Still, both settler mortality and 1500 population density are strongly correlated with today’s
per capita income. Why might this be so? This gets us to our third and crucial point. A necessary
condition for these variables to be valid instruments for institutions is that they not influence per
capita income through other channels, i.e., be uncorrelated with the error term. We have seen that
human capital is an important determinant of economic growth. The importance of malaria in
determining current income points in the same direction. Could the influence of AJR’s proposed
instruments on today’s development work through human capital? Put differently, perhaps when
colonizers settled, they brought with them their know-how rather than constraints on the executive.
Figures 2-5 show the relationship between settler mortality and 1500 population density on
the one hand, and total years of schooling in 1960 and 2000 on the other. These correlations are
even stronger than those between settler mortality and the measures of institutions. For example,
the correlation between settler mortality and years of schooling in 2000 is -.73.
Some additional evidence on the importance of human capital, and its relationship to the
proposed instruments, comes from the small sample of countries for which we have data on
primary school enrollments in 1900. Figure 6 shows that this measure of educational investment a
century ago is a strong predictor of the level of economic development today. Figures 7 and 8
further show that this measure of education is strongly negatively correlated with the proposed AJR 24
instruments. This evidence may further suggest that human capital, both today and as historically
introduced by the colonizers, drives economic growth.
Table 11 further investigates the effects of human capital and political institutions in the
instrumental variables framework. We present the first and second stage results from the IV
estimation of the impact of average years of schooling between 1960 and 2000, and average
executive constraints over the same period, on log GDP per capita in 2000. As instruments, we
use French legal origin, log settler mortality, and log 1500 population density (the last two used one
at a time). The AJR instruments are important determinants of both executive constraints and
years of schooling in the first-stage regressions, while French legal origin countries have a lower
level of constraints on the executive, consistent with La Porta et al. (1999). In the second-stage
regression, however, the predicted years of schooling are a statistically significant determinant of
per capita income, but executive constraints are not. If anything, in the IV framework human
capital seems to be a more important variable predicting development than political institutions.
We do not wish to push these results too far. By our own logic, human capital and
institutions are not the only potentially important baggage that the European colonizers have
brought with them, and so the instrument might still be correlated with the error term. They
brought “guns, germs, and steel” among other things (Diamond 1997, Engerman and Sokoloff
1991). The effects of colonial settlement work through many channels, and the instruments used
in the literature do not tell us which channel matters. Even if one accepts the view that the
variables proposed by AJR (2001, 2002) shaped the European settlement patterns, the data do not
tell us whether the Europeans brought with them their human capital, political institutions, or
something else. The instrumental variable approach does not tell us what causes growth.