Chapter 7: Improving Institutions with Trade Policy: Myth or a Possibility
7.1 INSTITUTIONS AND TRADE POLICY As I described in Part I of this book, a growing number of economists argue that institutional divergence across countries can be best explained by colonial history. In brief, the story is as follows. The Europeans resorted to different styles of colonization in different parts of the world depending on the feasibility of settlement. In tropical climates, the mortality rates among European colonizers were extremely high which prevented them from settling there and they erected extractive institutions characterized by weakly defined property rights and weak enforcement of contracts. However, in temperate climates, the mortality rates among colonizers were low, which made them ideal for settlement and they erected strong institutions characterized by well-defined property rights and enforcement of private contracts. These institutions persisted over time and they continue to influence the current institutional and economic performance of these countries. Therefore, colonial history shaped institutions in most countries around the globe and perhaps policy has very little or no role to play. But the fact that we occasionally do notice improvements in institutional quality due to good policy suggests that good institutions are not entirely determined by history. This is an important policy question for growth given that institutions are a crucial determinant. A good illustration of this is perhaps post-independence India.1 India inherited relatively good institutions from the British in 1947. A democratic polity, an independent judiciary and secure property rights were among many other positives that were enshrined into the constitution of independent India....
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