Several economists have argued that cross-country differences in economic development today have their roots in the colonial era. For example, Engerman and Sokoloff (1997, 2002)—henceforth referred to as ES—argue that different types of economic activities that the colonizers engaged in led to different growth paths. They claim that the link between colonial activities and current-day levels of economic development is as follows. In many areas, colonial society was very unequal, giving political rights only to a few landowners, while repressing most of the population through slavery or forced labor. Consequently, institutions that developed during colonial times were designed to protect the rights of only a few. These institutions persist until today and constrain economic development. To give one example, many Latin American banking systems developed primarily to serve a wealthy elite, restricting access to finance for the rest of the population.
In a paper I recently co-authored  with Francisco Gallego , we test empirically whether areas with different types of colonial activities do indeed have different levels of economic development today. We use within-country data for 345 regions in seventeen countries in the Americas to do this. We rely on within-country data because colonial activities varied considerably even within countries (for example, the northeast of Brazil grew sugar, while many states in central and southern Brazil had large cattle ranches). Moreover, in our sample, levels of development vary almost as widely within countries (between regions) as they do between countries.
In our paper, we classify regions into four groups, based on ES’ argument:
(i) No colonial activities - these are areas that were only settled after colonial times;
(ii) Good colonial activities;
(iii) Bad colonial activities; and,
(iv) Ugly colonial activities.
The distinction between good, bad, and ugly colonial activities depends on two factors 1) whether the activity exhibited economies of scale, implying that it was more economically efficient to perform the activity on large slave plantations rather than on small plots owned by individual proprietors; and 2) whether there was a large native population present in an area before colonization. Figure 1 summarizes the classification of colonial activities into good, bad, and ugly.
Figure 1: Classification of Colonial Activities into Good, Bad, and Ugly
“Good” colonial activities were those that did not display economies of scale, such as the cultivation of subsistence crops, that were performed in areas with low pre-colonial population density. These areas were typically characterized by small plots owned by independent proprietors, leading to a relatively egalitarian society in economic and political terms. We call these activities “good” in the narrow sense that ES associate them with high levels of long-run development rather than as any kind of endorsement of colonialism.
“Ugly” colonial activities also cover activities that did not display economies of scale, but were performed in areas with a large native population. Ugly colonial activities existed for example, in Spanish colonies, where the Spanish Crown granted a small number of individuals land and claims on labor and tribute from natives. This led to the creation of large-scale estates with forced labor even where these activities did not display economies of scale. We call these activities “ugly" since they relied primarily on the native population as an exploitable resource. ES associate this with low levels of long-run economic development.
“Bad” colonial activities are activities with economies of scale, such as sugar, coffee, rice, and cotton cultivation. Production of these crops on large slave plantations was so profitable (in part because there was high demand for these products in Europe) that land owners could import forced labor if too few natives were present in an area. Thus, bad activities could be performed even in areas with low pre-colonial population densities. Given the economic efficiency of large plantations and the extensive use of slaves, economic and political power became highly concentrated in the areas with bad colonial activities, leading to institutions that commonly protected the privileges of the elite and restricted opportunities for the broad mass of the population, which in turn led to “bad” long-run economic outcomes.
In my paper with Francisco, we demonstrate empirically that these various types of colonial activity are still associated with differences in economic activity today. We control for a range of factors that might also have had an impact on this relationship, e.g. climate and proximity to the sea, but find that the relationship between colonial activity and current economic activity persists in our data. Figure 2 below shows our results. Areas that had good colonial activities have basically the same level of GDP per capita today as areas that experienced no colonial activities. However, areas that suffered from bad colonial activities today have about 30% lower GDP per capita, and areas that suffered ugly colonial activities have about 15% lower GDP per capita than areas with no or good colonial activities. These differences are statistically significant and they are quite large, given that, on average, GDP per capita varies by 40% across regions within our sample of countries in the Americas.
Figure 2: GDP per capita in 2000 (PPP)
Engerman, Stanley L., and Kenneth L. Sokoloff. 1997. “Factor endowments, institutions, and differential paths of growth among new world economies." In How Latin America Fell Behind, ed. Stephen H. Haber, 41-109. Stanford, CA: Stanford University Press.
Engerman, Stanley L., and Kenneth L. Sokoloff. 2002. “Factor Endowments, Inequality, and Paths of Development among New World Economies." Economia, 3(1): 41-109.
Bruhn, Miriam and Francisco Gallego. 2010. “Good, Bad, and Ugly Colonial Activities: Do They Matter for Economic Development? ” The Review of Economics and Statistics, forthcoming.