Principal investigator: Eduarda Miller de Figueiredo
Authors: Daron Acemoglu, Simon Johnson, James A. Robinson
Location of the Intervention: group of countries
Sample Size:
Sector: Economic development
Primary Variable of Interest: The effect of institutions on per capita income.
Type of Intervention: Mortality Rates and Risk of Expropriation
Methodology: 2SLS
Summary
To fill the gap in estimates of the effect of institutions on economic performance, the impact of these institutions on performance was estimated using an exogenous source of variation, based on a three-installation theory. The hypothesis of the study is that settler mortality affected settlements, wherein settlements affected early institutions, and thus, early institutions persisted and formed the basis of current institutions. Through a 2SLS, a strong correlation was demonstrated between institutions and economic performance, and that settler mortality rates 100 years ago explain more than 25% of the variations in current institutions.
- Policy Problem
Differences in institutions and property rights have received considerable attention in attempts to answer the fundamental causes of large differences in per capita income between countries. Countries with better institutions, more secure property rights, and fewer distortions in international politics will invest more in physical and human capital, enabling them to use these factors more efficiently to achieve higher income levels (North, 1981; Knack and Keefer, 1995; Rodrik, 1999).
At some level, it is obvious that institutions are important. However, at the time of the study discussed here, there was a gap in reliable estimates of the effect of institutions on economic performance. Therefore, the authors estimated the impact of institutions on economic performance using an exogenous source of variation in institutions, proposing a theory of institutional differences between countries colonized by Europeans.[1]Thus, exploring this theory to derive a possible source of exogenous variation.
- Implementation and Evaluation Context
The theory proposed by the authors is based on three installations:
- There were different types of colonization policies that created different sets of institutions. On one hand, European powers created "extractive states" that did not introduce much protection for private property, nor did they provide checks and balances against government expropriation, focusing on the main objective that the extractive state should transfer as many of the colony's resources as possible to the colonizer. On the other hand, Europeans migrated and settled in various colonies, attempting to replicate European institutions, with a strong emphasis on private property and checks against government power.
- The colonization strategy was influenced by the viability of settlements. In places where the disease environment was not favorable to European colonization, the chances of creating "neo-Europes" and forming an extractive state were higher.
- The colonial state and its institutions persisted even after independence.
- Policy/Program Details
The authors hypothesize that settler mortality affected settlements, which in turn affected early institutions, and consequently, these early institutions persisted and formed the basis of current institutions.
Based on the premises listed in the theory proposed by the authors, mortality rates expected by the first European colonists in the colonies were used as a tool for current institutions in those countries. The Europeans were well informed about these mortality rates at the time, although they did not know how to control the diseases that caused these high mortality rates.
Figure 1: Relationship between income and mortality of the colonizer
Figure 1 plots the logarithm of GDP per capita in the year of the study (2001) against the logarithm of colonizer mortality rates per thousand for a sample of 75 countries. A strong negative correlation is shown, where colonies where Europeans faced higher mortality rates are currently poorer. For the authors, this reflects the effect of colonizer mortality acting on the institutions brought by the Europeans.
Taking these considerations together with data on local population mortality and population density before the arrival of Europeans, the authors believe that colonist mortality is a plausible instrument for institutional development: the diseases of the time affected European settlement patterns and the type of institutions they established, but had little effect on the health and economy of indigenous peoples.
- Assessment Method
The authors regressed the current performance of institutions and instrumentalization by settler mortality rates. A variety of variables were used to capture institutional differences, but since the focus of the study was property rights, the index of protection against “risk of dispossession” was used. Political Risk Services as a proxy for institutions. In which this variable measures differences in institutions originating from different types of states and state policies. The Political Risk Services It reports a value between 0 and 10 for each country and year, with 0 corresponding to the lowest protection against expropriation. The authors used the average value for each country between 1985 and 1995.
A linear regression was performed using the Ordinary Least Squares (OLS) method, according to this equation:
wherein yi is the per capita income in country i
Ri
It is protection against "risk of expropriation," Xi
is a vector of covariates, and ei is a random error term. The coefficient of interest throughout the article is the effect of institutions on per capita income.
In addition to the equation describing the relationship between current institutions and the logarithm of GDP, the following equations are presented:
where R is the measure of current institutions (protection against expropriation between 1985 and 1995), C
It is the starting measure for institutions and M
This refers to the mortality rate faced by the colonists. The simplest identification strategy is the use of Si.
or Ci
as an instrument for Ri
However, since settlers are more likely to migrate to wealthier areas and early institutions reflect other characteristics that are important for current income, the identification strategy would be invalid (i.e.,
Ci and Si could be correlated with ei.
Therefore, the mortality rates faced by the colonists, logMi, were used.
, as an instrument for
.
Therefore, the two-stage least squares estimates of equation (1), the protection against the expropriation variable (Ri), is treated as endogenous and modeled as:
where It is the mortality rate of settlers in an average force of 1.000.
- Main results
The results show that the mortality rates faced by settlers more than 100 years ago explain more than 25% of the variation in current institutions.
Furthermore, the findings suggest a strong correlation between institutions and economic performance. This relationship should not be interpreted as causal, as wealthy economies may be able to afford (or perhaps prefer) better institutions. Additionally, they highlight that many omitted determinants of income differences are naturally correlated with institutions, and finally, they describe that measures of institutions are constructed ex-post, and analysts may have had a natural bias towards viewing better institutions in wealthier areas.
It was also demonstrated that this relationship occurs through hypothetical channels: the (potential) mortality rates of settlers were one of the main determinants of settlements, which were one of the main determinants of the first institutions.[2]And there is a strong correlation between the earliest institutions and current institutions.
- Lessons in Public Policy
The study emphasizes the colonial experience as one of many factors affecting institutions. Since the mortality rates faced by colonists are undeniably exogenous, they are useful as a tool to isolate the effect of institutions on economic performance.
According to the authors, these results suggest substantial economic gains from improving institutions.[3]Furthermore, the results indicate that reducing the risk of expropriation leads to significant gains in per capita income, but do not indicate that concrete measures lead to an improvement in these institutions.
Reference
ACEMOGLU, Daron; JOHNSON, Simon; ROBINSON, James A. The colonial origins of comparative development: An empirical investigation. American Economic Review, v. 91, no. 5, p. 1369-1401, 2001.
[1] The authors here refer to the "colonial experience" as European influence on the rest of the world.
[2] In practice, institutions in 1900.
[3] For example, as in the case of Japan during the Meiji Restoration or South Korea during the 1960s.
