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

Abstract

We would like to express deep appreciation for the help of our research assistants Elisa Mariscal, Patricia Juarez, and Leah Brooks. We have also benefited from discussions with Stephen Haber, Daron Acemoglu, George Alter, Sam Bowles, Roberto Cortés Conde, Lance Davis, Gerardo della Paolera, David Dollar, William Easterly, David Eltis, Jeff Frieden, the late Robert Gallman, Claudia Goldin, Aurora Gomez, Avner Greif, Karla Hoff, Lawrence Katz, Daniel Kaufmann, Zorina Khan, Naomi Lamoreaux, Margaret Levenstein, Ross Levine, Frank Lewis, Peter Lindert, Nora Lustig, Douglass North, James Robinson, Jean-Laurent Rosenthal, Elyce Rotella, Jon Skinner, Joel Slemrod, Federico Sturzenegger, William Summerhill, Alan Taylor, Peter Temin, Mariano Tommasi, Dan Treisman, Miguel Urquiola, John Wallis, Jeffrey Williamson, Gavin Wright, and participants in presentations at Harvard, McGill, Stanford, Yale, Michigan, Indiana, Dartmouth, UC Davis, UC Berkeley, Washington University, the Santa Fe Institute, the NEUDC, and the meeting of the Economia panel held in Cambridge, May 2002. We gratefully acknowledge the financial support we have received from the National Science Foundation, as well as from the Academic Senate and International Studies and Overseas Programs at the University of California, Los Angeles. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.© 2002 by Stanley L. Engerman and Kenneth L. Sokoloff. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. ABSTRACTWhereas traditional explanations of differences in long-run paths of development across the Americas generally point to the significance of differences in national heritage or religion, we highlight the relevance of stark contrasts in the degree of inequality in wealth, human capital, and political power in accounting for how fundamental economic institutions evolved over time.We argue, moreover, that the roots of these disparities in the extent of inequality lay in differences in the initial factor endowments (dating back to the era of European colonization).We document --through comparative studies of suffrage, public land, and schooling policies --systematic patterns by which societies in the Americas that began with more extreme inequality or heterogeneity in the population were more likely to develop institutional structures that greatly advantaged members of elite classes (and disadvantaging the bulk of the population) by providing them with more political influence and access to economic opportunities. The clear implication is that institutions should not be presumed to be exogenous; economists need to learn more about where they come from to understand their relation to economic development. Our findings not only contribute to our knowledge of why extreme differences in the extent of inequality across New World economies have persisted for centuries, ...

Political instability: Effects on financial development, roots in the severity of economic inequality

“…As such, it needs to be added to the short list of major determinants of financial development. First, structural conditions first postulated by Engerman and Sokoloff (2002) …”

“…And we indeed find that political stability and the fundamental conditions that induce it should be added to our understanding of the key determinants of modern financial development. Engerman and Sokoloff (2002) postulated that historical conditions, often due to agricultural necessity in the colonial era, could induce economic inequality and institutional structures that could persist to today. Our results here point to such conditions as perpetuating economic inequality as having an exogenous impact on political instability, which in turn holds back the financial development of countries.…”

Contract Enforcement: A Political Economy Model of Legal Development

“…All of these elements are present in Latin America, whereas the opposites are often observed in the developed West, especially North America, and somewhat in between are East Asian countries under the influence of Confucian culture. 37 The sharp contrast between Latin and North America may be deeply rooted in their colonial institutions, which in turn can be linked to different levels of inequality in endowment (Engerman and Sokoloff 2002). Indeed, large plantation agriculture and slavery in mining in Latin America induced huge disparities in wealth and thus made it more prone to elite rule and slow legal development.…”

“…The average Gini index is around 32-36 for both the West and East Asia, while it is 51.4 in Latin America, which has almost the highest income inequality among all countries (United Nations 2005). equal distributions of human capital and wealth'' (Engerman and Sokoloff 2002). 38 In both Latin American and East Asian countries, relational contracts are more extensively used, and social communities and collective culture are stronger relative to North America; 39 a crucial difference between them, however, is that income inequality is much higher in Latin America and elite rule is stronger, which may lead to its lower economic growth and legal quality relative to East Asia.…”

“…13 Furthermore, the links between elite rule, low legal quality, and high inequality can be mutually reinforcing when the political power of a group is affected by its collective economic strength (Engerman andSokoloff 2002, 2005). 14 This article contributes to the literature of contract enforcement institutions by formally endogenizing legal quality in a political economy model of legal development.…”