Nation building
Institutions and the long-run impact of early development
James Ang
Journal of Development Economics, November 2013, Pages 1-18
Abstract:
We study the role of institutional development as a causal mechanism of history affecting current economic performance. Several indicators capturing different dimensions of early development in 1500 AD are used to remove the endogenous component of the variations in institutions. These indicators are adjusted with large-scale movements of people across international borders using the global migration matrix of Putterman and Weil (2010) to account for the fact that the ancestors of a population have facilitated the diffusion of knowledge when they migrate. The exogenous component of institutions due to historical development is found to be a significant determinant of current output. By demonstrating that the relationship between early development and current economic performance works through the channel of institutions and that better institutions can be traced back to historical factors, the results of this paper shed some light on how history has played a role in shaping long-run comparative development.
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Do Island States Have Better Institutions?
Heather Congdon Fors
Journal of Comparative Economics, forthcoming
Abstract:
Since the end of World War II, the number of countries in the world has increased dramatically. Many of these newly independent countries are small both in terms of population and geography, and several are islands. The purpose of this paper is to explore the effects of island status and country size on institutional quality, and to determine if these institutional effects can explain the relatively strong economic performance of islands and small countries. I distinguish between political institutions (Democracy) and economic institutions (Rule of Law). One of the main findings of this paper is that the relationship between island status and institutional quality is significantly positive, and that these results are robust to the inclusion of a number of control variables. Further, I find that country size is negatively related to institutional quality, which is in keeping with previous results. Finally, I demonstrate that when Rule of Law is included in regressions on levels of per capita GDP, the positive effects of small country size and island status disappear. These results provide further support for our hypothesis that institutions account for these countries' relatively better economic performance.
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Barriers to Health and the Poverty Trap
Yin-Chi Wang & Ping Wang
NBER Working Paper, August 2013
Abstract:
Why have some poor countries been able to take off while others are still stuck in the poverty trap? To address this old question, we observe that (i) with similar or higher levels of educational attainment, trapped countries tend to have much poorer health conditions compared to the initially poor countries that later took off, and (ii) improving health conditions in poor countries usually involves large-scale investment where such resources can be easily misallocated. We construct a dynamic general equilibrium model with endogenous health and knowledge accumulation, allowing health-related institutional barriers to affect individual incentives and equilibrium outcomes. We then calibrate the model to fit (i) the U.S. economy (as a benchmark), (ii) a representative trapped economy based on the average economic performance and economic conditions of 41 countries that are still in the poverty trap, (iii) a group of trapped economies with richer institutional data (Bangladesh, Kenya and Nigeria), and (iv) two initially poor countries that later took off (China and India). The results show that, although low among all countries in this study, the U.S. economy still faced a health-related institutional barrier of 15%. The trapped economies all suffered much large barriers ranging from 50% to 73% under which the incentive to invest in health is severely hindered. For China and India, the magnitudes of such barriers were large (about twice as much as for the U.S. and half that for the trapped economies on average) but not enough to undermine the willingness to invest in health. This paper thereby advances our understanding of the role played by barriers to health in the poverty trap.
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Does the intelligence of populations determine the wealth of nations?
Vittorio Daniele
Journal of Socio-Economics, October 2013, Pages 27-37
Abstract:
Can the average intelligence quotient of populations be considered the root cause of international development inequalities? Psychologists and some economic studies have proposed the existence of a link between intelligence quotient (IQ) and economic development. The paper tests this hypothesis, using different measures of economic development for the year 1500. Consistent with Jared Diamond's (1997) hypothesis, the paper shows how the differences in the timing of agriculture transition and the histories of States, not population IQ differences, predict international development differences before the colonial era. The average IQ of populations appears to be endogenous, related to the diverse stages of nations' modernization, rather than being an exogenous cause of economic development.
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Development and Freedom as Risk Management
Bhagwan Chowdhry, Richard Roll & Konark Saxena
Finance Research Letters, forthcoming
Abstract:
Amartya Sen has argued that many development and freedom measures such as health, education, political and civil liberties are important constituents of human welfare. We concur with Sen and conjecture that an important reason these measures affect human welfare is because they allow individuals to better cope with risk and uncertainty that cannot be hedged using market based insurance mechanisms. We find some empirical support for this conjecture in that the volatility of consumption growth appears to be negatively related to life expectancy, political rights, and property rights (but is positively related to the rate of literacy) after controlling for the size of the country, per capita income, and openness to trade and capital flows, (which, as one would expect, also reduce consumption growth volatility) in cross-country panel regressions.
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Are modern financial systems shaped by state antiquity?
James Ang
Journal of Banking & Finance, November 2013, Pages 4038-4058
Abstract:
We demonstrate that existing differences in financial development between countries can be explained by the cumulative variations in their levels of state experience since 1 AD. This dimension of early historical development has not been considered so far in studies that analyze the determinants of financial development. The estimation allows for all major theories established in the literature as possible explanations for the disparity of financial development across the globe. Significance of state antiquity is robust to the use of alternative indicators of financial development, the consideration of different lengths and periods of statehood, and controlling for a range of variables or country characteristics. Our results highlight the important role of statehood in propelling financial system development, and thus provide some support to the view that historically determined differences in the early-start developmental advantage provide the basis for explaining the fundamental sources of variations in financial development between countries today.
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Should developing countries undervalue their currencies?
Marcel Schröder
Journal of Development Economics, forthcoming
Abstract:
The Washington Consensus emphasizes the economic costs of real exchange rate distortions. However, a sizable recent empirical literature finds that undervalued real exchange rates help countries to achieve faster economic growth. This paper shows that recent findings are driven by inappropriate homogeneity assumptions on cross-country long-run real exchange rate behavior and/or growth regression misspecification. When these problems are redressed, the empirical results for a sample of 63 developing countries suggest that deviations of the real exchange rate in either direction from the value that is consistent with external and internal equilibrium reduces economic growth. Deviations from Balassa-Samuelson adjusted purchasing power parity on the other hand do not seem to matter for growth performance. The real exchange rate should thus be consistent with external and internal balance irrespective of implied purchasing power parity benchmarks.
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Do Public Equity Markets Matter in Emerging Economies? Evidence from India
Radhakrishnan Gopalan & Todd Gormley
Review of Finance, September 2013, Pages 1571-1615
Abstract:
Do public equity markets serve an unique role that is not easily served by other forms of financing in emerging economies? We analyze this question using the collapse of India's equity market in 1997, which provides an exogenous shock to firms' ability to issue equity. We find that both public and private firms exhibit higher bankruptcy rates and lower growth after 1997. The decline in growth is greater among firms with more external finance needs and fewer tangible assets. Overall, the evidence suggests that public equity markets are an important, not easily replaced, source of finance in emerging economies.
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Are complementary reforms a "luxury" for developing countries?
Jorge Braga de Macedo, Joaquim Oliveira Martins & Bruno Rocha
Journal of Comparative Economics, forthcoming
Abstract:
This paper investigates the impact of complementarity reforms on growth and how it depends on GDP per capita. Based on reform data for six policy areas compiled from various sources during the period 1994-2006 for over 100 countries, we compute composite indicators of reform level and complementarity. We provide qualitative justification for the existence of pair-wise complementarities among policy areas. We then use cross-section and panel data estimates to test the effect of reform level and complementarity on GDP per capita growth. We found reforms to be positively related and their dispersion negatively related to growth, controlling for initial conditions, monetary stability and other structural and institutional variables, as well as endogeneity of reform level and complementarity. We show that the effect of policy complementarity is a stronger condition for sustainable growth in developing than in advanced countries, to conclude that complementary reforms are not a ‘luxury' for developing countries.
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From Divergence to Convergence: Re-evaluating the History behind China's Economic Boom
Loren Brandt, Debin Ma & Thomas Rawski
Journal of Economic Literature, forthcoming
Abstract:
China's long-term economic dynamics pose a formidable challenge to economic historians. The Qing Empire (1644-1911), the world's largest national economy before 1800, experienced a tripling of population during the 17th and 18th centuries with no signs of diminishing per capita income. While the timing remains in dispute, a vast gap emerged between newly rich industrial nations and China's lagging economy in the wake of the Industrial Revolution. Only with an unprecedented growth spurt beginning in the late 1970s did this great divergence separating China from the global leaders substantially diminish, allowing China to regain its former standing among the world's largest economies. This essay develops an integrated framework for understanding that entire history, including both the divergence and the recent convergent trend. We explain how deeply embedded political and economic institutions that contributed to a long process of extensive growth before 1800 subsequently prevented China from capturing the benefits associated with the Industrial Revolution. During the 20th century, the gradual erosion of these historic constraints and of new obstacles erected by socialist planning eventually opened the door to China's current boom. Our analysis links China's recent development to important elements of its past, while using recent success to provide fresh perspectives on the critical obstacles undermining earlier modernization efforts, and their eventual removal.
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Respect, Responsibility, and Development
Janice Boucher Breuer & John McDermott
Journal of Development Economics, November 2013, Pages 36-47
Abstract:
We develop a theory that explains how two core values - Respect for others and Responsibility - affect productivity, the accumulation of capital, and output per worker. Using data from the World Values Survey, we empirically test the model using a panel dataset that includes 82 countries over six distinct years. We find that these two core values are important to production and that their impact is substantial. We also show that Respect and Responsibility reduce the influence of trust and mitigate the negative macroeconomic effects associated with fractionalized societies. Our results are robust to various treatments for endogeneity and under alternative samples.
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Failure to Launch? The role of land inequality in transition delays
Andros Kourtellos, Ioanna Stylianou & Chih Ming Tan
European Economic Review, August 2013, Pages 98-113
Abstract:
This paper provides empirical support for one theory of transition delays: initial land inequality. Using a new historical data set for land inequality (Frankema, 2009) we employ duration analysis to investigate whether higher levels of land inequality lead to longer delays in the extension of primary schooling. Our findings suggest that land inequality is a key determinant of delays in schooling.
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Democracy and Female Labor Force Participation: An Empirical Examination
Ghazal Bayanpourtehrani & Kevin Sylwester
Social Indicators Research, July 2013, Pages 749-762
Abstract:
This paper empirically examines associations between female labor force participation (FLFP) and democracy. Using a cross-country, time series (1980-2005) data set, we find evidence that FLFP is lower in democracies. One possible explanation is that dictators promote FLFP above what traditional norms would dictate and so a greater freedom to follow custom lowers FLFP. However, we also find that the ratio of FLFP to male labor force participation (MLFP) is similar under both types of regimes and that MLFP is also lower in democracies. This outcome casts doubt on the aforementioned explanation. Instead, one possibility is that both men and women voluntarily withdraw from the labor force with greater freedoms.
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Coevolution of farming and private property during the early Holocene
Samuel Bowles & Jung-Kyoo Choi
Proceedings of the National Academy of Sciences, 28 May 2013, Pages 8830-8835
Abstract:
The advent of farming around 12 millennia ago was a cultural as well as technological revolution, requiring a new system of property rights. Among mobile hunter-gatherers during the late Pleistocene, food was almost certainly widely shared as it was acquired. If a harvested crop or the meat of a domesticated animal were to have been distributed to other group members, a late Pleistocene would-be farmer would have had little incentive to engage in the required investments in clearing, cultivation, animal tending, and storage. However, the new property rights that farming required - secure individual claims to the products of one's labor - were infeasible because most of the mobile and dispersed resources of a forager economy could not cost-effectively be delimited and defended. The resulting chicken-and-egg puzzle might be resolved if farming had been much more productive than foraging, but initially it was not. Our model and simulations explain how, despite being an unlikely event, farming and a new system of farming-friendly property rights nonetheless jointly emerged when they did. This Holocene revolution was not sparked by a superior technology. It occurred because possession of the wealth of farmers - crops, dwellings, and animals - could be unambiguously demarcated and defended. This facilitated the spread of new property rights that were advantageous to the groups adopting them. Our results thus challenge unicausal models of historical dynamics driven by advances in technology, population pressure, or other exogenous changes. Our approach may be applied to other technological and institutional revolutions such as the 18th- and 19th-century industrial revolution and the information revolution today.
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America's Role in Making Japan's Economic Miracle: New Evidence for a Landmark Case
Michael Beckley, Yusaku Horiuchi & Jennifer Miller
Tufts University Working Paper, August 2013
Abstract:
The postwar rise of Japan is one of the most dramatic cases of rapid economic development in modern history. While most studies attribute Japan's growth to domestic institutions and policies, this study argues that it depended upon unique international circumstances; in particular, Japan's close security relationship with the United States. Using a recently developed statistical tool - the synthetic control method - we show that the acceleration of Japan's growth coincided with the consolidation of the U.S.-Japan alliance. We corroborate these results with historical evidence that reveals how the alliance put Japan in a privileged economic position.
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Disease Control, Demographic Change and Institutional Development in Africa
Margaret McMillan, William Masters & Harounan Kazianga
NBER Working Paper, July 2013
Abstract:
This paper addresses the role of tropical disease in rural demography and land use rights, using data from Onchocerciasis (river blindness) control in Burkina Faso. We combine a new survey of village elders with historical census data for 1975-2006 and geocoded maps of treatment under the regional Onchocerciasis Control Program (OCP). The OCP ran from 1975 to 2002, first spraying rivers to stop transmission and then distributing medicine to help those already infected. Controlling for time and village fixed effects, we find that villages in treated areas acquired larger populations and also had more cropland transactions, fewer permits required for cropland transactions, and more regulation of common property pasture and forest. These effects are robust to numerous controls and tests for heterogeneity across the sample, including time-varying region fixed effects. Descriptive statistics suggest that treated villages also acquired closer access to electricity and telephone service, markets, wells and primary schools, with no difference in several other variables. These results are consistent with both changes in productivity and effects of population size on public institutions.
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Public sector corruption and the probability of technological disasters
Eiji Yamamura
Economics of Governance, August 2013, Pages 233-255
Abstract:
A growing number of studies have explored the influence of institution on the outcomes of disasters and accidents from the viewpoint of political economy. This paper focuses on the probability of the occurrence of disasters rather than disaster outcomes. Using panel data from 98 countries, this paper examines how public sector corruption is associated with the probability of technological disasters. It was found that public sector corruption raises the probability of technological disasters. This result is robust when endogeneity bias is controlled.