Geography, History and Institutions January 2011 () Institutions - - PowerPoint PPT Presentation

Geography, History and Institutions

January 2011

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Economic Institutions

The “rules of the game” in society (North, 2003) , ! the humanly–devised constraints that structure incentives in economic transactions They consist of (1) formal rules (statute law, common law, regulations), (2) informal constraints (conventions, norms of behavior), (3) the enforcement characteristics of both Determined by domestic/global, politics, religion, nature, etc. Change only gradually in response to economic/politicial pressures.

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“Why do Some Countries Produce So Much More Output per Worker than Others ?”

Hall and Jones (1999)

Social infrastructure, institutions, geography + Investment (in physical/human capial), employment, technology adoption + Output per worker

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Determinants of Economic Performance

Output per worker and inputs strongly correlated with: , ! social infrastructure — government anti-diversion policy (GADP) Index , ! openness to trade — Sachs–Warner index Direction of causation ? , ! instrumental variables

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Figure 2: Social Infrastructure and Output Per Worker

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1000 2000 4000 8000 16000 32000

DZA AGO BEN BWA BFA BDI CMR CPV CAF TCD COM COG EGY GAB GMB GHA GIN GNB CIV KEN LSO MDG MWI MLI MRT MUS MAR MOZ NAM NER NGA REU RWA SEN SYC SLE SOM ZAF SDN SWZ TZA TGO TUN UGA ZAR ZMB ZWE BRB CAN CRI DOM SLV GTM HTI HND JAM MEX NIC PAN PRI TTO USA ARG BOL BRA CHL COL ECU GUY PRY PER SUR URY VEN BGD CHN HKG IND IDN IRN ISR JPN JOR KOR MYS BUR OMN PAK PHL SAU SGP LKA SYR OAN THA YEM AUT BEL CYP CSK DNK FIN FRA DEU GRC HUN ISL IRL ITA LUX MLT NLD NOR POL PRT ROM ESP SWE CHE TUR GBR SUN YUG AUS FJI NZL PNG

Observed Index of Social Infrastructure Y/L (U.S. dollars, log scale)

Hall and Jones use the following instruments: , ! distance from equator , ! language indices , ! predicted trade share ) results suggest that social infrastructure and openness are signi…cant factors BUT (1) aside form distance to the equator other instruments are not clearly exogenous (2) why does distance to the equator matter ?

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Table 2: Basic Results for Output per Worker

log Y/L = α + β ˜ S + ˜ ǫ OverID Test Coeff Test Social p-value p-value Specification Infrastructure Test Result Test Result ˆ σ˜

ǫ

• 1. Main Specification

5.142 .256 .812 .840 (.508) Accept Accept Alternative Specifications to Check Robustness

• 2. Instruments:

4.998 .208 .155 .821 Distance, Frankel-Romer (.567) Accept Accept

• 3. No Imputed Data

5.323 .243 .905 .889 79 Countries (.607) Accept Accept

• 4. OLS

3.289 — .002 .700 (.212) Reject The coefficient on Social Infrastructure reflects the change in log output per worker as- sociated with a one unit increase in measured social infrastructure. For example, the coefficient of 5.14 means than a difference of .01 in our measure of social infrastructure is associated with a 5.14 percent difference in output per worker. Standard errors are computed using a bootstrap method, as described in the text. The “Main Specification” uses distance from the equator, the Frankel-Romer instrument, the fraction of the popu- lation speaking English at birth, and the fraction of the population speaking a Western European language at birth as instruments. The “OverID Test” column reports the result of testing the overidentifying restrictions and the “Coeff Test” reports the result

• f testing for the equality of the coefficients on the GADP policy index variable and the
• penness variable. The standard deviation of log Y/L is 1.078.

Table 4: Results for log K/Y , log H/L, and log A

Component = α + β ˜ S + ˜ ǫ —— Dependent Variable ——

α 1−α log K/Y

log H/L log A Social 1.052 1.343 2.746 Infrastructure (.164) (.171) (.336) OverID Test (p) .784 .034 .151 Test Result Accept Reject Accept ˆ σ˜

ǫ

.310 .243 .596 ˆ σDepV ar .320 .290 .727 Note: Estimation is carried out as in the main specifi- cation in Table 2. Standard errors are computed using a bootstrap method, as described in the text.

“The Colonial Origins of Comparative Development: An Empirical Investigation”

Acemoglu, Johnson and Robinson (2001).

Basic Idea: To capture the true impact of institutional di¤erences on economic performance, we need an exogenous source of variation in institutions Early determinant of current institutions in many countries was the nature of early colonization after 1500 Two broad kinds: (1) extractive (e.g. the Belgian Congo) (2) “neo–Europes” (e.g. Australia)

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BUT what determined nature of colonization ? , ! settler mortality rates ? Sierra Leone (1793), Niger expedition (1805) Pilgrim fathers: US vs. Guyana convicts: Australia vs. Gambia

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The Theory

(potential) settler mortality (1500) + nature of settlement (1600–1800s) + early institutions (1900) + current institutions (1995) + current performance (1995)

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Main Results of statistical analysis:

Impact of settler mortality rates in 1500 can “account for” as much as 75% of the variation in per capita incomes in ex–colonies today. Geographic factors (e.g. distance from the equator) are less important conditional on institutions , ! “... the reason why African countries are poorer is not due to cultural

• r geographic factors, but mostly accounted for by the existence of

worse institutions in Africa.”

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