Weekend Reading: Dietz Vollrath: Deep Roots of Development

Weekend Reading: Dietz Vollrath: Deep Roots of Development

…It will seem presumptuous to explain cross-cultural patience as a function of agricultural productivity around the time of the Neolithic Revolution. And I think that researchers within this field do have a tendency to take big swings at big questions, and at times the prose in the papers will reflect that. Don’t let that put you off. The question still remains whether there is a valid empirical link established, and whether that link can be interpreted causally or just as a correlation. I think you’ll see that there is an accumulation of papers establishing strong links between deep roots and current development, and that this is not just a few odd results….

The cross-country empirical work on institutions that started around the mid-1990s as part of the cross-country growth regression literature, and was carried forward by the Acemoglu, Johnson, and Robinson study that used settler mortality as a source of exogenous variation in institutions…. The TL;DR version of them is that I don’t find the empirical work convincing in establishing the proposition that institutions are the fundamental determinant of comparative development. The main criticisms were as follows:

  1. The scales of institutional quality (e.g. “protection against expropriation” or “constraints on executives”) are used improperly in regressions….

  2. In many cases institutional scales are just functioning as regional dummies. If you code a measure of institutional quality for European countries in 1750, and get that the Netherlands and England have a “3”, while Spain and Portugal have a “1”, and use this in a regression, then you may as well be using an indicator for “gray winters” versus “sunny winters”.

  3. Instrumenting for the quality of institutions in colonies using the mortality rates of European settlers doesn’t satisfy the condition that the instrument (settler mortality) have an effect on living standards only through its effect on institutions…. Settler mortality is like a summary statistic for biological/geographic conditions, which almost certainly have other routes to influence living standards.

Hence I don’t spend a lot of time in class going through the body of literature on these cross-country institutional studies. Nevertheless, I do spend time talking a lot about institutions….

Let’s take the 7 point index for “constraint on the executive” used by Acemoglu and Johnson in their 2005 paper. 1 is “not so many constraints” and 7 is “lots and lots of constraints”…. Does Australia (7) have seven times as many constraints at Cuba (1)? Does the one-point gap between Luxembourg (7) and South Korea (6) have a similar meaning to the one-point gap between Liberia (2) and Cuba (1)? Using this as a continuous variable presumes that the index values have some actual meaning, when all they are is a means of categorizing countries. So what happens if you use the constraint on executive scores simply as categorical (i.e. dummy) variables rather than as a continuous measure? You’ll find that all of the action comes from the category for the 7’s (Western developed countries) relative to the 1’s (Cuba, North Korea, Sudan, and others)…. Countries with 2’s, 3’s, 4’s, and 5’s are not significantly richer than 1’s (2’s, 3’s, and 4’s are actually estimated to be poorer than 1’s). Country’s with 6’s have marginally significant higher income than 1’s. The finding is that having Western-style social-democracy constraints on executives is what is good for income per capita, but gradations in constraints below that are essentially meaningless.

But there is a more fundamental empirical problem once we use constraints on executive to categorize countries. Regressions are dumb, and don’t care that we have a particular interpretation for our categories. They just load any differences in income per capita onto those categorical variables…. Empirically, the best I can conclude is that Western-style social democracies are different from poor countries. Well, duh. One aspect of that may be constraints on executives, but we cannot know that for sure. Other indices of institutions are just as bad…. You want to tell me Governance is good in Switzerland and bad in Uganda, I guess I’d have to agree with you, not having any specific experience to draw on. But if I ask you what exactly you mean by that, what kind of answer would I get?… The institutions that get coded as “good” are the institutions people find in rich countries, because those must be good institutions, right? These measures are inherently endogenous…. Another big problem with the empirical cross-country institutions work is courtesy of Glaeser et al (2004). Their point is that our institutional measures are generally measuring outcomes, not actual institutional differences. One example is Singapore, which scores (and scored) very high on institutional measures like risk of expropriation and constraints on executives. Except under Lee Kwan Yew, there were no constraints. He was essentially a total dictator, but happened to choose policies that were favorable to business, and did not arbitrarily confiscate property. But he could have, so there is no actual institutional limit there. The empirical measures of institutions we have are not measuring deep institutional, but transitory policy choices….

The whole issue of incredibly small sample sizes, often times in the 50-70 country range…. And don’t forget publication bias…. It may be that institutions do matter fundamentally for development. But the cross-country empirical literature is not evidence of that….

Next up will be 2nd-generation cross-country empirical work that uses instrumental variables. Spoiler alert: those don’t work either….

  1. They are still using an arbitrary measure of institutions as a continuous variable….

  2. It is nearly impossible to believe that their instrument (settler mortality) has no separate correlation with the dependent variable (income per capita)….

  3. The estimated effect of institutions doesn’t make sense. Their IV results show a coefficient for institutions that is twice as large as the OLS coefficient. This is problematic. The whole reason we want IV estimates is because we think there is some kind of endogeneity between income per capita and institutions-specifically, that higher income leads to better institutions. This implies that the basic correlation of institutions and income per capita is biased upwards, or the OLS results are too big. But when they run IV, they get even bigger effects for institutions. This implies that income per capita has a negative effect on institutions, and that is hard to believe…. In the end, the simplest explanation for why their IV results are larger than the OLS is that there is a correlation of their instrument with the error term. We know settler mortality is negatively related to expropriation risk. If settler mortality is independently and negatively related to income per capita, then the IV results are going to be larger than the OLS….

  4. The data are probably wrong. David Albouy’s paper is the central reference here. Let me review the main issues. First, of the 64 observations, they do not have settler mortality data for 36 of them. For those 36, they infer a value from some other country. This inference could be plausible, but in many cases is not. For example, they use mortality data from Mali to infer values of mortality for Cameroon, Uganda, Gabon, and Angola. Gabon is mostly rainforest, and about 2300 miles away from Mali, a desert or steppe. Second, the sources vary in the type of individuals used to make mortality estimates. Most relevantly, in some countries the mortality rates of soldiers on campaign are used, and in others the mortality rates of laborers on work projects. In both cases, mortality rates are outliers relative to what settlers would have experienced. Most importantly, the use of the higher mortality rates from campaigning soldiers or laborers is correlated with poor institutions. That is, AJR use artificially high mortality rates for places with currently bad institutions. Hence their results are already baked in before they go to run regressions. Albouy’s paper shows that making any of a number of equally plausible assumptions about how to code the data will eliminate the overall results…. So in the end the settler mortality evidence that institutions matter just does not stack up. It certainly does not have the kind of robust, replicable features we would like in order to establish the importance of something like institutions for development. If you want to argue that institutions matter, then by all means do so, but the AJR evidence is not something you should cite to support your case.

Next up I’ll talk about why 3rd generation empirical studies of specific institutions aren’t actually about institutions, but about poverty traps…. Dell (2010): Household consumption and child health are lower in areas in Peru and Bolivia subject to the Spanish mita-forced labor in mines-than in areas just outside the mita… .Nunn (2008): The number of slaves taken from an African country is negatively related to income per capita today. Banerjee and Iyer (2005): Agricultural output and investments in education and health are currently lower in areas of India where the British invested property rights in landlords as opposed to cultivators. Iyer (2010): Areas of India subject to direct British colonial rule have lower investments in schooling and health today than areas ruled indirectly through Indian governors. Michalopoulos and Papaioannou (2013). Pre-colonial ethnic political centralization in Africa is related to current levels of development within Africa:

These papers demonstrate is that economic development is persistent. If you like, they are evidence that there are poverty traps. If something happens to knock you below some threshold level of development-slaving activity, the mita, arbitrary borders, bad landlords-then you can’t get yourself out of that trap. You are too poor to invest in public goods like human capital or infrastructure because you are spending all your money just trying to survive. So you stagnate. Pushing you into the trap was the result of an “institution”, if we call these historical experiences institutions, but it isn’t institutions that keep you poor, it’s the poverty itself that prevents development.

Dell shows that education is lower and road networks are less dense in [former] mita areas than in their close neighbors…. Was some other institutional structure left behind by the mita that limited development[?]. But we have no evidence of any institutional difference between the mita areas and others. We simply know that the mita areas are poorer, and that could be evidence of a poverty trap rather than any specific institution. The papers on India have a similar flavor. The British no longer are in charge in India, but there are some differences today related to how they did govern. With regards to the effects of direct British rule, we don’t actually know what the channel is leading to the poor outcomes…. With regards to the effect of landlords or cultivator property rights, this isn’t about institutions, it’s about the distribution of wealth. Think of the question this way. What specific policy change do any of these papers suggest would lead to economic development? “Don’t get colonized, exploited, or enslaved by Europeans” seems like it would be hard to implement retroactively.

Understanding how a country/region/ethnicity got poor is not the same thing as understanding what will make them rich. “Institutions mattered” is different from “institutions matter”. I think the better conclusion from the 3rd generation of institutions research is that economies can fall into poverty traps from which escape is difficult if not impossible. Would better institutions allow these places to escape these traps? I don’t think we can say that with any confidence, partly because we have no idea what “better institutions” means.

I think the right null hypothesis regarding existing institutions is that they likely solving a particular issue for a particular group. Let’s call this the Elinor Ostrom hypothesis. I don’t think that the existing empirical institutions literature has provided sufficient evidence to reject the null at this point. Certainly not to the point that we can pinpoint the “right” institutions with any confidence….

All the other reading and thinking I’ve done on this subject suggests to me that they do matter. But the existing empirical evidence is not sufficient to strongly reject the null that they do not…. Given the empirical evidence, then, I’m uncomfortable making broad pronouncements that we have to get institutions “right” or “improve institutions” to generate economic development. We do not have evidence that this would work. Further… Acemoglu and Robinson did not lay out a theory of what constitutes good institutions, they laid out a theory of why institutions are persistent. Their work shows that being stuck in the bad equilibrium is the result of a skewed distribution of economic power that grants some elite a skewed amount of political power. The elite can’t credibly commit to maintaining reforms, and the masses can’t credibly commit to preserving the elite’s position, so they can’t come to an agreement on creating better institutions (whatever those might be).

The implication of the institutions literature is that redistributing wealth towards the masses will lead to economic development (and vice versa, that redistributing it towards the elites will slow economic development). Only then will the elite and masses endogenously negotiate a better arrangement. You don’t even have to know precisely what “good institutions” means, as they will figure it out for themselves. The redistribution need not be explicit, but may arise through changes in technology, trade, or population. Douglass North has the same underlying logic in his work. It was only with changes in the land/labor ratio favoring workers in Europe that old institutions disintegrated (serfdom) and new institutions arose (secure property rights). A good example is South Korea. In 1950, Korea was one of the poorest places on earth, falling well below many African nations in terms of development. It had also been subject to colonization by Japan from 1910 to 1945. Korea had the same history of exploitive institutions as most African nations.

So why didn’t South Korea get stuck in the same trap of bad institutions and under-development as Africa? One answer is that is had a massive redistribution of wealth. In 1945, the richest 3 percent of rural households owned 2/3 of all land, and about 60 percent of rural households had no land. This should have led to bad institutions and persistent underdevelopment. (See Ban, Moon, and Perkins, 1980, if you can find a copy). But starting in 1948 South Korea enacted wholesale land reform. By 1956, only 7 percent of farming households were tenants, and the rest owned their land. According to the FAO Agricultural Census of 1962, South Korea had zero farms larger than 5 hectares. Not a small number, not just a few, but zero. Agricultural land in South Korea, probably the primary source of wealth at that point, was distributed with incredible equity across households. According to North or Acemoglu and Robinson, this redistribution changed the relative power of elites and masses. It would have allowed them to reach a deal on “good institutions”…. If you want to generate economic development, the implication of the institutions literature is that you have to reform the underlying distribution of economic power first. Once you do that institutions will endogenously evolve towards the “good” equilibrium, whatever that may be.

Dietz Vollrath (2017): Who Are You Calling “Malthusian”?: “I’m not sure how to reply. I’m not a Malthusian ‘believer’, because that isn’t a thing. But I do think that several of Malthus’ assumptions about how economies function, in particular prior to the onset of sustained growth during the 1800’s, are well founded. And those assumptions have implications that help make sense of the world in that period of time:

Who are you calling Malthusian

Who are you calling Malthusian

Dietz Vollrath: Involution and growth: “This is a long-promised, long-simmering, longer-than-necessary post on the concept of involution. This term comes up often in discussions of Asian and/or Chinese development, or the lack thereof relative to western Europe. You can find several definitions, which is one of the problems with the concept. Perhaps the best way to give you a sense of what it means is that the Platonic use of the term would be “Rather than developing like western Europe, the Yangzi Delta involuted.”… The classic referenc… comes from Clifford Geertz’s Agricultural Involution: The Processes of Ecological Change in Indonesia. Geertz borrowed the term from an anthropologist, Alexander Goldenweiser, who used it to describe a situation in which the crafts or art of a society stuck with the same fundamental patterns, only making them more and more intricate over time….

Geertz adopted the word as a description of how village society in… the… paddy rice-growing heartland of Java… adapted to the growth in population, colonization by the Dutch, and the introduction of sugar as an export crop…. Villages did not change in a fundamental way during all this, even as they incorporated sugar production alongside paddy rice, but simply refined their existing social structures to further support small scale intense labor use. Those social structures included how land and labor was rented, hired, and shared across families…. What did not come along with all this refinement in agricultural relationships was growth in output per worker…. Village life in Indonesia did not become more market-oriented or commercialize in a way that one familiar with western European or English economic history might have expected…. The relationship with the Dutch, and the idea that Indonesia was an effective agricultural hinterland for Amsterdam. Thus money and goods flowed back and forth, but there was almost no flow of people. For Geertz, the importance of this showed up in a comparison of Java and Japan:

Japanese peasant agriculture came to be complementarily related to an expanding manufacturing system…. Javanese peasant agriculture came to be complementarily related to an expanding agro-industrial structure under foreign management…. Most of the invigorating effect of the flourishing agro-industrial sector was exercised upon Holland, and its impact upon the peasant sector was… enervating…

Philip Huang’s work on Chinese development… There were technological and market changes taking place in the Chinese economy…. Huang identifies the outcome as involution…. He identifies changes in the type of crops produced (e.g. cotton, tobacco, maize, silk) and in family work relationships (e.g. an expansion of women’s role in producing goods for sale)…. Here the concept of involution is really about how per-worker or per-capita outcomes could stagnate or fall despite expansions in absolute output, and at the same time as significant technological and commercial changes. This observation of involution is argued to run back through Chinese history to at least 1350, the scope of Huang’s book…. Is the term involution useful as an analytical concept for understanding why this occurred? No, as far as I’m concerned…. We’ve got a reasonable analytical model-Malthus-that allows one to think about the relationship of output per worker, population density, and the effect of changes in technology. It has the advantage of being clear on how those things are related, while also highlighting that the response of family formation and fertility to changes in output per worker is central to the story…. I’d reserve the term involution for Geertz’s specific idea that-as part of a Malthusian outcome-the agrarian or social relationships within an economy may evolve to a more refined or hyper-specialized version of themselves…

Most of Europe up until the late 1800s could still be explained within the context of a Malthusian model…. That said, there were places within Europe that saw commercial and market development which did lead to growth in living standards, urbanization, and ultimately sustainollrath**: ed growth earlier than this occurred in most of Asia. Why or how did they accomplish that, if they were stuck inside the same Malthusian framework?… Let me reach back to those two specifics that Geertz talked about with respect to Indonesia… paddy… rice cultivation, and the absence of an urban outlet within Indonesia itself…. The Chinese experience included urban areas, so it was not a “pure” Malthusian economy like Indonesia, in that sense. Despite that, it still ended up in a Malthusian situation of stagnant or falling output per worker, and the urbanization rate did not appear to change much. Here I think… paddy rice production, played a role, at least for the development of the Yangzi…. The marginal product of labor in rice production does not fall by much as additional labor is applied. That means output per worker in those agricultural areas is insensitive to growth in the number of workers. This turns out to be both good and bad for those areas…. Here’s Huang:

The involuted peasant economy was able to support very large and complex cities, and, by extension, also a highly advanced elite and urban culture, even if the surplus above subsistence produced by the average cultivator shrank from the diminished marginal returns that came with involution. The paradox is poorly understood. Large cities and advanced urban cultures are commonly associated with rural prosperity, but I would like to suggest that the opposite was actually the case in much of Chinese history…

How does this compare to Europe, and why does it explain the lack of crude involution? In European agriculture, there are reasons to think that the marginal product of labor is very sensitive to the amount of labor used. This is both bad and good. It is bad, because any population growth in agriculture leads to significant loss of output per worker. But that means population growth slows down quickly, and hence the transition to the Malthusian stagnant equilibrium is very fast. So one reason Europe may not have looked like it “involuted” is that it did not have long, drawn-out, transitions towards the Malthusian equilibrium, as in China….. [Plus] relative to rice-growing areas of China, Europe had an advantage in that any urbanization it generated created this follow-on effect of improving rural output per worker…. And I haven’t even touched on differences in family formation and fertility patterns, which would add a whole other layer on top of this…

Dietz Vollrath (2014): Solitary, Poor, Nasty, Brutish, Short…and Happy?: “I have no idea how happy these hunter-gatherers really were…. But let me suggest two negatives…. One, they had to witness a brutal rate of infant and child mortality…. And let’s not forget that those kids led unhappy lives, dying early, likely from some kind of infectious disease. Two, according to table 5 from the GK paper… close to one-in-five deaths occurred on the end of a spear, knife, arrow, or whatever weapon was at hand. One in five. For comparison, in the U.S. in 2010 (p. 11) only 0.4%, or 1 in 250, deaths are from homicide…. Hobbes may have been wrong about life being ‘solitary’, as my guess is that you stuck as close as possible to your trusted family network, but ‘poor, nasty, brutish, and short’ is a good first approximation…

Dietz Vollrath: Papers https://growthecon.wordpress.com/papers/: “If you are new to the field then the following papers provide a nice entry point:

Chang-Tai Hsieh and Peter J. Klenow (2010): Development Accounting http://ideas.repec.org/a/aea/aejmac/v2y2010i1p207-23.html

Mancur Olson (1996): Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor http://ideas.repec.org/a/aea/jecper/v10y1996i2p3-24.html

Nathan Nunn (2009): The Importance of History for Economic Development http://ideas.repec.org/a/anr/reveco/v1y2009p65-92.html

Oded Galor (2005): From Stagnation to Growth: Unified Growth Theory http://ideas.repec.org/h/eee/grochp/1-04.html

Xavier Sala-i-Martin (2006): The World Distribution of Income: Falling Poverty and… Convergence, Period http://ideas.repec.org/a/tpr/qjecon/v121y2006i2p351-397.html

  • Chris Blattman: Should We Believe the Institutions and Growth Literature? https://chrisblattman.com/2014/11/26/believe-institutions-growth-literature/: “Dietz Vollrath… you should read these posts, and follow the blog…. The institutions literature has focused too much on constraints and not on capacity. Constraints on power matter a lot. But the capacity of the state to get things done is equally or more important…. The slightly less-read stuff that should be more read, in my opinion…. North, Wallis and WeingastTim Besley and Torsten Persson… on state capacity… small-sample comparative case study work in Latin America, such as Jeffrey Paige or James MahoneyJohn Ishiyama’s short textbook…

  • Ricardo Hausmann (2013): The Tacit-Knowledge Economy https://www.project-syndicate.org/commentary/ricardo-hausmann-on-the-mental-sources-of-productivity-growth: “Know how resides in brains, and emerging and developing countries should focus on attracting them, instead of erecting barriers to skilled immigration. Because knowledge moves when people do, they should tap into their diasporas, attract foreign direct investment in new areas, and acquire foreign firms if possible…. Recent research at Harvard University’s Center for International Development (CID) suggests that tacit knowledge flows through amazingly slow and narrow channels. The productivity of Nuevo León, Mexico, is higher than in South Korea, but that of Guerrero, another Mexican state, resembles levels in Honduras. Moving knowledge across Mexican states has been difficult and slow. It is easier to move brains than it is to move tacit knowledge into brains, and not only in Mexico. For example, as the CID’s Frank Neffke has shown, when new industries are launched in German and Swedish cities, it is mostly because entrepreneurs and firms from other cities move in, bringing with them skilled workers with relevant industry experience…. Knowledge moves when people do…

  • Timothy Besley and Torsten Persson: The Origins of State Capacity: Property Rights, Taxation, and Politics http://econ.lse.ac.uk/staff/tbesley/papers/originsofstatecapacity.pdf: “‘Policy choices’ in market regulation and taxation are constrained by past investments in the legal and fiscal capacity of the state. We study the economic and political determinants of such investments and find that legal and fiscal capacity are typically complements. Our theoretical results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity of both forms. Our preliminary empirical results uncover a number of correlations in cross-country data which are consistent with the theory…

  • Douglass C. North, John Joseph Wallis, and Barry R. Weingast: A Conceptual Framework for Interpreting Recorded Human History https://www.nber.org/papers/w12795: “Beginning 10,000 years ago, limited-access social orders developed that were able to control violence, provide order, and allow greater production through specialization and exchange… using the political system to limit economic entry to create rents, and then using the rents to stabilize the political system and limit violence…. This type of political economy arrangement… appears to be the natural way that human societies are organized…. In contrast, a handful of developed societies have developed open-access social orders. In these societies, open access and entry into economic and political organizations sustains economic and political competition. Social order is sustained by competition rather than rent-creation. The key to understanding modern social development is understanding the transition from limited- to open-access social orders, which only a handful of countries have managed since WWII…

  • Robert I. Moore (2000): The First European Revolution: c. 970-1215 https://books.google.com/books?isbn=0631184791: “This book provides a radical reassessment of Europe from the late tenth to the early thirteenth centuries…. The period witnessed the first true revolution in European society, characterized by a transformation in the economy, in family structures, and in the sources of power and the means by which it was exercised. Together these changes brought into being for the first time an autonomous city-supporting civilization in non-Mediterranean Europe. The circumstances and outcome of this transformation, he demonstrates, not only shaped medieval and modern Europe but established enduring and fundamental characteristics which differentiated Europe from other world civilizations. The process at the heart of change involved social, cultural and institutional transformations whose implementation required extensive popular participation. On occasion it required the use or threat of popular violence, in part consciously sanctioned and led by some of those challenging for power within the social elite; once the revolution had been achieved this popular enthusiasm had to be subdued and contained. These developments were far from simple and anything but uniform. The differences which resulted both within Europe and between Europe and other world civilizations were of lasting significance…

  • Michael Mitterauer: Why Europe?: The Medieval Origins of Its Special Path https://books.google.com/books?isbn=0226532380: “While most historians have located the beginning of Europe’s special path in the rise of state power in the modern era, Mitterauer establishes its origins in rye and oats. These new crops played a decisive role in remaking the European family, he contends, spurring the rise of individualism and softening the constraints of patriarchy. Mitterauer reaches these conclusions by comparing Europe with other cultures, especially China and the Islamic world, while surveying the most important characteristics of European society as they took shape from the decline of the Roman empire to the invention of the printing press. Along the way, Why Europe? offers up a dazzling series of novel hypotheses to explain the unique evolution of European culture…

#economicgrowth #economichistory #weekendreading #2019-10-12

Read More