Historical Legacy and Institutions Across Countries

Author:Sylwester, Kevin

Several recent theories postulate why some countries were able to devise institutions conducive to long-run economic growth whereas others were not. Most of these consider various historical factors or geographic characteristics as important predeterminants. But which of these theories comes closest to the truth? This paper simultaneously considers several competing theories and empirically... (see full summary)


I. Introduction

According to Parente and Prescott (2000), average income levels between the highest and lowest income countries differ by a factor of 30. What accounts for these differences? Cannot lagging countries simply emulate more advanced countries and so catch-up over time? Many have cited distinctions in institutions to explain these differences. As argued in North (1981, 1990), economic outcomes are a function of the incentives that institutional arrangements provide to individuals. Institutions that create incentives to produce output and engage in innovative activity will spur economic growth whereas institutions that encourage rent seeking will thwart economic prosperity.

Knack and Keefer (1995) report that institutions promoting bureaucratic efficiency, enforcement of contracts, protection of property, and limits to government expropriation are positively associated with the growth of income per capita in a cross-section of countries. Mauro (1995) finds negative correlations between corruption and economic growth and between bureaucratic inefficiency and growth. Parente and Prescott (2000) argue that institutional barriers to technology adoption largely explain income disparities across countries. Bertocchi and Canova (2002) report that former British and French African colonies grew faster than Portuguese, Belgian, and Italian ones. One possible explanation is that French and British colonies were able to establish more effective colonial institutions that could be used as a foundation for economic growth after independence.

But these hypotheses and findings immediately beg the question as to why some countries were able to develop effective institutions while others were not as fortunate. One possible explanation is that institutions cannot be substantially modified in short periods of time and so today's institutions depend greatly on their historical antecedents. Hall and Jones (1999) and Acemoglu, Johnson, and Robinson (2001) point to how geographic factors influenced the extent of European settlement or influence. Englebert (2000a, 2000b), on the other hand, focuses on the evolution of the state. Countries where the state did not arise endogenously but was imposed from external sources are viewed to be less able to create institutions or promote policies that spur economic growth. Bockstette, Chanda, and Putterman (2002) consider the past extent of state level institutions as important for the existence of strong modern-day institutions. Countries having state institutions with longer historical antecedents are predicted to have better institutions today. However, Acemoglu, Johnson, and Robinson (2002) consider a "reversal" where (outside Europe) populous, rich regions circa 1500 have weaker institutions and are poorer today.

This paper analyzes these various hypotheses as to why some countries were able to form salutary institutions whereas others did not. In this sense, this paper is similar to Easterly and Levine (2003). They consider several hypotheses regarding historical or geographic explanations for the distinctions between rich and poor countries today. They find little evidence that geographic factors explain income levels today other than through institutions. However, the institutional theories they consider all have geographic foundations. For example, Acemoglu et al. (2001) argue that climate determined settler mortality which then influenced institutional outcomes. Or, Engerman and Sokoloff (1997) see factor endowments as influencing subsequent institutions. I pursue a different track. I do not consider direct effects on income but examine various hypotheses as to why some countries developed institutions promoting economic growth. But unlike Easterly and Levine (2003), I also consider theories of institutional formation that are not grounded in geography such as those from Englebert (2000) and Bockstette et al. (2002). Is the reason some countries developed institutions conducive to economic prosperity primarily due to geographic differences across world regions or do other factors matter?

The empirical work will utilize both a world sample and an African sample. Although most of sub-Saharan Africa has not enjoyed rapid economic growth, exceptions arise and I deem it important to understand why these few have been more successful. Bloom and Sachs (1998) and Easterly and Levine (1997) join Englebert in citing Africa's problems as motivation for their work.'

The paper is organized as follows. Section II provides further discussion on recent work in this area and presents in greater detail the hypotheses mentioned above. Section III discusses the empirical specification. Section IV presents the results . A conclusion follows . Details regarding data and their sources are provided in an appendix.

II. Background

Hall and Jones (1999) examine to what extent institutions matter for economic development. They regress the natural log of output per worker on a measure of social infrastructure which is viewed as the government's commitment to both promoting nondistortionary policies (e.g., support for free trade) and protecting property rights. Since social infrastructure is likely to be endogenous, they use various measures of western European influence as instruments, such as the fraction of the population that speak a western European language. They also consider latitude since Europeans were more likely to settle in temperate climates. Their premise is that beneficial institutions evolved in regions with strong connections to Europe.

Acemoglu et al. (2001) examine European influence in more depth than do Hall and Jones (1999). They argue that western influence can be beneficial to the longrun development of a colony but can sometimes be quite malignant, King Leopold's Belgian Congo being an apposite example. (Hochschild 1998 and Pakenham 1991 present further details as to colonialism in the Belgian Congo. Alam 1994 discusses more generally the costs and benefits of colonialism for the indigenous population.) It is difficult to imagine that such pernicious forms of influence would have beneficial long-run effects upon postcolonial development. Moreover, the institutional structure created in these colonies need not be similar to that enjoyed by denizens at home.

They further argue that whether European influence was malignant or beneficial depended on the degree of European settlement. Colonies that attracted a large number of colonists were less likely to be extractive since this community of settlers would not want to see wealth leaving the colony. Moreover, they were likely to erect similar institutions as found in the home country. Finally, areas with low mortality rates for settlers would be areas more likely for settlement. Hence, mortality rates among settlers influenced...

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