Today, at the National Bureau of Economic Research, William Easterly and Ross Levine have published a paper on the impact of European settlements on future development. Their results are rather robust and I believe their analysis to be convicing (and will probably feed the likes of Niall Ferguson). However, I am always perplexed by one very simple item: how are institutions chosen?
Consider the following: the British attempted to prevent white settlement in India because they felt it would threaten their colonial rule. Instead, they prefered to rule in a system that mixed direct control with indirect control via the princely states. Why?
Colonial institutions are very relevant items in explanining modern economic growth, yet their political economy and the process of their formation is often understudied or taken for granted. For example, why did the British decide to implant a particular set of rules in Quebec after its conquest in 1763 than in its colony of Nova Scotia? What were the constraints for each choices? What motivates constitutional reforms like those seen in 1763, 1774, 1791, 1840, 1848 and 1867 (in the case of Canada)?
Another example can be found in Africa. In an article in Explorations in Economic History, Ewout Frankema noticed that each British colonies spent the revenues they collected in very different manners. For example Mauritius spent on education and infrastrucutre while the Kenyan protectorate acted as a predatory state where tax revenues were redirected towards white farmers. Moreover, Mauritius developped complex institutional frameworks for the collection of revenues that minimized distorsions on growth while Kenya enacted cheap administration for revenue collection even if it exacted a high cost on the economy. Why and how do such policy choices – which clearly have a long term impact on growth – come to be?
These are all questions that I believe need to be answered more thoroughly. In short, I believe we need to develop a political economy of colonial institutions.