What Are Institutions?

The explanation of comparative economic development set forth in Why Nations Fail is based on institutions, particularly the consequences of different sets of political and economic institutions. Though we provide a great deal of evidence to support this idea, no theory can explain every single episode from word history and there are always going to be counter-examples.

One proposal for a counter-example comes from the research of Peter Blair Henry and Conrad Miller (2009) “Institutions versus Policies: A Tale of Two Islands” published in the American Economic Review Papers and Proceedings (a longer version of the paper is available here).

They argue that the massive divergence of economic performance between Barbados and Jamaica since independence is such a counter-example to the notion that institutions matter. This is because both countries had the same colonial history with identical institutions at independence and hence this cannot explain why Barbados was only $1,000 per person richer in 1960 but over $5,000 per person richer today. They propose that instead of institutions being important in this case “the macroeconomic policies that governments choose to implement may exert just as much (or more) influence on the trajectory of their economies as the broader institutional framework within which those policy decisions take place.”

But in closer inspection, it turns out that the economic and institutional history of Barbados and Jamaica is far from being a counter-example to the main thesis of Why Nations Fail.

Though Henry and Miller focus on several types of institutions, for example, the inheritance of the English Common Law system, this is not something we have argued to be important in Why Nations Fail. In fact, our academic work with Simon Johnson “Colonial Origins of Comparative Development” and “Unbundling Institutions” has found this not to be important for long run development. There is no surprise there from a historical viewpoint. The United States and New Zealand were colonized by the British, but so were Guyana, Sierra Leone and Malawi, three somewhat less successful economies.

So what sorts of institutions did we emphasize? Not the written aspects of the constitution such as whether or not there is a parliamentary democracy, another thing that Henry and Miller focus on. Those things can be important, but the types of institutions that influence the political and economic incentives in society can be very different. For example, in the first chapter of Why Nations Fail, we emphasized that the distinctive economic performance of the United States was created by the US Constitution with its checks and balances and separation of powers. But we also argued that this document was an outcome of a set of political institutions that had already been established during the colonial period. A further illustration from the same period that other types of institutions matter is the two-term limit for presidents in the United States. This was not part of the Constitution. Rather, it was established as a social norm by George Washington when he decided not to run for a third term. The social norms worked form 150 years until Franklyn Roosevelt violated it. The role of the Supreme Court in assessing the constitutionality of legislation was not in the Constitution either, but likewise emerged as a social norm after the landmark Marbury versus Madison case in 1803.

In our post last week about Cows and Capitalism, we pointed out that social norms, like the one in Lesotho that cash could be converted into cows but not vice versa, counted as institutions according to the definition we used. In this case the social norm that Washington set, for example, clearly created incentives and constraints for future US presidents that influenced their behavior. That’s what institutions do.

How was it that the United States came to adopt such institutions?

As we argued in the first chapter of Why Nations Fail, this was not because of some particular British history, but because of the nature of early colonial society and the opportunities and constraints it faced when it formed. The Jamestown colony and what followed did not slavishly implement some model of what British colonial society should be, though they did try. Instead something very different emerged where political power was much more inclusive and so were economic institutions. Some of these institutions were indeed what might be called social norms, but that doesn’t make them any less powerful.

A contrast with Latin America is instructive. One of the most powerful social norms which still guides much of life in Latin America dates back to the colonial system where it was known as “obedezco pero no cumplo,” or “I obey but I do not comply”. This was the adage used by Spanish colonial officials to refer to their attitude towards laws emanating from Spain and still characterizes many attitudes towards laws in Latin America today. Why would such a social norm emerge in Latin America and not in North America? We know of no academic study of this but one reason might have been that unlike the British crown that extracted little out of North America, the Spanish crown benefitted hugely from flows of gold and silver. Thus they were in continual conflict with local elites one who would grab and benefit from these resources. Thus colonial elites pretended to obey but tried to undermine the intent of laws from Spain.

So in what sense might Barbados and Jamaica have had different institutions and how did they matter for economic growth?

To see this let’s first point out that as Noam Yuchtman of the Haas School of Business at UC Berkeley and James Robinson discovered in ongoing unpublished research: the puzzle is in fact much greater than Henry and Miller argue. Today income per capita levels in Jamaica are lower than they are in Barbados, but in 1838, they were much higher in Jamaica. The date 1838 is significant because it marks the end of the 4 year apprenticeship period which follows the 1834 freeing of slaves in the British Empire. After 1838 ex-slaves were really free. Before 1834, in both Barbados and Jamaica they had labored in sugar plantations. After 1834, what were the ex-slaves to do? In Barbados there was essentially no land to do anything. Migration off the island was illegal. The only option was to go back and work as “free” laborers on the plantations. But Jamaica was much bigger with a mountainous interior where there was the possibility of living an autonomous life free from plantation work. So in Jamaica the ex-slaves had an “outside option,” in Barbados they didn’t.

The first result of this was that wages were much higher in Jamaica because after 1838 there was a big fall in labor supply to the plantations and white owned businesses. But the rulers of Jamaica were not content to take this sitting down. In his famous paper on the origins of slavery and serfdom, “The Causes of Slavery or Serfdom: A Hypothesis”, Evsey Domar argued that it was exactly in situations where market wages were high that there would be a high incentive to repress and coerce labor (see this paper by Daron Acemoglu, Alexander Wolitzky for a formalization of this idea). This was exactly the case in Jamaica after 1838. Yuchtman and Robinson document this through violations of the Masters and Servants Acts that were designed to block competition in the labor market and keep wages down. Prosecutions under these acts were intense in Jamaica, absent in Barbados. One thing that made the acts very powerful was that nearly all labor contracts were verbal and could be invoked on almost any ground. For example, a law passed in Jamaica in 1842 workers convicted of ‘misconduct, miscarriage, misdemeanor, ill behavior in service’ could be sentenced to 30 days hard labor. Whipping was also a common offense. In effect, these laws and many like them gave employers almost total control over the “free” labor force. They were backed up by the state. As Nigel Bolland points out about the post emancipation period in his seminal 2001 book The Politics of Labour in the British Caribbean:

Throughout the British Caribbean the regular police forces themselves often showed characteristics of paramilitary organizations, with the emphasis on force rather than public service. Officers were generally white and of military background, and the ranks were frequently from other colonies and were stationed in barracks like troops in a colonial army to keep them from fraternising with the general public (p. 71).

The main point here is that this repression was much worse in Jamaica than Barbados. One result was rebellion, such as the Morant Bay uprising of 1865, on a scale not seen in Barbados.

This labor repression lasted well into the 20th century. In the late 1920s, for example, the colonial office started to consider some of the labor laws. Bolland (p. 149) quotes a colonial office official noting:

there are certainly serious drawbacks about leaving on the statute books legislation reaking of the taint of slavery, and providing for insolence, misdemeanor, miscarriage, ill-behavior and other obsolete and undefinable offences.” Jamaica, the official commented, had been “decidedly obstructive regarding the amendment of this labour legislation.

It was not until after independence that the Masters and Servants laws were repealed in Jamaica.

This greater history of labor coercion and violence has left a long shadow in Jamaica. When the first political parties formed in the late 1940s and 1950s, they immediately adopted confrontational and violent tactics and at independence in 1962 they inherited a state that was far more used to exercise violence and repression. It was not just the use of violence that was important but how the state governed and was constructed.

In Barbados the much lower levels of coercion and desire to control labor meant that the creation of a modern central state was more feasible. In Jamaica the continued rule of planters and their use of the state to coerce labor left the state more decentralized and more open to the use of informal methods to control the population. As we will see in our next post this different structure of the state has had powerful consequences in post-independence Jamaica.

Some evidence of the greater extent of violence for this comes from the history of homicide rates in Jamaica. This can be seen from the following figure that uses data from the United Nations (partly from the Office of Drugs and Crime (UNODC), and partly from the demographic yearbooks).


Unfortunately the data does not go back far enough but it shows that the homicide rate in Jamaica has typically been about 5 times higher than in Barbados.

This situation had also created a much more unequal society. For example, data from the UNU WIDER Inequality database suggests that at the time of independence the Gini coefficient (which measures inequality ranging from 0 perfect equality to 1 perfectly inequality) was around 0.40 in Barbados, but it was far higher, possible 0.57 in Jamaica, though measures of inequality are notoriously difficult to compare across countries. So, taken on face value, while Barbados has a level of inequality similar to Britain, Jamaica had one similar to Colombia.

The nature of the state, the history of violence and confrontation and the levels of inequality led to very bad economic policies in the 1970s as they have done all over Latin America. They also led to a great deal of extra-constitutionality, for example the National Emergency that was declared in 1976, which led to the arrest of 500 members of the opposition Jamaica Labour Party. This emergency rule also facilitated the re-election of Prime Minister Michael Manley’s People’s National Party.

Finally, Henry and Miller are of course right that one should pay attention to the independent effects of macroeconomic policies. This is particularly true of bad macroeconomic policies. As we’ll see in future posts, bad macroeconomic policies can block economic development in countries that have many aspects of inclusive institutions.

But economic policies don’t just drop out of the blue. They are chosen by governments and politicians whose incentives are determined by political institutions, that we talk rather a lot about in Why Nations Fail. This is why we do not make a big thing about the distinction between “institutions” and “policies”. Certainly at any one moment you can think that institutions are relatively slow moving, while policies can change much faster. All the same, they are ultimately determined by the same political forces.

So the argument that not institutions but macroeconomic policies distinguish Jamaica from Barbados is not compelling. Jamaica certainly has had worse policies since independence but as we have seen this was because it had more extractive institutions.

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