The Role of Colonial Institutions in Comparative Development Today

We have made giant leaps forward in the past four decades, moving closer to the United Nations’ Sustainable Development Goals (SDGs). Global life expectancy has increased by ten years, whilst the literacy rate has increased by 20%. Perhaps the most impressive metric is the fall in the global poverty rate from 42% to just 9.2%.

Whilst these are incredible achievements, there is still a large disparity between low-income countries and the rest of the world. The poverty rate in low-income countries, for example, is still 45.5% while the World Poverty rate is 9.2%. It is crucial to understand the root causes of these disparities if we are to overcome them.

Scholars have articulated a few theories to explain this comparative development, some more robust than others. One of the most popular theories is based on geographical determinants, postulated by scholars ranging from Machiavelli (1519) to Sachs (2001). The theory states that most of the productivity differences, the main driver of growth, stem from the effect of climate and disease on work rate. However, this hypothesis is inconsistent with ‘the reversal’ – the fact that countries that are underdeveloped today were often the most prosperous before colonisation. Comparing population density in 1500, an indicator of economic performance, and GDP per capita today can illustrate this point.

Another explanation puts the colonial powers at the centre of the hypothesis. Von Hayek (1960) argues that British Common Law was superior to French Civil Law, and as a result, Britain’s colonies developed better institutions than the French, Spanish and Portuguese colonies, through better property rights and financial markets, for instance. Looking at the legacy of the British Empire in India refutes this point. Hall et al. (1999) also put colonial powers at the centre of the debate with a theory that emphasises the correlation between latitude and western influence, assuming that western influence leads to higher development. This assumption is questionable when one considers the impact of the slave trade on the gold coast of Africa.

A much more convincing argument put forward by Acemoglu, an MIT Economics professor, puts colonial institutions which have persisted until today, rather than geography or the colonial powers themselves at the centre of the debate.

What are Institutions?

Institutions are systems of organisations grounded in economic, political and social activity. Inclusive economic institutions secure property rights, unbiased law systems that enable exchange and contract, and citizens’ ability to create business and choose their career. Countries with inclusive institutions will accumulate more physical and human capital and achieve a higher income. Societies that protect property rights, for example, will incentivise investment and, in turn, will be more prosperous than those which do not.

On the other hand, societies with extractive institutions will be more impoverished, with power concentrated in the hands of a few elites. In such societies, elites will block technological innovation, the main engine of economic growth, as it might empower workers. For example, Elizabeth I and James I of England both blocked the ‘stocking frame’, which would have produced substantial productivity gains, but also would have empowered workers which would risk their rule. Moreover, a lack of property rights will lead to a high risk of expropriation, and amongst other things, will disincentivise investment. Acemoglu predicts that if Nigeria improved their institutions to Chile’s level, they would achieve a 7-fold increase in income in the long run. One observes these trends in the graph below, which plots GDP in 1995 against Protection Against Expropriation over 1985-1995. The trend indicates that the higher the protection against expropriation today, the higher the country’s GDP. Institutions are, therefore, central to the development of nations.

Colonialism as a Root Cause of Differences in Institutions

Rather than placing geography or colonial powers at the centre of the theories about comparative development, the institutional hypothesis puts institutions at the centre. Different colonial policies created different institutions; representative institutions promoting investment such as those set up in North America, and extractive institutions designed to expropriate resources from the colony, such as King Leopold’s Congo. What drove the decision of colonisers to set up inclusive or extractive institutions?

The insight of Acemoglu’s hypothesis relies on the idea that lower settler mortality rates encouraged Europeans to settle, incentivising them to set up inclusive institutions akin to those in their home country. Europeans were not incentivised to set up these institutions in countries with a high mortality rate, caused by malaria, among other things, as they could not settle. Using previously colonised countries, the graph below shows that the higher the incidence of settler mortality, the lower the Protection against Expropriation and GDP today.

A further reason why colonisers set up extractive institutions, in the place of inclusive institutions, is explained by ‘the reversal’ illustrated in the graph below.

The graph again plots population density in 1500 against GDP. One can see a clear downward trend, showing countries with higher populations, and higher relative prosperity before colonisation, are less developed today. It was more profitable for colonisers not to settle and set up extractive institutions in wealthier countries with higher populations as natives could be forced to work or be heavily taxed.

A potential critique of this theory is that higher settler mortality rates in countries considered to be developing today may directly affect their level of prosperity, disregarding the role of colonial institutions. Whilst disease does play a role in development, the fact that most low- income countries today were densely populated and relatively prosperous before colonisation limits its effect. Moreover, whilst half of the British colonisers in Africa could expect to die within a year, locals faced much lower mortality rates. The fact that British troops in Bengal faced a mortality rate between 70 and 170 per 1000, whilst local troops faced a much lower rate of around 11 in 1000 further illustrates this.

Denoon, an economist, highlighted that there was something inherently capitalistic in settler societies, emphasising representation. Settlers set up European-style institutions in North America, which was sparsely populated and relatively less prosperous. On the other hand, in the more densely populated and prosperous south, the Spanish set up institutions to extract gold and other commodities. North America now enjoys a much higher GDP per capita.

By outlining the origins of colonial institutions that still persist today, the institutional hypothesis helps to explain much of the comparative development we see today. The Black Lives Matter movement has spurred old colonial powers to rethink their past. Doing this will help us to understand the root causes of the disparity in development, which is crucial if we are to achieve the UNs SDGs.

References:

Acemoglu, Daron, Simon Johnson, and James A. Robinson. “The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review 91.5 (2001): 1369-1401

Acemoglu, Daron, Simon Johnson, and James A. Robinson. “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution.” Quarterly Journal of Economics 117.4 (2002): 1231-1294