The Colonial Origins of Comparative Development: An Empirical Investigation By Daron Acemoglu, Simon Johnson, and James A. Robinson, 2001 Presentation by Zachary Rosenthal

Introduction Question: What causes large income per capita differences across countries? Institutions, property rights, and distortionary policies cause differences in capital investment. Cross-country correlations between property rights and economic development support part of this hypothesis.

Background and Argument European colonies with high mortality rates are more likely to set up extractive institutions Institutions make a difference North and South Korea East and West Germany 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 Authors here focus on conditions of the colonies rather than identity of the colonizer Engerman and Sokoloff (1997) Factor endowments

Possible Limitations of the Study Might greater economic performance influence the rise of certain institutions? Omitted or lurking variables? Exclusion restriction: Might mortality rates of European settlers affect current GDP per capita levels directly or through other channels? Potential correlation with current disease climate

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

Theory

Income and Settler Mortality

Methodology Regress current performance on current institutions Instrument institutions by settler mortality rates PRS protection against “risk of expropriation” index as proxy for institutions R2 = 25% for institutions and mortality rates Overidentification tests

The Hypothesis and Historical Background Mortality and settlements The paper cites previous studies’ empirical historical evidence on early European expeditions which were terminated due to high mortality rates Even when “settler colonies” weren’t initially formed, settlers in Australia and New Zealand fought for them, while mercantilist systems were formed in Latin America, Asia, and Africa.

Theory: Institutions Link

Institutional Persistence: Establishing the Link Sunk costs of establishing institutions may prevent elites from switching to extractive institutions, and vice versa Inverse relationship between size of elite and size of revenue shares from an extractive strategy Irreversible investments lead to persistence

OLS Estimators

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

Sources of European Mortality in the Colonies Malaria Yellow fever

Data Collection on Potential Settler Mortality Local people’s mortality rates and population densities before European arrival Philip Curtin: British, U.S., French, and Dutch East Indies military medical records, 1817-1836

Equations

Mortality and Institutions

Institutions and GDP/Capita

Two-Stage Least-Squares Results A substantial but not implausibly large 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 Only valid if settler mortality has no direct effect on current economic performance Controls for legal origin and religion verify original results Temperature, humidity, soil quality all insignificant as well Malaria, expected to be endogenous, is insignificant

Theory

Overidentification Tests Test 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 Impact of integration on income? (Rodrick et al.) Current diseases? East Asia and other regions?