Factor endowment

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

One historical 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 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.

Kenneth Sokoloff and Stanley Engerman argue in their article "" 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 and a hierarchical social system. 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.