Colonialism
We all know colonialism was bad. Exactly why is a source of debate.
“Was colonialism bad?” is an incredibly dumb question: of course it was bad. There is no way that enslaving, exploiting, and brutalizing whole nations for centuries didn’t have long-lasting effects. Spanish colonialism in the Americas, for example, was so bad that many of its contemporaries (de Las Casas, Montesinos, de Vitoria) criticized it. Christopher Colombus himself behaved so reprehensively that he was punished by the Spanish Crown in his own lifetime. The more interesting question is, then, how colonialism was bad for the countries it exploited.
The path not taken
There is little doubt that colonialism was bad for countries; the problem is that the reason why it was bad is much harder to pin down. The main reason for this is path dependence. Path dependence relates to how a certain set of choices can become engrained into economic decisionmaking over time, leading to worse and worse choices that everybody dislikes but nobody can avoid. This runs counter to ideas that only outcomes, but not the mechanisms from which they result, matter for economies.
An example can comes from Dell (2008), which examines the Peruvian institution of the mining mita. The mita was an Inca tradition, whereby workers would be forced to do public service work for a period of time, and they were compensated for their work. The Spanish took the mita and modified it, forcing the natives to work in silver mining under grueling conditions. In the present, districts where the mita was frequently used are still poorer than those where it wasn’t. Why?
There aren’t any districts where there was no exploitation or less exploitation. The answer has to do with who held power. The mines were often directly owned by the Spanish authorities, and they locked out large landowners (known as hacendados) from setting up in mita districts to maximize the supply of labor available. The main difference was that the hacienda elite was extremely influential and well connected, whilst there were no similarly influential landowners in mita districts, which made the hacendados able to lobby government officials for various public goods: roads, schools, etcetera. Because of this, non-mita districts developed better public services and economies that were more closely linked with the rest of the country’s to this day, even after the hacendados had their properties divided in the 1970s. It also resulted in clearer and more secure property rights, which allowed small-scale farmers and peons to write contracts - meanwhile mita districts were plagued by revolts and unrest even during colonial times, because of the lack of secure claims to property.
Thus, the effects of colonialism should mostly be observed through institutions, the arrangements that rule economic life: countries that were colonies should, for some reason or another, have much worse ones that countries that weren’t, so their underperformance comes from the “game” having bad rules. But there are loads of questions remaining: was the problem the policies and decisions of the colonizers, or the conditions of the settlement? Was it the identity of the colonizers, or their decisions? What was the role of geography? How do institutions determine outcomes, actually?
Location, location, location
But how can we know that colonialism was economically bad? This feels like a very stupid question, but it’s one we at least have to consider. We could argue that we don’t have enough evidence to pinpoint colonialism as the cause of economic problems in the developing world, and we could point to some other factor instead.
Firstly, how can we be really sure that colonialism caused all those problems? We don’t know a lot about pre-modern societies, and we can’t really tell whether or not all of the problems poor countries currently have can be traced back to colonialism. If some other, non-colonial cause was more important, then we’d be able to blame it on that - after all, we don’t have a second Africa that was never colonized just lying around for us to run regressions by.
The most plausible non-colonial explanation is geography. Because many of the places that were colonized by Europeans were really hot, wet, tropical locations, maybe those places have problems that are inherent to them. “How does geography influence economic development” is a huge question, so I’ll tackle it quickly.
Sachs (2003) makes the case for a geographical explanation. Via statistical analysis, the paper finds a large correlation between economic performance and various geography-related variables: climate, diseases, distance from the coast, etcetera. These are relevant because of two reasons: firstly, because they make work and effort more difficult, lowering productivity. Secondly, Sachs makes a very bold claim: that institutions are settled on due to geographical factors. Many hypotheses have a geographical component (tropical plantations being viable, disease, etc), so this is a really strong claim - causation rather than correlation.
Other research, however, shows that the quality of institutions “trumps” everything else, and that after controlling for institutions geography becomes basically irrelevant to explain incomes. Although, it should be noted, that the influence on institutional choice remains present, just not the way Sachs specified it, since some of the most prominent explanations rely on geography as a starting point for path-dependent institutions.
How do institutions matter?
What does cause growth if not institutions? Well, inputs per worker and productivity. The reason why some places are very unproductive (and, therefore, poor) and others aren’t is that they have different levels of physical capital, financial development, human capital, and technology. But institutions shape how much of all of these is accumulated. Let me explain.
Social action is the prime determinant of output per worker (i.e. GDP per capita), since it determines how much of each individual’s economic output can be captured by themselves. “Bad” institutions feature lots of predation, corruption, etc, leading to a much lower percentage - and therefore lower investments of various kinds. The better a country’s institutions, the better it is at promoting growth, and the richer it eventually gets.
The main channel for this seems to be not the institutions themselves, but the government policies they lead to: good policies lead to good incentives, and good incentives cause growth. The role of institutions might be as a catalyst for good policies and not as a cause of them, or even more importantly, it might be a consequence of growth, since good institutions stem from policy and political decisions. The reason democracies are richer, then, isn’t that democracy is the magic sauce of development, but rather that democracies have incentives that are better aligned with the incentive structure that creates growth.
Regardless, a particularly important institution appears to be property rights. Basically, the better protected they are, the more the people who use the property invest in it, the richer and more productive a country becomes over time, and the easier things like specialization become. This idea goes back at least to North & Weingast’s classic “Constitutions and Commitment” from 1989. The key here is that strong protections on property rights eliminated the risk of expropriation of your assets by the government, which resulted in investment and growth - the example used is Britain after the Glorious Revolution and the English Civil War. The effect of the strenght of property rights is actually so strong it helps explain, partly, the lack of evidence for convergence in developing countries: they simply didn’t have the incentives for it.
An example could come from India. Banerjee & Iyer (2002) explore districts in the country where the British set up policies for who profited from farming: in some, the farmers did, and in others a class of landlords ran the farms and collected the revenue for the farmers. After controlling for basically every indicator of geographical and technical conditions at the start, they found that the farmers who profited from the land themselves invested more in their farms, resulting in yields 23% higher and a more prosperous district, with better quality of life (child mortality 40% lower).
(Not) Up to Code
Let’s start with the first institution that could potentially have hurt colonies: the legal system (or legal code) of their colonizers. Roughly speaking, there’s two kinds: civil law, based on Roman traditions and continued (and spread around) by Napoleon, which generally aims to order everything neatly around pre-determined sets of comprehensive rules; and common law, based on British legal traditions and formed by the ongoing settlement of specific legal disputes. In broad terms, common law is more focused on solving disputes and promoting private partnerships, whereas civil law is interested in implementing state policy and conditioning private contracts to social conditions.
Because of the differences between the two, countries have different regulations for a whole bunch of key economic variables, like capital markets, bankruptcy law, forming businesses, hiring and firing workers, et cetera, with common law systems being generally more flexible and more amenable to private property, freedom of contract, and investor protections. These differences are also present in colonies, where places colonized by civil law nations developed legal systems that were hostile to market-driven economic growth through excessive regulations in some areas and insufficient ones in others.
And how did colonizer nations design their legal systems? The classic theory is to protect private property from a strong government, but strong government wasn’t the rule in civil law nations - in fact, the French government was so weak it couldn’t even protect its own officials from threats of bribery and extortion. Britain, home of the common law tradition, was relatively peaceful and thus settled on juries and local decision makers, whereas the more violent and unstable France chose a highly centralized system that maximized the independence of the judiciary from local interests.
The source of growth from common law regimes, however, might not be the particular policies they incentivize, but rather, because common law results in governments that are less powerful, particularly in the realm of property rights. This view comes from Friedrich Hayek, and is somewhat compelling. The theory posited above mostly focuses on things like specific markets, whereas this view mostly focuses on the fact that, per North & Weingast, the legal system of Britain was set up to restrain the government - particularly from infringing on property rights.
The biggest problem for this theory, in my view, isn’t that it doesn’t fit the evidence (it generally does, although classifying legal systems sounds like a painful minutiae-riddled slog), but that it might be getting the causation backwards. For example, capital markets might have been more developed in countries like England for some reason other than regulations, and then laws changed to accomodate them, while they didn’t in, say, France or Spain. A similar thing happens with housing and construction regulations: common law is generally considered a key problem behind things like NIMBYism and high construction costs in the Anglosphere. But it’s also possible, as this interview with urbanism expert Alon Levy mentions, that the reason that most Anglosphere nations have sky-high housing and construction costs isn’t that Anglosphere countries all have common law, but that they’re all just in close contact with each other and share ideas about urban policy that are bad. The elites of Latin American nations, for instance, were educated in Spain for basically all of the 19th century - ergo, if Spanish elite conventional wisdom was bad for growth, the same bad ideas would be spread around between the metropolis and its colonies.
Land of gold and sugar
So far I haven’t mentioned one key item: slavery. Did it have a big effect on economic performance? Engerman & Sokoloff (2002) argues yes - but because of its effects on the distribution of wealth.
The key item here is geography. Because some places were hotter and wetter, and some had mining resources, that would mean that they incentivized wealth extraction through plantations and mines - both run by slaves (or the slavery adjacent mita and encomienda systems). Specialization in these large-scale, labor intensive activities, with slave or slave-like labor, led to significant wealth inequality within societies, resulting in an economically dominant elite holding all of the power over post-colonial institutions. This also ties in with another longstanding fact: direct rule is worse for colonies than indirect rule - the key here is that European countries tended to directly rule places like Potosí and Haiti rather than, say, Uruguay.
The evidence for this theory isn’t very strong - while there is a corpus of corroborating evidence on extreme wealth inequality being bad for economic development, for instance by discouraging investments in infrastructure, the truth is that it seems extremely mixed at best - while the gold mines of Colombia showed this pattern, the Peruvian silver mines showed the opposite one. And there’s no evidence that the channel was slavery itself, but rather large concentrated holdings of property. A good counterexplanation comes from Grafe & Irigoin (2008). The decentralized nature of the Spanish empire didn’t affect just taxation (which Irigoin later showed was extremely limited for basically unlimited fiscal needs), but also spending - by promoting disproportionate influence of a small group of stakeholders on public spending. Additionally, the limited capacity to tax and the bad provision of public goods led to a preference for lower tax rates that matched the quality of actual goods received by non-privileged taxpayers.
Why Nations Fail
Acemoglu, Johnson, and Robinson’s work is vast and complex (two of them even wrote a whole book about it, in fact) but it tries to answer just one question: why did European colonizers impose “good” institutions on some places and “bad” ones in others? Most of the factors are influenced by geography.
In a nutshell, acording to Acemoglu, Johnson, and Robinson’s ouevre, there were some colonies that were focused on extracting wealth from the locals (think the Belgian Congo, or Spanish Peru) and others that were focused on creating wealth for the colonists (say, New England, or Australia). Assuming that a significant chunk of colonial institutions persisted for a long time, the million dollar question is: what was the difference?
According to this theory, it’s partially geography: the places with the most dire conditions (as measured by settler mortality) had the lowest incentives to actually create wealth, and the largest ones to extract it from natives. If geographical conditions aren’t a direct determinant of poverty (which they might), then mortality of settlers acts as the channel by which Europe imported good or bad institutions into the “New World”. There’s a second geographical factor - the “reversal of fortune” story. The richest countries in Latin America in 1500, for instance, were Perú and Southern Mexico; now they’re incredibly poor, compared to the rest of the continent. Why is there a negative relation between urbanization in 1500 and GDP per capita today? Institutions and exploitation, again.
Consequently, the places with higher population density and/or better conditions had, by definition, more population (and often, natural resources), which provided large incentives to extract wealth from the natives by at least de facto enslaving them, whereas the places with lower population density and/or worse conditions provided incentives for Europeans to create wealth “of their own” instead - to a large extent, to be fair, at the expense of natives and African slaves. These institutions (extractive versus growth-promoting) survived for a long time, by keeping economic elites in power and those elites building their power and wealth on a similar basis.
The last piece of the puzzle is why the colonists themselves didn’t develop bad institutions of their own - the answer is trade. Because colonists extracted large amount of wealth from their overseas territories, the merchants and traders who carried out those transfers became rich and influential, strengthening “modernizing” coalitions that promoted private property over backwards feudal nobility or power-hungry monarchs. The less absolutist the initial conditions, the more beneficial the Atlantic trade was for Europeans. In the same vein, as Nunn (2008) shows, this trade was awful for the other side. The biggest source of trade for certain African coastal nations was slavery: the production of slaves was highly damaging for a country, for reasons that might not be particularly surprising - giving away large chunks of your labor force and your human capital isn’t especially good for the economy. Sadly, the countries most active in selling slaves, now the poorest in Africa, used to be the richest: their superior understanding of credit and markets, and their powerful merchant classes, locked them into destroying their own economic future.
But there’s a number of problems with the Acemogly - Johnson - Robinson theory. For starters, mortality data (the whole foundation of this exercise) isn’t particularly abundant, or high quality, for Latin America in the 1500s - most of it comes from a handful of sources, which are then extrapolated not so carefully. Regardless, if you actually test the settler mortality hypothesis for each continent and not all colonial territories, using the original study’s data, then it doesn’t hold for the whole sample, just Asia and the “successful” colonies (The US, Canada, Australia, New Zealand).
The biggest issue is actually time: Latin America, Asia, and Africa weren’t colonized at the same time, by the same countries, or with the same technologies. Latin America was settled by the Spanish in the 16th and early 17th century, whilst African imperialism reached its zenith at the second half 19th century - nearly 200 years apart (in fact basically all of Latin America was already independent by the time the Scramble for Africa began). Plus, the causes of mortality were handled really differently: between the Age of Discovery and the Second Industrial Revolution, medical science had advanced significantly, to the point where natural conditions weren’t nearly as binding on European settlement.
The institutional consequences of these differences in time are even more troubling. Peter Minuit bough Manhattan from the Lenape over a hundred years after Pizarro kidnapped Atahualpa in Cajamarca. Buenos Aires, one of the richest cities in Latin America, didn’t become a major settlement until 1776, the same year as Adam Smith published “The Wealth of Nations” and the 13 colonies started the fight for life, liberty, and the pursuit of happiness. And regardless of what the Spanish and Portugues could have intended, the truth is they couldn’t have brough over the institutions of capitalism to the New World even if they wanted to, since capitalism didn’t really exist anywhere back in the early 1600s. In contrast, most North American colonization happened later, and places such as Southeast Asia were literally invaded by private corporations. In consequence, exactly when and how a colony was settled mattered, because even if the natural conditions were favorable for wealth creation, it’s also possible the home country hadn’t developed the necessary institutions itself. Plus, trade and colonization “locked in” institutions (per the reversal of fortune story), so it’s possible that having colonies undeveloped Spain and Portugal over the long term.
Chaos: a chute, not a ladder
After independence, Latin America was extremely chaotic for the better part of a century; Africa has spent the past five decades or so in a constant state of violence and economic crises. Instead of separate phenomena, these might be the same: the growing pains of independence.
After colonies become independent, normally, they don’t have a government of their own and haven’t had for a while, which results in decades of political instability: wars, coups, inflation, governments of dubious legitimacy, etc. Because of this, macroeconomic performance is shoddy, and it might result in bad institutions originally meant to serve as short-term stopgaps to perdure for longer periods of time. Plus, struggles over limited government resources resulted in political coalitions and changes to politics, which shaped institutions over the long term.
This could account for three facts: that economic performance in Latin America seems to have severely worsened after independence, that colonies with self-government are more successful than ones without it, and that a major shaper of institutional quality is whether or not a country had preexisting institutions that clash with colonial ones. Simply put, independence is a mess and sorting it out is difficult, expensive, time consuming, and rife with conflict.
Conclusion
I’m didn’t entertain the idea that colonialism was actually good. Amartya Sen makes the case for dismissing this theory quite succintly: countries that modernized as a result of colonization could have modernized on their own - history doesn’t stand still. Take Japan: if it had been invaded by the US in 1853, for example, we would claim that it was modernized by the Americans, without knowing (like we do) that the Meiji Restoration would have occurred. We can’t be certain the same wouldn’t have happened to India, or China, or Aztec Mexico for that matter. Regardless of what institutional progress might be chalked up to imperialism, the truth is that it set in place laws, governments, and economic processes that worsened performance over the long term, proving to be one of the bigger tragedies in human history, and one that ended not so long ago.
Sources
Introduction
Acemoglu & Robinson, “The economic impact of colonialism”, VoxEU, 2017
Acemoglu, Johnson, & Robinson (2005), “Institutions as a Fundamental Cause of Long-Run Growth”
Nunn (2009), “The Importance of History for Economic Development”
Dell (2008), “The Persistent Effects of Peru's Mining Mita”
Geography
Sachs (2003), “Institutions Don't Rule: Direct Effects of Geography on Per Capita Income”
The role of institutions
Hall & Jones (1999), “Why Do Some Countries Produce So Much More Output per Worker than Others?”
Glaeser, La Porta, Lopez-de-Silanes, & Shleifer (2004), “Do Institutions Cause Growth?”
The Legal Origins theory
La Porta, Lopez-de-Silanes, Shleifer, & Vishny, “Legal origins”, VoxEU, 2019
La Porta, Lopez-de-Silanes, Shleifer, & Vishny (1997), “Legal Determinants of External Finance”
La Porta, Lopez-de-Silanes, & Shleifer (2008), “The Economic Consequences of Legal Origins”
Glaeser & Shleifer (2001), “Legal Origins”
Mahoney (2001), “The Common Law and Economic Growth: Hayek Might Be Right”
Engerman-Sokoloff
Why Nations Fail
Nunn (2008), “The Long Term Effects of Africa's Slave Trades”
Olsson (2004), “Unbundling Ex-Colonies: A Comment on Acemoglu, Johnson, and Robinson 2001”
The “disorganization theory”
Irigoin (2003), “Macroeconomic aspects of Spanish American independence”
Grier (1999), “Colonial Legacies and Economic Growth”
Acemoglu, García, & Robinson (2015), “State Capacity and Economic Development: A Network Approach”
Conclusion
Amartya Sen, “Illusions of empire: what British rule really did for India”, The Guardian, 2021
Can you clarify the section on Engerman and Sokoloff, a personal favorite paper of mine. I always summarized the paper as natural endowments lead to certain colonial institutions (extractive v. settler), those institutions persist post independence, influencing present development.
So when you write "The evidence for this theory isn’t very strong", what is the theory in question? The linked papers on the silver mines and gold mines, both seem to generally support the Engerman and Sokoloff theory. Presence of minerals led to an extractive institution (coerced labor), and this extractive institution has hindered present day growth: mita regions are poorer, and Colombian slavery regions are poorer.
Am I missing something or misreading the papers/section?
Big fan of this blog and I often assign your posts to my students, thanks for your work.
“ The richest countries in Latin America in 1500, for instance, were Perú and Southern Mexico; now they’re incredibly poor, compared to the rest of the continent. ”
sorry what? southern mexico is poor relative to the rest of latin America? and so is Peru?
is that true? southern mexico looks poor for mexico, but mexico is rich for latin America, Peru looks middle of the pack, maybe I’m missing some more detailed data