This paper analyzes the causes and consequences of variation in local institutions, withina constant ‘macro-institutional’ setting. We show that variation in institutional quality acrossBrazilian municipalities is partly inherited from the distinct colonial histories experienced bydifferent areas of the country, and argue that some of this institutional variation conditionedregional development.
Specifically, we explore the role of rent-seeking colonial episodes indetermining the quality of current local institutions along four very precise dimensions:distribution of economic power through distribution of endowments, distribution of political power, quality of local government practices, and access to the justice system. Our results showthat municipalities with origins tracing back to the sugar-cane colonial cycle – characterized by a polarized and oligarchic socioeconomic structure – display today more inequality in thedistribution of land. Municipalities with origins connected to the gold colonial cycle – characterized by an over-bureaucratic and heavily intervening presence of the Portuguese state – display today worse governance practices and less access to justice. In addition, we show that thevariation in current institutions explained by colonial history is significantly related todevelopment.The role of institutions as key determinants of development has received increasedattention in recent years. After the initial work of North (1991) and Engerman and Sokoloff (1997), a vast array of cross-country empirical literature developed following the footsteps of theseminal contributions of Acemoglu, Johnson, and Robinson (2001 and 2002).
Much of thisliterature has evolved around the idea that the geographic pattern of development observedacross countries – summarized in the relationship between distance to the equator and income per capita reproduced here in Figure 1 – reflects different institutional arrangements, inheritedfrom different experiences of colonization. According to the emerging consensus in thisliterature, geographic conditions were associated with particular paths of colonization, which inturn translated into the establishment of different types of institutions. Institutions then, throughtheir effects on property rights, political competitiveness, and governance, led to good policiesand, ultimately, development. In this view, the adoption of distinct ‘macro-institutions’ –
Municipalities are the smallest political and administrative units in Brazil. They have administrative autonomy, aregoverned by a mayor and a chamber of representatives, and are something in between US counties and cities.Municipalities raise certain taxes, receive transfers from the federal government, and decide on part of theexpenditures along several different dimensions (education, health, infrastructure, etc.).
See, for example, Easterly and Levine (2003), Rodrik, Subramanian, and Trebbi (2004), and Acemoglu andJohnson (2005). Other literature contends that the geographic pattern of development reflects indeed the directimpact of geography on income per capita, through its effects on the disease environment, agricultural productivity,and access to trade (see, for example, Gallup, Sachs, and Mellinger, 1999).