The Colonial Origins of Comparative Development: An E mpirical Investigation (NBER Working paper series)

1. The Colonial Origins of Comparative Development: An Empirical Investigation(NBER Working paper series) By: DaronAcemoglu, Simon Johnson, James A. Robinson EshnaChapagain

2. Authors’ introduction (NBER) • The NBER is the nation's leading nonprofit economic research organization. Eighteen Nobel Prize winners in Economics and twelve past chairs of the President's Council of Economic Advisers have been researchers at the NBER.

3. KamerDaronAcemoğlu • A Turkish economist of Armenian origin • He is currently the Elizabeth and James Killian Professor of Economics at Massachusetts Institute of Technology and winner of the 2005John Bates Clark Medal. He is among the 10 most cited economists in the world according to IDEAS/RePEc. • He is a member of the Economic Growth program of the Canadian Institute of Advanced Research. He is also affiliated with the National Bureau of Economic Research, Center for Economic Performance, and Centre for Economic Policy Research.

4. Simon Johnson • A British American economist. • He is the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. • He has held a wide variety of academic and policy-related positions, including Professor of Economics at Duke University's Fuqua School of Business. From March 2007 through the end of August 2008, he was Chief Economist of the International Monetary Fund.

5. James A. Robinson • He is an American academic who, between 1974 and 1987, served as the second president of the University of West Florida. • A political science professor, James A. Robinson established the Marion Viccars Award, which recognizes superior performance and accomplishments of faculty and administrators. He is also the author of a biography of President Richard Nixon

6. Introduction • What are the fundamental causes of the large differences in income per capita across countries? • Differences in institutions and property rights • Countries with better “institutions”, more secure property rights, and less distortionary policies will invest more in physical and human capital, and will use these factors more efficiently to achieve greater level of income

7. Introduction • Examples: North and South Korea, East and West Germany, where one part of the country is stagnated under central planning and collective ownership, while the other prospered with private property and market economy. • However, it may be that the rich countries choose or can afford better institutions (endogenity problem)

8. Introduction • Source of exogenous variation: mortality rates faced by European settlers at the time of colonization • The paper was provided with set of economies that had relatively similar income levels 400 years ago and still exhibit large differences in per capita income today • Institutions in these countries were shaped, at least in part, by their colonization experience

9. Colonization process • Different types of colonization policies created different sets of institution: • “Extractive states” (Belgian colonization of the Congo): the main purpose of the extractive state was to transfer as much of the resources of the colony to the colonizer, with minimum amount of investment possible • Neo-Europes: the settlers tried to replicate European institutions, with great emphasis on private property, and checks against government power; Australia, New Zealand, Canada and the US • the colonization strategy was influenced by the feasibility of settlements; disease • the colonial state and institutions persisted even after independence

10. The Hypothesis Current performances Current institutions Early institutions Settlements Settler mortality

11. Mortality and Settlements • The mortality rates were a key determinant of European settlements: • Early European attempts to settle in West Africa foundered due to high mortality from disease. • On Mungo Park's Second Expedition, 87 percent of Europeans died during the overland trip from Gambia to the Niger, and all the Europeans died before completing the expedition. • Also, the Pilgrim Fathers decided to migrate to the U.S rather than Guyana because of the very high mortality rates in Guyana. • Beauchamp Committee in 1795 was set up to decide where to send British convicts, who had previously been sent to the U.S. Lemane, 400 miles up Gambia river was rejected because they decided mortality rates would be too high even for the convicts; South-West Africa was also rejected for health reasons; final decision was to send convicts to Australia

12. Types of Colonization and Settlements • There was a wide range of different types of colonization and the presence or absence of Europe settlers was a key determinant of the form colonization took. • Historians have documented the development of "settler colonies" where Europeans settled in large numbers, and life was modeled after the home country. • The motives for colonization could be slavery, gold, other valuable commodities; it was also driven in part by an element of superpower rivalry, but mostly by economic motives • With a strategy of exploitation in mind, European powers had little incentive to invest in institutions or in infrastructure in Africa. In fact, despite apparently high rates of return, almost no investment went to Africa

13. Institutional persistence • The institutions of law and order and private property established during the early phase of colonialism in Australia, Canada, New Zealand and the U.S have been the basis of current day institutions of these countries • The paper cites Young (1994), "although we commonly described the independent polities as 'new states' in reality they were successors to the colonial regime, inheriting its structures, its quotidian routines and practices, and its more hidden normative theories of governance."

14. Three intuitive economic mechanisms that led institutional persistence • Setting up functioning institutions, which place restrictions on government power and respect property rights is costly. • The gains to an extractive strategy may depend on the size of the ruling elite. Small number of elites means greater share of revenue. In many cases where European powers set up authoritarian institutions, they delegated the day-to-day running of the state to a small domestic elite. The narrow group often was the one to control the state after independence and favored extractive institutions. • If agents make irreversible investments that are complementary to a particular set of institutions, they will then be more willing to support them, making institutions persist.

15. Data and descriptions • Income (GDP) per capita was the measure of economic outcome. Since all ex-colonies in the sample had relatively low levels of income 400 years ago, current income per capita was a good measure of long-run economic performance. • The main variable to capture the institutional differences was index of protection against expropriation. Political Risk Services resorts a value between 0 and 10 for each country and year with 0 corresponding to the highest expropriation risk.

16. Results • OLS regression • It implies that differences in institutions would account for approximately a quarter of the income per capita differences across countries • However, they did not report this result as causal because of the direction of causality and many omitted determinants of income differences that will naturally be correlated with institutions.

17. Results • To solve the problems of causality and omitted variables, they used instrument for institutions. • [Instrument: In regression, we study the causal effect of some variable x on y. And instrument is a third variable z which affects y only through its effect on x] • So, here the mortality rate of the early settlers is the instrument which affects the economic performance through its effect on institution

18. INSTITUTIONS AND PERFORMANCE: Instrumental variables results • The relationship between the log of mortality rate and the measure of institution is linear. • Association between protection against expropriation and European settlements: • the fraction of Europeans in 1900 alone explains approximately 29 percent of the variation in our institutions variable today • the settler mortality alone explains 26 percent of the differences in institutions we observe today

19. Results • The corresponding 2sls estimate of the impact of institutions on income per capita is 0.95. This implies that over three-quarters of the income per capita differences across countries is due to differences in institutions. • Latitude does not change the relationship; the result was different earlier because it was correlated with the institutions

20. Robustness • [The result is not affected or influenced by the outliers.] • They checked whether the results are robust to varying degrees of data quality and different methods of constructing the mortality estimates and found the results to hold in different samples to varying degrees of data reliability

21. Additional controls • The validity of 2sls results depends on the assumption that settler mortality in the past has no direct effect on current economic performance. • They checked with the identity of the colonizer, with or without latitude, legal origin, religion, climate, malaria, ethnolinguistic fragmentation, measures of soil quality, natural resources and found that the results didn't change much. • The estimates also changed relatively little when other controls are added. Therefore, the paper concludes that the effect of variations in institutions caused by early colonial experience on income is robust, and likely captures the causal effect of institutions and government policies on economic well-being.

22. Conclusion • The differences in colonial experience could be a viable source of exogenous differences in institutions • They document these hypotheses in the data by showing a high correlation between mortality rates faced by soldiers, bishops, and sailors in the colonies and European settlements; between European settlements and early measures of institutions; and between early institutions and institutions today • The estimates imply that differences in institutions account for roughly three-quarters of the differences in income per capita.

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