Garett Jones  

Why are Economic Miracles Rare in Colonies?

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A decade ago, Robert Lucas noticed a pattern:

The economic progress that has come to Asia and Africa came after the colonial empires were dismantled. 

To put it another way, Lucas claims that with the exception of Hong Kong, no massive economic modernization has ever happened in a colony.  

So being an independently governed nation is a near-necessary condition for economic success.  Remember: the only non-Western economy to undergo genuine economic modernization in the 19th century was Japan...and Japan was one of a handful of nations to avoid colonization. 

Lucas was responding to Niall Ferguson's praise for the economic policies of the British Empire.  In a more famous essay, Lucas noted: 

The second major change in the postwar world is the beginning of per capita income growth in Africa and Asia, entirely a post-colonial phenomenon. 

If the British empire brought such great policies to its colonies, why did the policies only pay off after the British up and left? 

I suspect public choice helps explain why independence is a near-requirement for economic success.  Colonizers probably believed in some version of the Lipset Hypothesis that democracy and economic modernization tend to go hand in hand.  Colonizers may also have believed in some version of Milton Friedman's claim (YouTube, 3 minutes) that economic freedom is a necessary condition for political freedom.  The urban bourgeoisie might start demanding the vote. 

That means that free market capitalism is a threat to any would-be colonizer.  Yes, a colonizer could grab more tax revenue from a productive country than from an unproductive one, but if you let the colony become productive one thing they might produce is a revolution.  

Lucas's observation should change the pacifist's moral calculus.  Yes, defensive wars have real costs, as Bryan notes.  But on the list of defensive war's possible benefits we probably need to include "opening the door to prosperity."   

Coda: I've wondered if Korea under Japanese occupation fits or fails Lucas's pattern.  In Korea's three decades of political independence before the Japanese took over Korea made real strides toward modernization, though it was less successful than Japan.  At least to a degree independent Korea fits the Lucas pattern.  But this article claims that living standards improved substantially during the decades of Japanese occupation.  Did Japan impose a broad-based industrial revolution on Korea?  Does Lucas have two major exceptions to his rule?  

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COMMENTS (22 to date)
bryan willman writes:

what about Canada? some degree of modernization in the 19th century, no? at what point was it no longer "a colony"?

William Barghest writes:

Macau is an obvious exception?
How autonomous was Canada during the industrial revolution?

Salem writes:

"To put it another way, Lucas claims that with the exception of Hong Kong, no massive economic modernization has ever happened in a colony."

No, he doesn't claim anything so silly. He accepts (as any sane person must) that massive economic modernization took place in the colonies of America, Canada, Australia and New Zealand - what Ferguson refers to as "dominions." What he's arguing is (1) British rule didn't do much for non-dominion countries and (2) Ferguson is inconsistent in his distinctions. I think that, at a minimum, some distinction is needed between "colonialism" and "imperialism" which are now often used interchangeably but during the British Empire were seen as opposites.

Moreover, I think GDP per capita is a misleading measure. If GDP per capita is stagnant, but population increases a lot, that IS economic progress, and Lucas's measure is deliberately concealing much of the progress that took place. It's also worth pointing out that the alternative to British imperialism/colonialism was often a much worse imperialism/colonialism by some non-European country. For instance, in the case with which I am most familiar, Iraq, Britain saved the country from Turkish imperialism, and there really was an economic transformation during the period of British influence (1917-1958). However, at the end of the period, the country was still very poor.

Hugh writes:

Singapore was a colony and seems to be doing well.

...and as I'm British, I am clearly the right person to remind you that the USA also has ex-colonial status.

Lucas notes that economic growth has happened after the colonial structure was dismantled - after WWII to keep it simple. But as there was a generalised economic boom after 1945 I don't see how that observation proves anything.

mdc writes:

"So being an independently governed nation is a near-necessary condition for economic success."

Dangerously mixing correlation with causation here, I think. What countries outside of Europe and that weren't just transplanted European populations overseas have ever economically modernised? With the exception of Japan that seems to be a purely >1980s phenomenon, and post-war Japan itself was a US colony of sorts.

More fundamentally, I think that when you get down to trying to define things like "self-governing" you produce a mess for yourself. Were the Baltic states in the USSR self-governing, for instance? They were previously independent democracies that were forcibly annexed by a dictatorial state, but they didn't have noticeably lower standard of living than the rest of USSR as far as I understand. Is French Guyana self-governing? It's not racially European, but it votes proportionally in French elections and is reasonably well developed. Not as much as France itself, but much more so than its "self-governing" neighbours.

I would at least agree that colonial rulers will tend to favour poverty of colonies if the colony:

1. Does not feel itself to be part of the same nation as the mother country.

2. Has a comparably large or larger population than the mother country.

Whether they can actually force it to be poor - that depends mainly on native institutions rather than colonial policy. Britain failed to impose even fairly minor trade restrictions on the US, for instance, while it probably was trying high minded reforms in India prior to the Mutiny. It then turned to a policy of propping up the native institutions of feudal vassalage, religious caste systems and so forth in exchange for a quiet life. This was broadly what the natives at the time wanted - or at least, what did not provoke imminent backlash.

FredR writes:

This paper about growth in African countries during British colonization was linked at marginal revolution a little while ago: http://www.cgeh.nl/sites/default/files/WorkingPapers/CGEH.WP_.No24.Frankema&vanWaijenburg2.pdf

Or what about gdp growth in rhodesia vs. zimbabwe?

Garett Jones writes:

@Willman & Barghest:

Canada was largely self-governed by the 1840s, according to Wiki:

http://en.wikipedia.org/wiki/Post-Confederation_Canada_(1867%E2%80%931914)

Just to cite casual evidence as if it were rock-solid: I got the same sense when I toured the Canadian Parliament--the feeling that they ran the place for quite a while was strong. The tour is fantastic, by the way.

There's no doubt Canada was wholly self-governed after the Constitution Act of 1867.

Surely there are some judgment calls on definitional issues but Canada was autonomous pretty early on.

And here I would like to formally start the rumor that Prince Harry has long harbored secret designs of direct rule over Canada. I hear he's been dropping hints to his big brother for years....

Jim Rose writes:

Speaking from a lifetime of personal experience of Australia and New Zealand, they do not fit into the Lucas model because they were settler-colonies. Extractive institutions were not set-up to lord it over large native populations as in the Acemoglu model.

Secondly, New Zealand was self-governing to a large degree from 1851, a decade or two after any significant European settlement. The Australian colonies became largely self-governing around the 1850s, if not before.

Legal and political independence arrived for Australia in 1901 and for New Zealand in 1907. The residual power of the imperial parliament in London was curios for the constitutional lawyers to bother over.

The right to vote was quickly granted widely and to women by 1900 to entice immigration to far away places where their interests still would be protected by inclusive economic institutions supported by political parties wanting their vote.

Ken B writes:
There's no doubt Canada was wholly self-governed after the Constitution Act of 1867.
Actually there is. Britain declared war on Canada's behalf in 1914. Changing this power was a major demand by Canada and Oz after the war. 1926 is probably the year. In 1939 we waited a week to declare war, to make the point.

domestically, yes 1841 for almost everything, and 1867 for the rest of it.

There is not the slightest doubt Canada would have declared war in 1914 anyway however.

As for Harry ... ABC (anybody but Charles)

Ken B writes:

Canada, Oz, New Zealand, USA, singapore , Hong Kong, bahamas. Botswana. More recently India.
This seems a pretty impressive track record for British rule.
I dunno about Lucas but Ferguson has a point.

Ken B writes:

One more pedantic correction. "British North America Act" of 1867 is the name.

Jim Rose writes:

Ken b, substance over form

Australia declared war in 1914 during a general election. Prime Minister Cook stating on 5 August 1914 that ".when the Empire is at war, so also is Australia."

The opposition labor party then won office by pledging to defend the home country by fighting to the last man and the last shelling.

In 1939, the New Zealand labor party government arranged for a coded telegram to be sent from London so it could follow the UK in declaring war by a few hours. NZ backdated its declaration to the same moment when the UK declared war. Prime Minister Savage’s statement was ‘Where she goes, we go; where she stands, we stand”,

In British Commonwealth constitutional law, the right to declare war is a royal prerogative. For example, on August 5, 1914, the Governor General declared a war between Canada and Germany.

Actual participation in any hostilities is a matter for each Dominion to decide for itself.

The Statute of Westminster 1931 (UK) marked an important step in the legal independence of the Dominions, including in the area of foreign affairs. Again this law confirmed what has evolved rather than broke new ground.

Jim Rose writes:

The French settlers heavily colonised Algeria but that was to run extractive institutions.

The only thing I know of Portuguese colonisation is that after 500 years in East Timor, the only sealed road was to the governor’s mansion and the telephone number of the Australian consulate was 7.

The British were late to the imperial scramble so they may have just picked up the vacant scraps that were not suited to extractive institutions. no offence to north american readers.

Shayne Cook writes:

I would recommend reading Hernando de Soto's "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else".

The central thesis of de Soto's work is that the degree to which private property rights - rights both to proceeds and rights to control - are extended to all residents of a jurisdiction is a primary determinant of wealth creation and economic well-being. Those private property rights being both the essential pre-condition and incentive to capital formation.

That's not exactly a new thought, but it may provide a better answer to Garrett's and Lucas' question:

If the British empire brought such great policies to its colonies, why did the policies only pay off after the British up and left?

The upshot being, it is probably less relevant where British (or other European power) imposed colonial rule, than how that rule was imposed by those imperialists. Did the "colonizer" effect a private property rights recognition system for the prior residents, or did they merely displace the prior residents, and proclaim for themselves rights to proceeds and rights to control? And after leaving, to whom did those rights accrue?

Lucas notes Hong Kong as an "exception that proves the rule". He attributes that to more "laissez faire economic policies" of the then "maverick" British colonial governor. I suggest that if Lucas were to research further he would find that a mature, extensive and robust system of private property rights than the British could or would impose already existed in Hong Kong. And that more robust private property rights system had already resulted in capital formation (wealth creation) there, such that imposition of a British replacement would degrade rather than enhance returns to the Crown.

In the cases of Canada, Australia and especially the United States, the new "colonizers" basically claimed and established private property rights of their own, and basically "stiffed" the Crown.

RPLong writes:

I think the idea that British Colonial rule is good for economic progress is basically insane. I can understand why some North Americans buy into the idea, because most of us are unfamiliar with African/Asian history. But anyone with a real understanding of the history of Pakistan, India, and Bangladesh will rightly and necessarily understand that the British ruined the eons-long economic prosperity of that region.

And of course, as a final parting gift, they partitioned the land and pit the people against each other in bloody war.

British Colonialism is one of history's great evils. I don't understand how people can see it any other way.

Ann S writes:

"a mature, extensive and robust system of private property rights than the British could or would impose already existed in Hong Kong. And that more robust private property rights system had already resulted in capital formation (wealth creation) there"

The Chinese negotiator that got the British to take Hong Kong thought he'd pulled a fast one precisely because it was pretty much a barren island at the time. It's a rock with a nasty climate and virtually no natural resources except a deep harbor. There were only a few hundred farmers and fishermen already there, plus pirates periodically hid out in the harbor.

Are you saying that the pirates had a "robust private property rights system" that had already resulted in wealth creation?

If I understand the earlier points about settler-colonies, then Hong Kong falls into that category. Most Chinese moved there only after (and because) it was controlled by the British, either to make money or just to get away from China.

As for the timing of the return of HK, the British would have left sooner but HK leaders asked them not to, since departure by the British would have led the Chinese government to take over.

Jim Rose writes:

Doug Allen in ‘the rhino’s horn’ explains why owners reduce the value of certain attributes of their property because this reduces the incentives for others to steal it. It is cheaper to reduce the value of that part of the asset that others want to steal than spend a fortune defending that part against potential theft.

Allen specifically wrote about how Australia was first colonised in 1788 as a penal colony.

Very expensive to do, but a penal colony filling up the only valuable part - Sydney harbour – with 60,000 riffraff and low life. This for a number of decades and well past 1815 made the only valuable part of Australia unattractive to other powers to conquer.

A prosperous colony is an attractive colony to conquer so imperial army and navy resources would have deployed to defending it. Prosperous locals and locally recruited troops can switch loyalties.

France lost its North American colonies through wars. Many colonies changed hands after the countless European wars as part of the peace settlements.

An empire full of prosperous colonies makes you an attractive target for other European powers to gang up on and divide the spoils.

John Ray writes:

By some metrics Australia was at the time of its independence the richest country in the world (around 1900)

Shayne Cook writes:

Ann S:

"Are you saying that the pirates had a "robust private property rights system" that had already resulted in wealth creation?"

Yes, I am saying precisely that. Actually, your fairly accurate description of the pre-British state of affairs - "pirates", "piracy", Hong Kong as a "safe harbor", and the lack of other means of producing wealth in the Hong Kong area due to spartan land features - illustrates my point and illustrates why.

There were robust property rights agreements between the pirates themselves as well as between the pirates and the land-bound harbor folks in order for Hong Kong to be considered a "safe harbor". There had to be in order for piracy to be lucrative. Pirates require ships - capital formation. They also require harbors. Harbors are also capital formation.

And both sea-borne and land-based forms of capital build-out must have been fairly extensive and robust, or Hong Kong would never have attracted the interest of the British. As you noted, Hong Kong was a "a rock with a nasty climate and virtually no natural resources except a deep harbor".

The "flaw" you seem to be indicating with your question is that these pirate-borne property rights agreements were intensely localized and exclusionary. They were that. But that does NOT indicate they weren't robust.

The imposition of British governance merely recognized those prior local property rights systems, and encouraged (rather than inflicted) extension of them. It's my understanding that many of the "pirates" were enticed into service as merchantmen and commerce protection service for South China Sea traffic - freeing British commerce and military shipping from those tasks. It was lucrative for the British and the "pirates", and much less dangerous for both.

My assertion, and de Soto's assertion, is that property rights recognition systems emerge and develop, locally, spontaneously and completely absent any influence of "recognized government". As a matter of fact, they emerge specifically due to absence of or even in spite of "recognized government". Indeed, those property rights recognition systems become government where no other governance exists. And de Soto's further point is that any form of "recognized government" can only be considered legitimate if and when it recognizes - formalizes, protects, and extends - those pre-existing property rights recognition systems within and beyond its jurisdiction.

You correctly note in the balance of your comment that Hong Kong expanded after British control. That is due to the British governor extending and de-localizing prior property rights systems, not replacing or usurping them. That is the "laissez faire economic policies" in action, referred to by Lucas. You also correctly note that modern day Hong Kong was concerned about the British departure. Rightly so. Communist governments are not widely noted for their recognition and support of private property rights - a fact emphasized by de Soto.

Again, I recommend reading de Soto. He does not discuss Hong Kong specifically, but he does fairly thoroughly discuss property rights emergence and importance. It's quite interesting.

Jim Rose writes:

in the last few decades, it became fashionable in Australia to have early relatives who came out as convicts in the first fleet in 1788!?

John Thacker writes:
Remember: the only non-Western economy to undergo genuine economic modernization in the 19th century was Japan...and Japan was one of a handful of nations to avoid colonization.

To some extent Thailand, though I believe that helps your thesis, since Thailand avoided colonization.

Though I think people could argue in favor of the quasi-colonization policies of the US and the various frontier colonies of the British Empire. Being at least semi-colonized by the USA did seem to to lead to better results than other countries. If we extend to the 20th century, South Korea, Japan, Thailand, the Philippines, Puerto Rico, Guam, US VI, and others with lots of US influence seem to have done relatively well, even if there's a lot of argument about how much the US influenced these allies (among people on all sides of the argument.)

I'm afraid that there's a lot of confounding variables. Perhaps the strongest countries that could modernize simply avoided colonization.

It seems like modernizing is difficult, but I tend to look at the results and think that US or British involvement or alliance is among least bad options.

Jim Rose writes:

didn't Ethiopia avoid colonisation too?

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