3.1. Institutions and development: the dominant view

The empirical literature on institutions and economic development has been dominated by Acemoglu et al. (Reference Acemoglu, Johnson and Robinson2001, Reference Acemoglu, Johnson and Robinson2002, Reference Acemoglu, Johnson and Robinson2003a, Reference Acemoglu, Johnson, Robinson and Thaicharoen2003b), Acemoglu and Johnson (Reference Acemoglu and Johnson2005), and Rodrik et al. (Reference Rodrik, Subramanian and Trebbi2004). Their main argument is based on the statistical significance of the institutional quality variable in a cross-country regression model and the following hypothesis. They assert that the Europeans resorted to a different style of colonization, depending on the feasibility of settlement. In a tropical environment the settlers had to deal with malaria and yellow fever and they faced a high mortality rate. This prevented them from settling in a tropical environment, and resource extraction became the most important if not the only activity in these colonies. In order to support these activities, the colonizers in the tropics and the sub-tropics erected institutions that were extractive in nature. On the other hand, in temperate conditions European settlers felt more at home and decided to settle. In these places they erected institutions characterized by strong protection of property rights and efficient enforcement of contracts. These institutions persisted over time and influenced the incentive structure in these societies. In settler colonies the incentive structure became more favourable towards capitalist development, whereas the non-settler colonies experienced the opposite. The shaping of the incentive structure during the colonial period has a long-run impact on economic development, which is reflected by the current standard of living of these places. As we all now observe, the settler colonies are more prosperous than the non-settler colonies, but all of this can be traced back to their respective institutional origins.

Solid as rock as it may appear, this theory suffers from the problem of isolation. Even though disease environment features as an initial condition for future institutions, this link is not explored any further in the literature. The other problem is that the story is only relevant for former colonies; it bears no significance for countries that were never been colonized. The theory also suffers from lack of formalism. The only attempt to formalize this theory is Nunn (Reference Nunn2007), which is Africa specific. The lack of a general model still confounds the empirical findings in this literature.

Furthermore, the empirical literature mainly focuses on private property rights and enforcement of contracts as institutions (see, Acemoglu et al., Reference Acemoglu, Johnson and Robinson2001, Reference Acemoglu, Johnson and Robinson2002; Acemoglu and Johnson, Reference Acemoglu and Johnson2005; and many others).Footnote ⁴ It also uses the rule of law index as an overall measure of institutions (Rodrik et al., Reference Rodrik, Subramanian and Trebbi2004). Even though these measures serve well in terms of capturing the overall effect of institutions on economic progress, they do not provide a more detailed account of what institutions mean. The literature mainly follows Douglass North's definition that, ‘institutions are the rules of the game in society or, more formally, are the humanly devised constraints that shape human interaction’ (North, Reference North1990: 3).Footnote ⁵ However, more often than not, they only focus on the ‘humanly devised constraints’ that create incentives for economic and political exchanges, without taking into account the role of institutions that promote trust and facilitate social exchanges. North (Reference North1990) makes a distinction between formal and informal constraints. However, these distinctions are not free from ambiguities (Hodgson, Reference Hodgson2006). Some scholars identify ‘formal’ with ‘legal’ and ‘informal’ with ‘nonlegal’ (see Djankov et al., Reference Djankov, LaPorta, Lopez-de-Silanes and Shleifer2003 and LaPorta et al., Reference LaPorta, Lopez-de-Silanes, Shleifer and Vishny1999) and others take it as a distinction between explicit and implicit forms of constraints. North (Reference North1990) however does not make this distinction sufficiently clear.Footnote ⁶ These ambiguities in North's (Reference North1990) definition of institutions are also carried over to the empirical literature by authors who followed North's definition.

3.2. Institutions and development: an alternative view

An alternative view on institutions suggests that a nation's economic and political institutions are broadly endogenous and they come out of a dynamic game of power struggle between the different segments of the society. At every point in time this power game is being played out between formal (for example: the Monarchy, Democracy, Autocracy, Dictatorship etc.) and informal (for example: economic and social interest groups etc.) institutions, and whoever prevails shapes or reshapes the formal institutions for the future. The future institutions are shaped by the triumphant party in such a way that they get a larger share of the resources in the current period as well as the future periods. Therefore, if a group representing minority interest takes control, then it leads to persistent inequality, violation of property rights, and weakening of incentives for investment. This has negative consequences for long-run development. But if a group representing the majority takes control, then it leads to better distribution of resources, protection of private property, and strengthening of incentives for investment, which has positive consequences for long-run development. Acemoglu et al. (Reference Acemoglu, Johnson and Robinson2005a), Acemoglu and Robinson (Reference Acemoglu and Robinson2000), Engerman and Sokoloff (Reference Engerman and Sokoloff2001), and Acemoglu and Robinson (Reference Robinson2006) are the strongest proponents of this view.

Again the political power view focuses solely on institutions and their impact on development and not the links with diseases. Engerman and Sokoloff (Reference Engerman and Sokoloff2001) do look at the link between natural resource endowments and institutions.Footnote ⁷ They argue that the settlement colonies of the North and the South Americas differed significantly in terms of factor endowments, creating incongruous initial conditions. The North was favourable to mixed farming of grains and livestock, which encouraged the development of small family-size farms and a relatively homogeneous population in terms of the distribution of wealth and political power – a recipe for strong institutions. The South and the Caribbean in contrast were endowed with vast mining resources as well as climates and soil conditions conducive to commercial crops such as sugar, tobacco, and cotton. These led to the establishment of large mining firms and plantations. Mines and plantations, maintained with cheap slave labour, led to a very high level of inequality in the distribution of wealth and political power – a recipe for weak institutions. But, Engerman and Sokoloff (Reference Engerman and Sokoloff2001) do refrain from exploring the link between disease and political power.

3.3. Disease and development

The literature on disease and development is fairly recent. The interest in this area has grown over the last decade or so following the publication of quite a few influential empirical papers on this topic. Gallup and Sachs (Reference Gallup and Sachs2001) point out that the countries with intensive malaria grow 1.3 percentage points slower per person per year than countries without malaria and a 10 percentage point reduction in malaria might result in a 0.3 percentage point increase in annual per capita income growth. Bloom and Sachs (Reference Bloom and Sachs1998) also claim that the high incidence of malaria in sub-Saharan Africa reduces the annual growth rate by 1.3 percentage points a year. In other words, eradication of malaria in 1950 would have resulted in a doubling of current per capita income. Gallup et al. (Reference Gallup, Sachs and Mellinger1998), Sachs (Reference Sachs2003), and Carstensen and Gundlach (Reference Carstensen and Gundlach2006) in their empirical studies report on the strong and negative effect of malaria on economic progress, even after controlling for institutions and openness. Analysing cross-national as well as sub-national data, Lorentzen et al. (Reference Lorentzen, McMillan and Wacziarg2008) find that high adult mortality reduces economic growth by shortening time horizons. In a study specific to Africa, Bhattacharyya (Reference Bhattacharyya2007) report that high disease incidence is the major bottleneck for African development and the effect acts via household savings. However, Acemoglu and Johnson (Reference Acemoglu and Johnson2008) disagree with these findings. In a study using historical data on diseases and life expectancy, they show that an increase in life expectancy through better treatment do contribute positively to population growth but not so much to economic development.

The empirical literature is also supplemented by a growing body of work on theory. The theory models mainly argue that infectious disease has a debilitating effect on human productivity and directly affects economic performance. It also positively affects the mortality rate and the fertility rate, slowing down demographic transition and hence dampening economic growth indirectly. Chakraborty et al. (Reference Chakraborty, Papageorgiou and Perez-Sebastian2005) and Bhattacharyya (Reference Bhattacharyya2007) formalize this theory using the overlapping generation framework.

In spite of the growing interest in this area, none of the studies explores the link between diseases, institutions, and development. Diamond (Reference Diamond1997) mentions this link in chapter 11 of his book Guns, Germs and Steel. He shows the link between livestock, diseases, technology, and more complex social structure. But this construct is not exploited by any of the mainstream economic models. Hence, the same criticism of looking at diseases and development in isolation can be levelled against the disease and development literature as well.

4.1. A unifying framework for Western Europe

It is perhaps not inappropriate to divide the process of economic development in Western Europe into four different stages. The first stage is the era of the Malthusian cycle in which geography and epidemic diseases played a crucial part in determining food production. The widely known economic as well as social impact of the ‘Black Death’ and other epidemic diseases that hit Western Europe during the fourteenth century is a testimony to the power of geography and germs. The second stage is characterized by conflict, militarism, and increase in food production and population density. The third stage is the period of an increased demand for wealth. This epoch is characterized by state investments into daring expeditions to acquire wealth and resources from foreign lands to finance the soaring costs of war. Finally, the fourth stage is the stage of change in the nature of the state leading to rapid technological progress, industrial revolution, mass production, and the rise of the capitalist system.

In order to describe the first stage, one can think of a food production function that makes use of land, labour, human capital, technology, and climate. Land is fixed and is owned by the small state or group. The entire population supplies labour except the elite. Human capital is defined as the knowledge required for using the existing technology successfully. Technology signifies the development of new tools and it is spasmodic. Climate is exogenously given. Labour supply is affected by the disease environment with high incidence of diseases resulting in less labour supply. In this kind of world, an increase in food production, because of the positive effects from all of these factors, results in an increase in the population. Increased population raises the demand for food. However, there is a limit to what a fixed amount of land can yield given technology, climate, and diminishing returns to labour and human capital. Therefore, a food crisis ensues and eliminates a large proportion of the population. This cycle repeats itself in the absence of technological progress. In addition to this natural cycle, food production is also constrained by epidemic diseases and natural disasters. This is what Thomas Malthus described as the principle of population in his famous essay in 1750. This process took place in Western Europe approximately during the thirteenth and the fourteenth centuries when it was ruled by the small and medium sized feudal states. Robbins (Reference Robbins1928) provides evidence of a Europe close to what I have described above. In her paper on the impact of the Black Death in France and England, she records that France was hit by famine on at least 15 occasions during the fourteenth century.

In stage two, the production of food may rise due to technological progress. New technology may evolve due to indigenous effort or due to technology transfer or can be completely serendipitous. At least in case of Western Europe, we know that most of the early technologies were acquired from the Chinese or the Arabs or from ancient Rome (Mokyr, Reference Mokyr1990). There is support for this in Diamond (Reference Diamond1997) as well. He writes:

The arrival of new technology increases agricultural production manyfold and creates a situation of food surplus. The food surplus also increases fertility and reduces mortality, raising the total population. Rising population puts pressure on land and other resources, inducing the state to get involved into territorial conflicts. This is what we observe during the age of the Crusades when Europe engaged in repeated conflicts and wars. The state also gained more in terms of tax revenue in the event of an increased agricultural yield. A significant proportion of this revenue is spent on the development of new armoury and the military. The logic is simple. More lethal weapons and a well-nourished army can win battles and winning battles was crucial to the very existence of the state. The state investment in military technology creates a positive externality for civilian research and development, leading to more breakthroughs in technology for agriculture and crafts. New technology in agriculture and crafts results in steady growth in output and population, causing more territorial conflict. This pattern is observed till the fifteenth century in Western Europe when the states become stronger and stronger. However, the increased frequency of military conflict did put enormous pressure on the state's exchequer and forced her to look for alternative and richer sources of revenue. Perhaps, this is what led Western Europe to the stage three.

Stage three signifies a state in which investments in maritime expeditions, in order to hunt for alternative sources of wealth and resources, become extremely important. Michael Beaud (Reference Beaud2000) describes this process in his book. He writes, ‘Monarchs greedy for greatness and wealth, states battling for supremacy, merchants and bankers encouraged to enrich themselves: these are forces which inspired trade, conquests, and wars’ (p. 14). These investments led to the discovery and conquest of new land. The prevailing mercantilist philosophyFootnote ⁸ induces explorers to search for bounty in these newly discovered lands and bring it back to their motherland. This is what Hernan Cortez did when his band of conquistadors came in contact with Montezuma's Aztecs in the new world. Similar was the fate of Atahualpa's Inca when Francisco Pizzaro's army of two hundred conquistadors defeated them in Cajamarca in 1532. The Capture of Atahualpa by Pizzaro's men yielded the largest ransom recorded in human history. The ceaseless pillage of wealth and precious stones from the new land triggers inflation in the home country as too much money chases too few goods. To counter inflation, the state imposes restrictions on imports but encourages exports so that the state does not run out of wealth. This policy leads to the expansion of maritime trade and commerce. The ‘no-imports’ ideology also boosts domestic manufacturing, providing it with a large domestic as well as overseas market. Outward orientation and trade in manufacturing leads to specialization, division of labour, and increased gains from trade. The nature of the distribution of gains from trade changes the structure of the political economy and the distribution of political power. Two distinct patterns emerge. The first is an absolutist state, which takes control of all gains from trade and concentrates political power. The second is a type of state that allows private accumulation (such as money lending, trading of precious metals, real estate etc.) by the bourgeoisie and hence a relatively equitable distribution of wealth and political power. In an absolutist state, no change occurs in the institutional structure. However, in the second type of state, institutional changes take place, which are favourable to capitalism. The increase in wealth of the bourgeoisie due to private accumulation provides them with de facto political power. The bourgeoisie invest in private manufacturing and trade, which generates more wealth for the future. This further strengthens their de facto political power. The bourgeoisie with their new found political power start demanding institutional change by challenging the authority of the monarchs. They demand protection of private property and a more equitable distribution of political power. If the de facto political power of the bourgeoisie is greater than the de jure political power of the monarchs, then the will of the bourgeoisie prevails over the will of the monarchs. This leads to the establishment of institutions that protect the private property and political rights of the bourgeoisie. Democratic institutions are established to cement the power of the bourgeoisie and also to make sure that the monarch cannot take over power in the future.

This pattern of institutional development is observed in Western Europe from the sixteenth century onwards. The Spanish and Portuguese monarchs were absolutist in nature and they centralized the process of manufacturing and trade, discouraging private enterprise (Acemoglu et al., Reference Acemoglu, Johnson and Robinson2005b). This prevented the development of institutions, which provide incentive for private investment. However, in Britain and in the Netherlands, the state allowed private enterprise, which led to the Civil War in 1642 and Glorious Revolution in 1688 in Britain and the Dutch war of independence, which began in the 1570s. Describing the events in Britain and the Netherlands Acemoglu et al. (Reference Acemoglu, Johnson and Robinson2005b) writes:

Stage four signifies more private as well as state investments in technology, which leads to the development of the factory system and industrial revolution. The institutional changes of stage three create the ideal incentive structure for private investments in technology development. This induces rapid technological progress. The rapid improvement in technology increases the cost of moving information relative to the cost of moving people (Mokyr, Reference Mokyr2001). This leads to the rise of the factory system and a subsequent breakdown of the cottage industry. Such pattern is observed in Britain and other parts of Western Europe during the period of the Industrial Revolution (1760–1830).

Therefore, in sum the story that I want to get across is as follows. Western Europe managed to beat the constraints imposed by its geography, in particular diseases, on food production early on and started her journey on an independent growth trajectory. Availability of food increased population density, which caused territorial conflicts and war. Ceaseless conflicts induced more investment in military technology. The conflicts also put enormous pressure on the finances of the state. The state commissioned daring naval expeditions to search for bounty so that it could finance its military expenditures and from avarice. These expeditions brought wealth from overseas which also caused inflation. In order to remedy inflation and also to abide by the principles of mercantilist philosophy, the state restricted imports of foreign goods and promoted exports of domestically manufactured goods. This induced specialization and division of labour in the domestic economy. Institutional changes followed, depending upon the initial distribution of the gains from trade. A non-absolutist state allowed bourgeois accumulation, which increased the power of the bourgeoisie, resulting in major institutional changes favourable to capitalism. In contrast, an absolutist state allowed very little or no bourgeois accumulation, which arrested the prospect of any institutional change. The states with capitalist institutions attracted private investment in production and technology building. This led to rapid technological progress, the rise of the factory system, and industrial revolution.

Therefore, what we learn from the unifying framework is that breaking the disease bottleneck is crucial for future institutional development, which leads to sustained technological progress and economic growth.

4.2. What was Different in Africa, China, India, and the Americas?

4.3. Summary

In summary, the framework shows that diseases are important at an early stage of development. But as technology coupled with population growth and some good luck allow a society to escape this early stage then institutions become important. The interactions of institutions, technology, and trade drive the economy on a sustained growth path thereafter. This is perhaps an appropriate way of describing the process of economic development in Western Europe.

In China and India, the Malthusian cycle was broken fairly early on and institutional weaknesses played a crucial role in their respective declines. In the Americas, colonial institutions were a crucial factor.

The African case was somewhat different from the others as the continent struggled to escape from the strong grip of the Malthusian cycle. Long history of slave trade and colonial institutions complicated the story even more later on.

Therefore, the unifying framework does show that there is a case for dealing with diseases and institutions in the same framework rather than in isolation. This is a major departure from the existing studies, which tend to view these two factors as mutually exclusive rather than interlinked.