The Indian Economy Blog

June 15, 2007

Colonialism As A Cause Of Income Inequality

Filed under: Basic Questions,Economic History,Growth — Dweep @ 12:35 pm

Economist Luis Angeles suggests (in his paper Income inequality and Colonialism) that we can lay part of the blame for income inequality in the new world on colonialism:

Our paper’s main point is that colonial history is a major explanatory factor behind today’s large differences in inequality among the world’s countries. We have reviewed the different colonial experiences of the last five centuries and have classified them in 3 broad categories. Of these three, we argued that one clearly produced and sustained highly unequal societies. This high inequality group is the one where colonialism brought into the country an amount of European settlers whose number was considerable but still inferior to that of the local population. This minority was able to concentrate most of the countries’ income in their hands, mainly by excluding the rest of the population from owning land or mining resources. Moreover, and with the exception of Algeria, it was this minority who took all political power once these countries became independent. This allowed high inequality to remain a characteristic of these countries up to our times.

It is important to make a distinction here between inequality – the subject of this paper – and general lack of growth and poverty. In this paper, the countries that are more unequal (in Latin America, Carribean, and Southern Africa) also generally have higher GDP than countries that are less unequal (e.g. India).

There is no contradiction whatsoever between the fact that Settler colonies became highly unequal and that these same colonies achieved a higher level of production per capita than Peasant ones. This relative economic success was precisely the result of the European settlers’ growth record. By their cultural background they were able to put at least partially in place the technology and institutions that made the economic superiority of Europe and the New Europes. 

The paper is also useful for its brief survey of literature on colonialism and economic evolution, and if the subject interests you see also Guns, Germs, and Steel: The Fates of Human Societies:

Acemoglu et al. (2001) argue that the pattern of European settlement in the colonies determined the type of institutions that these countries developed and that these institutions are a major factor behind their economic backwardness. In those regions where few Europeans settled, Europeans created “extractive states” and the resulting institutions “…did not introduce much protection for private property, nor did they provide checks and balances against government expropriation.” On the other hand, the authors also propose that the countries that received a large number of settlers “tried to replicate European institutions” and therefore created the right set of rules encouraging future economic growth.

By way of New Economist, the paper is available on SSRN and also from the University of Manchester (PDF). If you’d like to check the correlation, the World Income Inequality Database (WIID) may be useful, as also the UN Human Development Report (PDF).

16 Comments »

  1. You are kidding right? Colonialism is the reason for poverty? What is next – because the queen sneezed in 1801 hence we have malaria in 2007.

    The work of Lal has shown that a lot of notions of extractive systems are misplaced. The British also invested a lot into India – railways, administrative system, schools etc. This also puts a lot (understatement) of onus on initial conditions.

    If this thesis is indeed true there would be a significant income differential between countries that were colonized and colonies that were not. That just does not hold up – the countries stuck in victim mentality socialist mindset – namely South Asia and Middle East are paupers and the ones that have shaken off that mentality – namely east Asia have marched up the economic ladder.

    Lets stop this stupidity and move on … no one owes you anything, except yourself. Excepting that, you are digging a hole.

    Comment by disgusted — June 16, 2007 @ 1:59 am

  2. disgusted, who asked for reparations? It’s nice the British invested in railways and administrative system and schools – to keep the imperial power going.

    When an economy goes from 12.2% of global GDP in 1870 to 4.2% of global GDP by 1950 with almost anemic growth for forty years starting 1900 I wouldn’t call it “invested a lot”. In fact the utter growth less decades of British imperialism is used to justify the socialism of the next four decades, even now – 3.5% is dynamic when compared to 0.5%.

    Moving on doesn’t mean not understanding history and issues. Learn a bit before getting disgusted.

    Comment by Chandra — June 16, 2007 @ 12:57 pm

  3. Excellent comments, Disgusted! I second them fully.

    The GDP share comparison actually cuts both ways. Consider this-
    World GDP share of India dropped from 12.2% in 1870 to 4.2% in 1950, ergo the British were lousy administrators.
    But after the British left, the GDP share kept going down and it was 3.1% in 1973.Ergo, we were not much better than the British, by Chandra’s logic. So 3.5% growth didn’t help much.
    (all figures from Wikipedia)( By the way, what happened between 15th August, 1947 and 1950?)

    But things are a little different than this almost facile comparison-

    “How does one begin to explain India’s economic performance over the past hundred years? The Indian nationalist blames the first fifty years’ stagnation on British colonialism. But a trade economist will counter this by showing that the world economy was also stagnant in the first half of the 20th century (especially after World War I) when world per capita GDP grew annually at just under one percent. The main culprits, he would say, were conflict and autarky. Disgraceful protectionism by most governments between the Wars slowed both the world and the Indian economy.

    Although the Indian economy picked up after 1950, the neoclassical economist would argue that it performed below the world economy, which experienced a “golden age” driven by trade expansion until 1971. Like the rest of the Third World India did not benefit from global trade expansion because it had closed its economy and pursued ‘import substitution’. Moreover, Nehru’s socialism had shackled the economy with fierce controls on the private sector, pejoratively called ‘Licence Raj’; hence its annual GDP growth was 1.5 percentage points below even the Third World average between 1950 and 1980.”

    Source- Gurcharan Das
    http://www.ccs.in/gdas/?page_id=70

    http://libertynewscentral.blogspot.com/

    Comment by Gurmeet — June 17, 2007 @ 2:37 am

  4. Chandra – Thank you for reminding us – learn before you are disgusted. The sad fact is Indian socialists are learning the wrong facts 50 years after independence and digging a bigger hole. That is disgusting.

    The fact that Indian+China’s economy shrunk from quarter of Global GDP to inconsequential around 1900 is a direct result of non-investment in R&D by Indian manufacturers. i.e. small scale cottage industries. The British did, so the time to manufacture a yard of cotton cloth (a luxury) shrunk by a factor of 10x+. It doomed the Indian manufacturers as you can imagine…

    The story repeats itself, those who invest in technology, gain productivity. Their goods/services becomes cheaper. Meanwhile, you are crying in the corner of how they stole your cotton etc. etc, taxed you and all those things. If you want to understand true horrors of imperialism see what the Belgians did in the Congo. The British bought modern systems of education to the country, introduced technology etc.

    Learn the right lessons and we will prosper. Carry a chip on your shoulder and 10 years later you will be still sitting in the school cafeteria with a Jholi smoking beedis, drinking Chai. No GDP gain there.

    Comment by disgusted — June 17, 2007 @ 5:57 am

  5. Gurmeet, you’re partially right of course – trade barriers went up after WWII (one reason for Germany’s trouble meeting payments of Versailles treaty and Hitler’s rise). None the less, British was still ruled by conservative market based economic policies (the main reason for Chamberlain’s appeasement of Hitler was continued British economic prosperity). Fabian socialism, that Nehru learned from (and later devastated, in the long run, India economy even further with), came to England after WWII with Labour party taking over.

    Fleecing of India really began post-1857 failed war of independence and went into full swing by the early 1900. Trade walls may have come up in Europe after WWII but the empire was a world in itself. Surely there were no trade walls within the empire. And the growth of Imperial British India GDP was anemic because the empire was servicing the island – not trading with, not invested in, not built up for economic activity. (There is a reason why Gandhiji boycotted British clothes and went kadhi and cotton and why Jamshedji had a tough time getting license to build a steel mill in India.)

    BTW, the entire globe was not shirking in early 1900. US grew dramatically in the early 1900 (even after WWII ended) continuing it’s gilded age until the great depression in 1929.

    “The fact that Indian+China’s economy shrunk from quarter of Global GDP to inconsequential around 1900 is a direct result of non-investment in R&D by Indian manufacturers. i.e. small scale cottage industries.”

    disgusted, what R&D by small scale cottage industries? I thought the British were investing but the lorded over slaving bumpkins couldn’t produce because they had chip on their shoulder!

    Comment by Chandra — June 17, 2007 @ 12:34 pm

  6. Chandra,
    Thank you for providing a sane voice.

    Gurmeet / disgusted, please read the summary of the study I refer to. First, it talks of income inequality, not GDP growth. The authors state that this inequality was either created or exacerbated by colonialism – not because the colonial masters did not invest (that would explain lack of GDP growth). Rather, the case was that in nations where the Europeans were a substantial but not majority segment of the population, they created rules and institutions to establish a “super class”. This class hierarchy persisted after independence (e.g. in white Africa, or Latin America).

    As for the unrelated discussion on GDP growth, you are right about India’s poor record after independence. That was the result of import substitution. However, that does not mean that colonialism was not the cause of poor development prior to independence. As Chandra points out, colonies were servicing the Empire, not trading with it.

    Finally, let me point out that there is no socialist agenda here. It is easy, indeed fashionable, to criticize Nehru for India’s failings. While he may well have chosen the wrong economic model, note that his brand of economic theory (Fabian socialism) was quite popular in the 1950s. India’s planning commission received input from the British and the Americans, and the British nationalised far more of their economy than the Indians did, in the middle of the last century.

    Comment by Dweep — June 19, 2007 @ 7:02 pm

  7. In my comment above, I keep thinking WWI but typed WWII in most places. I should have written WWI (1914-1918), still called the Great War by the Europeans. Reference to World War II was only when talking about Labour Party coming to power in UK, after Churchill’s defeat soon after the war ended in 1945. (While I admire Churchill for standing up to Hitler and Nazis and socialist fascism, I am glad Churchill lost as soon as WWII ended because India probably would not have attained independence if Churchill won reelection until much later into the 50s)

    Comment by Chandra — June 20, 2007 @ 12:44 am

  8. What income inequality because of Colonialism? Study history more carefully. Do you mean to say the Mughals were better? In fact the inequality in India was highest BEFORE the Britishers came in. It was only they who brought some kind of hope to those who were bright and hardwaorking to rise up in life, albeit by little bits, either in clerical jobs or in the Civil Services. Before their arrival, there were only royalty and their clans who “extracted” everything from the peasant multitudes. There were only two classes, the rulers and the ruled. The income disparity between them was much higher than that in British times.

    Comment by Sane Voice — June 22, 2007 @ 1:03 pm

  9. [...] I recently noted the link between income inequality and colonialism (over at the IEB). Income inequality is often mentioned in the comparisons of India and China. Proponents of India’s path to development make much of the fact that income inequality in India is relatively low. The UN Human Development Report 2006 estimates the Gini Index for India to be 32.5 (in 2000). This compares favorably with much of the world, including the USA and OECD countries (Sweden: 25; Norway: 25.8; China: 44.7; USA: 40.8; Brazil: 58). [...]

    Pingback by Income Inequality in India - The Discomfort Zone — June 22, 2007 @ 6:12 pm

  10. To an extent both sides of the argument are right. The British investing in railways and postal service are the law of unintended consequences. They invested in these so that they could milk the Indian cow faster,but ended uo helping India,and Nehru\’s Fabian socialism did not help either.

    However, it is a fact that from 1857 to 1947 India\’s share in the world economy fell from 18% to 3%, a six fold decrease. It is also true that British levied high taxes on agriculture, leading to disastrous famines the second half of the nineteenth century (Late Victorian Holocausts by Mike Davis). British goods flooding Indian markets lead to the complete destruction of the Indian industries.

    This is a microcosm of the British rape of India
    http://www.vigilonline.com/index.php?option=com_content&task=view&id=486&Itemid=103 and
    http://www.vigilonline.com/reference/relart/vicharamalaArt_view.asp?art_id=94
    http://epaper.timesofindia.com/Repository/ml.asp?Ref=VE9JS00vMjAwNy8wMS8xNCNBcjAwODAw&Mode=HTML&Locale=english-skin-custom

    There are two reasons of Income inequality
    1) Colonialism
    2) Fabian socialism post 1947
    Socialism is IMHO,more responsible than colonialism. But, saying that the British rule was good for India is complete BS. We were doing quite well without the British, thank you.

    Comment by AS — June 23, 2007 @ 10:08 am

  11. If colonialism caused income inequality in India, guess what is causing income inequality in the US? Capitalism!

    Isn’t it true that the collateral damage of the strong US economy of the past two decades has been the widening gap between the rich and poor? Is that all bad?

    My point is: is income inequality always indicative of economic failure? Is it even a relevant economic indicator?

    Comment by Sarat — June 24, 2007 @ 3:46 pm

  12. http://en.wikipedia.org/wiki/Income_inequality_metrics

    Try the above link to a Wikipedia article on income inequality. The Gini coefficient, as I had suspected, indicates a greater inequality in the US than even in India. So what?

    Also read the criticism of income inequality metrics further down in the article.

    A comment on colonialism in general. Since this is an economic blog, it must stay true to form by seeking statistical and other measurable effects of colonialism. But what about the psychic effects? Aren’t those ultimately the driving forces of all economic outcomes, good or bad? My belief is that the British, through its vast bureaucracy, turned Indians into a “service raj,” which then gave birth to its offspring, “license raj,” after Independence. A nation whose educated middle class only dreamed of joining a service could not have NOT adopted Fabian Socialism. So here is a country that completely missed out on “enterprise raj” during the crucial one hundred period of mid-19th to mid-20th century and is still paying for it dearly.

    A nation’s psyche may be hard to measure, but in my humble opinion, has far reaching economic impact.

    Comment by Sarat — June 24, 2007 @ 4:07 pm

  13. Are there any stats about the level of income equality/inequality for India before 1857? How does that compare with england at that time? I guess that would be a more appropriate question.
    Or how about before the plassey battle?

    About colonialism, it needs to be pointed out that the zamindari system improved upon by the british ranks right at the top of the sh1t-list India had to deal with after independence and is still dealing with now. This system, while it existed before the british was not institutionalized and the revenue agent did not have the kind of powers in local affairs that the zamindars did. Even during the mughal times.

    Comment by vijay — July 13, 2007 @ 6:22 am

  14. [...] http://indianeconomy.org/2007/06/15/colonialism-as-a-cause-of-income-inequality/ [...]

    Pingback by A People’s History of the British Empire: Compensation for Colonialism-$58 Trillion « Moin Ansari’s Disquisitions & Fulminations — January 8, 2008 @ 4:18 am

  15. Few Relevant quotes about imperialism:
    “When the missionaries arrived, the Africans had the land and the missionaries had the Bible. They taught us to pray with our eyes closed. When we opened them, they had the land and we had the Bible”
    - Jomo Kenyatta, in Absurdities in the Name of Religion

    “I have traveled across the length and breadth of India and I have not seen one person who is a beggar, who is a thief. Such wealth I have seen in this country, such high moral values, people of such caliber, that I do not think we would ever conquer this country, unless we break the very backbone of this nation, which is her spiritual and cultural heritage, and, therefore, I propose that we replace her old and ancient education system, her culture, for if the Indians think that all that is foreign and English is good and greater than their own, they will lose their self-esteem,their native self-culture and they will become what we want them, a truly dominated nation.”
    - Lord McCauley in his speech of Feb 2, 1835, British Parliament

    “The burning of ancient books on Ayurveda in Kerala, so as to impose the European system of medicine on the natives, the cutting of weavers’ thumbs in Bengal with a view of crippling the production of superior Indian cloth and ensuring the sale of British products, the ruthless, often bloody, extortion of revenue from the peasants for decades on end, even in the midst of the worst famines, the whipping, hangings and tortures that awaited those who opposed the Empire – these are only a few among the unending examples of the “providential character” of the British rule.”
    - Readings in Vedic Literature: The Tradition Speaks for Itself – By Satsvarupa dasa Goswami
    “During the first 80 years of the 19th century 18,000,000 of the Indian people perished of famine. In one year alone – the year when Her Majesty, Queen Victoria, assumed the title of the Empress, – 5,000,000 of the people of Southern India were starved to death. In the District of Bellary, with which I am personally acquainted – a region twice the size of Wales – 1/4 of the whole population perished in the famine of 1876-77. I shall never forget my own famine experience; how, as I rode out on horseback, morning after morning, I passed crowds of wandering skeletons, and saw human corpses by the roadside, unburied, uncared for, half devoured by dogs and vultures; and how – still sadder sight – children, ‘the joy of the world’ as the old Greeks deemed them, had become its ineffable sorrow there, forsaken even by their mothers, their feverish eyes shining from hollow sockets, their flesh utterly wasted away, only gristle and sinew and cold shivering skin remaining, their heads mere skulls, their puny frames full of loathsome disease engendered by the starvation… Everyone who has been in India in famine times, and has left the beaten track of western made prosperity, knows how true a picture this is”
    - India in Bondage: Her Right to Freedom – By Rev. Jabez T. Sunderland

    All from the following blog:http://www.kaveri.org/pari/archives/000096.html

    but disgusted idea of “Lets stop this stupidity and move on … no one owes you anything, except yourself.”
    sounds too romantic to be true…imagine yourself born as native of Sudan…darfour and then I wonder if you will say the same romantic idea of your…for get Sudan in India in some remote village with ” less than 1$/day”

    Comment by swaptions7 — January 16, 2008 @ 5:41 pm

  16. Thank you all above for a very interesting discussion. I came across this forum while googling “Fabian Socialism” and was pleased to find an intelligent exchange of ideas regarding British colonialism and India’s past, present, and future. I myself grew up in 60′s England, my parents having moved from the coal mines of Scotland to the Steel mills of England, Prior to the coal mines my people on my fathers side of the family were herded into Glasgow slums after the “clearances” which moved the peasant peoples out to make way for sheep. Socialism in the form of public education and health care were a clear boon to our family of four children, but left us fit for little at sixteen years old but factory work or the armed forces. A pervasive “second class” mindset which the working class almost universally carried with them in my day was a major detriment to their further advancement.
    So much of India’s future will be determined by changed mindsets in my humble opinion, that is disavowing “place” in society in favor of “ability” in society. The entrepreneurial spirit that I found when I came to the US in my early 20′s opened a world to me which I had not realized existed, and frankly, I have never looked back. Socialism seems to me a “bridge” philosophy, which successfully lifts the poorest up to a basic level, it should never be used to stifle creativity however, and again in my humble opinion, the Indian peoples have gifts in abundance if they are only allowed to fulfill their potential.

    Comment by J9 — May 16, 2008 @ 7:29 am

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