The Economic Impact of Colonialism

The economic nuances of colonialism have always been a topic of debate. Many writers have described the economic system behind colonialism in a variety of ways. However, most economics regard colonialism as an extraeconomic hegemonial relation designed primarily for exploitation. As most existing nations have emerged from colonialism, the economic impact of colonialism is even prevalent today. Some economists have also defined colonialism as a positive force for the once colonized nations. Nevertheless, an accepted fact among all economists and writers is that colonialism has had a severe economic impact on the history of the world.

The immense economic inequality we observe today didn’t happen overnight. The present and lasting impacts of colonialism has been derived out of a multitude of historical processes. One of the most important phases was the era of European colonialism. Colonialism has shaped modern inequality in several fundamental, but heterogeneous, ways. The European discovery of America was a prominent event in the history of colonialism. Subsequently, after the colonization of America, the Europeans established their roots in Asia and Africa. Such a movement helped to spur institutional and economic development and set the prerequisites of the industrial revolution. Colonialism was also affected by the internal situations in the colonizing countries. For example, the way colonialism worked was dependent upon the institutional differences within Europe. In Britain, early resistance against the monarchy gave the upper hand to the parliament and the society. The discovery of America led to the further empowerment of the mercantile and textile industry, which were able to benefit from the new economic opportunities that America and Asia presented. Such communities also pushed for improved economic and political institutions. Economic growth, therefore, was a byproduct of such shift in dynamics. Spain was another prominent colonizer. The political and economic institutions in Spain were disparate from those of Britain. Therefore, the outcome of colonization was also different. The monarchy had a stronghold over the functioning of the country. They dominated trade, society, and economic opportunities, and in consequence, the political institutions became weaker, and the economy declined.

Colonialism not only impacted the societies that did the colonizing, but also affected the societies that were colonized. Every nation that was colonized became the birthplace of distinct cultures and values. Different institutional legacies were left in different parts of the world. The institutions that were set up by the colonizing nations on the colonized countries were the same. However, the initial and implicit conditions that were pre-prevalent in the colonized countries modified the imposed institutions and led to the emergence of distinct societies. For example, in Latin America, where there were dense populations of indigenous people, a colonial society could be created, based on the exploitation of these people. In North America where no such populations existed, such a society was infeasible, even though the first British settlers tried to set it up. In response, early North American society went in a completely different direction: early colonising ventures, such as the Virginia Company, needed to attract Europeans and stop them running off into the open frontier and they needed to incentivise them to work and invest. The institutions that did this, such as political rights and access to land, were radically different even from the institutions in the colonising country. Circumstances similar to Latin America were found in African countries like South Africa, Kenya and Zimbabwe. On discovering this, the British thought that they were perfectly capable of setting up ‘extractive institutions’. Extractive institutions strip the vast mass of the population of incentives or opportunities. Therefore, they also cause poverty as a by-product. It is also not a coincidence that African societies are as unequal as Latin American countries in the status quo.

The disease environment in the potentially colonizable nations was also a determining factor for the Europeans. North America was a prime target for European colonization because of the relatively benign disease environment. Something that encouraged the colonisation of North America was the relatively benign disease environment that facilitated the strategy of creating institutions to guarantee European migration. Something that encouraged the creation of extractive institutions in West Africa was the fact that it was the ‘white man’s graveyard’, discouraging the creation of the type of ‘inclusive economic institutions’ which encouraged the settlement and development of North America. These inclusive institutions, in contrast to extractive institutions, did create incentives and opportunities for the vast mass of people.

Thus, just as colonialism had heterogeneous effects on development within Europe, promoting it in places like Britain, but retarding it in Spain, so it also had very heterogeneous effects in the colonies. In some places, like North America, it created societies with far more inclusive institutions than in the colonising country itself and planted the seeds for the immense current prosperity of the region. In others, such as Latin America, Africa or South Asia, it created extractive institutions that led to very poor long-run development outcomes.

That colonialism in the early modern and modern periods had heterogeneous effects is made plausible by many other pieces of evidence. For example, Putnam (1994) proposed that it was the Norman conquest of the South of Italy that created the lack of ‘social capital’ in the region, the dearth of associational life that led to a society that lacked trust or the ability to cooperate. Yet the Normans also colonised England and that led to a society which gave birth to the industrial revolution. Thus Norman colonisation had heterogeneous effects too.

Colonialism mattered for development because it shaped the institutions of different societies. But many other things influenced these too, and, at least in the early modern and modern period, there were quite a few places that managed to avoid colonialism. These include China, Iran, Japan, Nepal and Thailand, amongst others, and there is a great deal of variation in development outcomes within these countries, not to mention the great variation within Europe itself. This raises the question of how important, quantitatively, European colonialism was, compared to other factors. Acemoglu et al. (2001) calculate that, according to their estimates, differences in economic institutions account for about two-thirds of the differences in income per-capita in the world. At the same time, Acemoglu et al. (2002) show that, on their own, historical settler mortality and indigenous population density in 1500 explain around 30% of the variation in economic institutions in the world today. If historical urbanisation in 1500, which can also explain variation in the nature of colonial societies, is added, this increases to over 50% of the variation. If this is right, then a third of income inequality in the world today can be explained by the varying impact of European colonialism on different societies.

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