Settlement and extraction or – how come Argentina is so much richer than Bolivia?

Argentina and Bolivia are neighbours yet Argentina feels rich, like home, and Bolivia, feels poor. Today despite having been colonised by the same country, about the same time, Argentinians are about four times richer than Bolivians.

Why some countries end up rich and others poor is of constant interest to development economists and other scholars. There are a bunch of theories. For example, and grossly simplified:

  • Climate – in cold places you have to work harder to stay alive so you develop technology sooner.
  • Geography determines whether there are plants and animals that are ripe for domestication. With farms you develop surpluses so you have time to do other things, like getting rich (this is the theory put forward in an enjoyable book called Guns, Germs and Steel that was recommended to me by readers, thanks for that).
  • Institutions – the way society is structured – governance, hierarchy etc. – supports or hinders the development of wealth.

Enter colonisation

These theories are all interesting, and not necessarily mutually exclusive, but they become a bit moot once you add colonisation to the mix, as in South America. Geography, say, might explain why the Incans got smashed by the much more developed Spanish at Cajamarca, but it doesn’t necessarily explain what happens next once the Spanish took control of much of the continent. And what did happen was that some of their colonies, like Argentina, turned out much richer than others, like Bolivia.

Settlement and extraction

One popular explanation in economics is that the colonists’ intention for the colony – extraction or settlement – determined the kind of institutions that they developed and this in turn determined whether the colony became rich or poor.

Peru is a nice micro-example. The Spanish who arrived in Cusco and other great Incan cities were interested in plundering precious metals. They didn’t necessarily envisage they would stay in the frigid Andes long and so they were probably more cavalier about the way they set up government and courts and schools, if they bothered to at all. Lima, now Peru’s capital, was founded by the Spanish. They wanted a capital by the sea and they preferred the coastal climate. They built that city, and its institutions, to last. Today, Lima is much richer than the Andean hinterland.

On a wider scale you can apply this logic to whole countries, including, say, Argentina and Bolivia. While, at its height, Potosi was among the greatest cities in the world, the industry that brought about its prominence was fundamentally extractive. In contrast, Argentina was settled by Europeans who planned to stick around and raise cattle. The long term view of the settlers in Argentina undoubtedly influenced the kind of institutions they developed.

There is, of course, a rejoinder between this institutional view and other schools of thought about climate and geography. While the institutions may have been the first order determinant of who got rich and who got poor, it was geography and climate that determined where Europeans settled and where they didn’t.

Being able to make a strong case about why some countries got rich and others didn’t doesn’t imply a justification for the present, of course. In fact, it’s another cause to reflect on the birth lottery, and how random our personal riches really are. That’s especially true for those of us from New Zealand, who just happen to have grown up with settler institutions and not extractive ones.

One thought on “Settlement and extraction or – how come Argentina is so much richer than Bolivia?

  1. Another book by Jared diamond you may want to read is “Collapse: How societies choose to fail or survive”. It is tougher to read than “guns” but makes many interesting points.

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