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A factor endowment, in economics, is commonly understood to be 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 if all other things are 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's 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 those 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.
In 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 such countries benefited greatly by borrowing many of Britain's institutions and laws. North America undoubtedly gained from the borrowing, but that 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 similarly. In fact, data show that connection between the prosperity of the colonizing and the wealth of the colony is weaker than is 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 per capita, the United Kingdom. In 1910, the United States overtook it and began to diverge from it until about the 1950s. That shows that there must have been another explanation for the future United States and Canada developing faster 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 only in institutions but also in the nature of their respective factor endowments. Countries like Brazil and Cuba had an extremely large but concentrated factor endowment that tended toward exploitation, a hierarchical social system and exhibited economies of scale. Cuba and Brazil grew primarily lucrative products such as cotton, coffee, and sugar, which required hand picking and most efficiently picked when picked by hands in unison, but 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. That distribution led to a more open and opportunistic economy, and eventually to long-term prosperity. For example, wealth and power were distributed relatively equally in the United States and in Canada, which made both countries lead the rest of the Americas in providing education on a broader scale. Since education is an important factor to improve technology to boost productivity, the United States 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 the article, the United States had relatively equal distribution of wealth and a relatively homogeneous population, political power, and human capital. That ultimately affected the development of institution, extent of franchise, and public education, which have persisted and influenced the growth of the country. The open franchise in both countries was possible because of the large numbers of those in the middle class and the small elites. The open franchise brought elimination of wealth and literary requirements by 1940 in Canada and most of the United States (except in the Southern United States). Again, the open franchise was possible because the United States endowed a land suitable for wheat growing and so had a large body of middle class, unlike Brazil and Cuba, which exhibited small elites, some overseers, and a large slave population. The United States therefore outpaced other New World countries and eventually diverged from Cuba and Brazil in the late 18th and the early 19th centuries.
Sokoloff and Engerman hypothesize that in societies founded with greater inequality, the gain more power to influence the choice of legal and economic institutions. In countries that are inequal, small elites restrict the majority's rights, such as to education and to vote, so that they can perpetuate the social structures and continue to be the elites. The United States began its economic growth largely through slave labor and the trade of its output. As elites enacted policy to generate more economic equality, such as by increasing literacy rates, the GDP per capita pulled ahead of other long-established countries, along with its literacy rate.
It is essential to note that factor endowments played a crucial role in shaping colonies' institutions and economic growth; those 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. The vast inequality that the society developed by a small elite population, in comparison to the vast laborer population, made them able to maintain wealth and power in the elite class by establishing a restricted franchise. The inequalities within the cash crop colonies resulted in their economies being unable to expand and grow as fast as the United States and Canada because of restrictive policies that curbed the intellectual development of most people, who are must do simple manual jobs. The United States and Canada, however, encourage their people to take part in education and so both countries excel with higher productivities that 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.CS1 maint: uses authors parameter (link)