
Reverse causality?
Omitted variable bias
Institution index bias?
Thus the need for an instrument for institutions, namely mortality

25. Settler mortality Main sources
Malaria
Yellow fever
More fatal to European settlers than locals.
Curtin (1964)
Adult indigenous population developed genetic immunity, hence less vulnerable
Porter(1996)

26. Mortality as an instrument
Plausible instrument
Affected European settlement patterns and type of institutions set up;
However, limited effect on health and economy of adult indigenous people.
Unlikely to be proxy for geographic or climatic feature
Data source: Philip Curtin: British, U.S., French, and Dutch East Indies military medical records,

27. Equations

28. Explanation Where R denotes current institutions
C - measure of early(1900) institutions.
S – measure of European settlement
X- vector of covariates that affect all variables
S & C as instruments for R- endogeneity problem
Settlers likely to migrate to richer colonies
Early institutions may reflect characteristics important for income today
We thus use M as an instrument for R.

29. Mortality and Institutions

31. Institutions and Income per capita

32. 2 SLS Results
A substantial effect of institutional differences on income per capita
Latitude has wrong sign and no longer significant; correlated with institutions
Resistant to exclusion of the Neo-Europes and addition of insignificant continent dummies

33. Robustness
Valid only if settler mortality has no direct effect on current economic performance
We add controls for legal origin, religion, temperature, humidity, soil quality.
All turn out to be insignificant and verify original results.
Malaria, expected to be endogenous, is insignificant
Sachs

37. Overidentification Tests
Tests whether settler mortality, settlements, or early institutions have any direct effect on income per capita
Data support the aforementioned overidentifying restrictions: no additional effects
These variables are already captured in the mortality-current institution regression and thus are not significant as exogenous regressors

40. Conclusions
Differences in colonial experience might be a source of exogenous differences in institutions
Early institutions persisted to the present
The mortality-settlement-institutions link
Income-institution relationship is not driven by outliers and is robust for all conceived controls
However, the results do not imply that current institutions are predetermined by colonial policies and cannot be changed
Economic gains from improving institutions (Japan, South Korea)

41. Areas for Further Study
How to reduce expropriation risk and improve institutions
Institutional features should be treated as an equilibrium outcome related to “fundamental” institution types including presidential and parliamentary
A more detailed analysis of the effect of more fundamental institutions on property rights and expropriation risk
Effect of current diseases.