Economic growth and economic development 205

Average Protection Against R isk of Expropriation, 1985-95

Introduction to Modern Economic Growth

.
10

USA
CAN

NZL

AUS

SGP

IND

HKG

8

MYS

BRA
CHL

VEN
URY
PRY

IDN
COL

PNG
JAM

DOM

LKA
PAK
PAN
MMR

GUY
PHL

4

MAR
ECU

VNM

ARG

6

MEX
CRI
TUN

EGY
DZA

PER
BOL

HND
LBY
NIC
BGDGTM
SLV

HTI

0

5

10
Urbanization in 1500

15

20

Figure 4.9. The Institutional Reversal: urbanization in 1500 and
economic institutions today among the former European colonies.

The institutional reversal, combined with the institutions hypothesis, predicts

the Reversal of Fortune: relatively rich places ended up with relatively worse economic institutions, and if these institutions are important, we should see them become relatively poor over time. This is what the Reversal of Fortune shows.
Moreover, the institutions hypothesis is consistent with the timing of the reversal. Recall that the institutions hypothesis links incentives to invest in physical and
human capital and in technology to economic institutions, and argues that economic
prosperity results from these investments. Therefore, we expect economic institutions to play a more important role in shaping economic outcomes when there are
major new investment opportunities–thus creating greater need for entry by new
entrepreneurs and for the process of creative destruction. The opportunity to industrialize was the major investment opportunity of the 19th century. As documented in
Chapter 1, countries that are rich today, both among the former European colonies
and other countries, are those that industrialized successfully during this critical
period.
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