Article Summary | Tutorial 1 - Subgroup B Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution In this paper, the authors present two hypothesis that aim at explaining the current economic order. The first hypothesis is the so-called geography hypothesis. It states that economic differences are due to geographic, climatic or ecological differences across countries. However, authors argue that if this view would explain economic growth, a persistent economic performance should be seen as geographic factors are stable over time. The alternate view which is referred to as the institutions hypothesis states that differences in economic performance are due to the organization of a society. Societies with good incentives and opportunities to invest should achieve the best economic growth. The paper’s goal is to distinguish these two broad hypothesis by using a “natural experiment”, the expansion of European overseas empires starting at the end of the 15th century. European colonialism caused a major change in the organization of societies and a “institutional reversal” took place in the countries they colonized. European colonialism led to better institutional quality in previously poor areas and they introduce extractive institutions in previously prosperous places. This institutional reversal together with the hypothesis view suggest a possibility of a reversal among the former European colonies. To quote the paper: “countries that were relatively rich in 1500 should be relatively poor today.” This is because of the different institutions Europeans would set up in colonies depending on their prosperity. The argument the authors use is the following: Europeans would set up institutions with the goal of exploiting the natives rather than to attract European settlers, extractive institutions, in densely populated areas. Whereas they would set up more inclusive institutions with strong protection of property rights in sparsely populated areas because they wanted European settlers to come. The finding of the paper is that indeed countries who were relatively rich 500 years ago are relatively poor today. They state that there was a close association between urbanization rates and prosperity. In their data analysis they used both population density and urbanization as proxies for economic prosperity and found a robust reversal in relative incomes among former European colonies between 1500 and today. This reversal cannot be explained by the simple geography hypothesis for the reason that if this view was right, there would be high of persistence in economic output. Since the findings show exactly the opposite it can be concluded that this view comes short in explaining the reversal. The reversal can be explained by the institution hypothesis. The different type of institutions that were implemented, extractive in rich areas and inclusive in sparsely populated areas, sort of laid the seeds for a reversal in relative incomes. However, the industrial revolution really made the reversal happen because institutions with private property were essential. These institutions would give people an incentive to invest whereas extractive institutions did the opposite. Therefore, the institution hypothesis explains the “reversal of fortune” the best. Article Summary | Tutorial 1 - Subgroup B Group Members: Irene Soriano, s3520749 Inês Cunha, s3169057 Iuliana Frunze, s2577089 Jan Ruben de Goede, s3215520 Hailun Zhou, s3188957 Jan Paul de Jong, s3165736