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Unformatted text preview: Root “ A historical approach to assessin the role of institutions in economic deve opment Daron Acemoglu REMENDOUS differences in incomes and stan- dards of living exist today between the rich and the poor countries of the world. Average per capita income in sub-Saharan Africa, for example is less than one-twantieth that in the United States. Explanations for why the economic fortunes of countries have diverged so much abdund Poor countries such as those in sub—Saharan Africa, Central America or South Asia, often lack functioning markets, their populations are poorly educated and their machinery and technology are outdated or nonexistent. But these are only pmvimate causes of poverty. begging the ques- tion of why these places don’t have better markets, better human capital. more investments, and better machinery and technology. There must be some fundamental causes leading to these outcomes. and via these channels, to dire poverty. The two main candidates to explain the fundamental causes of differences in pros— perity between countries are geOgraphy and institutions. The geography hypothesis. which has a large following both in the popular imagination and in academia, The two main candidates to explain the broad segments of society. so that individuals can make investments especially in human capital and participate in productive economic activities. rli‘rese good institutions con— tr ast with conditions in many societies of the world, through- out history and today, where the rule of law is applied selectively: property rights are nonexistent for the vast major- ity of the population; the elites have unlimited political and economic power; and only a small fraction of citizens have access to education credit. and production opportunities. Geography's influence If you want to believe that geography is the key, look at a world map. Locate the poorest places in the world where per capita incomes are less than one-twentieth those in the United States.You will find almost all of them close to the equator in very hot regions that experience periodic torrential rains and where. by definition tropical diseases are widespread However this evidence does not estab~ lish that geography is a primary influence on prosperity. It is true there is a correlation maintains that the geography. climate and fundamental between geography and prosperity. But ecology of a society shape both its technol— correlation does not prove causation. Most ogy and the incentives of its inhabitants. It causgs 0f important. there are often omitted factors emphasizes forces of nature as a primary driving the associations we observe in the factor" in the poverty of nations The alter— differences in data. native. the institutions lwoflresis, is about I Similariy. it you look around the world human influences. According to this view. prosperity betweefl you'll see that almost no wealthy country some societies have good institutions that encourage investment in machinery. human capital, and better technologies. and. consequently these countries achieve economic prosper ity Good institutions have three key charac— teristics: enforcement of property rights for a broad cross section of society. so that a variety of individtk als have incentives to invest and take part in economic life; constraints on the actions of elites politicians and other powerful groups so that these people cannot expropriate the incomes and investments of others or create a highly uneven playing field: and some degree of equal opportunity for countries are geography and institetions. achieves this position without institutions protecting the property rights of investors and imposing some control over the gov— ernment and elites. Once again. however. this correlation between institutions and economic deveiopment could reflect omit- ted factors or reverse causality To make progress in understanding the relative roles of geographic and institutional factors. we need to find a source of exogenous variation in institutions—in other words a natural experiment where institutions change for reasons unrelated to potential omitted factors (and geographic fac- tors remain constant, as they almost always do) Finance 8: Development June 2003 27 Shifting prosperity l': I .- Countries that. were 'rich'ir'r '1 Sellers among the lessor-ill off Societiestoriay " . .. .7. ' .' -- The colonization of much ofthe globe by Europeans starting in the fifteenth century provides such a natural experiment. The colonization experience transformed the institutions in many lands conquered or controlled by Europeans but, by and large had no effect on their geographies Therefore if geogra- phy is the key factor determining the economic potential of an area or a country, the places that were rich before the arrival of the Europeans should have remained rich after the coloniza— tion experience and in fact should still be rich today In other words. since the key determinant of prosperity remains the same, we should see a high degree of persistence in economic outcomes. If, on the other hand, it is institutions that are cen— tral. then those places where good institutions were intro- duced or developed should be richer than those in which Europeans introduced or maintained extractive institutions to plecler resources or exploit the non-European population Historical evidence suggests that Europeans indeed pur- sued very different colonization strategies with very differ- ent associated institutions, in various colonies At one extreme, Europeans set up exclusiver extractive institutions. exemplified by the Belgian colonization of the Congo. slave plantations in the Caribbean, and forced labor systems in the mines of Central America These institutions neither pro— tected the property rights oi regular citizens nor constrained fire power of elitesAt the other extreme Europeans founded a number of colonies where they created settler societies, replicating—and often improvinguethe European form of 28 Finance a Development June 2003 institutions protecting private property. Primary examples of this mode of colonization include Australia. Canada New Zealand, and the United States. The settlers in these societies also managed to place significant constraints on elites and politicians, even if they had to fight to achieve this objective. Reversal of fortune So what happened to economic development after coloniza— tion? Did places that were rich before colonization remain rich. as suggested by the geography hypothesis? Or did eco- nomic fortunes change systematically as a result of the changes in institutions? The historical evidence shows no evidence of the persis- tence suggested by the geography hypothesis On the c0n- trary there is a remarkable reversal of fortune in economic prosperity Societies like the Mughals in India and the Aztecs and the Incas in America that were among the richest civi- lizations in 1500 are among the poorer societies of today. In contrast countries occupying the territories of the less devel- oped civilizations in North America. New Zealand and Australia are now much richer than those in the lands of the Mughals, the Aztecs, and the Incas Moreover, the reversal of fortune is not confined to this comparison Using various proxies for prosperity before modern times we can show that the reversal is a much more widespread phenomenon For example. before industrialization only relatively devel- oped societies could sustain signiiicant urbanization so urbanization rates are a relatively good proxy for prosperity before European colonization The chart here shows a strong negative relationship between urbanization rates in 1500 and income per capita today That is the former European colonies that are relatively rich today are those that were poor before the Europeans arrived. This reversal is prima facie evidence against the most stan— dard versions of the geography hypothesis discussed above: it cannot be that the climate, ecology or disease environments of the tropical areas have condemned these countries to poverty today. because these same areas with the same cli- mate. ecology, and disease environment were richer than the temperate areas 500 years ago. Although it is possible that the reversal may be related to geographic factors whose effects on economic prosperity vary over time—for example. certain characteristics that first cause prosperity then con— demn nations to poverty—there is no evidence of any such factor or any support for sophisticated geography hypotheses of this sort. Is the reversal of fortune consistent with the institutions hypothesis? The answer is yes In fact, once we look at the variation in colonization strategies we see that the reversal of fortune is exactly what the institutions hypothesis predicts. European colonialism made Europeans the most politically powerful group, with the capability to influence institutions more than any indigenous group was able to at the time In places where Europeans did not settle and cared little about aggregate output and the welfare of the population in places where there was a large popula- tion that could be coerced and employed cheaply in mines or in agriculture or simply taXed. in places where there were resources to be extracted Europeans pursued the strategy of setting up extractive institu- tions or taking over existing extractive institutions and hier- ar‘chical structures In those colonies. there were no con- straints on the power of the elites (which were typically the Europeans themselves and their allies) and no civil or property rights for the majority of the population; in fact. many of them were forced into labor or enslaved Contrasting with this pattern. in colonies where there was little to be extracted where most of the land was empty where the disease environment was favorable Europeans set-- tled in large numbers and developed laws and institutions to ensure that they themselves were protected. in both their political and their economic lives. In these colonies the insti- tutions Were therefore much more conducive to investment and economic growth. This evidence does not mean that geography does not matter at all, however Which places were rich and which were poor before Europeans arrived might have been deter- mined by geographic factors These geographic factors also likely influenced the institutions that Europeans introduced For example. the climate and soil quality in the Caribbean made it productive to grow sugar there. encouraging the development of a plantation system based on slavery What the evidence shows instead is that geography neither con- demns a nation to poverty nor guarantees its economic suc- cess If you want to understand why a country is poor today, you have to look at its institutions rather than its geography No natural gravitation If institutions are so important for econornic prosperity, why do some societies choose or end up with bad institutions? Moreover. why do these bad institutions persist long after their disastrous consequences are apparent? Is it an accident of history or the result of misconceptions or mistakes by societies or their policymakers? Recent empirical and theo- retical research suggests that the answer is no: there are no compelling reasons to think that societies will naturally grav- irate toward good institutions Institutions not only affect the economic prospects of nations but are also central to the dis- tribution of income among individuals and groups in soci- ety—in other words, institutions not only affect the size of the social pie but also how it is distributed Dutch settlers arrive on Manhattan Island. This perspective implies that a potential change from dys- functional and bad institutions toward better ones that will increase the size of the social pie may nonetheless be blocked when such a change significantly reduces the slice that pow- erful groups receive from the pie and when they cannot be credibly compensated for this loss That there is no natural gravitation toward good institutions is illustrated by the atti- tudes of the landed elites and the emperors in Austria— Hungary and in Russia during the nineteenth century These elite groups blocked industrialization and even the introduc- tion of railways and protected the old regime because they realized capitalist growth and industrialization would reduce their power and their privileges Similarly European colonists did not set up institutions to benefit society as a whole. They chose good institutions when it was in their interests to do so, when they would be the ones living under the umbrella of these institutions as in much of the New World In contrast they introduced or maintained existing extractive institutions when it was in their interest to extract resources from the non—European populations of the colonies, as in much of Africa Central America. the Caribbean, and South Asia Furthermore, these extractive institutions showed no sign of evolving into better institutions, either under European control or once these colonies gained independence. In almost all cases, we can link the persistence of extractive institutions to the fact that, even after independence, the elites in these societies had a lot to lose from institutional reform Their political power and claim to economic rents rested on the existing extractive institutions as best illustrated by the Caribbean plantation owners whose wealth directly depended on slavery and extractive institutions. Any reform of the system. however beneficial for the country as a whole would be a direct threat to the owners Finance 8: Development June 2003 29 European colonialism is only one part of the story of the institutions of the former colonies, and many countries that never experienced European colonialism nonetheless suffer from institutional problems (while certain other former European colonies have arguably some of the best institu- tions in the world today). Nevertheless, the perspective developed in this article applies to these cases as well: institu- tional problems are important in a variety of instances and in most of these, the source of institutional problems and the difficulty of institutional reform lie in the fact that any major change creates winners and losers, and the potential losers are often powerful enough to resist change“ The persistence of institutions and potential resistance to reform do not mean that institutions are unchanging There is often significant institutional evolution, and even highly dysfunctional institutions can be successfully transformed, For example, Botswana managed to build a functioning democracy after its independence from Britain and become the fastest—growing country in the world. Institutional change will happen either when groups that favor change become powerful enough to impose it on the potential losers, or when societies can strike a bargain with potential losers so as to credibly compensate them after the change 30 Finance & Development June 2003 takes place or. per haps. shield them from the most adverse consequences of these changes Recognizing the importance of institutions in economic development and the often for- midable barriers to beneficial institutional reform is the first step toward significant progress in jump-starting rapid growth in many areas of the world today I Daron Acemoglu is a Professor ol‘E‘conornirs at the Massachusetts Institute of Technology This article draws on the author's joint work with Simon johnson and James Robinson in particular: on Daron Acemoglu. Simon Johnson and [ames A Robinson 2001 "Colonial Origins of Comparative De velopment: An Empirioai Investigation "American Economic Reriew Vol Ell (December) 1 369-4 401: Daron Acemoghr Simon Johnson and farms A Robinson. 2002. "Reversal ofForturre‘ Geography and institutions in the Making of‘the Modern World Income Distribution ” Quarterly Journal of Economics Vol CXVII (November) pp. 123144: and Daron Acemoglu and James A Robinson 2000. “Political losers as a Barrier to Economic Development "American Economic Review {or 90 (May) on 126144 . as Well as on Damn Ammoglu. 2003' “Why Not a Political Cease Theorem? Social conflict Commitment and Politics,.' Journal ofCornpar-ative Economics, forthcoming ...
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