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Miguel Urquiola: In their paper, Engerman and Sokoloff summarize the results of a productive research program, undertaken with the broad objective of understanding why some former colonies in America have grown so much more than others, producing the dispersion of incomes seen today. In seeking to answer this question, they emphasize how different colonies' factor endowments conditioned the early and subsequent development of their institutions and thereby affected their readiness for modern industrial growth. This work is not only interesting in and of itself, but it has also served as a building block for recent influential research that extends these ideas to other regions of the world. ¹

This note briefly summarizes the authors' argument and the facts they present and seek to explain. I then raise some identification issues and counterexamples that this work does not fully address, along with a couple of more specific issues to consider in future research.

Some Interesting History That Needs an Explanation

One of the key points that Engerman and Sokoloff seek to establish is that in the first century or two of European settlement in America, the southern English colonies (such as present-day Jamaica and the southern United States) and many of the Spanish colonies (such as Mexico and Peru) were just as well-off or even richer than northern colonies like the present-day northeastern United States or eastern Canada. ² The large advantage in incomes that the latter have today did not begin to develop until the late eighteenth and nineteenth centuries.

Engerman and Sokoloff were among the first to make this point and document its validity across the Americas, which is an important contribution in itself. This assertion has gained wide acceptance, and as Acemoglu, Johnson, and Robinson show, such drastic changes in the relative wealth of former European colonies are also a feature in other parts of the world. ³

Accounting for the stark differences in growth experiences is the challenge that Engerman and Sokoloff face in their work. Their main emphasis is on the way colonies' factor endowments affected the development of their institutions, which in turn determined their readiness to take advantage of the industrial growth that started in the late eighteenth and nineteenth centuries. Put briefly, their argument is that in places such as the Caribbean or Brazil, soils and climate were suited to valuable crops with ample economies of scale, such as sugar, which stimulated the importation of slaves. This created a large, poor, and disenfranchised segment of the population. In other areas, like present-day Peru, the combination of factors like preexisting native populations, silver mining, and the awarding of large land holdings contributed to a similar outcome: highly unequal societies.

While the value of sugar or silver made such colonies wealthy in their early history, the resulting economic and political inequality facilitated the formation of institutions that made these areas ill-suited for more modern economic growth. In contrast, the northernmost colonies, namely, the northeastern United States and eastern Canada, had soils best suited for the production of wheat and other grains, which presented few economies of scale. The authors contend that this led to their settlement by European immigrants working with relatively small landholdings. These colonies therefore developed more egalitarian societies and better institutions, which put them in a position to benefit more from industrial growth.

A Strength in This Approach: Geography versus Institutions

From an analytical perspective, this approach is interesting because it provides an alternative to pure geographical hypotheses, which assign responsibility for most differences in income to factors broadly related to geography. ⁴ As emphasized by Acemoglu, Johnson, and Robinson geographical explanations for economic performance generally suggest that differences in income should be quite persistent. ⁵ Engerman and Sokoloff, however, show that something rather different is needed to account for differential paths of development in the Americas, and their argument outlines a theory that is consistent with the facts.

In their theoretical outline, the key line of causality runs from factor endowments to poor institutions...