Factor Endowments, Inequality, and Paths of Development among New World Economies

Geographic patterns in economic performance across societies have long been recognized, but there has been a recent revival of interest in them among economists. Confronted by systematic evidence of powerful empirical regularities, such as the per capita income of countries near the equator lagging far behind that of their neighbors at more moderate latitudes, researchers hope to gain insight into the processes of economic growth by exploring the sources of these disparities. One group focuses on the direct effects of conditions closely associated with geography, such as climate, disease environment, soil quality, or access to markets, and on the availability and productivity of labor and other factors of production. Other scholars, however, highlight how such differentials in performance could be rooted in the indirect effects that geography and factor endowments have on paths of development through their influences on the ways institutions evolve. ¹ Both perspectives have distinguished intellectual traditions, but the question of whether there might be systematic reasons why some societies are more likely than others to evolve institutions that are conducive to growth seems to have generated particular excitement. This should not be surprising. Despite an emerging consensus that institutions are important for growth, knowledge of where institutions come from and how institutions that are bad for growth persist over time remains very limited.

Although it may be obvious that institutions matter for growth, our understanding of just how they matter depends, in part, on whether they are exogenous or endogenous and on the factors and processes that shape or determine them. Unfortunately, the study of how institutions evolve, and whether and how they are related to factor endowments or geography, is not straightforward. Not only does institutional change take place gradually over long periods of time, but the likelihood of different causal mechanisms being involved further complicates analysis. Geographic factors might be associated with institutions and economic performance, either because they directly shape the sorts of institutions that evolve and thus indirectly affect performance or because they have a direct effect on economic performance, which in turn affects the quality of institutions. One intriguing method of attacking this empirical problem is to use geographic or historical variables as instruments for contemporary measures of the quality of institutions, and to estimate the relationship across countries between current economic performance and the exogenous component of institutional quality. This approach has yielded some important new findings about the patterns of long-term development, but it leaves open many questions about the mechanisms that link the geographic or historical factors to contemporary circumstances and about the processes of institutional change more generally. ²

Our own research program for studying the sources of institutions and their relation to long-term paths of economic development centers on exploring the record in detail in a specific context—the societies of the New World. The experience of a limited number of European countries coming to the Americas to establish colonies in quite dissimilar environments, within a relatively short span of time, makes for an extremely interesting natural experiment. For example, investigators should, in principle, be able to employ the record to identify the degree to which colonies adapted the institutions they brought from their home countries to the new environments, and whether such adaptations followed any systematic patterns. Differences in income levels across the economies of the Americas were quite small for the first quarter of a millennium after the Europeans arrived, and per capita incomes in at least parts of the Caribbean and South America exceeded those in the colonies that were to become the United States and Canada. Looking back from the vantage point of the early twenty-first century, it is puzzling that the areas first settled, and the choices of the first Europeans to colonize parts of the Americas, were those that fell behind. Conversely, the societies that were established by Europeans who came...