REVERSAL OF FORTUNE: GEOGRAPHY ANDINSTITUTIONS IN THE MAKING OF THE MODERNWORLD INCOME DISTRIBUTION*DARON ACEMOGLUSIMON JOHNSONJAMES A. ROBINSONAmong countries colonized by European powers during the past 500 years,those that were relatively rich in 1500 are now relatively poor. We document thisreversal using data on urbanization patterns and population density, which, weargue, proxy for economic prosperity. This reversal weighs against a view thatlinks economic development to geographic factors. Instead, we argue that thereversal reflects changes in the institutions resulting from European colonialism.The European intervention appears to have created an “institutional reversal”among these societies, meaning that Europeans were more likely to introduceinstitutions encouraging investment in regions that were previously poor. Thisinstitutional reversal accounts for the reversal in relative incomes. We providefurther support for this view by documenting that the reversal in relative incomestook place during the late eighteenth and early nineteenth centuries, and resultedfrom societies with good institutions taking advantage of the opportunity toindustrialize.I. INTRODUCTIONThis paper documents a reversal in relative incomes amongthe former European colonies. For example, the Mughals in Indiaand the Aztecs and Incas in the Americas were among the richestcivilizations in 1500, while the civilizations in North America,New Zealand, and Australia were less developed. Today theUnited States, Canada, New Zealand, and Australia are an orderof magnitude richer than the countries now occupying the terri-tories of the Mughal, Aztec, and Inca Empires.* We thank Joshua Angrist, Abhijit Banerjee, Olivier Blanchard, AlessandraCassella, Jan de Vries, Ronald Findlay, Jeffry Frieden, Edward Glaeser, HerschelGrossman, Lawrence Katz, Peter Lange, Jeffrey Sachs, Andrei Shleifer, FabrizioZilibotti, three anonymous referees, and seminar participants at the All-Univer-sities of California History Conference at Berkeley, the conference on “Globaliza-tion and Marginalization” in Bergen, The Canadian Institute of Advanced Re-search, Brown University, the University of Chicago, Columbia University, theUniversity of Houston, Indiana University, Massachusetts Institute of Technol-ogy, National Bureau of Economic Research summer institute, Stanford Univer-sity, the Wharton School of the University of Pennsylvania, and Yale Universityfor useful comments. Acemoglu gratefully acknowledges financial help from TheCanadian Institute for Advanced Research and the National Science FoundationGrant SES-0095253. Johnson thanks the Massachusetts Institute of TechnologyEntrepreneurship Center for support.© 2002 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnology.The Quarterly Journal of Economics, November 20021231Our main measure of economic prosperity in 1500 is urban-ization. Bairoch [1988, Ch. 1] and de Vries [1976, p. 164] arguethat only areas with high agricultural productivity and a devel-oped transportation network can support large urban popula-tions. In addition, we present evidence that both in the timeseries and the cross section there is a close association betweenurbanization and income per capita.1As an additional proxy forprosperity we use population density, for which there are rela-tively more extensive data. Although the theoretical relationshipbetween population density and prosperity is more complex, itseems clear that during preindustrial periods only relativelyprosperous areas could support dense populations.With either measure, there is a negative association betweeneconomic prosperity in 1500 and today. Figure I shows a negativerelationship between the percent of the population living in townswith more than 5000 inhabitants in 1500 and income per capitatoday. Figure II shows the same negative relationship betweenlog population density (number of inhabitants per square kilome-ter) in 1500 and income per capita today. The relationships shownin Figures I and II are robust—they are unchanged when wecontrol for continent dummies, the identity of the colonial power,religion, distance from the equator, temperature, humidity, re-sources, and whether the country is landlocked, and when weexclude the “neo-Europes” (the United States, Canada, New Zea-land, and Australia) from the sample.This pattern is interesting, in part, because it provides anopportunity to distinguish between a number of competing theo-ries of the determinants of long-run development. One of the mostpopular theories, which we refer to as the “geography hypothe-sis,” explains most of the differences in economic prosperity bygeographic, climatic, or ecological differences across countries.The list of scholars who have emphasized the importance ofgeographic factors includes, inter alia, Machiavelli [1519], Mon-1. By economic prosperity or income per capita in 1500, we do not refer to theeconomic or social conditions or the welfare of the masses, but to a measure oftotal production in the economy relative to the number of inhabitants. Althoughurbanization is likely to have been associated with relatively high output percapita, the majority of urban dwellers lived in poverty and died young because ofpoor sanitary conditions (see, for example, Bairoch [1988, Ch. 12]).It is also important to note that the Reversal of Fortune refers to changes inrelative incomes across different areas, and does not imply that the initial in-habitants of, for example, New Zealand or North America themselves becamerelatively rich. In fact, much of the native population of these areas did notsurvive European colonialism.1232 QUARTERLY JOURNAL OF ECONOMICStesquieu [1748], Toynbee [1934 –1961], Marshall [1890], andMyrdal [1968], and more recently, Diamond [1997] and Sachs[2000, 2001]. The simplest version of the geography hypothesisemphasizes the time-invariant effects of geographic variables,such as climate and disease, on work effort and productivity, andtherefore predicts that nations and areas that were relatively richin 1500 should also be relatively prosperous today. The reversalin relative incomes weighs against this simple version of thegeography hypothesis.More sophisticated versions of this hypothesis focus on thetime-varying effects of geography. Certain geographic character-istics that were not useful, or even harmful, for successful eco-nomic performance in 1500 may turn out to be beneficial