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In economics a country's factor endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all other things being equal. The development of sound institutions to access and equitably distribute these resources, however, is necessary in order for a country to obtain the greatest benefit from its factor endowment.
Nonetheless, the New World economies inherited attractive endowments such as conducive soils, ideal weather conditions, and suitable size and sparse populations that eventually came under the control of institutionalizing European colonists who had a marginal economic interest to exploit and benefit from these new discoveries. Colonists were driven to yield high profits and power by reproducing such economies’ vulnerable legal and political framework, which ultimately led them towards the paths of economic developments with various degrees of inequality in human capital, wealth, and political power.
Factor endowments in the New World
A classical example often cited to emphasize the importance of institutions in developing a country's factor endowment is that of North America (the United States and Canada) around the turn of the 20th century. It is commonly argued that these countries benefited greatly by borrowing many of Britain's institutions and laws. While North America undoubtedly gained from this borrowing, this does not fully explain why the rest of the New World (which also enjoyed a large factor endowment and access to British institutions) did not develop in a similar way. In fact, data shows that connection between the prosperity of the colonizing and the wealth of the colony was weaker than many thought. The future United States and Canada surpassed several British established colonies in the Caribbean, such as Barbados, Jamaica, Belize, and Guyana. In fact, the United States converged on the world economic leader, measured in GDP/capita, the UK. In 1910, the United States overtook the UK and began to diverge from it until about the 1950s. This shows that there must have been another explanation as to why the future United States and Canada developed at a faster rate than other colonies in the region.
Kenneth Sokoloff and Stanley Engerman argue in their article "History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World" that the difference between North America and the rest of the New World was not just in institutions but in the nature of their respective factor endowments. Countries like Brazil and Cuba had an extremely large yet concentrated factor endowment that tended toward exploitation, a hierarchical social system and exhibited economies of scale. Cuba and Brazil primarily grew lucrative products such as cotton, coffee, and sugar, which required hand picking and most efficiently picked when picked by hands in unison, whereas the United States was generally a wheat producer. The true advantage of the United States and Canada lay in a more equitable distribution of factors that could not be exploited on an extremely large scale. This distribution led to a more open and opportunistic economy, and eventually to long-term prosperity. For example, because wealth and power were distributed relatively equally in the United States and in Canada, these two countries led the rest of the Americas in providing education on a broader scale. Education is an important factor to improve technology in order to boost productivity, which is the reason that US and Canada surpassed the others. Greater access to education allowed for greater investment in human capital, which increases productivity and contributed to the United States and Canada's economic growth. According to Sokoloff and Engerman's article "History Lessons: Institutions, Factors Endowments, and Paths of Development in the New World," not only the United States had relatively equal distribution of wealth, it had relatively homogeneous population, political power and human capital. United States and Canada's relatively equal distribution of wealth, amount of human capital and political power ultimately affected development of institution, extent of franchise, and public education that persist and influence growth of the country. The open franchise in the United States and Canada was possible due to the large voting body of middle class and small elites. The open franchise brought elimination of wealth and literary requirement by 1940 in Canada and the United States (literacy requirement was still enforced in US southern regions only). Again, the open franchise was possible because the United States endowed a land suitable for wheat growing thus had a large body of middle class unlike Brazil and Cuba where they exhibited small elites, some overseers and large slave population. United States, then, outgrows other New World countries and eventually diverged from Cuba and Brazil in the late 18th and early 19th centuries.
Sokoloff and Engerman hypothesize that in societies founded with greater inequality, the elites gained more power to influence the choice of legal and economic institutions. In those countries which are inequal, small elites restrict majority people's rights, such as education and votes, to perpetuate the social structures and continue to make themselves "elites." The U.S. began its economic growth largely through slave labor and trade of the output of that labor. As the elites enacted policy to generate more economic equality, for example by increasing literacy rates, the U.S. GDP per capita pulled ahead of other long-since established countries along with the literacy rates. It is essential to note that factor endowments played a crucial role in shaping the colonies institutions and economic growth; colonies with a richer quality of soil grew cash crops such as sugar, coffee, and cotton, which were most efficiently grown using plantation systems. As such, the demand for not only slave labor but also peonage within these colonies grew. Due to the vast inequality that the society developed due to a small elite population in comparison to the vast laborer population, they were able to maintain the wealth and power within the elite class via establishing a guarded franchise. The inequalities within the cash crop colonies resulted in their economy not being able to expand and grow as fast as the U.S and Canada, due to restrictive policies. Those policies in inequal countries curb the intellectual development of most people who are only required to do simple manual jobs; however, US and Canada encourage their people to take part in education. As a result, US and Canada excel with higher productivities which are supported by advanced technology.
- Kenneth L. Sokoloff, Stanley L. Engerman (2000). "History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World" (PDF). The Journal of Economic Perspectives. 14 (3): 217–232. doi:10.1257/jep.14.3.217.