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

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.

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

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

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

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

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

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)

World Empires and Colonies (1914)

British Empire

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.

Theory Potential settler mortality settlements early institutions current institutions current performance

Per capita Income and Settler mortality

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

Schematic Flow

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)

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.

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

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

OLS Estimators

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

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

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)

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, 1817-1836

Equations

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.

Mortality and Institutions

Institutions and Income per capita

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

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

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

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)

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.