DEVELOPMENT ECONOMICS

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

DEVELOPMENT ECONOMICS

Author: Katalin Szilágyi

Supervised by Katalin Szilágyi January 2011

ELTE Faculty of Social Sciences, Department of Economics

DEVELOPMENT ECONOMICS

Week 6

History and institutions:

empirical analysis

Katalin Szilágyi

Outline

1. Role of history in development

2. Persistence of institutions 3. Role of institutions in

development

1.Role of history in

development

Role of history

• Does history matter?

• Causes? Explanation?

• 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/s hleifer/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/facu

lty/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

Bockstette et al.

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

(http://www.econ.brown.edu/fac/Louis_Pu tterman/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)

Bockstette et al.

• 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

Bockstette et al.

• ”State antiquity”: [0,1]

• China = 1

• Zambia = 0.066

State antiquity and growth

State antiquity and

growth/income

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

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

AJR (2001)

Alternative explanations

• Sachs: Tropical underdevelopment (NBER WP, 2001)

http://www.nber.org/papers/w8119

• Tropical conditions → settler mortality

• Tropical conditions → current

performance

Alternative explanations

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

http://www.economics.harvard.edu/facul ty/shleifer/files/do_institutions_cause_gr owth.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

AJR

• Dependent variable: current GDP per capita

• Dependent variable (endogenous):

current institutional quality

• Instrument: settler mortality during

colonisation

Independent and dependent variable

Dependent variable and IV

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 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