The long-term effects of early European settlement on local development: Evidence from Indonesia

This study addresses the long-term effects of early European settlement on today’s regional economic development in areas of Indonesia in which such settlements have been ubiquitous for more than three centuries. To establish a potential causal relationship, we exploit variations in the year that settlement began at the district level. We find that while the overall impact of the length of the settlement has a significant negative association with per capita GDP, the impacts are heterogeneous across regions. Longer exposure to settlements negatively (positively) affects per capita GDP today for districts outside Java (in Java). Longer exposure to settlements is associated with: (i) lower poverty level and poverty gap and (ii) lower birth attendance and morbidity rate. We partly explained our findings using the institutional transfer channel via improvement in the education infrastructure. Our findings imply that the increased accumulation of human capital might have a long-term impact on economic performance in the present through productivity and improvement in the quality of institutions.