Instrumental Variables
Imperial institutions may determine prosperity, but the reverse may also be true. The trick is to find some third factor that is securely linked to institutions, but entirely unconnected to economic success. Such factors are called “instrumental variables.”
In a recent study of 80 islands, all but one of which eventually fell under the imperial yoke, James Feyrer and Bruce Sacerdote argue that winds and currents dictated which islands were colonized when. The early colonialists went where their sails took them; only after steamships became the norm in the 19th century could they travel against the wind.
As a result, some islands were colonized early, some late, for reasons that had much to do with meteorology, and rather little to do with any other intrinsic attractions the islands might offer. The accessible islands, which lay on natural sailing routes, have prospered relative to the others, in part due to the longer period these islands spent under colonial rule. A century as a colony is worth a 40% increase in today’s GDP, the authors argue.
This striking result disguises a more disturbing fact: on many islands the original population was decimated by European contact. For example, after the Spanish colonised Puerto Rico in 1505, the native population fell from 60,000 to 1,500 within 30 years. Colonized islands may have prospered, but the original islanders did not.
Lakshmi Iyer points out that the British did not wrest direct control of India all at once. From 1848 to 1856, for example, the governor-general pursued a “doctrine of lapse,” taking charge of states whenever the native ruler died without an heir. These states came under British rule as a result of patrilineal misfortune, not economic potential. Ms Iyer shows that such areas had fewer schools, clinics and roads as a result of British rule. The effects lingered into the 1980s.
“Winds of change,” by The Economist