Stanley Engerman and Kenneth Sokoloff famously argued that patterns of growth across the Americas can be traced back to historic levels of inequality. Natural factor endowments in certain areas (for instance, Caribbean islands) encouraged rent-seeking extraction over investments in human capital, and led to the political empowerment of rich landowners. These elites, in turn, created historical institutions that fostered economic coercion rather than entrepreneurship.
A recent paper by Melissa Dell looks into this thesis in more granular detail by examining the role of Peru’s mita system in sparking long-run development. Under the mita, certain local communities were forced to send one seventh their male population to work in Peru’s silver mines; other communities were exempt. Districts under the mita system now have 25% lower household consumption, pointing to a durable, long-run effect of this historical institution.
Dell’s explanation for this difference relies on the role of large-scale hacienda estates that grew up in the areas outside the mita zone. These hacienda owners were able to lobby politically for public goods like roads. They were also able to secure inhabitants from the extractive levys of the state; and under established property rights were able to better make long-term investments. On one level, these results confirm the point of view that “history matters.” But the manner in which history matters here is at odds with the traditional narrative — espoused by Engerman/Sokoloff and Oded Galor, among others — that land inequality is bad. In Peru, wealthy landowners here appear to leave inhabitants better off (at least, relative to other areas subject to extractive labor levies).
Interestingly; the opposite pattern can be found in India. Abhijit Banerjee and Laxmi Iyer highlight the impact of different land tenure systems dating back to the British Raj. Some regions of British India fell under the zamindari system, in which government officials collected revenue directly from landlords. In other parts of India, village communities or individual farmers provided tax revenue.
Fortunately for their analysis, the particular form of land tenure adopted in British India was more dependent on the prevailing political ideology in Britain when the region was occupied rather than local characteristics. For instance, Holt Mackenze implemented the an individual-based raiyatwari system in the Bombay Presidency under the influence of James Mill (father of John Stuart Mill).
Indian areas under landlord-based systems had persistently worse outcomes, especially after the beginning of the Green Revolution dramatically grew agricultural yields. Non-landlord areas had 16% higher agricultural yields and applied 45% more fertilizer. This would reinforce the Engerman/Sokoloff view that inequality of a sort entrenches a rentier class and harms long-run productivity.
Also, compare the above graph (which shows the various British Indian land tenure systems), with the one below, which shows districts in India facing a “naxalite,” or Maoist, insurgency:
This may just be me, but I see some sort of overlap here. This guerilla insurgency is certainly fueled by resource extraction in hilly tribal areas, but as the graph suggests is also strong areas of strong land inequality like Bihar.
The only common theme here is that the relation between inequality and growth is complicated. While an unequal landowner based system was a boom in Peru, it may have hurt in India. Possibly, this is because the British Indian state was better able to protect small landowners from attacks by brigands; while a small landowner lifestyle was simply unsustainable in Peru, where large landholdings provided a second-best solution to the problem of property rights and physical security.
It’s tempting to infer from these cases some general rule that can apply to today’s sky high inequality. Yet the lesson from at least these two studies on Peru and India may provide some reasons for reassurance. In Peru, elite landowner dominance actually led to better outcomes. It did not in India, but the problem there inequality caused by differences in endowments, not differences in earned income. When inequality fosters a rentier class that grows its status through economic coercion; inequality might be bad. But it’s not obvious that this is the case now. Many of today’s rich are “working rich”; and have made their income through entrepreneurial activities. Many plan on donating large proceeds of their income. To the extent we worry about such issues, ideal policies might target, say, copyright or other monopolies, as opposed to income inequality itself.
It’s also not clear how much about inequality we can learn from the gini coefficient. It’s true that high-inequality Latin America had a high gini coefficient, but so did comparable European societies without coercive economic institutions. The problem, according to one team of scholars, is that the total feasible inequality varies from society to society, given the fact that people have certain substance needs. They argue that the relevant comparison is not income inequality by itself; but rather the overall share of surplus extracted by elites. Taking this into account, they find that Latin America historically has had a higher level of elite extraction than Europe.
America, too, comes of looking better in their measure. While it’s gini coefficient measured as of 2000 is reasonably high by international standards, its inequality extraction ratio lies substantially lower than a number of developing countries like Brazil or South Africa.