Sunday, April 02, 2006

Does history matter?

As an economic historian-in-training, I am biased toward answering this in the positive. So much of what an economy, society, or country are today are the result of a myriad of social forces operating over a long period of time. America's modern-day political structure can be traced back to its colonial heritage and debates over slavery, for instance. And in India, the legal system and many of the laws come handed down from British colonial overlords.

What is becoming one of my favorite papers in economic history comes from Abhijit Banerjee and Lakshmi Iyer on this subject. They look at the whole of British India (that is, those territories directly administered by the East India Company or, after 1858, the British Crown rather than the "princely states") and divide the districts into different categories according to the land tenure system the British put in place. They then find that those districts in which taxation was done at the individual level (the raiyatwari system), rather than the landlord or village level, have higher rates of agricultural productivity today.

The idea behind this is that institutions and policies persist over time. If policy over one hundred years ago empowers landlords at the expense of individual farmers, landlords will gain more control of the local political system and will not be interested in modernizing traditional village-level institutions. More controversially, it may be that large landowners may take less interest in the productivity of the fields they control and will only half-heartedly support attempts to improve the land.

Whatever precise interpretation one assigns to this result, I think it provides clear evidence at the local, micro level that institutions matter and, more crucially, are resistant to change. While we cannot go back in time and tinker with institutions set up hundreds of years ago, we should be aware that political decisions made today may have serious implications for future generations. It is wrong to pretend that government is made up of social engineers who can manipulate the functioning of society at a whim.

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