Indian Economic and Political

History

Term I Pre- Mid-Term

2021-22

Session 2

Rajesh Bhattacharya
Email:
Virtual Lounge: Friday, 4pm to 6pm
23-25 June 2021 IIM Calcutta
Institutions and Economic
Development:
The Colonial Impact

23-25 June 2021 IIM Calcutta

Determinants of Long-Run Development: the
Geography Hypothesis
Early, ‘crude’ version: Montesquieu (1689-1755)—
people in tropical climates are lazy, lack
inquisitiveness→ are not hard-working or
innovative
Contemporary, ‘sophisticated’ version: Jeffery
Sachs— tropical diseases, particularly malaria,
have adverse consequences for health and
therefore labor productivity and tropical soils do
not allow for productive agriculture.
No empirical evidence: e.g. North and South Korea
today, North and South America in the past.

23-25 June 2021 IIM Calcutta

Determinants of Long-Run Development: the
Culture Hypothesis
Early version: Max Weber—Protestant reformation in
Europe and development of capitalism; Hinduism,
Buddhism, Confucianism etc. not conducive to
capitalism.
Contemporary (non-articulated, because ‘politically
inappropriate’, but widely shared beliefs) : ‘Africans
are poor because they lack a good work ethic, still
believe in witchcraft and magic’, or ‘Latin America
will never be rich because its people are intrinsically
profligate and impecunious’.
Counter-arguments: No empirical evidence
Also, though slow changing, culture must have been
profoundly modified by the colonial encounter.

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Reversal of Fortune (Acemoglu, Johnson and
Robinson 2002, 2003)

Reversal of Fortune among Former

European Colonies since 1500 AD

23-25 June 2021 IIM Calcutta

Reversal of Fortune (Acemoglu, Johnson and
Robinson 2002, 2003)

Reversal of Fortune among

Former European Colonies since
1500 AD

23-25 June 2021 IIM Calcutta

Reversal of Fortune (Acemoglu, Johnson and
Robinson 2002, 2003)

Persistence of Prosperity
among Non-colonies since 1500

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Reversal of Fortune (Acemoglu, Johnson and
Robinson 2002, 2003)

Persistence of Prosperity
among Non-Colonies between
1000 and 1500

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Reversal of Fortune (Acemoglu, Johnson and
Robinson 2002, 2003)

Persistence of prosperity among

former colonies between 1000 and
1500 AD

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Summing Up: Empirical Evidence for
Reversal of Fortunes

European Non-colonies
Colonies
1000A.D. - Persistence of Persistence of
1500A.D. Prosperity Prosperity

1500A.D. – Reversal of Persistence of

1995 A.D. Fortune Prosperity

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 Determinants of Long-Run Development: the
Institutions Hypothesis
 European Colonization: A Natural Experiment
 Colonization transformed many of the institutions in the
colonies.
 Europeans imposed different sets of institutions in different
colonies.
 The relatively densely settled and highly urbanized colonies
ended up with worse (or ‘extractive’) institutions, while sparsely
settled and non-urbanized areas received an influx of European
migrants and developed institutions protecting property rights
and other economic and civil rights.
 In prosperous and densely settled areas, Europeans introduced
or maintained already-existing extractive institutions to force the
local population to work in mines and plantations, and took over
existing tax and tribute systems.

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What are good institutions?

a) Enforcement of property rights for a broad

cross section of society, so that people have
incentives to invest
b) Constraints on the actions of elites,
politicians, and other powerful groups, so
that these people cannot create a highly
uneven playing field
c) Some degree of equal opportunity for broad
segments of society, so that individuals can
make investments, especially in human
capital
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Industrialization and Institutions
 Industrialization is a process that requires
investment from various different
segments of the society in new technology
and commerce and in skills and human
capital, which can only be incentivized by
good institutions.
 Those areas with good institutions could
surge ahead when industrialization offered
new scope for investment.

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 Timing of the Reversal
(Acemoglu, Johnson and Robinson 2002, 2003)

If the reversal is related to the extraction of resources from, and the "plunder" of,
the former colonies, or to the direct effect of the diseases Europeans brought to the
New World, it should have taken place shortly after colonization. Figure above shows
that the reversal is mostly a late eighteenth-and early nineteenth-century
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phenomenon, and is closely related to industrialization.
Why did bad institutions persist
after decolonization?
The difficulty of institutional reform lie in the
fact that any major change creates winners
and losers, and the potential losers are often
powerful enough to resist change.
Distribution of political power determines the
evolution of institutions.
Political institutions allocate de jure power and
those who hold power tend to influence
evolution of political institutions in a way
that maintain their political power.
This explains persistence of political
institutions.
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How can Institutions change
Institutional change will happen either
a) when groups that favor change become
powerful enough to impose it on the
potential losers,
or
a) when societies can strike a bargain with
potential losers so as to credibly
compensate them after the change takes
place or, perhaps, shield them from the
most adverse consequences of these
changes .

23-25 June 2021 IIM Calcutta