DEVELOPMENT ECONOMICS

DEVELOPMENT ECONOMICS

Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,

Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest

Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest

2

Author: Katalin Szilágyi Supervised by Katalin Szilágyi

January 2011

Week 6

History and institutions:

empirical analysis Outline

• Role of history in development

• Persistence of institutions

• Role of institutions in development

1. Role of history in development Role of history

• Does history matter?

• Causes? Explanation?

3

• Historical data: no reverse causality (endogenity bias) by construction

• Drawbacks of using historical data:

• Explanation?

• Small sample

• Normative consequences?

Glaeser–Shleifer

• Glaeser–Shleifer: Legal Origins (QJE, 2002)

(http://www.economics.harvard.edu/faculty/shleifer/files/legal_origins.pdf)

• Political institutions from 12–13. century influence current legal institutions

• England vs. France: more peaceful environment leads to more decentralised resolutions of disputes

• Origins of civil vs. common law traditions

La Porta et al.

• La Porta–Lopez de Silanes–Shleifer–Wishny: Law and Finance (JPE, 1998) (http://www.economics.harvard.edu/faculty/shleifer/files/law_finance.pdf)

• Legal tradition matter in the protection of private property → effect on concentration of capital and investment rates

• Historical institutions have long-lasting effects on development

4

Bockstette et al.

• Bockstette–Chanda–Puttermann: States and Growth: The Adventages of an Early Start (JEG, 2002)

(http://www.econ.brown.edu/fac/Louis_Putterman/working/pdfs/statehistjoeg.pdf)

• ”…it is clear that history does matter.”

• ”State antiquitiy” leads to faster growth and higher per capita income

• China (Italy) vs. Zambia (Papua)

• State antiquity matters

• Management experience

• Legitimation

• Common language, culture

• Measuring state antiquity

• Tribal or ”more developed” state? (q1)

• Local, external or mixed leadership? (q2)

• Territory of the antique state in % of the current? (q3)

• State antiquity (for 50-year periods) = q1*q2*q3

• ”State antiquity”: [0,1]

• China = 1

• Zambia = 0.066

5

State antiquity and growth

State antiquity and growth/income

6

2. Persistence of institutions Acemoglu–Johnson–Robinson

• Acemoglu– Johnson–Robinson: The Colonial Origins of Comparative Development: An Empirical Investigation (2001, AER)

http://econ-www.mit.edu/files/4123

• In Hungarian:

• Acemoglu, Daron: A gazdasági fejlődés gyökerei, Válogatás Daron Acemoglu műveiből. Rajk László Szakkollégium, Ráday Könyvesház, 2007

7

8

AJR (2001)

• Historical institutions matter for long-term economic performance

• Colonial development is the key

• Low settler mortality → good institutions (USA)

• High settler mortalaty → exploiting institutions (Congo)

• High persistence of institutions (Glaeser–Shleifer, La Porta et al., Bockstette et al.)

→ long-run consequences

Alternative explanations

• Sachs: Tropical underdevelopment (NBER WP, 2001) http://www.nber.org/papers/w8119

9

• Tropical conditions → settler mortality

• Tropical conditions → current performance

• Glaeser et al.: Do institutions cause growth? (JEG, 2004)

http://www.economics.harvard.edu/faculty/shleifer/files/do_institutions_cause_grow th.pdf

• Settlers imported human capital, not institutions

• Human capital → growth → institutions

AJR (2001)

• Key variable: ”current institutions”

• Proxy: expropriation risk (Political Risk Services)

• Assumption: good institutions provide protection of private property (investment)

• Problem: institutional quality can be endogenous

• Reverse causality

• Omitted variables

Endogenity

• Instrumental variable (IV):

• Correlates with the independent variable (current institutions)

• No direct effect on dependent variable (current income)

• IV estimation: 2SLS

10

AJR

• Dependent variable: current GDP per capita

• Dependent variable (endogenous): current institutional quality

• Instrument: settler mortality during colonisation

Independent and dependent variable

11

Dependent variable and IV

12

Results

• Institutions matter for income

• Settler mortality in the colonial era matters for current institutions

• Other ”tropical” factors have no additional explanatory power

3. Role of institutions for growth Institutions and economic performance

• Assumption: institutions matter for capital accumulation

• Protection of investors

• Stability and predictability of returns from investment

• Deadweight loss from investment (corruption)

Corruption and growth

• Mauro: Corruption and growth (QJE, 1995)

http://www.ppge.ufrgs.br/giacomo/arquivos/diremp/mauro-1995.pdf

• Endogenity bias: IV

• Etno-linguistic fragmentation is an instrument for bureaucratical efficiency (~

corruption)

• Bureaucratical efficiency (corruption) is a significant determinant of investment

13 rates (growth)

Institutions and welfare

• Hall–Jones: Why Do Some Countries Produce So Much More Output per Worker than Others? http://elsa.berkeley.edu/~chad/pon400.pdf

• Does GDP per capita depend on institutional quality (expropriation risk)?

• Instruments:

• Distance from Equator

• Official language

• Institutions matter for welfare/output

Role of informal institutions

• Social capital, norms, religion, beliefs

• Religion and growth: Barro

• Culture and growth: Gorodnichenko–Roland