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 MYS BRA CHL VEN URY PRY IDN COL PNG JAM DOM LKA PAK PAN MMR GUY PHL MAR ECU VNM ARG MEX CRI TUN EGY DZA PER BOL HND LBY NIC BGDGTM SLV HTI 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 191