NYU Institutions Factor Endowments and Paths of Development Article Summary Please write a 160 or more word summary for the text. Please include for each s

NYU Institutions Factor Endowments and Paths of Development Article Summary Please write a 160 or more word summary for the text. Please include for each summary a) a summary of the reading and b) your comments on the reading. If there is data within the article please write about the methodology. Also include the key idea in summary. Journal of Economic Perspectives—Volume 14, Number 3—Summer 2000 —Pages 217–232
History Lessons
Institutions, Factor Endowments, and
Paths of Development in the New World
Kenneth L. Sokoloff and Stanley L. Engerman
This occasional feature will discuss episodes and events drawn from economic
history that have lessons for current topics in policy and research. Responses to this
column and suggestions for future columns should be sent to Kenneth Sokoloff,
Department of Economics, University of California—Los Angeles, 405 Hilgard
Ave., Los Angeles, CA 90095-1477.
Introduction
As Europeans established colonies in the New World of North and South
America during the sixteenth, seventeenth, and eighteenth centuries, most knowledgeable observers regarded the North American mainland to be of relatively
marginal economic interest, when compared with the extraordinary opportunities
available in the Caribbean and Latin America. Voltaire, for example, considered
the conflict in North America between the French and the British during the Seven
Years’ War (1756-63) to be madness and characterized the two countries as “fighting over a few acres of snow.” The victorious British were later to engage in a lively
public debate over which territory should be taken from the French as reparations—the Caribbean island of Guadeloupe (with a land area of 563 square miles)
or Canada (Eccles, 1972; Lokke, 1932). Several centuries later, however, we know
that the U.S. and Canadian economies ultimately proved far more successful than
the other economies of the hemisphere. The puzzle, therefore, is how and why the
y Kenneth L. Sokoloff is Professor of Economics, University of California, Los Angeles,
California. Stanley L. Engerman is John H. Munro Professor of Economics and Professor of
History, University of Rochester, Rochester, New York. Both authors are Research Associates at
the National Bureau of Economic Research, Cambridge, Massachusetts.
218
Journal of Economic Perspectives
areas that were favored by the forecasters of that era, and the destinations of the
vast majority of migrants to the Americas through 1800, fell behind economically.
Systematic estimates of per capita income over time have not yet been constructed for many economies, and those that exist are rough, but Table 1 conveys
a sense of the current state of knowledge for a selected group of New World
countries relative to the United States. The figures suggest that the economic
leadership of the United States and Canada did not emerge until several centuries
after the Europeans arrived and began establishing colonies. In 1700, there seems
to have been virtual parity in per capita income between Mexico and the British
colonies that were to become the United States, and the most prosperous economies of the New World were in the Caribbean. Barbados and Cuba, for example,
had per capita incomes that have been estimated as 50 and 67 percent higher,
respectively, than that of (what was later to be) the United States. Although the
latter economy may have begun to grow and pull ahead of most economies in Latin
America by 1800, it still lagged behind those in the Caribbean, and Haiti was likely
the richest society in the world on a per capita basis in 1790, on the eve of its
Revolution (Eltis, 1997). It was not until industrialization got under way in North
America over the nineteenth century that the major divergence between the
United States and Canada and the rest of the hemisphere opened up. The magnitude of the gap has been essentially constant in proportional terms since 1900.
These differentials in paths of development have long been of central concern
to scholars of Latin America and have recently attracted more attention from
economic historians and economists more generally (North, 1988; Engerman and
Sokoloff, 1997; Coatsworth 1993, 1998; Acemoglu, Johnson and Robinson, 2000;
Engerman, Haber and Sokoloff, 2000). Although conventional economic factors
have certainly not been ignored, the explanations offered for the contrasting
records in growth have most often focused on institutions and highlighted the
variation across societies in conditions relevant to growth such as the security of
property rights, prevalence of corruption, structures of the financial sector, investment in public infrastructure and social capital, and the inclination to work hard or
be entrepreneurial. But ascribing differences in development to differences in
institutions raises the challenge of explaining where the differences in institutions
come from. Those who have addressed this formidable problem have typically
emphasized the importance of presumed exogenous differences in religion or
national heritage. Douglass North (1988), for example, is one of many who have
attributed the relative success of the United States and Canada to British institutions being more conducive to growth than those of Spain and other European
colonizers. Others, like John Coatsworth (1998), are skeptical of such generalizations, and suggest that they may obscure the insight that can be gained by examining the extreme diversity of experiences observed across the Americas, even
across societies with the same national heritage.
Indeed, a striking implication of the figures in Table 1 is that the relationship
between national heritage and economic performance is weaker than popularly
thought. During the colonial period, the economies with the highest per capita
Kenneth L. Sokoloff and Stanley L. Engerman
219
Table 1
The Record of Gross Domestic Product per Capita in Selected New World
Economies, 1700 –1997
GDP per capita relative to the U.S.
1700
1800
1900
1997
Argentina
Barbados
Brazil
Chile
Cuba
Mexico
Peru
Canada
—
150
—
—
167
89
—
—
102
—
50
46
112
50
41
—
52
—
10
38
—
35
20
67
35
51
22
42
—
28
15
76
United States (GDP p.c. in 1985$)
550
807
3,859
20,230
Notes and Sources: The relative GDP per capita figures for Latin American countries come primarily from
Coatsworth (1998). Coatsworth relied extensively on Maddison (1994), and we draw our estimates for
Canada and the United States in 1800 and 1900 from the same source (using linear interpolation to
obtain the 1900 figures from 1890 and 1913 estimates). The GDP per capita estimates for Barbados in
1700 are from Eltis (1995). The 1997 figures are based on the estimates of GDP with purchasing power
parity adjustments in World Bank (1999). Since there was no adjustment factor reported for Barbados
in that year, we used that for Jamaica in our calculations. The 1700 figure for the United States was
obtained from Gallman (2000), by projecting backward the same rate of growth that Gallman estimated
between 1774 and 1800. Maddison (1991) has published alternative sets of estimates, which yield
somewhat different growth paths (especially for Argentina) during the late nineteenth and early
twentieth centuries, and he has a more positive assessment of Brazilian economic performance during
the early nineteenth century than does Coatsworth, but the qualitative implications of the different
estimates are essentially the same for our purposes.
incomes were those in the Caribbean, and it made little difference whether they
were of Spanish, British, or French origin. The case for the superiority of British
institutions is usually based on the records of the United States and Canada, but the
majority of the New World societies established by the British—including Barbados,
Jamaica, Belize, Guyana, and the lesser-known Puritan colony on Providence Island—were like their other neighbors in not beginning to industrialize until much
later. Having been part of the British Empire was far from a guarantee of economic
growth (Greene, 1988; Kupperman, 1993). Likewise, there was considerable diversity across the economies of Spanish America. This is most evident in the contrasts
between the experiences of the nations of the southern cone and those with large
populations of Native American descent, such as Mexico or Peru. It is the former
class of countries, including Argentina, that of all the other economies of the New
World most closely resemble the United States and Canada in experience over
time.
With the evidence of wide disparities even among economies of the same
European heritage, scholars have begun to reexamine alternative sources of differences. Though not denying the significance of national heritage, nor of idio-
220
Journal of Economic Perspectives
syncratic conditions that are unique to individual countries, they have begun to
explore the possibility that initial conditions, or factor endowments broadly conceived, could have had profound and enduring impacts on long-run paths of
institutional and economic development in the New World. Economists traditionally emphasize the pervasive influence of factor endowment, so the qualitative
thrust of this approach may not be entirely novel (Baldwin, 1956; Lewis, 1955;
Domar, 1970). What is new, however, is the specific focus on how the extremely
different environments in which the Europeans established their colonies may have
led to societies with very different degrees of inequality, and on how these differences might have persisted over time and affected the course of development
through their impact on the institutions that evolved. In particular, while essentially
all the economies established in the New World began with an abundance of land
and natural resources relative to labor, and thus high living standards on average,
other aspects of their factor endowments varied in ways that meant that the great
majority were characterized virtually from the outset by extreme inequality in
wealth, human capital, and political power. From this perspective, the colonies that
came to compose the United States and Canada stand out as somewhat deviant
cases.
From Factor Endowments to Inequality
The “discovery” and exploration of the Americas by Europeans was part of a
grand, long-term effort to exploit the economic opportunities in underpopulated
or underdefended territories around the world. European nations competed for
claims and set about extracting material and other advantages through the pursuit
of transitory enterprises like expeditions as well as by the establishment of more
permanent settlements. At both the levels of national governments and private
agents, adaptation or innovation of institutional forms was stimulated by formidable problems of organization raised by the radically novel environments, as well as
by the difficulties of effecting the massive and historically unprecedented intercontinental flows of labor and capital. Common to all of the colonies was a high
marginal product of labor, as evidenced by the historically unprecedented numbers
of migrants who traversed the Atlantic from Europe and Africa despite high costs
of transportation.
Well over 60 percent of the more than 6 million individuals who migrated to
the New World from 1500 through the end of the eighteenth century were Africans
brought over involuntarily as slaves (Eltis, 2000; Engerman and Sokoloff, 1997).
With their prices set in competitive international markets, slaves ultimately flowed
to those locations where they were most productive. There were no serious national
or cultural barriers to owning or using them; slaves were welcomed in the colonies
of all the major European powers. The fraction of migrants who were slaves grew
continuously, from roughly 20 percent prior to 1580 to nearly 75 percent between
1700 and 1760. The prominence of slaves, as well as the increase over time in the
Institutions, Factor Endowments, and Paths of Development in the New World
221
proportion of migrants going to the colonies of Portugal, France, and the Netherlands, and the continued quantitative dominance in the destinations of migrants to
British America of colonies in the West Indies and on the southern mainland,
reflects the increasing specialization by the New World over the colonial period in
the production of sugar, coffee, and other staple crops for world markets. These
colonies attracted heavy inflows of labor (especially slaves) because their soils and
climates made them extraordinarily well-suited for growing these lucrative commodities, and because of the substantial economies of scale in producing such
crops on large slave plantations (Fogel, 1989). Indeed, there are few examples of
significant colonies which were not so specialized: only the Spanish settlements on
the mainlands of North and South America (some of which had concentrations of
labor in silver or other mines) and the New England, Middle Atlantic, and Canadian settlements of Britain and France. It was not coincidental that these were also
the colonies that relied least on slaves for their labor force.
The economies that specialized in the production of sugar and other highly
valued crops associated with extensive use of slaves had the highest per capita
(including slaves) incomes in the New World. Most, including Barbados, Cuba, and
Jamaica, were in the West Indies, but some (mainly Brazil) were in South America.
They specialized in these crops early in their histories, and through the persistent
working of technological advantage and international markets in slaves, their
economies came to be dominated by large slave plantations and their populations
by slaves of African descent (Dunn, 1972; Sheridan, 1974; Moreno Fraginals, 1976;
Schwartz, 1985; Knight, 1990). The greater efficiency of the very large plantations,
and the overwhelming fraction of the populations that came to be black and slave,
made the distributions of wealth and human capital extremely unequal. Even
among the free population, there was greater inequality in such economies than in
those on the North American mainland (Galenson, 1996).
Although the basis for the predominance of an elite class in such colonies may
have been the enormous advantages in sugar production available to those able to
assemble a large company of slaves, as well as the extreme disparities in human
capital between blacks and whites (both before and after emancipation), the
long-run success and stability of the members of this elite were also facilitated by
their disproportionate political influence. Together with the legally codified inequality intrinsic to slavery, the greater inequality in wealth contributed to the
evolution of institutions that protected the privileges of the elites and restricted
opportunities for the broad mass of the population to participate fully in the
commercial economy even after the abolition of slavery.
The importance of factor endowments is also evident in a second category of
New World colonies that can be thought of as Spanish America, although it also
included some islands in the Caribbean. Spain focused its attention on, and
designed their New World policies around conditions in, colonies such as Mexico
and Peru, whose factor endowments were characterized by rich mineral resources
and by substantial numbers of natives surviving contact with the European colonizers. Building on preconquest social organizations, whereby Indian elites ex-
222
Journal of Economic Perspectives
tracted tribute from the general population, the Spanish authorities adopted the
approach of distributing enormous grants of land, often including claims to a
stream of income from the native labor residing in the vicinity, and of mineral
resources among a privileged few. The resulting large-scale estates and mines,
established early in the histories of these colonies, endured even where the principal production activities were lacking in economies of scale. Although small-scale
production was typical of grain agriculture during this era, their essentially nontradeable property rights to tribute from rather sedentary groups of natives (tied to
locations by community property rights in land) gave large landholders the means
and the motive to operate at a large scale.
Although the processes are not well understood, it is evident that large-scale
agriculture remained dominant in Spanish America— especially in districts with
linkages to extensive markets—and that the distribution of wealth remained highly
unequal over time. Elite families generally acted as local representatives of the
Spanish government in the countryside during the colonial period and maintained
their status long after independence. The persistence and stability of elites, as well
as of inequality generally, were also certainly aided by the restrictive immigration
policies applied by Spain to her colonies, and by laws throughout Spanish America
requiring that a citizen (a status entailing the right to vote and other privileges)
own a substantial amount of land (qualifications that were modified in postindependence constitutions to require literacy and a specified economic standing).
For different reasons, therefore, Spanish America was like the colonies specializing
in the production of crops like sugar in generating an economic structure in which
wealth, human capital, and political power were distributed very unequally, and
where the elites were drawn from a relatively small group that was of European
descent and racially distinct from the bulk of the population (Lockhart and
Schwartz, 1983; Chevalier, 1963; Van Young, 1983; Lockhart, 1994; Jacobsen, 1993).
As in the colonial sugar economies, the economic structures that evolved in
this second class of colonies were greatly influenced by the factor endowments,
viewed in broad terms. The fabulously valuable mineral resources and abundance
of labor with low amounts of human capital were certainly major contributors to
the extremely unequal distributions of wealth and income that came to prevail in
these economies. Moreover, without the extensive supply of native labor, it is
unlikely that Spain could have maintained its policies of tight restrictions on
European migration to its colonies and of generous awards of property and tribute
to the earliest settlers. The colonists in Spanish America endorsed formidable
requirements for obtaining permission to go to the New World—a policy that
limited the flow of migrants and helped to preserve the political and economic
advantages enjoyed by those of European descent who had already made the move.
In 1800, less than 20 percent of the population in Spanish colonies such as Mexico,
Peru, and Chile was composed of whites; it would not be until the major new
inflows from Europe late in the nineteenth century that Latin American countries
such as Argentina and Chile would attain the predominantly European character
they have today (Engerman and Sokoloff, 1997).
Kenneth L. Sokoloff and Stanley L. Engerman
223
The final category of New World colonies were those located in the northern
part of the North American mainland— chiefly those that became the United
States, but including Canada as well. These economies were not endowed with
substantial populations of natives able to provide labor, nor with climates and soils
that gave them a comparative advantage in the production of crops characterized
by major economies of using slave labor. For these reasons, their development,
especially north of the Chesapeake, was based on laborers of European descent who
had relatively high and similar levels of human capital. Compared to either of the
other two categories of New World colonies, this class had rather homogenous
populations. Correspondingly equal distributions of wealth were also encouraged
by the limited advantages to large producers in the production of grains and hays
predominant in regions such as the Middle Atlantic and New England. With
abundant land and low capital requirements, the great majority of adult men were
able to operate as independent proprietors. Conditions were somewhat different in
the southern colonies, where crops such as tobacco and rice did exhibit some
limited scale economies; cotton, whi…
Purchase answer to see full
attachment