Geiff Institution

Lionel Robbins Lectures,
London School Economics, Feb.23-25

Understanding Institutions
Daron Acemoglu
(based on joint work with
Simon Johnson and
James Robinson)
1
The Argument
z Institutions---organization of society, “rules of the game”--- are a
major determinant of economic performance and a key factor in
understanding the vast cross-country differences in prosperity.
z Institutions are not exogenous, but there are potential sources of
exogenous variation in history.
– Example: the “natural experiment” of European colonization.
– Use of history to estimate the causal effect of institutions on growth.
z Institutions are not typically chosen for the good of society, but
imposed by groups with political power for their economic
consequences.
– Understanding institutions necessitates understanding the dynamics
of political power.
– Institutional reform possible, but many potential pitfalls;
z e.g., dealing with the symptoms rather than deep causes.
2
Plan of the lectures (1)
z Lecture 1: Institutional Causes of Economic
Performance.
– Sources of prosperity.
– What are institutions? Brief discussion.
– Sources of cross-country differences in prosperity.
– Geography versus institutions and the identification problem.
– Learning from the Korean experiment.
– The colonial experiment and the Reversal of Fortune.
– Reassessing geography versus institutions.
– Are British colonies different?
– The role of culture.
3
z Lecture 2: Towards a Theory of Institutions.
– Different meta-theories: efficiency, history, ideology and
social conflict.
– Economic institutions, political institutions and political power
– Historical examples:
1. Land relations in the Dutch East Indies
2. Early financial development in the U.S. and Mexico
3. Price regulation in Ghana, Kenya and Colombia
– Dynamics of political power and political institutions.
– A theory of institutions.
1. Atlantic trade and rise of constitutional regimes.
2. Emergence of mass democracy in Western Europe.
4
z Lecture 3: Institutions, Prosperity and Change
– Estimating the causal effect of institutions on income per
capita.
z Making further use of the colonial experience.
z Reassessing geography, culture and religion.
– From the long run to the short run: the effect of institutions on
volatility, instability and crises.
– Institutions and policies.
– Institutional change; putting the theory to work
– Institutional change; pitfalls:
z The seesaw effect: dealing with the symptoms not causes.
z Ignoring internal dynamics.
– Where to go from here?
5
Lecture 1: Institutional Causes of
Economic Performance
z Plan of Lecture 1:
– Sources of prosperity.
– What are institutions? Brief discussion.
– Sources of cross-country differences in prosperity.
– Geography versus institutions and the identification problem.
– Are British colonies different?
– The role of culture.
6
Sources of prosperity (1)
z Vast differences in prosperity across countries today.
– Income per capita in sub-Saharan Africa on average 1/20th of
U.S. income per capita
– In Mali, Democratic Republic of the Congo (Zaire), and
Ethiopia, 1/35th of U.S. income per capita.
z Why?
z Standard economic answers:
– Physical capital differences (poor countries don’t save enough)
– Human capital differences (poor countries don’t invest enough
in education and skills)
– “Technology” differences (poor countries don’t invest enough
in R&D and technology adoption, and don’t organize their
production efficiently)
7
Sources of prosperity (2)
z These are, however, proximate causes of differences
in prosperity.
– Why do some countries invest less in physical and human
capital?
– Why do some countries fail to adopt new technologies and to
organize production efficiency?
z The answer to these questions is related to the
fundamental causes of differences in prosperity.
z Potential fundamental causes:
– Institutions (humanly-devised rules shaping incentives)
– Geography (exogenous differences of environment)
– Culture (differences in beliefs, attitudes and preferences)
8
What are institutions? (1)
z Institutions: the rules of the game in economic, political
and social interactions.
– Institutions determine “social organization”
z North (1990, p. 3):
"Institutions are the rules of the game in a society or,
more formally, are the humanly devised constraints
that shape human interaction.“
z Key point: institutions
– are humanly devised
– set constraints
– shape incentives
9
What are institutions? (2)
z A broad cluster including many sub levels:
– economic institutions: e.g., property rights, contract enforcement, etc.
z shape economic incentives, contracting possibilities, distribution.
– political institutions: e.g., form of gov., constraints on politicians and
elites, separation of powers, etc.
z shape political incentives and distribution of political power.
z Important distinction between:
– Formal institutions: codified rules, e.g. in the constitution
– Informal institutions: related to how formal institutions are
used, to distribution of power, social norms, and equilibrium.
z Constitutions in U.S. and many Latin American countries similar,
but the practice of politics, and constraints on presidents and
elites very different.
z Why? Because distribution of political power can be very different
10 even when formal institutions are similar.
Institutional variation
z Big differences in economic and political

institutions across countries.
– Enforcement of property rights.
– Legal systems.
– Corruption.
– Entry barriers.
– Democracy vs. dictatorship.
– Constraints on politicians and political elites.
– Electoral rules in democracy.
11
Economic institutions and
economic performance (1)
.
LUX
USA
SGP CHE
HKG JPN NOR
DNK
BEL
CAN
10 AUT
FRA
ISL NLD
AUSITA GBR
SWE FIN
ARE
KWT ISR IRL
NZL
QAT BHR
ESP
PRT
Log GDP per capita, PPP, in 1995
MLT GRC KOR

BHS CHL
OMN SAU CZE
ARG VEN
URY
MEX GAB
PAN ZAF
CRI COL BWA MYS HUN
TTOTHA BRA
IRN TUR POL
TUN
ECU BGR
PER DOM DZA ROM RUS
GTM
JORPRY
JAM
PHL MAR IDN
SUR SYR
8 SLV BOL GUY EGY
CHN
AGO LKA
HND ZWE
NIC CMR
GIN
COG SEN CIV
SDN PAK GHA MNG IND
VNM TGO GMB
HTI
KEN
UGA
ZAR BFA
MDG BGD NGA ZMB
NER
YEM
MLI
MOZ MWI
SLE TZA
ETH
6
4 6 8 10
12 Avg. Protection Against Risk of Expropriation, 1985-95
Economic institutions and
economic performance (2)
.
USA
SGP CHE
JPN
BEL HKG NOR DNK
10 FRA AUT DEUGBR CAN
ITA AUS NLD
SWE
ISR IRL FIN
NZL
ESP
PRT
KOR GRC CHL
SVN
CZE
VEN ARG
URY
MEX ZAF MYS
PAN
COL SVK HUN
THA BRA
TUR
LBN POL
ECU BGRHRV TUN
DOM RUS ROM PER
JAM LTU JOR
KAZIDN LVA
PHL MAR
8 EGY
BOL CHN
UKR
ARM ZWE LKA
GEO
PAK SEN
GHA
IND
VNM
KEN
UGA
NGA ZMB MDGBFA
MLI
MOZ MWI
TZA
6
0 .5 1
Control of Corruption
13
Political institutions and economic
performance
.
LUX
USA
SGP CHE
JPN
NOR
DNK
BEL
CAN
AUT
10 FRA ISL
DEU
NLD
AUS
ITA
GBR
SWE
FIN
ISR
IRL
NZL
ESP
PRT
KOR
GRC
CHL
SAU OMN
ARGVEN
MUS
URY
MEX
GAB MYS
ZAF
BWA
PAN
COLHUN
CRI
THA TTO
BRA
IRN POL TUR
TUN ECU
DZA PER DOM
GTM FJI
JOR PRY JAM
SWZ IDN PHL
SYR MAR
8 EGY
CHN GUY SLV BOL
AGO
ZWE HNDLKA
GIN CMR NIC
CIV MRT
SEN COG COM
SDN GHA LSO PAK IND
TGO GMB
CAF HTI
KEN BEN
UGA
ZAR
TCD
NGA BFA ZMB MDG BGDNPL
NER
YEM
BDI MLI
RWA MWI MOZ
SLE TZA
ETH
6
0 2 4 6 8
Constraint on Exec. 1990s
14
But institutions are endogenous
z Institutions could vary because underlying factors differ
across countries.
– Geography, ecology, climate
– Culture
– Perhaps other factors?
z Montesquieu’s story:
– Geography determines “human attitudes”
– Human attitudes determine both economic performance and political
system.
– Institutions potentially influenced by the determinants of income.
z Identification problem.
– We can learn only a limited amount from correlations and ordinary
least square (OLS) regressions.
15
Geography hypothesis:
Montesquieu
z Montesquieu:
– “The heat of the climate can be so excessive that the body
there will be absolutely without strength. So, prostration will
pass even to the spirit; no curiosity, no noble enterprise, no
generous sentiment; inclinations will all be passive there;
laziness there will be happiness,”
– "People are ... more vigorous in cold climates. The inhabitants
of warm countries are, like old men, timorous; the people in
cold countries are, like young men, brave".
z Moreover, Montesquieu argues that lazy people tend to
be governed by despots, while vigorous people could
be governed in democracies; thus hot climates are
conducive to authoritarianism and despotism.
16
Geography hypothesis:
modern versions
z Jared Diamond:
– Importance of geographic and ecological differences in
agricultural technology and availability of crops and animals.
z Jeff Sachs:
– "Economies in tropical ecozones are nearly everywhere poor, while
those in temperate ecozones are generally rich" because "Certain
parts of the world are geographically favored. Geographical
advantages might include access to key natural resources, access to
the coastline and sea…, advantageous conditions for agriculture,
advantageous conditions for human health."
– "Tropical agriculture faces several problems that lead to reduced
productivity of perennial crops in general and of staple food crops in
particular" …
– "The burden of infectious disease is similarly higher in the tropics than
in the temperate zones"
17
Montesquieu’s story?
.
USA LUX
SGP CHE NOR

HKG QAT
AUS
JPN FRA NLD DNK
AUT BEL
DEU
CAN ISL
ITA GBR
IRL SWEFIN
10 ARE ISR ESP
NZL
KORGRC
PRT
BRB BHSBHR KWT MLT

ARG CZE
SAU SVN
HUN
MUS CHL SVK EST
MYS MEX URY
TTO OMN LBY ZAF POL
BLR LTU
FJI LVA RUS
BRA THAKNA TUR
GAB COL VENCRI BWA IRNTUN
ROMKAZ
BGRHRV
PAN DOM DZA
PER LCA PRY GEO
GUY NAM SWZ
PHL
GRDSLVGTM JAM
DMA EGY MAR CHN TKM UKR
JOR
IDN LKA BLZ SYR
ECU AZE
8 VCTHND
NIC BOL
BTN
LSO ARM MDA
PNG IRQ UZB YUG
ZWE
IND
GHA VNM MRT PAK
CMRCAF
CIV SEN BIH
KEN TGO CPV HTI BGD NPL
GIN MMR
STP
UGA GMBSDN TJK
COG LBR BEN BFATCD MOZ
NGA MWI NER
GNB
DJI
ZMBMLI MDG
YEM AFG
RWA TZA AGO
COM
ZAR BDI ETH
SLE
SOM
6
0 .2 .4 .6 .8
Latitude
18
Empirical pitfalls of correlations
and ordinary least square estimates
z Montesquieu’s story example of omitted variables bias
and identification problem.
– Other omitted factors---human nature, culture, geography---
vary across countries and affect economic performance.
– They also are correlated with or have a causal effect on
institutions.
– Similar problem affects inferences about geography on
income; potentially correlated with omitted variables.
z Reverse causality:
– Income affects institutions.
z Attenuation bias:
– Measures of institutions very coarse, poorly correspond to
conceptual measures, creating “errors in variables” problem.
19
Need for exogenous variation
z Exploit “natural experiments” of history, where some
societies that are otherwise similar were affected by
historical processes leading to institutional
divergence.
– Building towards an “instrument” for institutions (Lecture 3);
z a source of variation that affects institutions, but has no other
effect, independent or working through omitted variables, on
income.
z Examples of potential natural experiments of history:
1. South versus North Korea
2. European colonization
3. Chinese experience
20
The Korean experiment
z Korea: economically, culturally and ethnically homogeneous at the
end of WWII.
z If anything, the North more industrialized.
z “Exogenous” separation of North and South, with radically
different political and economic institutions.
– Exogenous in the sense that institutional outcomes not related to the
economic, cultural or geographic conditions in North and South.
– Approximating an experiment where similar subjects are “treated”
differently.
z Big differences in economic and political institutions.
– Communism (planned economy) in the North.
– Capitalism, albeit with government intervention and early on without
democracy, in the South.
z Huge differences.
21
North and South Korea GDP per capita
14000
12000
10000
8000
South Korea
North Korea
6000
4000
2000
0
1950 1960 1970 1980 1990 1998
22
European colonization as a “natural
experiment”
z After the discovery of the New World and the rounding
of the Cape of Good Hope, Europeans dominated
many previously diverse societies, and fundamentally
affected their social organizations (institutions).
z Approximating a “natural experiment” because
– Many factors, including geographic, ecological and climatic
ones, constant, while big changes in institutions.
– Changes in institutions not a direct function of these factors.
– Analogy to a real experiment where similar subjects have
different “treatments”.
z Consequences?
z Look at changes in prosperity from before colonization
(circa 1500) to today in the former colonies sample.
23
Measuring prosperity before
national accounts
z To answer these questions, we need a measure of prosperity
before the modern era.
z Urbanization is a good proxy for GDP per capita (Bairoch,
Kuznets, de Vries).
z Only societies with agricultural surplus and good transportation
network can be urbanized.
z Urbanization is highly correlated with income per capita today
and in the past.
z And we can construct data on urbanization in the past (Bairoch,
de Vries, Eggimann)
z In addition, use population density as a check.
– Useful also because related to the causal mechanism in
Lecture 2.
24
Urbanization and income today
.
USA
SGP
HKG
CAN
10 AUS
NZL
CHLBHS
BRB
GDP per capita, PPP, in 1995
ARG
MUS VEN URY
9 KNA GAB MYS
ZAF PAN BWA
MEX
CRI COL
TTO BRA
LCA
NAM
GRD ECUTUN
BLZ DZA DOM PER
FJI
GTM VCT DMA
PRY
JAM
SWZ IDN PHL
MAR
SUR
8 EGY
SLV CPV BOL
GUY
LKA AGO
ZWE HND
GIN CMR NIC
COM PAK CIV
SEN MRT COG
LSOIND SDN GHA
VNM GMB
TGO
HTI CAF
LAO KEN BEN
7 UGA
NPL
BFABGD TCD MDG
ZAR NGAZMB
NER
BDI ERI MLI
RWA MWI MOZ
TZA SLE
6
0 50 100
25 Urbanization in 1995
Results: until 1500
z Persistence is the usual state of the world.
– There is “mean reversion” and rise and decline of nations, and
certainly of cities.
– But countries that are relatively rich at a point in time tend to
remain relatively rich.
z The data confirm this persistence.
– After the initial spread of agriculture, there was remarkable
persistence in urbanization and population density.
– Largely true from 1000 BC to 1500 AD, and also for
subperiods.
– More important, true also in the former colonies sample.
26
Reversal since 1500 (1)
.
USA
SGP
HKG
10 CAN
AUS
NZL
CHL
ARG
VEN
URY
9 MYS
MEX
COL PAN
CRI
BRA
ECU TUN
DOM BLZ PER DZA
GTM
PRY JAM
PHL IDN MAR
8 GUY SLV BOL EGY
LKAHND
NIC
PAK
IND
VNM
HTI
LAO
7 BGD
0 5 10 15 20
27 Urbanization in 1500
Reversal since 1500 (2)
.
USA
SGP
HKG
CAN
10 AUS
NZL
CHL BHS
BRB
ARG
URY VEN
9 BWA ZAF GAB MEX
MYS
KNA
PAN
COL TTO
CRI
BRA
NAM LCA
ECU TUN
GRD
PER
BLZ
DOM DZA
DMA
VCT
GTM
PRY JAM
SWZ PHL IDN
SUR MAR
8 CPV BOL SLV EGY
GUY
AGO LKA
ZWE HND
NIC
CMR GIN
COG CIV
MRTGHA
SEN
COM
LSO SDN PAK
IND
CAF TGOVNM
GMB
HTI
LAO KEN BEN
7 TCD ZAR
MDG BFA
UGA NPL BGD
ZMB NGA
NER
MLI ERI BDI
MWI MOZ RWA
TZA SLE
6
-5 0 5
28 Log Population Density in 1500
When did the reversal happen?
Urbanization in excolonies with low and high urbanization in 1500
(averages weighted within each group by population in 1500)
25
20
15
10
0
800 1000 1200 1300 1400 1500 1600 1700 1750 1800 1850 1900 1920
low urbanization in 1500 excolonies high urbanization in 1500 excolonies
29
The nature of the reversal:
industrialization
Industrial Production Per Capita, UK in 1900 = 100
(from Bairoch)
400
350
300
250
200
150
100
50
0
1750 1800 1830 1860 1880 1900 1913 1928 1953
US Australia Canada New Zealand Brazil Mexico India
30
What’s happening?
z Former colonies with high urbanization and population density
in 1500 have relatively low GDP per capita today, while those
with low initial urbanization and population density have
generally prospered.
– But gains in the growing societies not always equally shared.
Native Indians and aborigines in the New World have all but
disappeared.
z (Simple) Geography hypothesis?
– It cannot be geographical differences; no change in geography.
z Sophisticated geography hypothesis? Certain geographic
characteristics that were good in 1500 are now harmful?
– no evidence to support this view; reversal related to
industrialization, and no empirical link between geography
and industrialization.
31
Understanding the patterns from
1500 to 2000
z Reversal related to changes in institutions/social organizations.
z Relatively better institutions “emerged” in places that were
previously poor and sparsely settled.
– E.g., compare the United States vs. the Caribbean or Peru.
z Thus an institutional reversal
– Richer societies ended up with worse institutions.
– Europeans introduced relatively good institutions in sparsely-settled
and poor places, and introduced or maintained previously-existing
bad institutions in densely-settled and rich places.
z E.g.; slavery in the Caribbean, forced labor in South America,
tribute systems in Asia, Africa and South America.
z Institutions have persisted and affected the evolution of income,
especially during the era of industrialization
– why to be discussed more below.
32
The institutional reversal (1)
.
Resids Cons. Executive First Year Indep on Years Since Indep
5 USA
CAN NZL
AUS
JAM
SGP MYS LKA
IND
GUY BGD
LAO
COL BOL
ECU MEX
DOM CRI
SLV
HND
0 PAN
PRY EGY MAR

CHL
BRA
ARG HTI PER
URY
VEN NIC
GTM
DZA
IDN
VNM PAK
TUN
-5
-10 0 10
Resids from Regress Urbanization in 1500 on Years Since Indep
33
The institutional reversal (2)
.
Resids Cons. Executive First Year Indep on Years Since Indep
5 USA
CAN NZL
AUS
SGP MYS JAM UGA LKA IND

SDN
GUY TTO NGA
GMB BGD
LAO KEN
MRT BDI
BOL MEX
CRI ECU
COL HND
SLV
DOM
ZAF
0 MDG
COG
PAN
NER
MLI CMRTZA TGO
SEN
BEN
BFA MAR
BRA
ARG AGO PRY CHL HTIPER EGY
URY VEN NIC
GTM
GAB DZA
IDN PAK
TCD ZAR
CAF GIN VNM
GHA
CIV TUN RWA
-5
-5 0 5
34 Resids from Regress Log Pop Density in 1500 on Years Since Indep
Institutions matter
z Reversal in prosperity resulting from the institutional
reversal, combined with persistence in institutions.
– Countries with “better” institutions prosper, while those with “bad”
institutions stagnate or decline.
– The reversal also emphasizes that the differences are not only
between capitalist and communist systems.
– What matters more is the “type” of capitalism.
z But then why different institutions?
– And what are “good” and “bad” institutions?
z For now, take good institutions to be those that
encourage investment in physical, human capital, and
in technology, and bad institutions in the opposite
– Are the same institutions always good and bad? Discussed later.
35
Are British colonies special?
z Popular view going back to Adam Smith and Winston

Churchill that British cultural and political influence was
beneficial, certainly better than that of Spanish and
French influence.
z Does the evidence support this view?
z The answer is no.
– The patterns shown above are robust to controlling for the
identity of colonial power.
– Similar patterns when we look at only British colonies.
36
The Reversal among former British
colonies (1)
USA
SGP
HKG
10 CAN
AUS
NZL
9 MYS
BLZ
JAM
8 GUY EGY
LKA
PAK
IND
7 BGD
0 5 10 15
Urbanization in 1500
37
The Reversal among former British
colonies (2)
USA
SGP
HKG
CAN
10 AUS
NZL
BHS
BRB
9 BWA ZAF MYS

KNA
TTO
NAM LCA
GRD
BLZ
DMA
VCT
JAM
SWZ
8 GUY EGY
ZWE LKA
LSO GHA SDN PAK

IND
GMB
KEN
7 UGA NPL BGD
ZMB NGA
MWI
SLE
6
-5 0 5
The role of culture (1)
z Can all this be related to culture?
z What is culture?
– Culture is a relatively fixed characteristic of a group or nation,
affecting beliefs and preferences. Example: religion
z Useful distinction between culture and informal institutions.
z Informal institutions are related to how society shapes incentives,
and are related to equilibrium of a given game (typically defined
by formal institutions, distribution of income, political power etc.).
z Informal institutions are not fixed, and change with economic
conditions and distribution of power, though they are typically
highly persistent.
z Culture not useful in understanding the Korean divergence
– North and South were culturally homogeneous.
39
z Possible that the reversal related to culture.
– But the growth trajectories of British colonies similarly to
Spanish, Portuguese and French colonies once we control for
differences in local conditions.
– Moreover, no econometric evidence that religion matters for
understanding the reversal or for long-run growth (to be
discussed more in Lecture 3)
– Reversal also not related to the presence of Europeans.
z Examples of prosperity in Singapore and Hong Kong, where
population is now almost entirely non-European, but institutions
protect investment.
z Overall, no evidence that European values or culture
played a special role.
40
The Reversal for colonies with less
than 1% Europeans in 1900
.
9 GAB
MYS
BWA
NAM
SWZ IDN
8 EGY
LKA
CMR GIN
COG CIV
MRT SEN
GHA PAK
IND
LSO GMB VNM SDN
CAF TGO
HTI
LAO KEN BEN
7 UGA NPL
TCD
MDG BFA BGD
NGA
NER
ERI
MLI BDI
RWA
TZA SLE
6
-2 0 2 4 6
The Reversal for colonies with less than
1% of European descent in 1975
.
SGP
HKG
10
9 BWA GAB
MYS
TUN
DZA
IDN
8 EGY
AGO LKA
CMR GIN
CIV
COG SEN
GHA SDN PAK
IND
TGO VNM
GMB
HTI
KEN
7 UGA
ZAR BFA BGD
ZMB MDG NGA
NER
MLI
MWI
TZA SLE
6
-2 0 2 4 6
z The Chinese experience informative about the role of
culture versus institutions.
– China, Hong Kong, Singapore and Taiwan many cultural and
ethnic similarities.
– While China adopted state planning and communist political
institutions, Hong Kong, Singapore and Taiwan followed a
capitalist path with relatively well-enforced property rights.
– While Hong Kong, Singapore and Taiwan prospered, China
stagnated.
– After the Mao’s death and 1978 reforms, especially the
introduction of some basic property rights, changes in
economic incentives in China, and now very rapid growth rate.
43
Role of culture (4)
GDP per capita in China, Taiwan, and Hong Kong, 1950-2001
25,000
20,000
15,000
10,000
5,000
0
50
52
54
56
58
60
62
64
66
68
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
China Taiwan Hong Kong Singapore
44
Lecture 2: Towards a Theory of
Institutions
z Outline:
– Recap of Lecture 1.
social conflict.
– Economic institutions, political institutions and political power
– Dynamics of political power and political institutions.
– A theory of institutions.
1. Atlantic trade and emergence of constitutional regimes
45 2. Emergence of mass democracy in Western Europe.
Recap of Lecture 1
– Sources of income differences and proximate versus
fundamental causes.
– Institutions as humanly-devised rules affecting incentives,
potentially determining cross-country differences in prosperity
– But identification problem; we can learn only a limited amount
from correlations and OLS regressions.
z Alternative fundamental determinants: geography, culture.
– Empirical strategy: exploit natural experiments of history.
– The Korean experiment.
z Little evidence of the primary role of geography, and strong
evidence that institutions matter for long-run performance.
46
Four meta-theories of institutions
1. Efficiency: institutions that are efficient for society (e.g., for
aggregate growth or welfare) will be adopted.
2. Ideology: differences in beliefs determine institutions (societies
choose radically different institutions because citizens or elites
have different beliefs about what’s good for economic growth).
• Perhaps North Korea chose planned economy because its
leaders believed it was “better”.
3. History: institutions determined by historical accidents or
unusual events, and are unchanging except for random events
and further accidents.
• Legal system today determined by past historical accidents.
4. Social conflict: institutions chosen for their distributional
consequences by groups with political power.
47
Which approach? (1)
z Efficient institutions view: not a useful framework
– Although,everything else equal, there would be a tendency to
adopt efficient institutions, everything else far from equal in
practice.
– Every set of institutions creates different losers and
beneficiaries. Efficient institutions require either the losers to
be compensated or the beneficiaries to impose their choice.
– But in practice, losers generally not compensated ex post, and
often can be powerful enough to block institutional change that
is beneficial in the aggregate.
– Empirically, efficient institutions view cannot help us
understand why some societies adopt institutions that were
disastrous for economic growth.
48
Which approach? (2)
z Ideology view: not a useful framework by itself either
– Clearly, beliefs across societies differ, and existing regimes
remain in place by gaining some degree of approval.
z Propaganda and media extremely important for regime survival.
– But many empirical patterns cannot be explained by ideology.
z In the Korean case, the original divergence in institutions partly
related to ideology, but the persistence of communist system not
only because of ideology; those with political power want the
continuation of the system that is good for them.
– For the reversal, same or similar groups of colonists opting for
very different sets of institutions in colonies with different local
conditions. Clearly not related to their beliefs about what’s
good for the society as a whole.
z Example: the Puritan colonies in Massachusetts Bay and
49 Providence Island.
Which approach? (3)
z History: ample evidence that institutional choices
persist.
z But they are also choices, not simply dictated by
history.
z Need to understand why institutions persist, and why,
and how, they change.
z Examples:
– While the communist system persisted in North Korea, it
collapsed in Eastern Europe and Russia.
– Persistence in China until 1978 and change thereafter.
– Very different institutions in North and South America during
the early colonial era and after independence.
50
Which approach? (4)
z Institutions and social conflict:
z (Economic) Institutions shape incentives and determine the
allocation of resources
– Each set of institutions creates beneficiaries and losers; certain
groups obtain high incomes, rents and privileges.
– Thus “distributional” implications from institutional choices.
– Preferences over institutions determined by their distributional
implications.
z E.g.: a monopolist would be opposed to a reduction in entry
barriers even if these increase aggregate income.
– Empirically more promising:
z We can explain inefficient choices, even when their
consequences are understood by the key actors.
z Also we can investigate when institutions will be more or less
51 efficient, that is, “comparative static” exercises.
Institutions and social conflict
– Institutions chosen for their economic consequences.
z In particular, economic institutions which shape incentives and
determine distribution of resources.
– But also taking account of their “distributional implications”
– How does society make decisions in conflictual situations (i.e.,
when there is no agreement on what should be done?)
– Importance of political power
z Political power: the power to impose or secure social choices
against the wishes of other groups.
– Political power Æ social choices;
– Political power Æ economic institutions
– Key questions to be addressed later;
z Where does political power come from?
z What about political institutions?
52
Sources of inefficiency:
commitment problems in politics
z Why doesn’t society buy off politically powerful losers?
z Key problem: commitment.
– Promise of compensation after institutional change not credible.
– Political power creates commitment problems.
– Contrast contracting between two private citizens versus political
contracting between two parties one of whom holds political power.
z The two private citizens can write contracts enforced by a third
party with enforcement power.
z In contrast, in politics, the party with political power cannot
commit to refrain from hold up; promise of a dictator not to
expropriate after investments is not credible.
z There is also no credible transfer of political power in exchange
for future payments; promise of payments to a dictator after he
relinquishes power is not credible.
53
Endogenous (economic)
institutions from history
z Examples of economic institutions chosen not
because of overall efficiency, or because of ideology,
or resulting from historical accidents, but chosen for
their economic consequences by groups with political
power:
2. Early financial institutions in the Americas: Mexico
vs. United States.
3. Price regulation in Ghana, Kenya and Colombia.
4. Back to the colonial experience.
54
Land relations in Dutch Indies (1)
z Dutch East India Company (V.O.C.) monopolizing the
production of valuable spices (nutmeg, cloves and
mace) in the Moluccas, in particular, in Ambon and
Banda islands.
z Different indigenous organization between the islands.
z van Zanden (1993):
“[in Ambon] The Company … took over the existing feudal
structure of raising tribute,” monopolizing supply (excluding the
British and Portuguese).
z They also used this feudal structure to increase the
output of cloves.
55
Land relations in Dutch Indies (2)
z In Banda, in contrast, there were many small
autonomous city states, but
“…There was no hierarchical social and political structure that
could impose the will of the V.O.C…”, especially stopping
locals from selling nutmeg to the British and the Portuguese.
z The V.O.C. decided to change the economic
institutions on Banda, via a radical solution:
“Through military action, the V.O.C. killed most of the
population in 1621…” and completely reorganized the
production of nutmeg and established a slavery system, with
the slaves supplied by the V.O.C. and its former employees as
planters.
56
Financial institutions in Mexico and
the U.S. (1)
z Big differences in the structure of banking between the
U.S. and Mexico in the 19th century, during the critical
period of divergence.
z Haber (2001)
“Mexico had a series of segmented monopolies that were
awarded to a group of insiders. The outcome, circa 1910,
could not have been more different: the U.S. had roughly
25,000 banks and a highly competitive market; Mexico had 42
banks, two of which controlled 60 percent of total banking
assets, and virtually none of which actually competed with
another bank.”
z Adverse consequences for Mexican industry.
– Lending by monopoly banks to inefficient firms of friends and
57 associates.
Financial institutions in Mexico and
the U.S. (2)
z Why?
z Power of insiders and state governments in Mexico, supported by
the dictatorship of Porfirio Diaz.
z In 1789, the U.S. structure also similar.
– Haber: [in the U.S. in late 18th century] “… it was not in the
interest of state governments to charter large number of banks
and create a competitive market for banking services”
– Many U.S. politicians, including Alexander Hamilton, wanted to
create monopolies.
z But expanding frontier, which caused interstate competition, and
universal male suffrage made this system unsustainable.
z Insiders did not have enough political power to impose their
preferred institutions, which would have been inefficient for society
at large.
58
Price regulation (1)
z Another form of economic institution: marketing boards
regulating agricultural prices.
– Originally, introduced to prevent large fluctuations in farm
revenues
z Bates (1981): very different form of price regulation in
LDC agricultural markets.
z Ghana and Zambia: low prices paid to farmers through
marketing boards, surplus transferred to politicians or
urban groups.
z Kenya and Colombia: much more pro-farmer policies
and institutions.
59
Price regulation (2)
z Why?
z In Ghana and Zambia, but not in Kenya and Colombia,
farmers had little political power.
– In Ghana, cocoa farmers small and unorganized, and also
from different ethnic group than the ruling party, while urban
groups politically more powerful.
– In Kenya, larger farmers with greater political power.
– In Colombia, farmers with greater power through more
democratic and competitive politics.
z Interestingly, during the military regime of the ‘50s when
democratic politics suspended, pricing was set to extract surplus
from farmers.
60
Summary of the three cases
z Institutions not dictated purely by history, but chosen
by society.
z Moreover, they are chosen, not for efficiency nor
because of differences in beliefs, but for their
distributional consequences.
– Social conflict and political power important.
– In all cases economic institutions chosen for their
consequences, and particularly the rents created for the
politically powerful groups.
– In almost all cases, the resulting economic institutions harmful
for certain groups, and in many cases harmful for society at
large.
61
Further lessons from the examples
z Key lesson:
political power Æ economic institutions
z Kenya vs. Ghana suggests a link between economic
institutions and political power;
– Kenyan farmers that were larger and wealthier had political
power, while small farmers in Ghana did not.
economic institutions Æ political power
z Mexico vs. U.S. and Colombia vs. Ghana show the
influence of political institutions on political power
political institutions Æ political power
z And we will see below:
political power Æ political institutions.
62
Towards a theory of institutions:
comparative statics
z When do we expect a society to adopt good institutions?
1. When those holding political power also will benefit from well
enforced property rights (and financial development, free entry,
functioning markets etc.)
2. When there are relatively few resources to be extracted or exploited
using political power
3. When constraints on political power preclude expropriation or the
imposition of institutions detrimental to excluded groups.
z Question: why use political power to protect others’ property
rights?
– Reputation: protection will generate greater investments and thus
greater revenues in the future, but hard to sustain.
– Oligarchic solution: protect only the rights of the elite, good for
investment by the elite, but not for the rest (to be discussed below).
63
History, ideology and social
conflict in the colonial experience
z Those with political power, the “Europeans”, set up different
economic institutions in different colonies.
– Smallholder production in northeastern U.S., slavery in the
Caribbean, forced labor in Central America.
z Not historical accident.
– Europeans did restructure existing institutions, and introduce new
institutions in many colonies.
z Not ideology
– the same British groups, opting for different structures and different
colonies; e.g., the U.S. vs. Caribbean, Massachusetts Bay vs.
Providence Island.
z Social conflict and political power are key.
– Europeans monopolized political power and set up institutions for
their own benefit, even if not beneficial for the society at large.
64
Comparative statics in action in the
colonial experience (1)
z Why the institutional reversal?
z “Europeans” monopolizing political power opted for very
different institutions in different colonies.
– In practice, Europeans not a monolithic entity; considerable
heterogeneity and conflict, e.g., between Lord Baltimore and
indentured servants in Maryland.
z Comp. Stat. 1: more profitable to set up good institutions when
Europeans themselves will benefit.
– Better institutions in places where Europeans settle and become a
significant fraction of population (typically places with low initial
population density).
z Comp. Stat. 2: more profitable to set up good institutions when
little to expropriate.
– Better institutions in places with low population density and/or fewer
resources to extract (i.e., low prosperity, low urbanization).
65
Comparative statics in action in the
z Comp. Stat. 3: better institutions more likely to emerge when there
are constraints on political elites.
– In colonies of settlement (where population density low), lower strata
of the settlers, the indentured servants in the U.S. and children of ex-
convicts in Australia, put constraints on the use of power by elites and
demanded equal treatment and protection before the law; emergence
of democracy.
z But Europeans also structured the political institutions differently
to support the different economic institutions.
– More democratic in U.S., repressive in Caribbean, Central America.
z Comp Static 3 again: once political institutions constrain the use of
political power, good institutions likely to persist.
z Conversely, when the state structure is highly hierarchical,
coercive and without checks and balances, persistent incentives
to expropriate and fight to control the state apparatus.
66
Understanding the timing of the
reversal
z Why did the reversal take place in the 19th century?
z Coercive institutions imposed by Europeans not extremely costly
when they dominated the major productive opportunities.
– E.g., the plantation complex generated investment in sugar
production; Barbados, Cuba, Haiti, Jamaica among the richest places
in the world at some point between 16th and 19th centuries.
z The major cost of these institutions arises when new
opportunities, in this instance in industry and commerce, require
investment by new groups and broad-based participation.
– 19th century was a period of industrialization, and societies with
relatively democratic institutions were the ones allowing free-entry by
new entrepreneurs.
– Highlights that the same set of institutions can have very different
effects under different circumstances.
67
Problems of Oligarchy
z Oligarchic structures, where the rich dominate politics,
may generate investment, because the rich will have
incentives to protect their own property rights.
– However, oligarchy also costly
– What is there to stop oligarchs from expropriating others, or erecting
entry barriers to protect their monopoly positions.
z Costly because it creates a non-level playing field and
a potential hold-up problem because power is
monopolized by the rich.
– More efficient producers do not enter and invest enough.
z Problem of institutional reform: how to transition from
oligarchy to a democracy?
68
Hierarchy of institutions
z What about political institutions?
– Political institutions determine the distribution of political power
and regulate its use Æ sources of political power.
z Association between economic and political institutions
– E.g., democratic systems emerged in European colonies which
were smallholder societies with secure property rights.
– Coercive states with few constraints emerged in societies with
slave production, forced labor and tribute systems.
z This is what theory predicts:
– If political power is the monopoly of the few, the property rights of
the rest cannot be entirely secure.
– Conversely, if economic institutions lead to unequal distribution
of resources, political institutions cannot be democratic.
69
Economic and political institutions
.
Average Protection Against Risk of Expropriation, 1985-95
USA
10 CAN
NZL
SGP AUS
ISR
CYP
GMB IND
BHR MYS
8 GAB BRA
CHL
BWA
SAU IDN MEX TTO
COL
PNG
ARE OMN MAR VEN JAM
TGO CIV KWT PRY CRI
URY
MWI JOR EGY ZAF
GIN TZA ZMB ECU
DZA TUN MOZ
CMR YEM ARG
GHA DOM
KEN
SEN
ZWE PAK LKA
6 SYR
MMR SLE ETH
GUY PER PAN
NGA BOL
AGO PHL
HND
NIC
GTM BGD
SLV
NER
COG
UGA BFA GNB MDG
SDN MLI
4 HTI
ZAR
SOM
2
IRQ
0 2 4 6 8
70 Constraint on Executive in 1990s
Sources of political power (1)
z Two types of political power:
– De jure (formal) political power
z Allocated by political institutions
z E.g., political power allocated to a party or Prime Minister by an
election.
– De facto political power
z Determined by economic and military power, or access to extra-
legal means
z E.g., the political power of rebel groups in a Civil War, or of
masses who can create social unrest or a revolution.
z De facto political power typically relies on military superiority or on
solving the “collective action problem”.
z Distribution of political power in society determined by
the distribution of de jure and de facto political power.
71
Sources of political power (2)
z The power of the Dutch colonists in Indonesia: de
facto, since decided by their military superiority.
z The limits on the power of politicians in the United
States and in Colombia was de jure, since the political
system legislated the control of politicians by citizens.
z The power of European colonists was originally de
facto (e.g., Cortés versus Moctezuma).
– But turned into de jure power by setting up the coercive and
hierarchical political institutions of the colonial system.
– Why did Europeans want to set up political institutions turning
their power from de facto into de jure?
72
Political institutions and political
power
z Political institutions are highly persistent; thus de jure
political power is persistent.
z De facto political power, which relies on military
superiority and solution to the collective action
problem, is by its nature transient.
– If a group uses its de facto political power to change economic
allocations or economic institutions for immediate gain, these
changes might be reversed when the distribution of de facto
political power changes.
– If a group uses its de facto political power to change political
institutions, then it can secure more durable gains.
– It therefore makes sense to use de facto power to change
political institutions and to regulate the future distribution of de
73 jure political power.
Economic institutions and political
power
z The interplay between economic institutions and
political power adds to institutional persistence.
Political power Æ economic institutions
Economic institutions Æ distribution of resources
Distribution of resources Æ de facto political power
z A non-level playing field in the economy favors those
with political power, which in turn increases their
political power further
– Example: colonialism in the Caribbean;
z planters monopolized political power, which enabled them to
capture the majority of the gains from sugar and other products.
z The planters’ incomes enabled them to dominate military power
and control the state Æ persistence of the system
74
A theory of institutions
z Economic institutions essential for the prosperity of nations
– But also benefit different groups and individuals Æ social conflict
z In the presence of social conflict;
– political power Æeconomic and political institutions.
z good institutions emerge when they benefit those with political
power.
– political institutions Æ de jure political power
z Constraints on elites often conducive to better institutions.
– de facto political power Æ political institutions Æ de jure
political power, both today and in the future.
z Toward a theory of institutional change
– political power Æ institutions Æ political power
z Source of persistence.
75
Dynamic linkages (summary)
Economic institutionst
De jure power
(Political institutions)t political
powert Economic policiest
De facto powert
Political institutionst+1
76
The rise of constitutional regimes:
the background
z Major issue in early modern Europe: security of

property rights for merchants and control of entry into
overseas trade.
z These economic institutions determined by the
distribution of political power.
z In absolutist monarchies, less security of property
rights and crown monopoly of foreign trade.
z Thus:
77
a major shock (1)
Voyages per year: Atlantic Trade (to Americas, African coast and Asia via Cape), and Mediterranean
(W.Europe, excluding Britain and Netherlands, to Levant)
800
700
600
500
Atlantic voyages per year

400 Mediterranean voyages per year
300
200
100
0
1300 1400 1500 1600 1700 1750 1800
78
a major shock (2)
Average population in Atlantic ports, Mediterranean ports, and West European cities
120.00 not ports (balanced panel)
100.00
80.00
60.00
40.00
20.00
0.00
1300 1400 1500 1600 1700 1750 1800 1850
Inland West European cities

Atlantic ports
79 Mediterranean ports
the effect of institutions
z Changing environment: opening of trade routes to New
World and Asia via the Atlantic.
z Different effects of this new economic opportunity
depending on economic and political institutions
– In countries with access to the Atlantic and with some degree
of entry into foreign trade (i.e., Britain and the Netherlands):
new groups of merchants enriched.
– In countries with tight crown monopoly of trade (i.e., Spain,
Portugal, France), the monarchy and its allies became the
main beneficiaries
– For countries without access to the Atlantic; no direct benefits
and indirect costs through diversion of trade
80
implications for social conflict
z Social conflict: in Britain and the Netherlands,
merchants and segments of landowners demand
greater security of property rights, lower taxes and free
entry into foreign trade.
– New merchants’ greater economic fortunes increased their
political power.
– Secure victory in the English Civil War and Glorious
Revolution, and the Dutch War of Independence.
– In all three cases, forces against the monarchy led and largely
financed by mercantile interests, especially those benefiting
from overseas trade.
– In Spain and Portugal, the monarchy remains strong.
81
interpretation
z Thus:
economic institutions Æ (economic outcomesÆ) political power.
– But note the role of de facto political power in determining
political and economic institutions.
– Merchants’ political power in the Civil War, in the Glorious
Revolution or in the Dutch revolt was not granted by political
institutions, but obtained because
z the “Atlantic shock” improved their economic situation and their
greater incomes enabled them to acquire military power and
z they could coordinate and solve the collective action problem.
– This was de facto political power, by its nature transient.
– In fact, merchants and their allies demanded not only changes
82 in economic institutions but changes in political institutions.
The Rise of Europe: changes in
political institutions
z Why fight to change political institutions?
z Because they care about the future as well as the present and
their de facto political power is transient.
– Political institutions, by regulating the future allocation of de jure
political power, influence future economic institutions, outcomes
z Thus:
de facto political power Æ political institutions
political institutions Æ political power
z These changes consolidate because now merchants and groups
in favor of a constrained monarchy are richer and more powerful,
thus command both greater de facto and de jure political power
– In Spain and Portugal, economic institutions implied a different
distribution of gains, and therefore the distribution of de facto political
power was very different, hence no regime change.
83
Understanding the emergence of
democracy (1)
z Another example of institutional change as a way of regulating the
distribution of future de jure political power and consequently
economic outcomes.
z In the early 19th century Western Europe: political power in the
hands of rich elite.
– E.g.; in Britain extremely limited franchise with less than 2 percent of
the population with the vote.
z Policies and economic institutions looking after the interests of the
rich elite.
z Challenge from excluded groups, threat of revolution, making
concessions necessary.
– Industrialization increased power of workers and the poor.
– Unusual circumstances and solution to collective action problem
further increased de facto political power for excluded masses.
84 – Social unrest, possible revolution; some response necessary
Understanding the emergence of
democracy (2)
z What can the elites do when de facto political power of excluded
masses threatens the system?
z Promises of pro-poor policies and changes in economic
institutions within the non-democratic system not credible.
– Standard problem of commitment with political power
– Credible commitment to future pro-poor policies Æ change political
institutions to increase the political power of the poor, democratization
z Democracy Æ the poor have more political power than in non-
democracy.
z Political institutions, here democracy, also harder to reverse than
policies. Thus:
– temporary de facto political power Æ change in political institutions Æ
change in future political power Æ change in policies, economic
institutions and outcomes.
85
Lecture 3: Institutions, Prosperity
and Change
– Recap of Lectures 1 and 2.
– Estimating the causal effect of institutions on income per
capita.
z Making further use of the colonial experience.
z Reassessing geography, culture and religion.
– From the long run to the short run: the effect of institutions on
volatility, instability and crises.
– Institutions and policies.
– Institutional change; pitfalls:
z The seesaw effect: dealing with the symptoms not causes.
z Ignoring internal dynamics.
– Institutional change; putting the theory to work
– Where to go from here?
86
Recap of Lecture 1
– Sources of income differences and proximate versus
fundamental causes.
– Institutions as humanly-devised rules affecting incentives,
potentially determining cross-country differences in prosperity
– But identification problem; we can learn only limited amounts
from correlations and OLS regressions.
z Alternative fundamental determinants: geography, culture.
– Empirical strategy: exploit natural experiments of history.
z Little evidence of the primary role of geography, and strong
evidence that institutions matter for long-run performance.
87
Recap of Lecture 2
social conflict.
– Towards the right framework; social conflict, political power
– Comparative statics and the colonial experience
– Towards a theory of institutions; sources of political power,
dynamics of political power and political institutions.
1. Atlantic trade and rise of constitutional regimes
2. Emergence of mass democracy in Western Europe.
88
The causal effect of institutions on
prosperity
z Evidence so far that institutions important for cross-
country differences in prosperity and long-run growth.
– But what is the magnitude of the effect? How much of differences in
prosperity can be explained as a result of institutions?
– The causal effects of geography and culture?
z We need an empirical framework to estimate causal
effect of institutions on economic outcomes.
– OLS estimation biased; omitted variables, reverse causality and
errors-in-variables problem.
– We need a source of exogenous variation; an instrument for
institutions.
– Instrument: affects institutions, but no direct effect, or effect through
other channels, on economic performance.
89 z History + theory Æ potential instruments.

Theory in action: back to the
z Theory Æ
– those with political power more likely to opt for good institutions when
they will benefit from property rights and investment opportunities.
– better institutions more likely when there are constraints on elites.
z The colonial context:
– Europeans more likely to benefit from good institutions when they are
a significant fraction of the population, i.e., when they settle
– Lower strata of Europeans place constraints on elites when there are
significant settlements.
Thus: European settlements Æ better institutions
z But Europeans settlements are endogenous.
– They may be more likely to settle if a society has greater resources or
more potential for growth.
– Or less settlements when greater resources; East India Company and
90 Spanish crown limited settlements.
The theory in action: back to the
z Look for exogenous variation in European settlements:
the disease environment
– In some colonies, Europeans faced very high death rates
because of diseases for which they had no immunity, in
particular malaria and yellow fever.
potential mortality of European settlers Æ settlements Æ
institutions
z Moreover, for many reasons, already discussed above,
institutions persist; so
potential mortality of European settlers Æ settlements Æ
past institutions Æ current institutions
91
Empirics: colonial origins of
comparative development (1)
z Empirical setup: Two Stage Least-Squares (2SLS)
Second stage: log income per capita = f(current economic institutions)
First stage: current economic institutions = g(settler mortality)
z Data on potential European settler mortality
– Work by the historian Philip Curtin provides us with mortality rates of
soldiers stationed in the colonies in the early 19th century
– Supplemented by data on mortality of Catholic bishops in Latin
America
z Current economic institutions proxied by protection against
expropriation risk
– Useful to bear in mind that history generates variation in a cluster of
broad institutions;
– Protection against expropriation risk proxying for many other sources
of institutional variation
92
z Is the empirical approach valid?

– Clearly no reverse causality, mortality rates refer to two
centuries ago
– Is the exclusion restriction of the 2SLS valid?
– Plausible: yellow fever, malaria and gastrointestinal diseases
affecting Europeans had much less effect on native
inhabitants, who had acquired and genetic immunity.
z Mortality rates of local troops very similar in different
regions despite very large differences in European
mortality rates.
93
z Is the empirical approach valid? (continued)
– Check validity further by controlling for potential sources of
direct effect, including latitude, measures of geography,
current prevalence of malaria and life expectancy.
– Use only variation due to yellow fever, which is now mostly
eradicated, thus less likely to have direct effect.
– Use over identification tests to check validity of instrument.
– Also note that if the instrument is valid, it solves the errors-in-
variables problem.
z These checks all support the validity of the approach.
z Note: not estimating the causal effect of being
colonized vs. not colonized
94
Preview of results
z Very large causal effects of institutions on long-run growth.
– Differences in institutions account for over ¾ of the variation in
income per capita today (long-run effect)
z Results highly robust.
– Robust in different subsamples
– Robust to controlling for continent dummies
– Robust to controlling for latitude, whether landlocked, temperature,
humidity
– Robust to controlling for current prevalence of malaria and life
expectancy
– Robust when exploiting only yellow fever
– Overidentification tests supportive.
z Also no evidence of any effect of geography or religion on long run growth
95
Settler mortality and current
institutions
.
USA
SGP
HKG
CAN
10 AUS
NZL
CHL BHS
ARG
VEN
URY
MYS
ZAF MEX GAB
COL
CRI PAN
BRATTO
TUN
ECU
PER
DZA DOM
GTM
PRY JAM
SUR MAR IDN
8 GUY EGYSLV
BOL
LKA AGO
HND
NIC CMR GIN
SEN COG CIV
PAK IND SDN GHA
VNM TGO GMB
HTI
KEN
UGA
BGD ZARBFA MDG NGA
NER
MLI
TZA SLE
6
2 4 6 8
96 Log Settler Mortality
The first stage
First Stage Regressions:
Dependent variable is protection against risk of expropriation
All former All former All former Without neo-
colonies colonies colonies Europes
Settler Mortality -0.61 -0.5 -0.43 -0.37
(0.13) (0.15) (0.19) (0.14)
Latitude 2.34
(1.37)
Continent Dummies (p-value) [0.25]
R-Squared 0.26 0.29 0.31 0.11

Number of Observations 63 63 63 59
97
The reduced form: settler mortality
and income per capita today
.
USA
SGP
HKG
CAN
10 AUS
NZL
CHL BHS
ARG
VEN
URY
MYS
ZAF MEX GAB
COL
CRI PAN
BRATTO
TUN
ECU
PER
DZA DOM
GTM
PRY JAM
SUR MAR IDN
8 GUY EGYSLV
BOL
LKA AGO
HND
NIC CMR GIN
SEN COG CIV
PAK IND SDN GHA
VNM TGO GMB
HTI
KEN
UGA
BGD ZARBFA MDG NGA
NER
MLI
TZA SLE
6
2 4 6 8
The causal effect of institutions:
basic 2SLS estimates
Second Stage Regressions:

Dependent variable is log GDP per capita in 1995
All former All former All former Without neo-
colonies colonies colonies Europes
Protection Against Risk of 0.99 1.11 1.19 1.43
Expropriation, 1985-95 (0.17) (0.26) (0.39) (0.45)
Latitude -1.61
(1.57)
Continent Dummies (p-value) [0.09]
99
The causal effect of institutions:
robustness
Second Stage Regressions: all former colonies
Instrument is:
Log Settler Log Settler Log Settler Log Settler
Mortality Mortality Mortality Mortality Yellow Fever
Protection Against Risk of 1.07 0.98 0.87 1.18 0.82
Expropriation, 1985-95 (0.27) (0.17) (0.32) (0.84) (0.22)
Temperature (p-value) [0.71]
Humidity (p-value) [0.64]
Malaria -0.28
(0.59)
Life Expectancy -0.014
(0.07)
100 Number of Observations 63 63 62 62 63
The role of geography
z No causal effect of geography.
z How do we think of the correlation between geography
(e.g., latitude) and income?
z This is caused by omitted factors;
– Geography correlated with institutions because of the natural
experiment of European colonialism.
– Tropical areas ended up with worse institutions, because
z they tended to be richer and more densely-populated circa 1500.
z they attracted fewer European settlers.
z Also no universal causal effect of geography on
institutions.
– Relationship created in a particular historical juncture.
101
Revisiting the British effect (1)
z We saw above that
– there is a reversal of fortune among the British colonies alone
– the British also introduced institutions to extract resources from
the native population and set up plantation complexes.
z But we have not answered the question of whether
there is any effect of being colonized by the British
versus by the French, Spanish, Portuguese and others.
z The framework here enables us to answer this
question once we condition on local conditions:
z No beneficial effect of the British (relative to others):
– either through different colonization strategy, or
– through the import of British institutions or culture
102
Former Colonies Former Colonies
Second Stage
Protection Against Expropriation 1.12 1.17
(0.23) (0.22)
British Colony Dummy -0.96

(0.39)
English Legal Origin Dummy -1.05
(0.37)
First Stage
Log Settler Mortality -0.53 -0.53
(0.14) (0.13)
British Colony Dummy 0.67
(0.35)
English Legal Origin Dummy 0.70
(0.34)
R-Squared in First Stage 0.30 0.30
103 Number of Observations 63 63
z British colonies have somewhat better institutions than
other European colonies
– 0.67 higher protection against expropriation
– 0.67 times 1.12 = 0.75 positive effect on log GDP
z But British colonies also have lower income controlling
for institutions
– - 0.96; negative effect on log GDP
z Overall effect weakly negative.
z Same conclusion for English legal origin vs. French
legal origin.
104
Revisiting culture and religion (1)
z What is the effect of culture?
– Even though no comprehensive measures of broad cultural
differences, evidence not favorable for importance of culture.
– Proxies for culture: religion, identity of colonizer, presence of
Europeans.
z Empirical strategy: look at the effect of religion on long-
run economic growth once we take differences in
institutions into account (that is, estimate the causal
effect of institutions simultaneously).
z Answer: no evidence of any effect of religion (therefore
culture) on cross-country differences in income.
– Also recall that no effect of identity of colonizer or direct effect
105 of presence of Europeans.
Revisiting culture and religion (2)
All former colonies
Dependent Dependent
variable is log Dependent variable is log Dependent
GDP per capita variable is GDP per variable is
in 1995 institutions capita in 1995 institutions
Second stage First Stage Second stage First Stage
Institutions 0.96 1.13
(Protection Against Expropriation) (0.16) (0.35)
Percent Catholic 0.006 -0.01

(0.01) (0.01)
Percent Muslim -0.002 -0.002

(0.01) (0.01)
Percent "Other" -0.011 -0.01

(0.01) (0.01)
Percent of European Descent in 1975 -0.008 0.019
(0.01) (0.006)
Log Settler Mortality -0.58 -0.40
(0.14) (0.15)
R-Squared in First Stage 0.30 0.35
106 For religion regressions, base category is percent Protestant.
Unbundling institutions (1)
z Digging into the black box of institutions.

z Political institutions Æ economic institutionsÆ
economic outcomes.
z But which economic institutions?
z Distinguish between:
1. “Property rights” institutions: protect citizens from various
forms of expropriation by elites: e.g., risk of gov.
expropriation, entry barriers protecting large firms. (quite
closely linked to political institutions).
2. “Contracting” institutions: determine the terms and ease of
contracting between citizens: e.g., legal formalism, judicial
efficiency, bankruptcy law (partly, but not entirely!,
107
historical).
Unbundling institutions (2)
z Property rights institutions more important than
contracting institutions for economic growth,
investment and financial development.
z Contracting institutions important only for the form of
financial development (debt vs equity)
– Conclusion related to the lack of an effect of British colonialism, since
contracting institutions vary strongly with English versus French legal
origin.
z Plausible: without protection against elite and
government expropriation, little that good contracts
between citizens can achieve.
– Perhaps also, when there are relatively mild contractual
imperfections, producers and investors can change the terms of
108 contracts, or build trust-based relations
Unbundling institutions (3): first
stages
. .
Res.fromRegress Av.Protect.Exprop.on Log Settler Mort.

Res.fromRegress Av. Protect.Exprop.on Eng. Leg.Orig.
4 2 C IV
US A
CA N
ID N N GA
US A S GP
N ZL CA N GH A
N ZL IN D
A US S GP B RA
2 1 CHL TZA
CBHRLA
ID N C MR A US TTOJA M
ME X ME X
C OL
HK G UR
V
MA
CY
P
E
RY
R I IN D
N
R C IV C OL
MY S V
MAEN
E GY C RR
I
EC U UPRRYY V N M MLI
TU
ANRDGZA V N M TTO C MR
0 D OM
SA ENN JA M
0 H MY
K GS
P E GY SEN
ZA F PER D OM KEN
B OL TZA EDCZA
U PAN
HND N IC NE R
GTM GH A AR
TU NG
SPLV
AK LK A NE R
KEN
MD G
B FA MD G N GA LK A
N IC
-2 B GD MLI
-1 PER
B OL ZA F
B FA U GA
PAK
U GA HND
GTM B GD
S LV
-4 -2
-2 0 2 4 -.5 0 .5 1
Res iduals from Regress ing Log Settler Mort. on Eng. Leg. Orig. Res iduals from Regress ing Eng. Leg. Orig. on Log Settler Mort.
. .
Residuals fromCheck Measure Formalismon Eng. Legal Orig.
Residuals fromCheck Measure Formalismon Log Sett.Mort.

VEN
2 P RY
2 B OL
GTM
PER
PAN
CG
AR RI
VEN
PPRAYK LK AN TZA
PA
B OL EHCNUD
GTM
1 PER ME
MAXR N IC
C R I IN D CD
SHZA
L
LV
A RG B GD N GA SEN
KEN C MR
CR
TU
U OL
NY B FA
N IC PAK
EH
CNUD
C MR E GY D OM LK A
US A ME
MAXR SEN U GA GH A MLI 0 NE R
0 S GP DLLV
S
CH ZA B FA ID N MD G
IN D
MY S JA M
MLI B GD TZA
N E R MD G US A
CA N B RA V NM S GP
C OL D OM
TUUNR Y MY S
C IV KEN
A US IDTTO
N
ZA F E GY A US CA N
N ZL C IV
-1 N ZL
ZA F
JA M U GA
V NM N GA
B RA GH A
-2 TTO
HK G
HK G
-2
-2 0 2 4 -.5 0 .5 1
109 Res iduals from Regress ing Log. Sett. Mort. on Eng. Leg. Or ig Res iduals from Regress ing Eng. Leg. Orig on Log. Sett. Mort.
Unbundling institutions (4): first
stages
Residuals fromRegressing Constrainton Exec on Eng. Leg. Orig.
. .
Resid. fromRegress Cons. on Exec on Log Settler Mort.

C
BH
U ROL
CL
YR I JA M
2 ANU
ZLS CSA
UZAAFN E IN
CU D TTO JA M
TTO
2 BC
U
C RR
OLYI
C OL EHCLU
P RY PAN IN D
B RA PAN
VEN C OL
P RY
PAK D OM
B RA
D OM VEN
A RG C
ZA
U AA
S FN
H
SN D
LV
0 LK A AH
GH A
0 SRNGD
LV ANU
ZLS PAK
ME X B GD LK A
GTM C IV N GA
MY S B GD
ME X
GTM
TZA
PER SEN
PER K E NU GA
SEN VN
IDM
N
GH A
EN
TU GY V NM MY S
-2 S GP MA R ID N K E N TZA C IV -2 EMA
TUGY
NR
U GA
N GA S GP
-4 -4
-2 0 2 4 -.5 0 .5 1
Res iduals from Regressing Log Settler Mort. on Eng. Leg. Orig. Residuals from Regressing Eng. Leg. Orig. on Log Settler Mort.
Residuals fromEviction Measure Formalismon Eng. Legal Orig.
. .
Residuals fromEviction Measure Formalismon Log Sett. Mort.

2 2 V E NP A N
GTM
A RG
PER
PAN B
PCOL
R
VEN
GTM RYI
LK A ME
C HX
MA LR
1 A RG
PAK
PER EHC
NU D
ZA F
IN D
BPOL D OM
CRRYI B GD S LV
MY S U
S GP ME
C H
MAXR
L N GA CR
TU N
Y
OL ZA F LK A
US A HUND B RA PAK
EC
KEN TZA 0 SID
ENN
0 E GY IN D
D OM GH A
S LV MY S B GD
U GA C IV S GP
JA M US A
CA N UR Y
TUCNOL TTOSID
EN
B RA
A US C IV V NM K E NTZA
E GY N GA
-1 CA N
GH A
A US JA M U GA
TTO
N ZL
V NM
-2
N ZL
-2
-2 0 2 4 -.5 0 .5 1
110 Res iduals from Regressing Log. Sett. Mort. on Eng. Leg. Orig Residuals from Regressing Eng. Leg. Orig on Log. Sett. Mort.
Unbundling institutions (5): 2SLS
estimates
Second stage regressions: all former colonies

Dependent variable is:
Stock Market
GDP per capita Investment-GDP ratio Credit-GDP ratio Capitalization
Average Protection Against 1.01 4.86 0.28 0.22
Risk of Expropriation (0.15) (1.05) (0.07) (0.07)
Legal Formalism (Check Measure) 0.37 0.74 -0.01 -0.10

(0.15) (1.03) (0.07) (0.07)
111
From long-run to the medium-run
z Institutional differences not only important for long-run
growth, but also for medium-run outcomes.
– Postwar economic growth
– Economic and political instability
– Crises
z Causal effect of institutions on these outcomes.
z Also opportunity to investigate the channels through
which institutions matter.
– For crises and volatility, is it macroeconomic policies that need
to be fixed as suggested by the Washington consensus?
– Or are distortionary macroeconomic policies symptoms of
deeper causes?
112
Institutions and economic growth:
the reduced form
.
10
Annual Growth GDP p.c., 1970-97
SGP
HKG
IDN
5 MYS
MUS
EGY
LKA
TUN
CHL DOM BLZ
PAK IND BRA
ECU
COL
PRY
AUS CAN MMR MAR
FJI USA MEX
URY TTO
BRB
CRI COG
BGD KEN GAB
NZL SDN PAN BFA
GTM
ARGHND
DZA CMR
PNG NGA
GUY PER
BOL BEN GMB MLI
ZAF SLV BDI
0 JAM SEN RWA CIV
VEN MRT GHA
TGO
TCD
HTI CAF
MDG
NERSLE
NIC
ZAR
-5
2 4 6 8
113 log settler mortality
Institutions and volatility: the
reduced form
.
10
Standard Deviation of Growth Rates, 1970-97
TCD
8
NIC NGA
CMR
COG
SDN NER
TGO
DZA BDI
TTO
PER
6 CHL SLE
FJI ARG
GUY ECU MLI
MUS
KEN
JAM PNG ZAR GHA
CIV
HKG SLV
MAR
BRA
BGD SEN
HTI PAN MRT
URY DOM BLZ CAF
MMR VEN
PRY
BRB IDN
MYS MEX
4 ZAF TUN
CRI BFA
BEN MDG
SGP GMB
IND EGYHND
BOL
NZL GTM
PAK
CAN
USA COL
2 AUS
LKA
2 4 6 8
The effect of macroeconomic
policies: ignoring institutions
OLS regressions
Dependent variable is: Volatility of growth rate, 1970-97
Former Colonies Former Colonies Former Colonies
Government Consumption 8.09
(3.81)
Log Inflation 0.12

(0.19)
Real Overvaluation 0.028

(0.006)
R-Squared 0.07 0.01 0.35
Number of Observations 61 61 44
115
The effect of macroeconomic
policies: symptoms vs. causes
Second stage regressions: all former colonies
Instrumenting for institutions and macro variables
Dependent variable is: Volatility of growth rate, 1970-97
Former Colonies Former Colonies Former Colonies
Institutions -0.92 -0.86 -0.62
(Constraint on Executive) (0.25) (0.22) (0.44)
Government Consumption -5.13

(5.19)
Log Inflation -0.14

(0.42)
Real Overvaluation 0.013

(0.03)
Number of Observations 60 48 32
116
Interpretation
z Deep institutional problems lead to bad performance
– Deep institutional problems related to political institutions and
distribution of political power as well as to weak property rights.
– Differences in settler mortality a source of variation in institutions.
Institutions are not necessarily purely historical and unchangeable.
z These problems manifest themselves via a variety of channels.
z Bad institutions lead to:
– weak property rights enforcement
– non-level playing field
– political instability as different groups fight to take control of the state
– worse macroeconomic policies, budget deficit, high inflation, etc.
z Important: these policies are partial causes of bad performance,
but they are in turn symptoms of deeper institutional problems.
– Potential implication: the seesaw effect.
117
The seesaw effect (1)
z Trying to improve incentives and economic
performance by dealing with policy symptoms (or even
symptomatic economic institutions) might have limited
benefits or even backfire.
– Suppose problems are institutional, and related to politics.
– Imagine political power in the hands of a small elite exploiting
the rest using a variety of instruments, including expropriation,
taxation, non-level playing field and inflation.
– Now take away inflation (make central bank independent),
one of two possibilities:
1. less distortions in the economy or
2. alternatively, they may start using expropriation, taxation and
other extractive means more heavily, leading to even worse
performance.
118
The seesaw effect (2)
z The seesaw effect: pressing on one side of will raise
the other.
– Potential caveat for the Washington consensus (which focuses
on macro policy reform)
– Potential caveat also for policy and institutional reforms more
generally.
z When the problem is institutional, related to political
institutions and the distribution of political power,
dealing with the source of the problem rather than the
symptoms more effective
– but only if possible!
– and at the moment we know little about how to change deep
institutions…
119
Seesaw effect in action: reforms in
Colombia (1)
z Colombian democracy re-created in 1958 after 5 years

of military rule on basis of rigid power sharing
arrangement by Liberal and Conservative parties (the
National Front agreement).
z All seats in legislature, bureaucratic appointments split
50-50, parties took turns with presidency.
– Officially lasted until 1974 but many elements persisted (cabinet
bi-partisan until 1986).
z Stopped inter-party conflict, but highly exclusionary and
oligarchic.
z 1980’s rising social conflict, drug mafias, left-wing
guerillas (M-19, FARC, ELN).
120
Colombia (2)
z Colombian Reforms 1988-1992 in response to rising
political crisis and assassination of three candidates for
president in 1990.
z Economic Reforms:
– trade liberalization, end of capital controls, financial
liberalization, fiscal decentralization, mandated spending on
public goods, independence of Central Bank
z Also Political Reforms
– introduction of Australian ballot, direct election of mayors,
Senate elected from nationwide constituency, Constitution re-
written in 1991.
121
Colombia (3) Inflation rate, 1956-2003
35
30
25
20
15
10
0
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
122 Inflation
Colombia (4) Central Government Surplus % GDP.
2.00
1.00
0.00
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
-1.00
-2.00
-3.00
-4.00
-5.00
-6.00
-7.00
Central Government Superavit (% of GDP)-with privatiizations

Central Government Superavit (% of GDP)-without privatiizations
123
Seesaw effect in action:
reforms in Colombia (5)
Real GDP Growth in Colombia (annual % increase), 1978-2002
10,00
8,00
6,00
4,00
2,00
0,00
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
-2,00
Source: DANE
-4,00
-6,00
124
reforms in Colombia (6)
Unemployment rate in Colombia, 1986-2003

Urban areas
25
20
15
10
Source: DANE
0
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
125
Seesaw effect in Colombia:
Interpretation
z Deep-seated distributional conflict in Colombian society.
z Since independence search for a stable political order,
but one which excluded large segments of society.
– E.g. National Front, barriers to entry of third party.
z Conflict manifests itself in political instability and in an
institutional structure the aim of which is to redistribute
rather than promote prosperity.
z Constitution of 1991 – political crisis leads to an assembly
designed to represent wide range of preferences,
– Result: inconsistent claims on the social product, the see-saw.
– Making the Central Bank independent removes a redistributive
instrument which will be substituted with something else in
equilibrium. E.g. fiscal problem.
126
reforms in Argentina (1)
z Argentina democracy re-created in 1983 after Falklands

z Radical Party defeats Peronists, Raúl Alfonsín president.
z Argentina caught in debt crisis, negative growth,
government unsuccessful at coping, by late 1980’s
hyperinflation develops.
z 1989 election won by Carlos Menem on traditional
Peronist platform emphasizing redistribution, protection.
z Once in power Menem embraces pro-market reforms.
z Currency board, liberalization of capital flows and FDI,
central bank independence, privatization
z 1995 Menem re-elected, 2001 Crash.
127
Inflation in Argentina, consumer prices (annual %)
1980-2003
3500
3000
2500
2000
1500
Source: World Bank
Development Indicators
1000
500
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
-500
years
128
Government Surplus in Argentina, % of GDP
0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
-1
-2
-3
-4
-5
-6
Source: World Bank
-7
-8
-9
129 -10
Real per Capita GDP Growth in Argentina, 1980-2001
10
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
-2
-4
-6
Source: Maddison-ECLAC
-8
-10
130
Unemployment rate in Argentina, 1974-2003

Urban areas
25
20
15
10
Source: INDEC
5
0
1974
1975
1977
1978
1980
1981
1983
1984
1986
1987
1989
1990
1992
1993
1995
1996
1998
1999
2000
2001
2003
131
Real Overvaluation of the Argentine
Peso
132
The seesaw effect in Argentina:
Interpretation
z Deep seated distributional conflict in Argentine society.

– Since independence search for a stable political order, polarization
between Buenos Aires and the interior provinces, between Peronist
coalition and the traditional landed elites and the military.
z Conflict manifests itself in political instability and fighting
over redistribution
– E.g. Argentina has the most malapportioned legislature in the world.
z Menem weakens links with workers but strengthens links
to interior provinces for support.
z Reforms under Menem removes traditional tools of
redistribution, monetary policy, tariffs, industrial subsidies,
employment in parastatals.
– But other instruments remain and are used more heavily
– No labor market deregulation, privatization to reward supporters, and
133 fiscal problem with large transfers to interior provinces Æ seesaw effect.
What to do? Reform of deep
institutions
z Deep institutions determined in history, but are changeable;
– Institutions “humanly devised”; in this sense contrast to geography
and culture theories.
– Examples of recent successful institutional change; Botswana,
South Korea, partially China, Eastern Europe (shall we mention
others?)
z Let us use our theory of institutions; understand institutional
persistence and institutional change.
z But two pitfalls:
1. The seesaw effect; reform only part of institutions, and the rest of
the institutions become worse as a consequence. Back to Colombia
and Argentina.
2. Ignoring internal dynamics; attempts at reform backfire because of
resistance by potential losers or subversive action by other groups.
134
Institutional persistence: some
things we know
z Institutions are by their nature durable:

z e.g., democracy more likely tomorrow if today there is democracy
than if dictatorship today.
z Bad institutions create bad incentives and self-sustain
z e.g., an extractive state apparatus will give incentives to political
elites to use it for extraction.
z Bad institutions create instability and self-replicate
z e.g., if controlling the state is a major source of rents, there will be
infighting to control the state as in Ghana.
z Bad institutions affect the composition of assets and
distribution of income, contributing the persistence:
z e.g., bad institutions Æ greater inequality Æ political power of the
rich to sustain bad institutions.
135
Institutional change (1)
z Towards a theory of institutional change:

– Recall:
political institutions Æ economic institutions
– Thus important to understand change in political institutions
– Political institutions a way of regulating the allocation of
future political power
z Two axes:
1. Elite-driven versus conflict-driven
2. Internal versus external
136
z Elite-driven: when the politically powerful elite wish to
change institutions in order to increase its
rents/utility.
– E.g., the U.S. Constitution or the imposition of different
systems of land relations in the Dutch East Indies.
z Conflict-driven: when institutional change forced from
the non-elites. E.g.:
1. Rise of democracy because of the threat of revolution.
2. Rise of constitutional monarchy resulting from the fight between
the crown and groups of merchants in Britain and the
Netherlands.
137
z Internal: because of internal shocks or dynamics.
– E.g., rise of democracy.
z External: because of external imposition, shocks, or
external incentives.
– E.g., colonial imposition of institutions, Korean response to
threat of communism.
– E.g., EU incentives for East European reform.
z Even with external imposition, internal dynamics are
very important Æ the pitfall of ignoring internal
dynamics.
138
Conclusions (1)
z Institutions matter.
z Although ideology and history influence institutions, in
many many cases institutions emerge because of their
distributional consequences.
z Although everything else equal more efficient
institutions more likely to arise, there will typically be
major social conflict over institutions.
z Then the choices benefiting politically powerful groups,
not the society as a whole, more likely to emerge.
139
Conclusions (2)
z Summary: towards a dynamic theory
Economic institutionst
De jure power
(Political institutions)t political
powert Economic policiest
De facto powert
Political institutionst+1
140
Conclusions (3)
z Progress towards a useful framework for thinking

about institutions and fundamental causes of
differences in prosperity across countries.
z Much research left to be done
z Future areas:
1. Unbundling institutions
2. Institutional persistence
3. Institutional change
4. Policy to influence institutions? (further further in the future!)
141

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Lionel Robbins Lectures,

London School Economics, Feb.23-25

z Big differences in economic and political

MLT GRC KOR

SGP CHE NOR

BRB BHSBHR KWT MLT

low urbanization in 1500 excolonies high urbanization in 1500 excolonies

US Australia Canada New Zealand Brazil Mexico India

PRY EGY MAR

SGP MYS JAM UGA LKA IND

z Popular view going back to Adam Smith and Winston

9 BWA ZAF MYS

LSO GHA SDN PAK

z Major issue in early modern Europe: security of

Atlantic voyages per year

Inland West European cities

89 z History + theory Æ potential instruments.

z Is the empirical approach valid?

R-Squared 0.26 0.29 0.31 0.11

Second Stage Regressions:

Humidity (p-value) [0.64]

British Colony Dummy -0.96

Percent Catholic 0.006 -0.01

Percent Muslim -0.002 -0.002

Percent "Other" -0.011 -0.01

z Digging into the black box of institutions.

Res.fromRegress Av.Protect.Exprop.on Log Settler Mort.

Residuals fromCheck Measure Formalismon Log Sett.Mort.

Resid. fromRegress Cons. on Exec on Log Settler Mort.

Residuals fromEviction Measure Formalismon Log Sett. Mort.

Second stage regressions: all former colonies

Legal Formalism (Check Measure) 0.37 0.74 -0.01 -0.10

Log Inflation 0.12

Real Overvaluation 0.028

Government Consumption -5.13

Log Inflation -0.14

Real Overvaluation 0.013

z Colombian democracy re-created in 1958 after 5 years

Central Government Superavit (% of GDP)-with privatiizations

Real GDP Growth in Colombia (annual % increase), 1978-2002

Unemployment rate in Colombia, 1986-2003

z Argentina democracy re-created in 1983 after Falklands

Real per Capita GDP Growth in Argentina, 1980-2001

Unemployment rate in Argentina, 1974-2003

z Deep seated distributional conflict in Argentine society.

z Institutions are by their nature durable:

z Towards a theory of institutional change:

z Summary: towards a dynamic theory

z Progress towards a useful framework for thinking

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