Colonial Origins and Comparative Development: Institutions Matter

A large literature is present on how colonial origins through the channels of Institutions and human capital explain the income variation between countries. In most cases, it is argued that colonial European settlement outside of Europe has shaped the type of institutions present today that explain the gap between income levels of countries. Others criticize this claim on the basis that firstly, geography plays a prominent role in income variation and secondly, the studies in favor of the primacy of the role of institutions suffer from measurement error and bias. In this study, we analyze the role colonial origins and geography play in comparative income levels of countries today. In this study, we present a theoretical analysis for what determines growth in the long run and how colonial origins come into play and then make an empirical study using OLS and IV techniques, while utilizing recent data and different proxies, into the claims that colonial origins and/or geography play the prominent role. We also investigate whether the institutions primacy studies suffer from measurement error. Our findings point out that while geography may play a small role, majority of the income variation is associated with institutions and colonial origins.