Good, Bad, and Ugly Colonial Activities: Studying Development Across the Americas

Levels of economic development vary widely within countries in the Americas. We argue that this variation can be explained by differences in institutions which in turn have their roots in the colonial era. Colonizers engaged in different economic activities in different regions of a country, depending on the local conditions and the supply of native labor. Some activities, such as mining and sugar cultivation, where "bad" in the sense that they depended heavily on the exploitation of labor and created extractive institutions, while "good" activities created inclusive institutions. We show that areas with bad colonial activities have 13 percent lower GDP per capita today than areas with good colonial activities. Moreover, areas that had high pre-colonial population density have lower output per capita today, independent of the type of colonial activity. We attribute this to the "ugly" fact that colonizers used the pre-colonial population as an exploitable resource, thereby also creating extractive institutions. We present some evidence that the intermediating factor between history and current development is related to institutional differences across regions and not to income inequality or the current ethnic composition of the population.