1. Colonial Period: Contemporary Interpretations Lecture # 3 Week 2

2. Structure of this class Colonial period ends: An historical Interpretation Institutional quality in the US relative to Latin America Colonial origins affecting underdevelopment today Geography, institutions and the reversal of fortune Conclusion: Limits of “institutional approach” to our understanding of underdevelopment in Latin America?

3. End of the colonial period Early 19 th Century associated with independence movements in the region Two positive consequences: (a)End of external trade monopoly (b)Latin America could finance investments in international capital markets Four negative consequences: (a)Boundary disputes (b)Bourbon and Pombaline reforms became obsolete (c)Fiscal problems exacerbated (d)Years of violence and retreat of landed aristocracy to haciendas

4. Institutional quality in the US versus Latin America (Engerman-Sokoloff (1994)

5. Colonial origins affecting Latin American underdevelopment

6. What is the meaning of institutional quality?

7. Empirical investigation

8. Main Findings:

9. Settlers’ mortality rates from 19 colonies?

11. Geography, Institutions and the reversal of fortune Geography hypothesis: Geography and climate of a society’s location main determinant of a) Work effort, incentives, and productivity b) Technology, especially in agriculture d) Tropical diseases

12. Some stylized facts may support the geography view Most of the poorest countries are located in tropical areas, in very hot regions (close to the equator), with periodic torrential rains Tropical areas do not have enough frost to clean the soil and suffer from soil depletion from heavy rains In tropical areas infectious disease abound And these stylized facts are supported by simple statistical association or correlation between geography and income per capita levels But these correlations do not prove causation, and there are often omitted factors which are driving such correlations (i.e., malaria)

13. Correlation between Latitude and Income per capita

14. 2) Institutions Unlike the geography hypothesis that emphasizes the forces of “nature”, the institutions hypothesis focuses on man-made influences: a) Enforcement of property rights b) Constraints on the actions of elites c) Some degree of equal opportunity for broad segments of society

15. However, as in the case of the geography hypothesis, these three factors may simply be correlations. Take the case of property rights protection:

16. What distinguishes the geography from the institutions hypothesis then? Unlike the geography hypothesis, the institutions hypothesis is able to distinguish between the “before” and “after” colonization In other words: the institutions hypothesis conducts a controlled experiment for establishing causality In a nutshell: Countries that were “rich” before colonization became poor because of extractive institutions Countries that were poor before colonization became rich because of good protection of property rights (particularly after 1800s)

17. Rich countries today are highly urbanized

18. Population density before colonization concentrated in countries that are poor today Reversal of fortune!

19. Another source of divergence is settler mortality

20. Again, settler mortality

21. But the geography hypothesis should nevertheless be taken seriously: Geography and diseases matters for economic outcomes Geography is important historically Geography could have an effect via institutions Geography has a significant effect on social welfare Next class: Topic 4, National Identities & export led growth