Economic growth and economic development 204

Introduction to Modern Economic Growth
The evidence in Acemoglu, Johnson and Robinson (2002a) shows a close connection between initial population density, urbanization, and the creation of good
economic institutions. In particular, the evidence points out that, others things
equal, the higher the initial population density or the greater initial urbanization,
the worse were subsequent institutions, including both institutions right after independence and also institutions today. Figures 4.9 and 4.10 illustrate these relationships using the same measure of current economic institutions used in Figure
4.1, protection against expropriation risk today. They document that the relatively
densely settled and highly urbanized colonies ended up with worse institutions, while
sparsely-settled and non-urbanized areas received an influx of European migrants
and developed institutions protecting the property rights of a broad cross-section
of society. European colonialism therefore led to an “institutional reversal,” in the
sense that the previously-richer and more-densely settled places ended up with worse
institutions. The institutional reversal does not mean that institutions were better
in the previously more densely-settled areas. It only implies a tendency for the relatively poorer and less densely-settled areas to end up with better institutions than
previously-rich and more densely-settled areas.
As discussed in footnote 4 above, it is possible that the Europeans did not actively introduce institutions discouraging economic progress in many of these places,
but inherited them from previous civilizations there. The structure of the Mughal,
Aztec and Inca empires were already very hierarchical with power concentrated in
the hands of narrowly based ruling elites and structured to extract resources from
the majority of the population for the benefit of a minority. Often Europeans simply took over these existing institutions. What is important in any case is that in
densely-settled and relatively-developed places it was in the interests of Europeans
to have institutions facilitating the extraction of resources, without any respect for
the property rights of the majority of the populace. In contrast, in the sparselysettled areas it was in their interests to develop institutions protecting property
rights. These incentives led to an institutional reversal.

190