Interaction of technology and human capital

nation’s economic development can depend on many things. One school of thought has argued that geographical factors — meaning temperate or tropical location, supply of ready labor, level of available natural resources — are key considerations (Sachs, 2001). This argument makes sense, except when applied to Africa, where countries have the lowest per capita GDP in the world, despite having abundant resources in a variety of locales. Another school of thought places emphasis on the production function (Sharma, 2007) — meaning the availability, use, and interaction of technology and human capital. This argument fails when applied to nations in Latin America which have grown more quickly than their embrace of technology and improvement of capital alone seems to justify. A third argument gives primacy to institutions — specifically those which allow for incentives and security that support production and investment. This argument seems well-favored, as it points to a simple, central tenet of economic development: “when investors believe their property rights are protected, the economy ends up richer” (Rodrik, Subramanian, and Trebbi, 2002, p. 152). Robinson, among others, argues credibly that “The most convincing theory of comparative economic development asserts that it is institutions — the way societies are organized — that are the fundamental cause of countries’ development or underdevelopment” (510). However, if it is true that “institutions rule” (Rodrik, Subramanian, and Trebbi, 2002) what impacts those institutions?

This paper argues that the colonial legacy of the European powers plays a crucial role in determining the institutional circumstances and the consequent productive growth of developing economies. Through a consideration of the colonial legacy in the developing economies of Asia, Latin America, and Africa, an argument will be presented that current day per capita GDP in the nations in those regions is largely a result of institutional structures left behind as part of that colonial legacy. If such a case can be argued successfully, it should lend credibility to the already-building case in the research literature that before developing countries can grow through infusions of capital and integration into the world economy, attention must be paid to political and social structures which are in place.

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Colonialism and Its Lasting Institutional Impact

In this section a variety of studies which show how colonialism resulted in different institutional legacies will be reviewed in an effort to lay the groundwork for the analysis to come.

Acemoglu, Johnson, and Robinson (2002) review 500 years of history, from the 1500s to the 20th century to show how the European powers’ colonizing efforts took different approaches in places as diverse as (what are now called) the Indian subcontinent, Latin America, and North America. They argue, specifically, that in places where there were already well-established economic and political institutions in well-populated areas (such as in India and Latin America), the European powers concerned themselves only with bringing in enough force and administration to set up extractive operations. Europeans relied on forced labor and local infrastructures in such cases in order to expropriate the natural resources they sought. In North American colonies and Australia, on the other hand, the Europeans established integrated institutions and infrastructure programs to obtain resources because the societies they found in these areas were less densely populated and more loosely organized. The result of these different institutional approaches was a “reversal of fortune” between the regions affected, with North American and Australian colonies found poorer when colonialism began but richer in later development after having benefited from institutions left behind, while India and Latin America were richer when colonies were established, but took longer to build institutions suitable for economic take off once the colonizers left. In a study with a similar thesis, Acemoglu, Johnson, and Robinson (2001) argue that in places where Europeans faced higher mortality rates, such as equatorial Africa, they established merely extractive operations and institutions, while in North America and elsewhere they established institutions built around the rule of law because they expected to settle there longer, with a result having the same effects. The point of both of these studies is that those former colonies which were administered with merely extractive intentions — such as those found in Latin America and Africa — did not benefit from the establishment of institutional and infrastructural development on the part of the colonizers, a result which may well have depressed later opportunities for economic growth.

Banerjee and Iyer (2002) use a different analysis framework to consider the institutional legacy of colonialism. They review data from the British colony in India to determine where the institutional structures left behind by the British seemed to work toward growth and where they failed. They found that in those areas where power was concentrated in the hands of a minority elite landlord class, growth remained slow for decades after the British left. However, in those areas where the people who cultivated the land were given more power, growth was faster to take off. Angeles (2007) offered a similar analysis to show that in those colonies where there was significant European settlement in the colonized territories such as across Latin America, a legacy of lasting inequality resulted due to concentration of power and land in the hands of those who remained behind when the colonizers left. Where there were few European settlers relative to the local population, as in many Asian colonies, the land rights tended to stay in the hands of the local population and inequalities were not as great. Engerman and Sokoloff (2005) found that where such inequalities were established early in the independent life of formerly colonized nations, they had persistent effects in restricting access to the resources and economic opportunities that were necessary to drive investment and growth.

A final type of analysis reviewed here suggested that in those regions where the British were the primary colonizers, the institutional legacies were more conducive to growth and development than in those colonies belonging to other European powers. This thesis was supported by a study conducted by Lee and Shulz (n.d.), which found that in sections of Cameroon formerly ruled by the French, growth was limited as a result of that nation’s colonial institutional conditioning while in the section formerly ruled by the British, growth was faster. A supportive study was conducted by Lange (2003) who found that in colonies where the British ruled directly, ultimate growth was greater than in those where British rule was indirect. The explanation for this seems to be that the British emphasized the rule of law, land-ownership rights, and other institutional factors which were more conductive to growth than the merely exploitative values held by other colonizers. While these studies point out that this effect can be complicated by a number of other factors, such as post-colonial policy, the important consideration here is that the institutional legacy of the British — characterized in its best form by the protection of land rights and its emphasis on the rule of law, political checks and balances, and the like — left an impact on the colonies formerly under its rule that was either more or less conducive to growth depending on the extent to which it adhered to the best ideals of those institutional goals.

Current Day GDP and the link to Colonialism’s Institutional Legacy

In the previous section, the literature was reviewed to show that European colonialism has had a lasting legacy characterized, at least in part, by an extractive philosophy in Africa and Latin America that destroyed pre-colonial institutions while preventing establishment of beneficial new ones. Additionally, the literature shows that where power is concentrated in the hands of a few, such as in India and Latin America, inequalities restrict economic growth and opportunity. Finally, in places where the better values espoused by the British, including the rule of law and property rights were more directly enforced, growth should be greater. For the remainder of this paper, a consideration of the three regions which are the subject of this paper will be made to determine if their GDPpc corresponds with expectations generated by this analysis. Economic Data and commentary are taken from the CIA World Factbook and World Bank regional briefs.

Africa. Of the 40 countries in the world with the lowest per capita GDP, 30 are located on the continent of Africa. They include even resource rich nations such as Burundi, Uganda and Ghana. The annual per capita GDP of these least-developed nations range from $200 in Zimbabwe to $1,700 in Cote D’Ivoire. Development is restricted by the lack of institutional stability and enforceable property rights, among other factors. The World Bank makes a telling analysis of the region in pointing that growth in the past decade was driven by increases in commodity prices, and that this development “was accompanied by” political stability and accountability. Due to the institutional legacy of colonialism, the political environment is not yet capable of leading growth.

Latin America. Countries in this region are generally grouped in the middle of the pack among the nations of the world in terms of GDPpc. Citizens in the region’s poorest countries, Paraguay and Honduras, make just above $4,000 per year, while those in the wealthiest countries, Chile and Mexico, make almost $15,000. The institutional legacy in the region is one clouded by inequality and corruption. In its brief on the region, the World Bank emphasizes the role of institutional development to alleviate poverty among vulnerable groups, a result in part of the lasting legacy of inequality due to colonial influences.

Asia. This region ranges widely from very poor nations such as Nepal (GDPpc of $1,100) to very wealthy nations like Singapore ($51,600). Because colonial dominance of this region was carried out by a relatively few European settlers, it was ultimately incomplete, leaving many of the region’s own institutions intact or enhanced. The World Bank’s comments on how governments across the region are reacting to the recent economic turndown are in line with an expectation that institutional factors in the region are stronger and more integrated with popular controls.

A Better Legacy. Appendix 1 presents the findings of a study done by the International Property Rights Index. This chart shows that, as expected from the discussion above, where property rights are secured, development and growth is higher. This suggests that there are possibilities for a better legacy to colonialism, one built on the best ideals of the once powerful European rulers. However, these ideas can only be achieved and subsequent growth realized through the improvement of institutions which were left behind when the colonizers departed.

Acemoglu, D., Johnson, S., and Robinson, J. (2001). “The colonial origins of comparative development: an empirical investigation.” American Economic Review 91 (5): 1369-1401.

Acemoglu, D., Johnson, S., and Robinson, J. (2002). “Reversal of fortune: geography and institutions in the making of the modern world income distribution.” Quarterly Journal of Economics 117(4): 1231-1294.

Angeles, L. (2007). “Income inequality and colonialism.” European Economic Review 51: 1155-1176.

Banerjee, A., and Iyer, L. (2005). “History, institutions, and economic performance: the legacy of colonial land tenure systems in India.” American Economic Review 95(4): 1190-1213.

Central Intelligence Agency. (2009). The World Factbook. December 12, 2009. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html.

Engerman, S., and Sokoloff, K. (2005, January). Colonialism, inequality, and long-run development, National Bureau of Economic Research working paper 11057, December 12, 2009. Retrieved from http://www.nber.org/papers/w11057.

International Property Rights Index. (2009). internationalpropertyrightsindex.org. December 12, 2009. Retrieved from http://www.internationalpropertyrightsindex.org/.

Lange, M. (2004) “British colonial legacies and political development.” World Development 32(6): 905-922.

Lee, A., and Schulz, K. (n.d.) Comparing British and French colonial legacies: a discontinuity analysis of Cameroon. University of California at Los Angeles. www.ucla.edu. December 10, 2009. Retrieved from http://www.sscnet.ucla.edu/polisci/wgape/papers/17_Lee.pdf.

Robinson, J. (2002). “States and power in Africa by Jeffery I. Herbst: a review essay.” Journal of Economic Literature 40(2): 510-519.

Rodrik, D., Subramanian, A., and Trebbi, F. (2004). “Institutions rule: the primacy of institutions over geography and integration in economic development.” Journal of Economic Growth 9 (2): 131-165.

Sachs, Jeffrey D. (2001, February). “Tropical underdevelopment” NBER Working Paper No. w8119.

Sharma, H. (2007, August). Sources of Economic Growth in China, 1952-1998. Issues in Political Economy, Vol 17.

World Bank. (2009). Regional Briefs. www.WorldBank.org. December 13, 2009. Retrieved from http://www.worldbank.org/.

Appendix 1

Relation Between IPRI and GDP Per Capita by Region

Source: International Property Rights Index, 2009. (http://internationalpropertyrightsindex.org/UserFiles/File/ex4_9relationbtwniprigdpbyreg.pdf).


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