Economic growth and economic development 215

Introduction to Modern Economic Growth Acemoglu and Johnson (2005) investigate the relative roles of these two sets of institutions Their strategy is again to make use of the natural experiment of colonial history What helps this particular unbundling exercise is that in the sample of former European colonies, the legal system imposed by colonial powers appears to have a strong effect on contracting institutions, but little impact on the available measures of property rights institutions At the same time, both mortality rates for potential European settlers and population density in 1500, which we have seen above as important determinants of European colonization strategy, have a large effect on current property rights institutions, and no impact on contracting institutions Using these different sources of variation in the sample of former European colonies, it is possible to estimate the separate effects of contracting institutions and property rights institutions Consistent with the pattern shown in Figure 4.13, which suggests that the identity of the colonizer is not a major determinant of future economic success of the colony, the empirical evidence estimating the different sources of variation in colonial history finds that property rights institutions are much more important for current economic outcomes than contracting institutions Countries with greater constraints on politicians and elites and more protection against expropriation by these powerful groups appear to have substantially higher long-run growth rates and higher levels of current income They also have significantly greater investment levels and generate more credit for the private sector In contrast, the role of contracting institutions is more limited Once the effects of property rights institutions are controlled for, contracting institutions seem to have no impact on income per capita, the investment to GDP ratio, and the private credit to GDP ratio Contracting institutions appear to have some effect on stock market development, however These results suggest that contracting institutions affect the form of financial intermediation, but have less impact on economic growth and investment It seems that economies can function in the face of weak contracting institutions without disastrous consequences, but not in the presence of a significant risk of expropriation from the government or other powerful groups A possible interpretation is that private contracts or other reputation-based mechanisms can, at least in part, alleviate the problems originating from weak contracting institutions For example, when it 201