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Economics is a study of the distribution of resources. This distribution plays a key role in determining the fortunes of societies around the world. When economists observe the disparities seen today, in terms of wealth but also in terms of certain unquantifiable factors, the intuitive reaction would be to understand why it is so and how to arrive at a fairer allocation. Why, for example, are North America and Europe so prosperous but Africa and South America are not? To answer questions such as these, researchers have to conduct a retrospective analysis. Certain events in history have shaped the world of today, and by understanding how that happened, we might be able to come up with solutions to the problems we face currently.

Over the last 200-300 years, the world has been shaped enormously by the act of colonialism. Around the 1500s or 1600s, there was a shift in the power balance of the world. The great empires of the East began to lose some of their prestige, and at the same time, small kingdoms in Europe were on the ascendency. The dominance of Europe over much of the world for the next few centuries was not a result of any inherent superiority, rather, there were certain specific characteristics of the European continent and their respective monarchies that allowed them to expand their empires. Each kingdom was relatively powerful and as a result there wasn’t much conflict between them. The focus was also slowly shifting more and more towards the general public, and as such the rulers themselves were less indulgent than their predecessors. A market economy was emerging and businesses began to flourish.

The fact that each kingdom was powerful and had its own advantages also meant that their militaries had to stay up to the mark. If any one kingdom gained an absolute advantage over the others, then this would pose an existential threat to all the monarchies. Military technology, therefore, be it weaponry, transportation, armour, tactics, etc. all had to constantly improve. Over a few decades the Europeans had developed technology and tactics that were far more advanced than what was available in the East.

If we look at the situation in India, which at the time was ruled by the Mughals, one would observe an empire descended into complacency. The rulers were leading decadent lives and little attention was paid to the lives of the ordinary people. There was a huge disparity between the two. The Mughals also let their guard down from a military point of view and as a result their armies would not be able to compete with their European counterparts. Expecting no imminent threat from their neighbours, the military of the Mughal Empire would be caught off guard by the distant kingdoms of the West.

Of course, there were also financial and economic factors that played a huge part. The Dutch East India Company was ruthlessly capitalistic, and it found in India a land rich with resources to exploit. Soon, the Europeans back home became enamoured with the exorbitant profits and luxury items that were being sent back, and active colonisation started garnering support. The Eastern empires were at a vulnerable point and the Europeans, only getting stronger, struck at the opportune moment.

The European superiority remained the status quo wherever they went, be it Asia, Africa, or the Americas. The existing kingdoms in these regions were simply not strong enough to deal with the European threat. The battles fought were not entirely one-sided, but there seems to have been an inevitability of the result

The following centuries saw the various European powers setting up colonies all around the world. South America was under the control of the Iberians. Africa had French, Belgian, English, and German presence, while India was ruled primarily by the English. Colonies were also set up in places like Australia, Canada, New Zealand, and the United States, where the indigenous population was much smaller and much less powerful by comparison.

We mentioned earlier how colonialism has had a huge hand in determining the outcomes of their colonies today. What has been observed around the world is that the nature of colonialism varied greatly from country to country. Some countries benefited from colonialism in a certain sense, while others continue to suffer as a result. The differences between the nature of colonisation is what we will discuss further in this article.

A study conducted by Daron Acemoglu, an economist who teaches at MIT, sought to understand the variations in colonial policies and their impact on the world today. He found that colonists set up institutions based on the liveability of their own people in that region. For example, most of Africa was uninhabitable for Europeans due to a number of environmental factors which saw the mortality rates amongst colonisers go up drastically. Diseases like malaria and dengue, which were not common in Europe, ravaged the settler population. The local population itself had developed immunity to these diseases to varying extents, having been exposed to the viruses from a young age. This meant that the colonisers themselves could not settle there, and therefore did not attempt to build any sort of society. This was reflected in the types of institutions that were set up as well, as the colonising presence was primarily extractive by nature.

If we look at other colonies like Canada or Australia, countries which are far more prosperous than the former colonies of Africa, we see a conspicuous difference in the type of institutions that were set up. These nations are populated today by the descendants of the original colonisers. Canada and Australia have similarities when it comes to the environment with the countries of Europe, and were therefore more liveable. This meant that the early colonisers who arrived on the shores were actually able to settle there and consequently built a society for themselves. This resulted in building institutions that would actually serve the people living there, as opposed to the kind of extractive institutions that countries like Congo, which was occupied by the Belgians, had to deal with.

We can see today the kind of impact that the varying colonial policies have had on these regions. The Democratic Republic of the Congo has been embroiled in one of the longest civil wars in history and the country is steeped in poverty and a host of welfare issues. On the other hand, Canada and Australia are amongst the richest countries in the world whilst also boasting a high quality of life.

India presents a unique case. The British found in India a country with vastly different environmental conditions in different regions. They had to deal with issues like malaria and dengue, but they could also settle in hilly regions which were more akin to what they were used to back home. The colonial policy also reflects this. They left behind institutions and infrastructure that have definitely helped this country grow post independence, but they also plundered the nation of its resources and left India as a poor and uneducated country. India today can be placed somewhere in between Canada and the Congo.

The disparity observed today between nations can be explained to a significant extent by the presence or lack of institutions. What are institutions and what is their role? What economists mean when they talk about institutions are things like property rights, political stability, a dependable legal system, competitive markets, and so on. The difference between ‘good’ and ‘bad’ institutions have to do with the extent to which the above mentioned characteristics are found in a country. We see good institutions in developed and rich countries like that of North America and Europe, and we generally see bad institutions in regions like Africa and Asia. Colonialism had a huge role to play in this as the colonists were the ones who decided whether or not to invest in setting up good institutions in a colony and this largely had to do with their own liveability in these regions.

This is not to say that well off countries today who were previously colonised have benefitted from colonisation itself. The agenda of the coloniser was purely self-serving, and had little to do with improving the lives of the native population. The indigenous populations of Australia and North America have suffered greatly at the hands of the early settlers, and today have little to no power in their own countries.

The main takeaway from Acemoglu’s paper is the fact that institutions have a very significant role to play in determining the future prospects of a country. This is also something that can be controlled. The poorer nations of the world today can become wealthy in the years to come. It will take time and a sustained effort, but it is possible

For feedback, write to pavan@bclindia.in

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