1Amavilah is an independent researcher and an adjunct instructor of economics and Glendale College,Glendale, AZ, USA.

Institutional Change and Economic Performance: An Off-the-Cuff Comment on ProfessorsDaron Acemoglu, Simon Johnson and James Robinson�s Three Papers

Voxi Heinrich Amavilah1

REEPSPO Box 38061, Phoenix, AZ 85069-8061

vhsamavilah@gmail.com cc amavilah@msn.com

Abstract

The three papers to which this comment is directed bring to vivid life the role of institutions in theeconomic performance of nations. The empirical examples the papers use illustrate specificinstitutional influences on at least two broad measures of economic performance: per capita incomeand urbanization. However, it is not clear (a) why similar changes led to dissimilar and oftenasymmetric outcomes, (b) how Atlantic trade produced progress for (Western) Europe early on, butnot for other regions, and ( c) how the growth of cities contributed to European trade while theurbanization phenomenon in general has tended to attract squalor living and inequality in manydeveloping countries today. This paper comments on these and similar issues.

Keywords: institutions, institutional change, economic performance

JEL Classification: O10, O11, P16, F10

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2I suspect that AJ&R (2002) was written first, although AJ&R (2001) was published first.

Among the many papers Professors Acemoglu, Johnson, & Robinson (AJ&R) coauhored,AJ&R (2002), AJ&R (2001), and AJ&R (2005) stand out as having beautifully recast aleading role for institutions in the economic performance of nations. This recasting advances

understanding of differential performance, raising both settling and troubling questions for policy andfurther research. This brief comment reflects on some of the issues raised in the three papers. Itfocuses only on the theoretical and practical aspects of the papers, leaving aside the econometricinstrumentation. Section 1 summarizes the major hypotheses of the papers. Section 2 - the main bodyof the comment - reflects on the papers, while Section 3 makes concluding remarks.

1. Institutions and Economic Performance

G AJ&R (2002): Reversal of Economic Performance2

This paper challenges two long-running hypotheses that countries� fortunes are tied to their physicalgeography and/or that technological development is biased toward the temperate regions of theworld, or what Barry Ickes (2005) has called the �Northian Conundrum� (original italics). The paperfirst observes that economies that were relatively rich pre-European colonialism were relatively poorpost-colonialism, then goes on to show that the difference in economic performance across economiesis a consequence of an �institutional reversal�. Finally, the paper concludes that economicperformance is a function of institutions, and institutional change reversed income per capita, raisingit in formerly poor economies and depressing it or leaving it unaltered in previously rich economies.Thus,

A naive and superficial interpretation of (1) is that colonialism was good for some economies and badfor others. The suggestion that colonialism had a positive externality is not entirely new, see, e.g.,Peter Bauer (1976, 1984). Even more recently Stephen Ellis (2005) has argued for the benefits of re-creating international trusteeships for those African countries whose governance is totally failingthem. A unique insight in AJ&R is a cogent explanation of how colonialism might have ended upbeing a positive externality for some economies and a drag for others. On the one hand, AJ&Robserve that previously poor economies adopted European �institutions of private property�, suchas formal forms of markets, which permitted voluntary exchange of property rights, which in turnencouraged private investment. On the other hand, institutions of expropriation (�extractiveinstutions�) characterized rich economies and there they either discouraged investment or distortedinvestment incentives. Hence, the notion that the interaction of institutions and �the opportunity toindustrialize� is responsible for long-term economic performance is a reasonable one. Or is it?

(1)

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G AJ&R (2001): Colonial Institutions as Origins of Economic Development

The central hypothesis in AJ&R (2001) is that economic performance over time is a function of theevolution of institutions. In a comparative sense the poverty of many African countries is due toworse institutions in those countries than in other countries of other regions (p. 1372). Currentinstitutions originate from early (colonial) institutions, which in turn depended on settler mortalityrates. In other words,

In this paper AJ&R are not alone. Barry Ickes (2005) blames the economic pathology of somecountries on dysfunctional self-preserving and self-propagating institutions in those countries. Butwhy should the geographical distribution of dysfunctional institutions be so heavily concentrated inAfrica, for example?

G AJ&R (2005): Trade-induced Institutional Change and European Economic Growth

Using the framework now well-developed from the other two papers, AJ&R (2005) argue thatEurope�s economic performance was a result of institutional change, but that in this case institutionalchange depended on foreign trade, especially Atlantic trade. Briefly,

This paper is the most controversial of the three papers in my judgment. Many economies haveengaged in trade, including Atlantic trade, for that matter. Examples later. For now the question is:Why did trade have the effect AJ&R describe on Western Europe and not elsewhere in the world?If correct, do AJ&R�s results dispute the notion that trade is mutually beneficial to trading partners?For that matter, is trade that unfair and its outcome that unequal? I reflect on these and similarquestions next below.

2. Reflections

AJ&R�s reversal of fortune hypothesis, even without its brilliant econometric (empirical) component,challenges the geography hypotheses adequately. In the scheme of bio-geologic time, the geographyof the world has changed very little over the past 500 years. Hence, while the geo-political world haschanged in many and important ways, AJ&R are right on target in insisting that it makes little senseto say that previously poor economies are now better-off than previously rich economies becausegeography has changed in ways favoring the former. Better is the notion that institutions driveeconomic performance.

The difficulty about the institutions hypothesis is that institutional change leads to asymmetricperformance outcomes. It reverses per capita performance (income) upwards in previously poor

(2)

(3)

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3By one estimate in 1913 there were 18,362 German colonists in Africa of which 12,292 were in SouthWest Africa (Cockram, 1976, p. 167). The number was only 105 in 1893 (Wellington, 1967, pp. 188-190).

countries and downwards in previously rich economies. This is rather a peculiar and unnatural resultto the extent it suggests, for example, that in Northern Rhodesia (Zambia) and Southern Rhodesia(Zimbabwe) British colonists, somehow and deliberately so, established extractive institutions(institutions of expropriation) that were unsupportive to investment, while in Australia they puttogether institutions of appropriation that encouraged investment. Contemporaneous evidence, someof which AJ&R cite, clearly shows that the Copperbelt (Zambia) and Wankie (Zimbabwe) were amongthe most profitable copper and coal mining complexes in the world, which questions why extractiveinstitutions should have arisen in Zambia and Zimbabwe and institutions of appropriation in Australiaand other neo-Europe (Szentes, 1985, McCord and McCord, 1986).

AJ&R�s theoretical story is both good and credible, but reality is often uglier than theory. In KingSolomon�s Mines Revisited William Minter (1986) tells us that the British, Germans, and SouthAfricans invested heavily in diamond, gold, coal, chromite, asbestos, lead, zinc, copper, and platinumas mining activities expanded northwards from South Africa, while Belgian and French investmentsexpanded copper mining southwards from the Congo. These huge investments, even by today�sstandards, facilitated rail and other transportation networks, and appear not to have been deterred byinstitutions of expropriation as AJ&R claim. What we see happening are highly productive extractiveprojects yielding high profits, some of which end up in international financial markets where theyfinanced business ventures outsides Southern Africa, e.g., in Australia ( Cooper, 1983, Szentes, 1986,Johnson, 1974). And so the immediate effects of extractive institutions on economic performance werepositive for the colonists and their home country. For the colonies the effects were largely negative,and constitute a �plunder�, as AJ&R correctly point out in at least one place in their paper, but a typeof plunder quite distinct and independent of extractive institutions.

AJ&R are aware of the difficulties implicit in their hypothesis, and their second paper (AJ&R, 2001)appears to have been aimed at addressing some of these problems. Here �the origins of comparativedevelopment� are in institutional change, not just in the existence of appropriative or expropriativeinstitutions. In that case Africa�s poverty, for example, becomes a function of worse institutionalconditions. A general proposition that emerges is the notion that current economic performancedepends on current institutions. Current institutions began with early institutions, which in turndepended on the growth of colonial settlements. Colonial settlements thrived only where settlermortality rates were low. The hypothesis is beautiful, yet looking back with the benefit of hindsightlow mortality rates favored only South Africa on the African continent. However, to be somethingother than a sophisticated restatement of the geography hypothesis, the institutions hypothesis mustaccount for its apparent inconsistency with then contemporaneous, albeit anecdotal evidence. ManyEuropeans settled in Africa outside of South Africa. Kenya, for example, was known as the �British�White man�s Africa�� (Minter, 1986). The Germans called Namibia (Sudwes Deutschland) �our ownplace in the sun� (Cockram, 1976, Wellington, 1967, Solf, 1919, Voeltz, 1988 ). In fact, there weremore German settlers in Namibia at that time than there were anywhere else.3 Even if we were toaccept that European colonists settled mainly in South Africa for climatic (geography) reasons, we

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4To-date if you picked any old-style capitalist, there is a 75% probability that their fortune can be traced tomining in Southern Africa.

cannot escape the fact that the colonial enterprise in South Africa had economic tentacles reaching farbeyond South Africa itself. Some of these tentacles are still thriving today even where colonialsettlements, and hence institutions of appropriation, never formed fully (see Jared Diamond�s chapteron Southern Africa). Given all that, the net positive effects of colonialism on both Kenya and Namibiaare indeed spotty, even as we note significant transfers of natural resources from Southern Africa tothe western countries in both Europe and America (Cooper, 1983, Minter, 1986).4 And so colonialinstitutions may have enriched others, but generally they impoverished Africa .

AJ&R�s (2005) paper is no less fascinating. Here focus is on the economic rise of Western Europepost-1500. Again the authors attribute such a rise to institutional change brought about by AtlanticOcean trade as measured by trade volume and access to seaports. The interaction between trade andpolitical institutions led to structures (executive and otherwise) of, and incentives for, private propertyrights. AJ&R�s emphasis on the interaction of the determinants of economic performance is especiallynoteworthy. Amavilah (2005) demonstrates the implications for technological change and economicgrowth of resource intra-actions and interactions and concludes that intra- active and interactiveeconomies are more productive than those that are not. Of course, one can still not overlooktheimportance of other factors and events such as war, Roman heritage, geography, and religion havebeen important. And so the suggestion that trade-induced institutional change led to Western Europe�seconomic rise raises just as many questions as it solves.

I am not an expert in European history, nor a historian of any kind for that matter. However, I knowjust enough from the experts to say, for good or bad, that economic progress in Europe from the1300s to the late1600s depended more on factors and events such as the Black Death, the Medicibanking scheme (Schevil,1949), farm husbandry, the German Peasants� War, Poor Laws, Enclosuresand associated inflation, the technological advancement which trade embodies, and science as a basisfor knowledge in general than on exports and imports a la Thomas Mun and pattern of trade a la R.H. Tawney (see Open University, 1996). Much is already known about these topics; next below Itouch upon them only randomly.

It is important to point out that long before Jared Diamond�s (1997) Guns, Steel, and Germs there wasGuns, Sails, and Empires in which Carlo Cippola (1965) argued that European imperial power(economic and otherwise) during what he called the �Vasco da Gama era� stemmed from �seamastery� enabled by sails and gun-making technologies. The latter allowed substitution of steelcannonballs by bullets made from cheaper metals, and guns made from bronze and churchbells whichhad overtaken wrought iron. Since at that very same time she was disunited by internal wars, and theMongols and Turks were militarily strong enough to cut off the flow of spices from the Near East,Europe sought Atlantic seaward expansion. Sails and guns came in handy in this imperial expansionas bronze ordinance and such were made from copper and tin available from mines in Germany,Hungary, England, and Spain. Moreover the growth of metal production accompanied technicalprogress - a key determinant of the European rise that predates Atlantic trade by many years indeed.

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I add more to this point later.

Another difficulty I had in reading AJ&R is that they use economic growth and progressinterchangeably. I am sold on the broad assertion that while economic growth is objective, progressis growth plus some ethical requirement that supposes a desirable direction: we can have growthwithout equality; progress that does not advance welfare is an oxymoron (Nesbit, 1980, Bury,1932).In other words, growth is a revolutionary reaction; development is a reactionary evolution. On thatpoint, one can argue that things have changed a lot even in Africa. An Angolan student returning homefrom four years of study abroad would hardly recognize his/her neighborhood in the capital cityLuanda. Objective growth of the city has meant new buildings and a fast rate of urbanization. In onlyfour years the city has performed well quantitatively, but qualitatively it has no progress to report.

The little example above suggests that AJ&R may have assigned much too large a role to cities. It isno surprise that there is this unexplained simultaneity: in one sense cities like seaports are said to bedrivers of the economic rise of Western Europe; in another they are a measure of it as in the dependentvariable �urbanization�. Hence, it may be worthwhile to point out Lewis Munford�s (1961) claim thatrather than being a function of free markets as such, cities have depended on surplus rural productsand surplus population, both highly influenced by feudal lords and the Church. Hence,

[t]he over-emphasis of the role of the market as a generator of towns derives partly from the factthat historians have read present motives and incentives back into past situation; and partly itcomes from their failure to distinguish the different roles of local, regional, and internationaleffect upon the founding of towns. [Given present day technology] international trade was toolimited, [and too slow] to keep a city growing throughout a year; it promoted their growth ... [butonly] after they had been established for other purposes (p. 255, [] added).

To say international trade was too slow to feed a city is too obvious for additional emphasis; that itwas inadequate to sustain a city is supported by the fact that trade focused on �luxury wares� whiletown life depended on the domestic (internal) trade of agricultural products and crafts. In that limitedsense trade was a function of cities, and not the other way around - at least in the beginning. AsPirenne (1952) puts it, the origins of cities were social activities that motivated the trade needed tosustain social activities that were already there. In this case trade was a function of the emergence andgrowth of a merchant class (Braudel, 1986).

Furthermore, W.O. Henderson (1969, p. 14) associates Europe�s economic rise with theindustrialization process. The industrialization of Europe depended on technological progress andrevolutions: the internal-combustion engine; coal, iron, and steam; steel and electricity; and the timeelapse that allowed learning, diffusion and adoption of new technologies and associated rates ofchange. More generally the industrialization process was a function of inventors, public and privateentrepreneurship, and improving worker-employer relations. Of course, political openness was partof the deal as evident from the fact that Britain gained her technical knowledge ahead of otherEuropean countries by adopting, for example, mining engineering from Germany, canal-building from

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5Britain�s early success at bridging the gap between the �know-how� and �know-why� explain in part howthe country ended up leading the Industrial Revolution.

6After all, the scientific greats and other pioneers in history �lived this era�: Newton, Locke, Leibniz,Bach, Montesquieu, Quesnay, Linnaeus, Franklin, etc.

7Take note of the paradox that feudalism prevented tsarist Russia from early industrializaion, but adifferent type of dictatorship under Stalin forced the USSR to industrialize very quickly.

8Again that wars can demote as well as promote economic performance is supported by the fact thatwealth building in the 20th C was closely correlated with upheavals: WWI, the Great Depression, WWII, the KoreaWar, the Vietnam War, the Arab-Israel War, the Cold War, and more recently the Gulf Wars.

Holland, and civil engineering from France (Birnie, 1930).5 Again, objective growth is not the samething as socioeconomic progress. What put Britain ahead was also social adaptability which did notbar the development of the middle-class. The emergence of a middle class then promoted socialmobility, an educable work force, free entrepreneurship, and social acceptance of modernity. French,and more so Russian, feudalism did not permit all the above. Thus, Fischer (1996) makes a good pointin saying that the economic rise of Europe depended on the Enlightenment (Gay, 1969, Hof, 1994).6

This means that while wealth and income favored the powerful, knowledge had the effect of levelingthe playing field - and it did so in Europe earlier than in other places. But that only brings back thequestion: Why did Europe get �enlightened� first, and how and why did Europe �reform� in light ofthe Enlightenment? Answers to this and similar questions will inform growth and development policyand research.

And there were wars. Wars and other violent upheavals have also acted as a drag and promoter ofEurope�s rise to economic supremacy. For examples, diseases reduced the population in the 14th C,such that Lander (1974) describes 15th C England as having had a mixed scent of blood and roses. Theproblems of the 14th -15th centuries may have motivated outward trade so that by the 16th C thepopulation started to grow again, and along with it there were declines in available land or increasesin rent. The general price level was also increasing as a result of treasures coming into Europe fromthe Americas. At the same time financial institutions were emerging with the Medici family in aprominent position. The growth of money supply from an expanding financial sector put a downwardpressure on wages, leaving peasants with the heaviest tax burden. The instabilities that ensued(droughts, famine, diseases) permitted riots against grain monopolies. Not surprisingly the 17th Cbecame the �great dearth� century - mortality went high up and fertility way down. ConsequentlyEuropean armies grew for fiscal policy reasons. The century of �great dearth� only came to a closewith the Enlightenment when the general price fell, real wages rose, and rents and interest ratesdeclined. This period of relative political stability gave England a chance to democratize, but militarydictatorships continued in France and Russia.7

In sum: while during the 1500s treasures from the New World swelled Europe�s coffers, by the 1700smetal prices, rent, and interest rates rose sharply and wages tumbled. This period was marked byrevolutionary wars (USA, France, etc.), and compared rather unfavorably to the Victorian era whichsaw only three wars, and in which wages rose faster than rent; and interest rates stagnated.8

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9This reminds me of my impressions of Disneyland�s attraction - The Pirates of the Caribbean. AJ&R arecorrect: an economy organized like that lacks incentives for investment for obvious reasons and will most likely

Another important determinant of Europe�s economic rise was the role government played in creatingcredit banks and joint-stock companies, thereby promoting private property rights which first spurredmanufacturing, and then financed sea routes. Government policy with respect to free trade laws, therepeal of Corn Laws, and reduction in import duties did much to help trade flourish. In this case,government activities induced institutional change. Trade came later, and it too not without significantgovernment support. But by the time trade came along in a significant way, Europe had already risen.Like AJ&R, Nick Barbon (1690) in A Discourse of Trade wrote about trade as the key to economicperformance. However, in Discourses upon Trade, while agreeing with Barbon that high interest andrestrictions hurt trade, and that �Wealth cannot be maintained without Foreign Trade�, Dudley North(17-) cautioned that �Nor in truth can Foreign Trade subsist without the Home Trade, both beingconnected. It is Peace, Industry, and Freedom that brings Trade and Wealth, and nothing else� (p.127). This is consistent with recent observations. Jong-Wha Lee (1996), for instance, notes for SouthKorea that under conditions of peace and economic freedom appropriate government intervention firstaffects institutions and trade later.

From that narrow perspective, history does seem to support Frankel and Romer�s (1999) questionabout whether or not trade causes growth (see also Amavilah, 2002). Part of the problem is thatEurope was neither the only, nor the most, foreign trade-oriented region. H.G. Wells (1940) indicatesthat boat technology is Neolithic; long before Europe�s seaward expansion it existed in Egypt, Ireland,the Upper Ganges regions, and Alaska-America-Siberia, to mention just a few places. Thus, while forEurope seafaring came late as a way of postponing diminishing returns to land and an escape tofreedom from the local socio-cultural constraints associated with monarchs and the Church, theSummerians had ships on the sea as far back as the 8th Century B.C. History also shows a thrivingCrete-Egyptian trade in textiles, pottery, fine arts, and gems, ivory and metal works. The ancient cityof Carthage traded with Africa by land and sea southward past the Gambia. In fact Hutchison (1962)tells us that the Herodotus people circumnavigated Africa long before W. Europeans did (cf. Grant1969). It would seem that the existence of trade alone is not a sufficient condition for institutionalchange. Hence, an inevitable question is: What was it about trade, or Europe, or institutions, thatpermitted progressive institutional change?

I am asking these silly questions because B. Malinowski (1961), for example, describes South SeaIslanders as �expert navigators and traders� who �evolved excellent types of large sea-going canoes�(p.1). The Kula, for instance, had two types of trade: primary and secondary. Primary trade was mainlyexchange of essential goods and services available locally. Secondary trade involved �voyaging to faroff countries endowed with natural resources unknown� locally. Both kinds of trade requiredsophisticated social organization to carry out. Indeed, Malinowski�s account agrees with MelvilleHerskovits�s (1952) analysis that trade was well advanced in so-called primitive societies. For thesesocieties trade had a prestige value (non-economic exchange value) and an economic exchange value.However, the gains from trade in primitive economies were limited not only by the extent of themarket, but also by a missing domestic investment function.9 Many markets were regional, seasonal,

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never grow, but that is not because pirates become worse at pillaging.

10Michael Tigar and Madeleine Levy (1971) assert that Law (natural law, law merchant, royal law, canonlaw, feudal law, and Roman law) determined capitalism. In Europe revolutions by the �potentiores burgenses(powerful bourgeois)� and earlier by the �pies poudreux (dusty feet)� merchants both had basis in the law (pp. 3-4).

and the business enterprise, credit, and value, all were too complicated. Consequently, barter was onlyan intra-tribal, whereas trade was an inter-tribal, activity (Herskovits, Chapters VIII and IX), whichguaranteed that each economy ended up having three distinct and competing sub-economies:subsistence, commercial, and prestige.

Again, I am not disputing the value of trade in W. Europe�s economic performance that AJ&Respouse. Diffie (1960) tells of the centrality of �the reign of Dinis (1279-1385)� in the Portugueseempire. It all came about by accepting and blending Portuguese culture with French and Spanish,especially in matters of law, education, and military orders.�Commerce and agriculture also receivedthe aid of the industrious Dinis. King of the sea-minded people, he (Dinis) was one of the most apt ofa line of commerce-minded monarchs� (p. 39) in Europe.10 In this case both trade and leadershipmattered (Jones and Olken, 2005). The question remains: what is it about trade that led economicprogress in Europe and not in say China? Shiba Yoshinoba�s (1970) collection of abstracts -Commerce and Society in Sung China - shows that China had sea-going technology early (cf.Kennedy, 1987). And so agreeing with AJ&R that the institutions hypothesis trumps the geographyhypotheses, is not saying geography does not matter at all. I know from D. Obolensky (1971) thatgeography limited the growth of the Byzantine Commonwealth and other Balkan civilizations - EasternEurope. However, that only shows that trade cannot be expected to be a significant determinant ofeconomic growth there. A proper comparison would be among countries that could trade by theAtlantic Ocean but did not and their economic performance suffered because of it. From Toynbee(1946), as from new growth theories (Rogers, 2003 , Islam, 2004), we know that challenges can beblessings: �Venice sits on a salt lagoon, Holland was salvaged from the sea�, and respectivelySwitzerland and Dubai learned to turn mountains and desert into productive resources. All theseexamples point out that technical progress can succeed, and often it does, when it becomes�progressive simplification or etherialization� (Toynbee, 1946, p.198). But adds Toynbee

the single finite movement from disturbance to a restoration of equilibrium is not enough ifgenesis is to be followed by growth. And, to convert the movement into a repetitive, recurrentrhythm, there must be an elan vital (to use Bergson�s term) which carries the challenged partythrough equilibrium into an overbalance which exposes him to a fresh challenge and therebyinspires him to make a fresh response in the form of a further equilibrium ending in a furtheroverbalance, and so on in a progression which is potentially infinite (AJ Toynbee, 1958, p. 187).Growth is achieved when an individual or a minority or a whole society replies to a challengeby a response which not only answers that challenge but also exposes the respondent to a freshchallenge which demands a further response on his part (AJ Toynbee, A Study of History, 1958,p. 241).

In that instance the resource curse is a non-issue issue. This is consistent with recent interpretationsof the resource curse hypothesis. Davis and Tilton (2005), for example, argue that it is not geography

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per se that matters; it is how it is used - bad use of it leads to bad outcomes, good use to goodoutcomes. This interpretation is echoed in Diang and Field (2005) who cogently demonstrated thatoften the resource (geography) curse is simply mismeasurement of resource dependence for resourceabundance. Resource dependence should have negative effects on economic performance, andresource abundance could have positive effects.

3. Concluding Remarks

AJ&R�s three papers enrich economic understanding not only of the role of institutions in economicperformance, but also of the importance of the economic history of institutions. They vividly portraythat institutions are always interactive, and as such each institution has its eventful life-cycle. Thatstatement is probably obvious; what is not is that one cannot then say that European institutions arebetter for economic performance than non-European institutions. While the evidence that AJ&Rlooked at supports the limited rule of institutions, one can still argue it does so tautologically andstylized-factly. Pushed to the extreme the case for asymmetric �reversal of fortunes� remainstroubling, for while on one hand �institutional reversal� is a sound alternative to the geographyhypothesis, on another it formalizes a tautological syllogism which partly explains why Europeaninstitutions have had asymmetric effects on different economies. It seems [to me] that Europeans setup institutions that served their best self-interests; permanent settlement need not be one of those self-interests. If so, one can expect extractive institutions where there is low cost of extracting andtransferring rents. Assuming that colonies were perfectly contestable in the Baumol-Panzar-Willig�ssense (1982), colonists� hit-n-run behavior were rational and extractive institutions were just aboutthe right policy for them. Alternatively where extractive costs were high and/or investment long-term,institutions of appropriation became vital. As H.S. Esfahami (2000) argues incentives for interventionare greater the largesr the cost of generating rents.

So, AJ&R�s question: �Why did European colonialism lead to institutional reversal?� is not aspregnant with further research potential as its corollary: �Why did institutional reversal lead to goodperformance of some economies and bad of others?� Part of the answer to the latter may lie in thatwhere the profit-to-cost ratio was high, the best policy action for the colonists was to collect their rentand move on. Where profits entailed a long and costly accumulation (irreversible investment) process,settlers set up base and waited. In both cases Europe either won or did not lose. In the case of coloniessome lost, while others either won a little, or remained unchanged. Thus, decisions about whether ornot to settle were made on the margin as the economic way of thinking teaches.

Reading from the recent economic history of Europe the validity of the geography hypothesis was afunction of economic structure (Birnie, 1930). When the economy was agrarian, geography matteredmost for its performance. For one, population growth was high, surplus was low, and trade waslimited. Hence diminishing returns to land and inter- and intra-resource competition, not to mentionforeign competition, led to a shift towards industrial production (cf. Amavilah, 2005). The fall in landproductivity was offset by a rise in labor productivity made possible by capital accumulation in additionto specialization with and without trade which improved production and consumption possibilities.

However, institutional change led to cultural change, i.e., it changed the social organization of society.

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11The is some painful truth to Turnbull�s imagery of �the lonely African� intellectual stuck between twoworlds.

Changing the �social economic organization� as Frank Knight (1951) has called it, alters irreversibly,for good or for bad, traditions, skills, knowledge and values of a society (Malinowski, 1961, White,1959, Desrochers, 2001, Platteau, 2000). Essentially it had the effect of turning the clock backwardsdepending on how fundamental and dramatic the social change was, and how much society couldabsorb. In Africa and a few other places in other regions the pendulum had swung too far backwardsso that Mancur Olson�s institutional sclerosis (arthritis) and poor performance were an inevitableinheritance - for now (Choi, 1983, Mueller, 1983).11

�For now� - because European economic history also shows that as economies came to depend moreand more on industry, labor-productivity went up and foreign trade became a "vent-for-surplus" " thatgives a value [to] superfluities, by exchanging them for something else, which may satisfy a part of[traders'] wants and increase their enjoyments," thereby lifting the "narrowness of the home market"that tends "to hinder the division of labor" (Smith in Thirlwall, 1982, p.338, cf. Allyn Young, 1928,Hicks, 1966, Kaldor, 1966, 1978). The disorganizing effects of the industrialization process in Europemet stiffer resistance in France and Russia than in Britain for reasons outlined above, but it lastedlonger in Russia than in both Britain and France. This is not unlike what has happened in Africa andother developing areas. As Bert Hoselitz (1952) pointed out, many developing nations remain stuckbetween two attractive poles of gravity: tradition on one hand and modernization and its tradition-wrecking influences on the other. The conflict between these two attractors impedes policy and delayseconomic performance. This assertion makes good sense; under competition few economies wouldhave a large enough comparative advantage to allow them to produce an efficient mix of modern andtraditional goods or services. Thus, while it is clear that institutional change led to industrialization,it is not as clear that trade led to institutional change. What seems clear, using Martin Bell and KeithPavitt�s (1997) taxonomy, is the role of technology. Here trade depends on industrial output whichis determined by production capacity (cf. Taylor, 2000). Production capacity is a function of technicalchange (cf. Amavilah and Newcomb, 2004). Technical change is endogenous in that it depends ontechnological capability which itself depends on technological accumulation (see Bell and Pavitt�sFigure 4.1, p.89). Technological accumulation is a function of inventions (often old inventions) andentrepreneurship, both of which depend on secure property rights flourishing. Britain�s disadvantagefrom diminishing returns to land became the source of her advantage in technological accumulation.

Europe had an early headstart in technological accumulation so that even if it is easy for newcomersto imitate Europe, the technical capability of different economies guarantee differential performance(Amavilah, 2005, Temple and Johnson, 1998, Stirling, 2003, Jonard and Yildizoglu, 1999). The resultwas a structural shift in which large productivity gains in manufacturing accompanied even larger gainsin the overall economy, the socalled Verdoorn-Myrdal-Kaldor effect (Thirlwall, 1982, Choi, 1983).

The point: institutions definitely have effects on economic performance, but differential nonetheless.Colonial institutions had positive externalities in some areas and negative side-effects in others. Thepositive net effect of European colonialism, where it existed, had gone mainly to the colonizers, with

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12As the reader know Rodney�s argument has counterarguments among them John Thornton�s (1992)which points out that the African elite of the time knowingly participated in the Atlantic slave trade. Jerah Johnson(1974) offers an alternative account.

an occasional trickle to some colonies too. There is thus some truth to Walter Rodney�s jab thatEuropean colonialism underdeveloped Africa and developed Europe.12 Or as David Landes (1966) soably put it �colonization and conquest contributed mightily to the transformation of the Europeaneconomy and society� (p.3), so that in judging the positive impact of Europe on world incomedistribution one may also want to consider whether or not of the countries that are performing wellthe majority followed distinctively European institutions and are better off because of it. Even if theanswer is affirmative, the debate will not be over for one has to distinguish which institutions areuniquely European, and be willing to assert that Europe did not learn from other regions. Of course,we know a priori that such an assertion will soon run aground and against some credible evidence.For instance, Wallerstein (1985) sees the integration of Africa into the world capitalist economy inthree phases, two of which represent contributions to the rise of Europe and one to the fall of Africa.Without elaboration the three phases were: the Atlantic slave trade, Africa as a supplier of rawmaterials, and Africa�s dependent development. Unfortunately, there is simply no one source ofeconomic performance for any country, and the search for solutions must continue to broaden(Fafchamps, 2000, Aulin, 1998).

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