Between the 15th and 20th centuries, a small group of European powers colonized much of the world's landmass (see the figure at the top of the page). The resources the colonizers extracted have long been thought to have played a key role in their economic rise – and the relative economic decline of the rest of the world. Can colonization explain how certain parts of the world became rich? Can it explain why other parts of the world did not?

The most common explanation for why colonization made Western Europe rich is exploitation. The colonial powers exploited the natural resources of their colonies. These included precious metals (South America), rubber (Congo), spices and sugar (Indonesia), oil (Middle East), and slaves. Theories that rely on colonization attempt to explain both why Europe became rich first and why much of the rest of the world has been relatively slow to catch up. Do these explanations survive upon further scrutiny? Colonization was brutal and extractive. Its legacy is still with us in many respects. But was it responsible for modern economic growth?

How important colonization was for economic growth depends on which parts of the world we are talking about. For some countries, the period of colonial rule was short and transitory. For others, it was long-lived. Europeans had a negligible impact on East Asian societies like China and Japan until after 1800 and so it is hard to see how colonization had a negative effect on them prior to the Great Divergence. Arguments pertaining to this divergence therefore focus on the benefits of empire to Europeans.

With respect to Africa and Latin America, the colonizers certainly benefited from the resources and slave/coerced labor provided by the regions. Meanwhile, these regions also fell further behind because of colonization. Some arguments focus on the role of the colonies and slavery in Britain’s industrialization. In fact, the role that slave and coerced labor played in Britain’s industrialization has been the source of heated discussion for decades, if not longer. This is an important debate. We review this debate in this chapter.

A large literature has also emerged in recent years that attempts to explain the lingering effects of colonization on the colonized. Some places subject to colonial rule clearly ended up quite well-off (the US, Canada, Australia, New Zealand, Hong Kong, and Singapore), while others remain poor today (much of sub-Saharan Africa and Southeast Asia). What accounts for these differences? What role did colonization play, if any? Why has poverty persisted in many of the colonies?

Of the many odious aspects of colonization, the most odious was the slave trade. Between 1400 and 1900, Africa experienced four slave trades: the transatlantic trade (to the New World), the trans-Saharan trade, the Red Sea trade, and the Indian Ocean trade. The colonial powers were the primary participants in the transatlantic trade, which brought over 12 million slaves to the New World. Most of these slaves came from the west coast of Africa (see the figure below). Countries that had more people enslaved still fare worse today on several economic and political outcomes. There are many reasons for this pointed to in the literature, including (lack of ) trust of outsiders, ethnic fractionalization, and weaker state development.

The type of institutions that colonizers established have also had an important legacy for the economic and political development of the formerly colonized world. Where extractive institutions were established, rights for the native population were limited (if they existed at all), and investments in public goods tended to be restricted to those that facilitated extraction (such as roads leading from mines to ports). Many post-colonial governments found these extractive institutions useful as well. As a result, these institutions often persisted after independence. This is one of the reasons why "bad" governance – in terms of checks and balances and freedoms secured – is more common in the formerly colonized world than in Western Europe. Works focusing on colonial institutions, most famously those of Acemoglu, Johnson, and Robinson, seek a comprehensive answer for the large variation in contemporary institutional quality and economic outcomes in the former colonies. We discuss this literature, especially those following in the footsteps of Acemoglu, Johnson, and Robinson, in this chapter.

While on net the economic effects of colonization on the colonized were almost certainly negative, colonization did bring a few benefits even in those places that remain relatively poor today. For instance, real wages grew considerably in British colonial Africa, accompanied by urbanization and structural change. Some places received public goods, such as railroads, roads, and infrastructure, that were put in place to benefit colonial powers but continued to be useful after independence. There were also investments in education and health facilities, especially in places near missions. We review this literature in this chapter.

By and large, this literature does not claim that colonization was a "good" thing for local populations. It does point out, however, that history is rich and complex. The economic consequences of colonialism were highly heterogeneous. It was very bad in some places, less bad in others, and probably good in a few others. Appreciating these nuances is important to gaining a better understanding of how colonization contributed to modern wealth and the distribution of wealth.

The colonial legacy is largely a dark one. A substantial literature has emerged showing various mechanisms through which the colonial legacy is still with us in many parts of the world. This includes institutional development, trust norms, human capital accumulation, and public good provision. All of these are key factors in either promoting or inhibiting economic catch-up with the leading economies. In the remainder of the book, we show how this legacy, along with the factors discussed in the first five chapters, interacted to enable some parts of the world to become rich.