New evidence from colonial history is challenging the consensus that extractive institutions always harm long-run development, showing that outcomes depend on whether extraction left behind durable public infrastructure and state capacity.
Editor’s note: This is the first of two articles on the paper Encomienda, the Colonial State, and Long-Run Development in Colombia. Read the second article here.
The authors have made slides available here.
Ever since Adam Smith’s Wealth of Nations, social scientists have been on a quest to understand why some societies are more developed than others. In recent decades, major strides have been made by scholars pointing to the crucial role that institutions play in organising economic and political activity and setting incentives and rewards. The current consensus holds that institutions which are more inclusive (Acemoglu et al. 2001, 2002, Acemoglu and Robinson 2012, 2019), more equal (Engerman and Sokoloff 1997, 2002, Sokoloff and Engerman 2000), or that provide open access to economic and political organisations (North et al. 2009) tend to promote long-run economic, social, and human development. By contrast, institutions that are extractive, unequal, or that limit such access are associated with worse development outcomes. These theoretical ideas have successfully changed how we think about development, but as with any intellectual advance, they also provoke further questions.
Are ‘institutions’ necessarily national-level complexes, or is there meaningful variation at lower – or indeed higher – levels? Can ‘institutions’ be disaggregated functionally into distinct dimensions – e.g. the electoral system, market regulation, taxation, property rights, and the justice system, to name only a few – and analysed separately? Might such components combine in different ways across different contexts, with different development effects? And how can we best test such ideas empirically?
How to study long-run development
Rigorously studying long-run development often requires both cross-country data and historical case studies. The combination of qualitative with quantitative evidence is to be celebrated, as each can potentially compensate for the other’s weaknesses. The principal drawback of a case study is, of course, generality, where one good, detailed case study explains exactly one observation. Ideally, it does so with a convincing account of causality. But do those insights hold anywhere else?
Researchers are often tempted to increase sample size by adding more case studies, each necessarily receiving briefer treatment, since researching and reading numerous detailed cases is taxing for both authors and readers. But this process quickly trades away the main strength of the case study method: the rich contextual depth that helps identify underlying mechanisms. There is a subtle line beyond which a sketched case becomes a cartoon.
Quantitative evidence solves the generality problem in a more satisfying way, by collecting similar data across many countries over long timelines that, in the case of this research, cover centuries or even millennia. The problem here is that the institutional and contextual variables that these theories posit as key factors are hard to define and quantify. For example, the civic and political rights of citizens, and social norms around political competition, feature prominently in all of the studies cited above. Ideally, these would comprise a bundle of distinct variables measured for each country and time period in our dataset. But we simply do not have good-quality data on them for most countries today, let alone across centuries, implying that results to date are intriguing but not conclusive.
A new direction for studying development
A small but growing body of studies may well provide a path forward, taking a different approach and reaching very different conclusions from the works that inspired them. And they benefit from a number of methodological advantages that strengthen their results. The most important of these is Dell and Olken (2020), who study the effects of sugar factories in 19th century Java under the Dutch empire. There can be no doubt that this institution was extractive and oppressive. But Dell and Olken (2020) show that areas receiving this colonial ‘treatment’ are today richer, more educated, have better infrastructure, and are more industrialised than similar nearby locations that escaped this treatment.
Similar studies are notable for focusing on single countries or regions, which facilitate both strong micro-foundations, meaning the theoretical mechanisms being tested are much clearer, and high empirical rigour that comes from comparing like with like, e.g. similar regions within Java rather than across many countries. This makes it all the more notable that their headline finding contradicts the dominant consensus: unambiguously extractive colonial institutions are associated with better development outcomes today across multiple dimensions.
But other empirically and methodologically focused studies find opposite results. For example, Lowes and Montero (2021) show that colonial rubber concessions in Congo, where the Belgian crown employed extreme violence to extract rubber, led to much worse education, health, and wealth outcomes today. And Rivadeneira (2023) finds that the Ecuadoran concertaje, a coercive institution that used debt to extract indigenous labour for the benefit of Spanish lords, is associated with higher extreme poverty, illiteracy, and worse educational achievement today.
How do we make sense of such conflicting findings? Why would forcing people to grow sugarcane in Java be good for long-run development, while forcing others to tap rubber in the Congo is bad? Over the decade that we spent researching another case of colonial extraction (Faguet et al. 2025), we realised that the answer lies in the interconnections between raw resource exploitation and state-building and public infrastructure. In short, where colonial extraction benefitted overlords but also left a legacy of durable institutions or public infrastructure, there is at least the possibility of long-run development as a side-effect. Where the colonial treatment was simply resource extraction, we should expect negative long-run effects. But for a deeper, better answer, we must first travel back 500 years to Colombia during the conquest.
Read the second article here.
References
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Dell, M, and B Olken (2020), "The development effects of the extractive colonial economy: The Dutch cultivation system in Java," Review of Economic Studies, 87(1): 164–203.
Engerman, S L, and K L Sokoloff (1997), "Factor endowments, institutions, and differential paths of growth among New World economies: A view from economic historians of the United States," in S Haber (ed), How Latin America Fell Behind, Stanford, CA: Stanford University Press, 260–304.
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