Paths of Institutional Development: A View from Economic History.” World Bank Research Observer 18(2):205–26

This article surveys an influential new research program on historical paths of institutional development and their consequences for growth. The research program exploits the experience of European colonialism as a kind of “natural experiment ” whose results bear on the way institutions affect development. The central hypothesis of this research is that societies that began with more extreme inequality were more likely to develop institutions allowing much of the population only limited access to economic opportunities. The research has uncovered a striking reversal of fortune among the areas colonized by Europe; those that were relatively rich in the 1600s are today far poorer than the areas (such as the United States and Canada) that initially were viewed as relatively undesirable. The timing of the reversal—at the onset of the Industrial Revolution, when there was probably a premium on broad participation in commercial activity—suggests that institutions associated with high inequality may be a causal factor in low aggregate incomes. This research program is still in its early stages. But studies of institutions in India using data rich enough to permit hypothesis-testing provide evidence supporting the hypotheses developed in the analysis of the European colonial experience. Economists have for some time recognized that institutions—the “rules of the game” that shape incentives and opportunities—are a key determinant of the wealth or poverty of nations.1 But they are just beginning to understand the process of institutional change. In earlier work I surveyed recent developments that led to a consensus that the traditional neoclassical model, because it abstracts from institutional change, leaves out the heart of development economics (Hoff and Stiglitz 2001; Hoff 2001). This article surveys an influential new research program on historical paths of institu-tional development and their consequences for growth. Much of the work discussed here is concerned with two puzzling facts abou