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Monday, November 12, 2012



Colonial Institutions and Comparative Development in North and South America


Map of North and South America

Colonialism started in American continent with the sighting of one of the Islands of Bahama by Christopher Columbus on 12th of October in 1492. This fateful expedition initiated the modern history of colonization of the New World and the South which were to leave lasting impression on the economic and social landscape of these lands. The motivation behind these expeditions is explained by the events that unfolded later on.

During 16th century the general price level quadrupled in Western Europe. Bodin (1530-96) wrote

"The principle and virtually sole cause of rise in prices is the abundance of gold and silver which is greater in number today than it was during the four previous centuries"

Most of this gold and silver came from the newly developed Spanish colonies in Central and South America. The empires of Aztecs in Mexico and Incas in Peru had abundance of these precious metals and that’s what the Spanish were after. 18000 tons of silver and 200 tons of gold were transferred from Americas to Spain from 1521 to 1660. Spain was forefront in this colonial enterprise.

Britain’s domestic politics was ridden with much controversy and conflict during this period. The country had not yet come to terms with the aftermaths of the civil war (1455-88). The English attempt to establish a colony in Roanoke, North Carolina thus ended in failure. The next major attempt by the English to settle colonies in America happened after she defeated Spain Armada in 1588. Spain’s failed attempt to invade England emboldened the English and they sent three ships namely Susan Constant, Godspeed and Discovery under the leadership of Christopher Newport to settle colonies in the New World.

Outrageous and inhuman however this apparent plundering of the indigenous wealth of American inhabitants was, the purpose of this writing is not to deliver a tirade against it. Spanish set their colonies in Central and South America while English took the left over in the North. Both of these countries developed different institutions and left entirely different colonial legacies. As we see now the countries which were under English rule are way more prosperous than those who were under Spanish colonial rule. Is it mere coincidence? This essay argues against it. The roots of divergent path to prosperity are to be found in the institutions which these European colonialists established in their respective colonies. The colonists, recognizing their objectives and constraints, put in function those institutions which were exclusive, rent-generating and design to favor the minority elite. These institutions were reformed later on (primarily in the North) as per the necessity arose. The oppressive and extractive economic institutions which the Spanish developed in Central and Southern America were to leave last impression on the economic fate of these countries. On the other hand, the historical reasons which led to an entirely different institutional framework development, the system which became more inclusive gradually, in North America initiated a process which was conducive to economic prosperity.

Hernan Cortes invaded Aztec empire in Mexico in 1519 and by fall reached the capital Tenochtitlan. The main strategy of this Spanish conquistador was to capture the ruler which would subdue the indigenous population, discourage resistance and provide the best opportunity to extract as much precious metal as possible. This strategy was to be followed by all prominent conquistador in the Spanish colonial history. The whole of Aztec empire was captured by 1521 and Cortes at this time initiated some of those oppressive economic institutions whose legacy still cast shadow on these lands. An institution by the name of “Encomeinda” was established. Encomienda was to be an indigenous person granted to Encomendero, Spanish colonialist. Encomienda was to provide his master with all sorts of services the colonialist required. This was institutionalization of abject form of slavery which would exclude the major chunk of population from any sort of economic or social activity to take part in. The same strategy was applied by Francisco Pizzaro in his conquest of Inca empire in Peru in 1533. He defeated the Inca emperor, Atahualpa, at Cajamarca and by next fall conquered Cusco, the Inca capital.


Hernan Cortes: Conqueror of Mexico


Same institution of Encomienda was established in Inca empire too. The establishment of these institutions were not without logic. The Spanish needed labor to produce food and provide services for newly established colonies thus came Encomienda. Lateron after the discovery of Silver, at Andes, in present day Bolivia, a new innovation occurred. Now they required labor for the extraction of precious metal. Francisco de Toledo was the brain behind the establishment of Reducciones ( reductions) where the adult working age population was concentrated to work in extracting metal . Mita, an Inca institution was also made functional to make the labor work in plantations to produce food who in return were given were given food and shelter. 



Francisco de Toledo: The brain behind the establishment of Reducciones 


These institutions were to last into the nineteenth century where as entirely different institutional developments were taking place in the colonies of North America. Another institutions Trajin was also put in place to make the indigenous population carry load for the Spanish colonialist. These institutions were exclusive and were designed to extract as much surplus as possible from the indigenous population. Wages were forced down to subsistence level and there was no incentive within the system to encourage any sort of innovation.

Cusco; Ancient Capital of Incas Empire


There was however a different story unfolding in the North America. Sailing in the aforementioned three ships, the English, into Chesapeak Bay, founded the settlement of Jamestown in May 1607. However the fate was not much friendly to the English. The indigenous Powhatan confederacy led by Wahunsunacock had no gold or silver. Moreover the demographic realities of the North America were also not conducive to any colonial plundering through forced labor. The population density of the land where English had set foot on was merely 0.75 whereas those in the lands of Aztecs and Incas was as much as 400. There was immense shortage of food and services and Wahunsunacock already aware of Spanish plundering in the South had imposed embargo on the new colony thus ruling out any possibility of trade. The directors of the Virginia company were forced to change the strategy and came up with plan of putting settlers to work if the colony was to survive.

Map of thirteen states which were to become United States. States of Virginia and Carolina where the English planted their earliest colonies can be seen.



Exact location of First English colony of Jamestown in North America



An oppressive institutional framework was put in place where the settlers were to put in barracks and forced to work under the supervisor from the company. Running away or trading anything with the indigenous population was crime punishable by death. The calculated ration was given to the settlers and every aspect of life was controlled. Clearly, not tune to survive in such circumstances, the opportunity cost of running away became more and more low. There was no incentive in the system to make settlers worker by choice. The company was eventually forced to change its strategy again a decade later when a General Assembly was formed to give settlers a say in the laws they were governed by. The system was opened a bit to give settlers a breathing place, to create willingness to stay and work in the colony. A decade further later another colony, Maryland, was formed after the crown gave Lord Baltimore, 10 million acres of land to establish it. The colony of Carolina was formed in 1663 by the eight Proprietors . Both of these colonies initially put up a hierarchical institutional structure where the tenants would work for the lords and pay rents to the elite. The constitution of Carolina was so formulated as there was to be Leet man who would work for the land graves and Caziques. The political power was asymmetrically distributed with only the elite having a say in the decision making. Both the systems were exclusive, designed to generate as much rent as possible and had no incentive for common settler to work willfully and be innovative. The systems had to be revamped after colonial elite failed to make settlers work. The lack of incentive pushed the opportunity cost of fleeing low and in New World such a policy was designed to fail. Clamoring for more economic and political freedom led to the declaration of Maryland and South Carolina as crown colony in 1693 and 1729 respectively. The colony status removed the privileges of the ruling elite and made system relatively more inclusive as the adult male settlers eventually got the say in decision making process.

So we see here entirely two different processes taking place maturing themselves in North and South of America. In the North system eventually got more and more inclusive thus increasing the incentive and scope of innovation in the society whereas in South the system led to congealed relations of power where minority perpetuated its rule and continuously extracted resources from the majority. The Spanish crown got more and more rich where as the indigenous population more and more poor. The roots of the divergent processes to prosperity lies here. Of course America was to experience its political upheavals in the coming years but the relative inclusiveness of its system was the reason behind its earlier take off to development. These divergent paths went further into 19th century. After the Napoleon invasion of Spain and abdication of king Fredinand, the National Junta was formed to resist the French. This national Junta was opposed to the privileges of the elite and this was an anathema to the ruling elites in the colonies attached to the crown. The independence movements thus started, in Bolivia in 1809 but eventually crushed, and culminated in the independence of Mexico 1821. The elite was the beneficiary of the institutional framework put in place during the start of colonial settlements and would no way let its privileges be curtailed.
The political upheavals in the United States during this time were also bloody. The civil war 1861-65 resulted in massive bloodshed. However the volatility of the country’s politics was not as intense as those of central and south America. Mexico had 52 presidents from just 1824 to 1857. The lack of political stability ,exclusiveness of the system and caprice of the rulers threaten the property and incentives to invest.

US had 338 banks by 1818 whereas 90 years later Mexico had only 42. Later rulers of Mexico such Porfirio Diaz indulged in massive land expropriation and rent generation. This was the direct legacy of Spanish colonial rule which developed an elite and institutionalized rent generation. The incentive to invest and innovate was absent within such an institutional framework. While the labor generated rent for elite in South, 40 percent of US citizens who had patents during the first half of 19th century had only primary school graduation. So its not surprise that innovators like Edison emerged from US rather than Mexico. The only guarantee that the former had was the security of return to his innovation and lack of any sort of expropriation.


All this historical discussion provide ample evidence to assume that the institutional framework is key to innovation and economic prosperity. The inclusive political and economic institutional framework provide incentive for the masses to undertake economic ventures. As the system gets more inclusive and competitive, it encourages innovation, which further expedite the growth. The divergent path of North and South America to economic prosperity are due to the institutionalization of the rules which made the former gradually inclusive and the latter exclusive. The institutions are those rules which shape are behavior. The rules set up during the colonial enterprise were designed to perpetuate the slavery and enrichment of minority elite. The historical developments in North America revamped the rules of the game later on whereas the South well into the twentieth century could get out of the grip of them. This to large extent explains Americas prosperity and South’s poverty.



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