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INSTITUTIONS VS. POLICIES: A TALE OF TWO ISLANDS Peter Blair Henry Conrad Miller Working Paper 14604 http://www.nber.org/papers/w14604

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2008

Henry gratefully acknowledges financial support from the John A. and Cynthia Fry Gunn Faculty Fellowship, the Stanford Institute foreconomic Policy Research, the Stanford Center for International Development, and the Freeman Spogli Institute. Miller gratefully acknowledges financial support from a Mellon Mays Undergraduate Fellowship. We thank Jonathan Bendor, Sir Courtney Blackman, Renee Bowen, Eleanor Brown, Cecilia Conrad, Kevin Davis, John Rapley, Tracy Robinson, members of the Caribbean Policy Research Institute, andseminar participants at MIT and Stanford for very helpful comments and discussions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2008 by Peter Blair Henry and Conrad Miller. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided thatfull credit, including © notice, is given to the source.

Institutions vs. Policies: A Tale of Two Islands Peter Blair Henry and Conrad Miller NBER Working Paper No. 14604 December 2008 JEL No. E0,F0,N0,O0 ABSTRACT Recent work emphasizes the primacy of differences in countries' colonially-bequeathed property rights and legal systems for explaining differences in their subsequent economicdevelopment. Barbados and Jamaica provide a striking counter example to this long-run view of income determination. Both countries inherited property rights and legal institutions from their English colonial masters yet experienced starkly different growth trajectories in the aftermath of independence. From 1960 to 2002, Barbados' GDP per capita grew roughly three times as fast as Jamaica's.Consequently, the income gap between Barbados and Jamaica is now almost five times larger than at the time of independence. Since their property rights and legal systems are virtually identical, recent theories of development cannot explain the divergence between Barbados and Jamaica. Differences in macroeconomic policy choices, not differences in institutions, account for the heterogeneous growth experiencesof these two Caribbean nations.

Peter Blair Henry Stanford University Graduate School of Business Littlefield 277 Stanford, CA 94305-5015 and NBER pbhenry@stanford.edu Conrad Miller Stanford University ccmiller@nber.org

1. Introduction A long line of work emphasizes the correlation between institutions and economic performance (Smith, 1776; Lewis, 1956; North, 1990). Rich countries havelaws that provide incentives to engage in productive economic activity. Investors rely on secure property rights, facilitating investment in human and physical capital; government power is balanced and restricted by an independent judiciary; contracts are enforced effectively, supporting private economic transactions. Recent research moves from correlation to causation by observing that countrieswhose colonizers established strong property rights hundreds of years ago have, on average, much higher levels of income today than countries whose colonizers did not (Acemoglu, Johnson and Robinson, 2001). Since a country’s colonial origin—literally determined centuries ago—can in no meaningful way be said to be caused by its present-day level of income, the nature of countries’ colonial originsenables researchers to estimate the causal impact of property rights on long-run economic outcomes. Differences in the legal tradition that countries inherited from their colonial masters also have a long-run impact on economic outcomes. Countries with English common law origins provide investors with stronger protection and are less prone to government ownership and regulation than countries with...
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