Colonial Theories of Institutional Development

Institutions are seen as a fundamental requirement for economic development, since they form the incentive structure of economic agents and are considered essential for the proper functioning of the economy. The immediate question that follows is what factors explain the quality of institutions. Many scholars have sought the answer to this question in colonialism. Our study is rooted in this renewed interest. Several factors have been highlighted to explain this different legacy of colonialism on subsequent institutional development. A first group of authors emphasizes the identity of the colonizer, with the hypothesis that certain colonial powers (particularly Britain) implemented more benign colonial policies and transferred better institutions to their colonies than others, which led to higher institutional development. A second group focuses on the initial conditions existing in colonized territories, arguing that factors such as the disease environment, indigenous population density or resources abundance determined the colonial strategy of all Western powers in largely similar ways, thereby shaping the incentives to create different types of institutions. In this debate we advocate an intermediate (eclectic) view, since historical examples and systematic analysis of the data show that colonial origin and endowments as well as their interaction should be important factors in the formation and subsequent development of institutions. This analysis is framed within a simple model of two styles of imperialism that integrates the colonial origin and endowment views.

Nowadays there is widespread consensus on the importance of institutions for economic progress. Many social scientists have seen the imprint of colonial past in countries’ current institutions. Some scholars focus on the identity of the colonizing nation, considering that Britain implemented better policies and institutions in their colonies than the other European powers. Others emphasize the initial conditions encountered by Europeans, arguing that colonial policies implemented in environments with large endowments or high potential mortality led to pernicious institutions. A third group advocates that both factors are relevant for the institutional development of former colonies. A review of these three strands of the literature is provided, along with a more general description of the literature that deals with the study of the long-term legacies of historical events.

This chapter provides a simple model of two styles of imperialism that integrates the colonial origin and endowment views. First, the ‘economically-oriented’ style is characterized by a strategy that aims to exploit colonial resources in order to satisfy the economic needs of the metropolis. Consequently, this style of imperialism renders a pragmatic empire, with purely economic goals and sensitive to the initial conditions of each territory, since the specific colonial policy required to maximize rents and satisfy metropolitan needs will depend on the particular characteristics of each colony. The ‘politically-oriented’ style of imperialism is characterized by a colonial strategy that consists of expanding the territorial domains of the colonizing power for non-economic reasons, such as the glory or prestige of the nation or religious-ideological motives. In this case, the lack of an economic calculus and the desire to impose political dominion lead to a uniform colonial policy insensitive to initial conditions. Importantly, colonial powers tend to adopt one style of imperialism or the other depending on their domestic circumstances. We argue that the specific conditions prevailing in Britain such as its insularity and liberal economic and political regimes favored the development of an ‘economically-oriented’ style of imperialism. In contrast, the centralist state tradition, the ideological heritage of the Great Revolution and military defeats led France to adopt a ‘politically-oriented’ style. These different models of imperialism were well reflected in the diverging characters of the British and French empires as well as in the different colonial policies adopted. Our model of colonial empires predicts that the endowment view is applicable to the ‘economically-oriented’ style of imperialism, but not to the ‘politically-oriented’ style. Therefore, we expect to observe a negative relationship between precolonial endowments and the current institutional level in the first case but not in the second.

This chapter describes the estimation methodology and the data. The model of colonial empires contains testable predictions. Among former colonies of European powers that adopted an ‘economically-oriented’ style of imperialism a negative relationship between initial endowments and current institutions is expected, whereas for colonial empires adopting a ‘politically-oriented’ style no such relationship is expected. These hypotheses are tested via an interaction model in which the effect of endowments on current institutions for each colonial empire can be differentiated. As far as the data are concerned, among all possible indicators of institutional quality, we choose rule of law. Regarding the measure of endowments, we choose population density in 1500, which represents the precolonial level of development and a crucial factor of production in colonial times. The estimation of a basic additive model provides evidence that institutions depend significantly on colonizer identity and endowments, which is consistent with the endowment and colonial origin views. However, since heterogeneity in the relationship between endowments and current institutions across colonial empires is expected, we estimate a baseline interaction model. The evidence indicates that not all colonial powers reacted in the same way to the level of precolonial endowments. Britain followed an ‘economically-oriented’ style of imperialism and, as such, we observe that the evidence fits well the endowment view, since there is a negative and highly significant relationship between initial endowments and current institutions among British colonies. France, by contrast, adopted a ‘politically-oriented’ style of imperialism and, as such, we find that the endowment view does not hold, as reflected in the insignificant coefficient on the interaction term. Regarding the Spanish colonial empire, which is a hybrid between both styles, our model predicts partial applicability of the endowment view, which is congruent with a reported negative coefficient on the interaction term that is smaller (in absolute terms) than that on British colonies and only marginally significant. Portuguese former colonies also show a pattern consistent with the categorization of the empire as ‘economically-oriented’, since endowments exert a negative effect on institutions.

This chapter exhaustively controls for all possible factors framed within alternative theories that can explain postcolonial institutional development, which may be relevant omitted variables for the baseline interaction model. These factors comprise (1) distance to the metropolis of Western colonial powers to account for differences in transportation costs from the metropolis to the colonies, (2) geographic costs of control of colonial dominions, (3) time variation in the colonial strategies of different colonial powers within the two main waves of colonization, (4) religion, (5) ethnolinguistic fractionalization and the existence of several precolonial native cultures, (6) the possibility that precolonial political centralization affected the strategies of colonizers beyond its effect on the accountability of local chiefs, and (7) climate and other geographical factors. The evidence indicates that the alternative explanation associated with the timing and duration of colonialism fails to overturn our results regarding the sharp contrast across colonial powers in the effect of endowments on current institutions. Concerning the inclusion of sociological and anthropological factors, current institutional levels are driven by the institutional arrangements imposed externally by the colonizers in the colonies (which in turn differed on the basis of the initial level of endowments) rather than by the degree of precolonial centralization or ethnic homogeneity encountered by European colonial powers upon their arrival. In addition, our results do not appear to be simply caused by a correlation between institutions and colonies concentrated in areas with certain geographic or climatic features.

This chapter conducts a thorough sensitivity analysis that controls for the presence of outliers and sample selection, the use of alternative institutional indicators and different measures of endowments, and limiting the range in the distribution of endowments to French range. Among the alternative endowment variables considered, we use the level of population density before colonization, measures of land suitability for sugar versus wheat, and measures of mineral resources abundance. As with our baseline analysis, the evidence continues to reveal strong presence of heterogeneity in the relationship of colonial origin and endowments with current institutions.

Our model predicts that domestic conditions in the metropolis determined the style of imperialism, which affected the choice of colonial policy (that could be responsive or not to colonies’ initial conditions and endowments), and in turn postcolonial institutional development. This chapter tries to trace the link of colonies’ initial endowments and their interaction with the domestic conditions in the metropolis to current institutions through their effect on the colonial strategy adopted. As argued above, the British colonial strategy varied according to local conditions and in large parts of Africa was based on indirect rule. In contrast, the French colonial policy was more uniform and based on direct rule. The empirical strategy is operationalized through the use of a suitable measure of the choice of colonial policy such as the number of Africans per European administrator, with a higher value implying a more indirect form of rule. The empirical strategy builds on a Two-stage Least Squares framework. In a first stage, the colonial strategy is explained on the basis of colonies’ initial endowments and their interaction with domestic conditions in the metropolis, whereas in a second stage, rule of law is regressed on the extent of indirect rule. The form of colonial rule is clearly found to mediate between colonies’ initial endowments and their interaction with metropolis’ domestic conditions and current institutional levels.

This chapter investigates the effect of European colonialism (measured through colonizer identity and its interaction with endowments) on important determinants of institutional development. The goal of this analysis is to help us understand why the legacy of colonialism has been so pervasive for institutional and economic development, and which factors may potentially act as channels. The percentage of European settlers is thought to be a key determinant of current institutions. Other factors such as early institutions, political instability in the early years of independence, cultural influence, human capital, inequality and social conflict may also be important channels from colonial policies to current institutions. The picture we find is complex. Today’s institutions are not simply the consequence of the persistence of institutions introduced by Europeans in the colonial era. Current institutions are rather the result of processes set in motion or intensified by European colonizers. Our evidence suggests that processes such as inequality, education and to a lower extent social conflict continue to influence the institutions of former colonies today.

This chapter provides some concluding remarks on the analysis of the interaction between initial endowments and colonial origin in the explanation of institutional development in former colonies. This study has proposed a model of two styles of imperialism that integrates the colonial origin and the endowment views explaining current institutions. Our results uncover remarkable heterogeneity that can be read in two ways: the impact of colonizer identity varies with the level of endowments, and the relationship between endowments and institutions is very different across former colonial powers. A couple of important consequences can be derived from this finding. First, the endowment view is not universally applicable. Negative effects of endowments on institutions are only observed for former British colonies and to a lower extent for Spanish and Portuguese colonies, but not for the rest. Second, former British colonies are not always associated with better institutions since former French colonies at least equal the British when the level of endowments is sufficiently high. Our analysis also shows that the form of colonial rule is a key factor to explain current institutional development. In addition, we provide evidence suggesting that European colonialism affected many relevant determinants of current institutions. Factors such as inequality, education and social conflict continue to influence the institutions of former colonies today.