The Economic Effects of Colonial Rule – An Institutional Story

Economics Aug 17, 2020

As India celebrates its 74th Independence Day, there is considerable consensus over the impacts of colonial rule on India’s economic growth. Back in the 1500s, under the expanding Mughal Rule, India was the wealthiest country in the world whose GDP accounted for 33% of the total world’s economic value. Its exports were booming, farmers were working towards self-sufficiency in food, and all forms of arts flourished in palaces from Srinagar to Gwalior. Then, in the late 1700s, the British East India Company’s ship sailed towards the ports of Calcutta, and all hell broke loose. Pitting one ruler against the other, they divided the country’s many folks and led their way to the Delhi throne, maiming and killing all those seeking to protest against their might.

At the time of our independence in 1947, our GDP was growing at less than 0.2% p.a. We had lost all export advantage that we once hand, indigenous industries had been destroyed, agriculture was in distress, and we were forever dependent on food exports to meet the needs of a crippled and impoverished population. Our economic conditions were so compelling that in the late 1960s, the PM of India (Lal Bahadur Shastri) had to plead with its citizens to skip one meal a day because of a paucity of grains. Seeing all this, it is elementary to argue that colonial rule led to the destruction of a successful country, and left agony and malice in its wake.

Yet, it is difficult to generalize that all this was an impact of colonial rule. After all, we have studied about foolish Late Mughals – known philanderers and lovers of wine and women – whose ruling capabilities were only matched by Anil Ambani’s business acumen. We have also heard of Afghani conquerors, expanding Chinese dynasties, South Eastern colonial powers and other threats could have besieged India and led to its decline. At the same time, if the colonial rule is disastrous per se, it is tough to explain the experiences of New Zealand, the USA, Canada, and Australia – countries who were little more than wilderness  in the sixteenth century, and whose prosperity flourished only after they had been annexed by the British. So is colonial rule inherently bad? How can we arrive at this judgment?

This article discusses at least one way to derive the answer. We borrow from Acemoglu (2002) and use it to explain why colonial rule behaved differently in different countries.

The method used by Acemoglu is pretty impressive. His hypothesis is simple: different countries faced different outcomes due to differing institutions set up by the colonial rulers. And this difference in institutions came from a variation in the ability of colonial powers to settle in a particular country. It turns out that for all their greatness, Europeans had pretty shitty immune systems, and they could not easily settle everywhere. For example, a report of the British India military shows that Indian troops had in Bengal and Madras had mortality rates of 11 and 13 per 1000. On the other hand, British troops’ mortality rates were 70 and 170. Clearly, a mix of tropical diseases and lack of exposure meant that colonizers could not settle into all their colonies with equal ease.

What this led to was the following: as colonizers could not settle everywhere, they had little interest in developing good institutions in all places. Where they could live, like in Australia and the US, they created progressive institutions that led to the development and flourishing of democracy. Where they could not settle in large numbers, like in India and Nigeria, the institutions created were extractive and exploitative. So Indians had to endure zamindari and ban on local industries, whereas the USA received technological spillovers. Hence the differing outcomes.

But how do institutions created hundreds of years ago impact us today? Is this wishful and nihilistic thinking, or is there some meat to the theory that colonial rule handicapped the colonies? Unfortunately for us, impact of institutions last longer than we can fathom. For example, even today, India’s Forest Department at the state level use the rules made by British in 1880s. Our IPC is borrowed directly from British rules. Even our Constitution embodies many of the provisions of Government of India Acts from 1919 and 1935. Our bureaucracy thrives on colonial sentiments and pride, and much of what we do is influenced by our anglicized past. It is tough to break these chains in just 3 generations that have come to pass since independence.

Given this, our challenges are both personal and historical. While we prepare to face the demons of the future like climate change and labor displacing technology, we also have to confront our colonial biases and institutional weaknesses. As we enter our 75th year of independence, we must be mindful of the burden of history that falls upon our shoulders. While we endeavor to shake it off, let us pledge to never under-estimate the ability of dividing rulers to undermine our sovereignty, and remember that rulers who divide do not rule for our good.

Happy Independence Day

(Vastav Ratra)


The Economics Association, BITS Hyderabad

The Economics Association aims to inculcate, enhance, and nourish the Economics and Finance culture of the Campus, and in extension, of the new age of Professionals, by conducting Talks and Events.

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