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Economic Development in the Americas since 1500: Endowments and Institutions

Author(s):Engerman, Stanley L.
Sokoloff, Kenneth L.
Reviewer(s):Nonnenmacher, Tomas

Published by EH.Net (September 2013)

Stanley L. Engerman and Kenneth L. Sokoloff, Economic Development in the Americas since 1500: Endowments and Institutions. New York: Cambridge University Press, 2012. xx + 417 pp. $99 (hardcover), ISBN: 978-1-107-00955-4.

Reviewed for EH.Net by Tomas Nonnenmacher, Department of Economics, Allegheny College.

Economic Development in the Americas since 1500: Endowments and Institutions brings together the works of Stanley Engerman and the late Kenneth Sokoloff ? along with coauthors Stephen Haber, Elisa Mariscal and Eric Zolt ? on the topic of geography, institutions, and economic development. Their thesis will be very familiar to economic historians: a causal chain links initial endowments in New World colonies to the organization of economic activity, economic power, political power, institutions, and long-run economic performance. Institutions, in Engerman and Sokoloff?s story, are endogenous, and knowing the resource allocation of a colony in 1500 explains much of its future economic performance. The book begins with three chapters that lay out the big picture and then turns to case studies on suffrage, schooling, taxation, land and immigration policies, and banking. The concluding chapters offer commentary on the use of institution-based explanations of growth and a comparison with alternative explanations of development.

The New World constituted a vast and heterogeneous set of opportunities for European nations. Engerman and Sokoloff group colonies into three categories: those with land most suitable for growing lucrative crops like sugar and tobacco, those with rich mineral resources and a substantial native population, and those with land most suitable for small-scale agriculture. Europeans exploited the natural resources in the first two categories of colonies by either importing slaves from Africa or using the Native American population. Doing so led to an uneven distribution of economic and political power that persisted via the adoption of institutions designed to protect that power. In contrast, in areas where the initial endowment of natural resources did not encourage the use of forced labor, a virtuous cycle of political competition generated pro-growth institutions. The long-run economic prosperity of the U.S. and Canada relative to their neighbors is not due to ?better? British institutions, but due to the British coming to the New World late to the game and acquiring colonies that did not possess the valuable natural endowments that made slavery so profitable. Indeed, the economic development of the British sugar colonies (Barbados, Jamaica, and Belize) is more similar to that of Spanish, Dutch, and French colonies in the Caribbean than to the U.S. and Canada. Even the Puritan work ethic has a counterexample in Providence Island off the coast of Nicaragua.

The middle chapters of the book are the heart of Engerman and Sokoloff?s analysis and provide compelling narratives and statistical evidence supporting their hypothesis of a link between inequality and institutional choice. The chapter on voting establishes the link between economic and political inequality. The original thirteen colonies had rules that linked property or wealth to the right to vote. While these restrictions were fairly strict, they still allowed a broad set of elites to participate in elections. In order to attract immigrants, new western states, which had lower population density and lower income inequality, restricted the franchise much less, using race, gender, age, and criminal record rather than wealth and property. The pattern of extending the franchise in areas with lower population density and lower income inequality is a central piece of Engerman and Sokoloff?s story. In Latin America, the right to vote was greatly limited via a literacy test. Racial boundaries were generally more porous in Latin America, making the implementation of an explicit racial criterion politically difficult. While generally rising over time, the proportion of the population voting in Latin America remained well below that in the United States and Canada through 1940. This pattern limited the access of the general population to the political process and led to rules being written for the elites.

Using literacy as a requirement for the franchise reduced the incentive to provide public school education. The schooling ratio was highest in cities (where inequality was lower), in countries with higher income, and in countries in which a higher percentage of the population voted. Political inequality and education are thus directly linked. Inequality is also linked to the tax structure, with more unequal countries relying on regressive sales and trade taxes and more equal countries relying on property and income taxes. Immigration and land policy was open in the United States and Canada and restrictive in Latin America. The cumulative effect led to enormous differences in land ownership rates by the early 1900s. In Mexico, the highest rural land ownership rate was 5.6% in the Pacific Northwest. The rural land ownership rate was 83.4% in the western United States and 87.1% in Canada. Finally, the chapter on the banking system (by Stephen Haber) draws links between elite power and banking regulation. A powerful Latin American elite manipulated the opaque regulatory process in their favor.

One measure of the importance of a research agenda is the number of scholars who build on it, and, by this measure, Engerman and Sokoloff have achieved great success. Many subsequent studies find support for their hypotheses or raise questions about the links between economic and political inequality and underdevelopment. The work of Engerman and Sokoloff is foundational to the literature on colonialism, institutions, and economic development and anyone interested in development or new institutional economics will need to read this book.

Tomas Nonnenmacher is a Professor of Economics at Allegheny College. His most recent article, ?Stability and Change on Henequen Haciendas in Revolutionary Yucat?n: Two Case Studies from the Henequen Zone? is coauthored with Shannan Mattiace and is forthcoming in Estudios Mexicanos/Mexican Studies. He is currently working on a project exploring entrepreneurship in the telegraph industry.

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Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Geographic Area(s):Latin America, incl. Mexico and the Caribbean
North America
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII