Discussion on Engerman & Sokoloff's Argument

Main question: Why did previously wealthy countries become poor countries after colonization?

• Main source of economic returns differ

• Initially rich countries kept institutions that kept the wealthy wealthy

• The institutions set up in initially rich colonies were designed to give as much return to colonizers, leading to weak institutions focused on profit, rather than sustainable growth.

• Latin American countries and Carribbean countries were very attractive for European colonizers to capture and make profit (Americas largely ignored).

→ See reversal of fortune: Latin American countries become relatively poor in comparison to North America.

Acemoglu et al.’s reason for reversal of fortune versus Engerman & Sokoloff’s:

• Acemoglu’s reason: elites adopt weak institutions to keep power.

• Engerman: reason for difference is due to initial inequality.

  • Initial inequality in colonized countries led to economic conditions that created different institutions.

  • Reversal of fortune is driven by difference in the quality of economic and political institutions.

  • But the choice of institutions were driven by initial inequality which in turn is driven by initial economic conditions.

Why was there high inequality in colonies?

• Latin American and Carribbean countries had tropic environment ideal for cash crops → large export potential.

• Production structure mainly export-centered.

• Labor shortage due to European diseases.

• Slave-labor rises and is huge input into cash crop production (coffee, sugar, tobacco, and mining)

• Labor is coming from slaves, Europeans bring the money and investment (large-scale production needed a lot of money and expertise/education)

→ Wealth and human capital is very divided between slaves and colonizers (→ effects institutions, education, access to land, etc..)

• Land and labor are extremely important for wealth accumulation, and it is mostly in the hands of Europeans.

Now why was the situation different in the Americas?

• You don’t have an ideal crop environment (for cash crops like sugar and coffee).

• Sparse population and harder to travel to

• Harder to bring slaves over

• Based on these initial conditions, U.S. was able to invest more in European colonizers and establish more inclusive institutions because there wasn’t as large of a native population to exploit for labor.

→ The origin of institutions is what matters here

• U.S needed to invest in their European population because there were no natives to exploit → they needed to incentivize more immigrants from Europe (for labor/growth), so they couldn’t set up extractive institutions.

• Lower start up costs as a farmer coming from Europe

Handout from class:

3 Institutions Affecting Economic Conditions/Institutions

1. Extent of Voting Rights

• Secret ballots

• Wealth requirement

• Literacy requirement

→ Proportion of population voting

(See that only very recently that people in Latin American countries have relatively high voter turnout; U.S. and Canada start with high rates)

2. Access to Education

• Literacy rates in U.S. and Canada have very high intitial rates.

• Reason for low education in Latin America isn’t due to lack of wealth, but intentional witholding of access to majority of population.

• In America, there was a lot of investment in education because whites wanted to educate their children (→ Required elementary education funded locally).

• In LA, the political elite decided to have private education for primary schools because their population was so low.

• In LA, they were pushing for federally funded universites that only the elite could get into → accumulating wealth and human capital → sustaining inequality.

→ Problem of public, well-funded schools vs. private, elite schools.

3. Access to Land.

• Proportion of household heads who own land (total in Mexico: 2.4, total U.S.: 74.5, total CA: 87.1)

• By late 19th century, U.S. has one of the most educated populations and largest number of people who own land (U.S. implemented strong institutions to give immigrants access to land).

Key Points

• Because of the nature of the economy, differences in initial inequality majorly impacted how elites set up institutions, and when the industrial revolution began, see this difference widen starkly.

• America has highly educated population with land-owners who could benefit more widely from institutions and investments.

• Latin America has much larger population of illiterate, non-land holders who could not take advantage of industrial revolution (→ circle of elite remains concentrated, and so does wealth).

*Points from Shiferaw

• Acemoglu’s view doesn’t fully consider origins and reasoning behind initial weak/strong institutions.

• One needs to acknowledge the difference in economic activities the colonizers could in engage in (easier in Americas)

→ Differences in response to labor shortage:

• LA: brought in slaves

• U.S: incentivized more immigrants from Europe to come and placed stronger institutions → enacted voting & property rights, access to education, etc.

• Initial conditions are very hard to reverse