Geography is Kinda-Sorta Destiny

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I spent last weekend in Orlando with my wife and kids at Universal Studios. This had two effects. The first was to confirm everything I hate about large groups of people. The second was that it allowed me to read a number of books. So this is another post that is partly a book review.

I read Why the West Rules–for Now: The Patterns of History, and What They Reveal About the Future by Ian Morris. This is a book I was surprised I hadn’t already read. But nevertheless, I finally got around to it on the plane.

By itself, Morris’ book is fine. I think it falls in a grey area: it gets a little dense for a popular book, but isn’t thorough enough for an academic one. Parts of it are like reading a history textbook, where it becomes a list of events and names without a lot of context. I do like his summary of what drives history. “Change is caused by lazy, greedy, frightened people looking for easier, more profitable, and safer ways to do things. And they rarely know what they’re doing.”

The larger theme of the book is interesting. Morris stakes out a position that geography is really why the West “rules” at this point. Somewhat fixed characteristics like soil and general weather patterns ensured that Western Europe and China were bound to be relatively rich compared to most of the world. The additional advantages of western Europe were the relatively easy access they had to the geographic bonanza of the New World (which itself was due to the particular fact that Native Americans died from European diseases and not vice versa).

Given my not-overwhelming recommendation of Morris’ specific book, let me offer you some additional books that make the case for geography and/or biology being a major factor in economic development.

  1. Plagues and Peoples by William McNeill
  2. Guns, Germs, and Steel: The Fates of Human Societies by Jared Diamond
  3. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David Landes. (Not the whole book, but the early chapters focus on geography)
  4. The European Miracle: Environments, Economies and Geopolitics in the History of Europe and Asia by Eric Jones. (Probably my favorite in this list)

I could go on, but I run into the “wedding invitation” problem. If I recommend another book in which geography features strongly, like Empire of Cotton, I feel compelled to recommend the other 10 books that I find similar in scope or quality. Pretty soon we’re talking about a long list. So stick with these for now as your entree to the world of geography as a determinant of development.

Morris and these other authors are often accused of “geographic determinism”. This is often slung about as a kind of epithet, implying that the author means that world economic history had to come out *exactly* like it did because of geography. This bothers people because it seems to exonerate western Europeans from all the awful things they did along the way to becoming rich. It can also be easily twisted into arguments about how Europeans are superior to other races or groups of people.

But that is setting up straw men in place of what these authors actually say. The mistake is to think that by asserting geography matters, this denies any role for human agency. Geography sets the budget constraint, affecting the slope (i.e. relative cost of land versus labor) and intercept (i.e. how many people land can support). But people set the utility function, making the choices about production, consumption, and innovation. To say that geography matters for development is to say that incentives matter, that’s all. Geography creates some subtle, and some not so subtle, differences in the constraints facing people, and they react accordingly. They look for easier, more profitable, and safer things to do within their given geographic conditions.

It is also a mistake to think that geography implies that relative development levels must be constant over time. Certain geographic characteristics are fixed, for all intents and purposes; North American is closer to Europe than to China. But nearly all other characteristics that we could lump under “geography” change over the course of human history. Think of the climate, with little ice ages and the Medieval warm period. And technological changes can make geographic characteristics change in their influence on development. Think of oil.

Geography doesn’t say that some populations are supposed to be rich, that they deserve to be rich, or that they will always be rich. It says that it isn’t terribly surprising that they are rich right now. Imagine that we could rewind and rerun human history over and over and over again. Each time, set the clock back to 15,000 BC and then let things go. Each time, it would be different as all the millions of coin flips in history came up heads or tails. Geography means the coins are not fair. Europe, blessed with productive agricultural land, lots of internal waterways, access to oceans, etc. etc.. comes up heads 55% of the time. Africa, with tough agricultural conditions, a bad disease environment, and a lack of natural transport networks comes up heads only 45% of the time. Over those thousands of versions of history, it would tend to be the case that Europeans would be relatively rich.

So when these authors say “geography matters”, take that as a statement similar to saying that a coefficient in a regression “matters”. It’s a statistical statement that the coefficient on geography is significant, not that the R-squared of the regression is 100%.

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Unified Growth Theory is not the Enemy

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In a recent post I compared and contrasted Joel Mokyr’s and Bob Allen’s viewpoints on the origins of the British Industrial Revolution (IR). One failure was to not link to a review paper by Nick Crafts. His is an in-depth review of their two positions, and you should read it.

One of the the themes running through Crafts review is that differences among economic historians in explaining the IR should be set aside (perhaps temporarily) in favor of defending themselves from the real enemy, unified growth theory (UGT). For the uninitiated, UGT is a set of work that develops dynamic models of growth that capture both a period of Malthusian stagnation in output per worker and the take-off to sustained growth. They are concerned with understanding what allows for that transition from stagnation to growth. Oded Galor is the capo di tutti capi of the UGT mafia, and early chapters of his book are an excellent introduction to this literature. I think Chad and I do a good job of giving a low-tech version of UGT in Chapter 8 of our book (you should buy lots and lots of copies).

Full disclosure here. Oded was my dissertation advisor, and I’ve co-authored a paper with him. I have papers of my own that hover around the edge of the true UGT world. So when I proceed to defend this literature below, I am not a neutral 3rd party.

My guess as to why Crafts sets UGT up as the foil to economic history is that UGT takes on big questions while sweeping tremendous amounts of detail under the theoretical rug. The models in UGT are abstract, and while their assumptions may be based on stylized facts drawn from history, they ignore nearly all the nuance that an economic historian would find compelling.

But of course it does that, it’s theory. UGT is not meant to explain the specific instance of the British IR, or any other particular take-off. It is intended to illuminate general forces driving the take-off to sustained growth. Forces that are not obvious from studying James Watts’ personal correspondence or the minutiae of French textile plant accounts.

UGT separates the “Industrial Revolution” from the concept of the take-off to sustained growth. They are not necessarily the same thing, nor do they have to have occurred in any particular order. The take-off to sustained growth is a general economic phenomenon, and the British experience is just one example of it. The British experience happens to make the distinctions very clear. The IR is traditionally date to the late 1700’s but there is a robust literature arguing that sustained growth did not begin in Britain until well into the mid-1800’s (see Crafts and Harley, 1992 on output growth, see Allen for a more recent evaluation of the wage literature).

To wildly over-simplify, the IR is the onset of a specific package of technology that (depending on the author) includes some combination of the following: inorganic power sources, mechanization of tasks, large scale enterprises, institutions supporting innovation, urbanization, the expansion of finance, the expansion of trade, and [fill in whatever I missed]. Growth in wages or output per worker is one other feature of the IR to be studied alongside these. The British IR would have been a revolution even if sustained growth hadn’t occurred.

In contrast, the take-off to sustained growth is specifically and particularly about growth in output per worker. Under what conditions will population growth fail to keep up with output growth caused by technological change? What UGT demonstrates is that something needs to shift in the demographics for sustained growth to occur. Technology, however widely defined, is not enough. It is not until technology changes the trade-off between quantity and quality of children that sustained growth happens.

While UGT focuses on general conditions for the take-off, it is a mistake to think that UGT rules out path dependence or historical contingency. There is nothing in UGT that makes take-off inevitable. Under the right conditions on the demographic or technology functions, an economy will end up stagnating forever. UGT focuses on the take-off because that is what we see in the data, but it need not be the case.

One source of confusion is that UGT papers often use the British experience for examples of the forces at work (I cannot begin to count the number of papers I’ve read that try to calibrate their model to UK data). That, I think, has led to the impression that UGT is meant as a competing explanation for the British IR. It’s not, and the UGT crowd can and should do better in moving beyond the British IR in terms of stylized facts. That would go a long way towards making the distinctions clearer in the literature.

But UGT is not in any sense mutually exclusive with detailed economic history work. If someone wakes up tomorrow and shows that both Mokyr and Allen are wrong about the British IR, that doesn’t mean UGT “wins”. And if someone wakes up tomorrow and shows that some central result of UGT is theoretically incorrect, that doesn’t mean Mokyr or Allen are right. We should all be focused on the true enemy of increased understanding: grading papers.

Research on Persistent Roots of Development

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A few papers of interest regarding the persistent effect of historical conditions (geographic or not) on subsequent development:

  1. Marcella Aslan’s paper on the TseTse fly and African development is now out in the American Economic Review. I believe I’ve mentioned this paper before, so go read it finally. Develops an index of suitability for TseTse flies by geography, then shows that within Africa higher TseTse suitability is historically associated with less intensive agriculture, fewer domesticated animals, lower population density, less plow usage, and more slavery (If you are queasy about using Murdock’s ethnographic atlas, then avoid this paper). Marcella shows that TseTse suitability is currently related to lower light intensity (everyone’s favorite small-scale measure of development), *but* this effect disappears if you control for historical state centralization. The idea is that the TseTse prevented the required density from forming to create proto-states, and that these places remain underdeveloped. Great placebo test in this paper – she can map the TseTse suitability index of the whole world, and show that it has no relationship to outcomes. The TseTse is a uniquely African effect, and she is not picking up general geographic features.
  2. James Ang has a working paper out on the agricultural transition and adoption of technology. Simple idea is to test whether the length of time from when a country hit the agricultural transition is related to their level of technology adoption in 1000 BCE, 1 CE, or 1500 CE (think “did they use iron?” or “did they use plows?”). Short answer is that yes, it is related. Places that experienced ag. transition sooner had more technology at each year. Empirically, he uses instruments for agricultural transition that include distance to the “core” areas of transition (China, Mesopotamia, etc..) and indexes of biological endowments of domesticable species (a la Jared Diamond, and operationalized by Olsson and Hibbs). The real question for this kind of research is the measure of technology adoption. We (meaning Comin, Easterly, and Gong) retrospectively code places as having access to technologies in different years. A worry is that because some places are currently poor (for non-agricultural reasons) the world never bothered to adopt their particular technologies, but that doesn’t necessarily mean they were technologically unsophisticated for their time.
  3. Dincecco, Fenske, and Onorato have a paper out on historical conflict and state development. The really interesting aspect here is how Africa differs from other areas of the world. Across the world and over history (meaning from 1400 to 1799) wars are associated with greater state capacity today. That is, places that were involved in conflicts in the past are now stronger states (measured as their ability to tax) than those without conflict. The basic theory is that wars allow states to concentrate their power. However, historical conflict is unrelated to current civil conflicts…except in Africa. In Africa, historical wars are correlated with current civil conflicts, and this is associated with poor economic outcomes today, so things are bad on multiple fronts. Here’s my immediate, ill-informed, off-the-cuff analysis: In non-African places, wars generated strong states who were able to use their power to completely and utterly eliminate ethnic groups or cultural groups that were alternative power centers. They don’t have armed civil conflicts today because the cultural groups that might have agitated conflict were wiped out or so completely assimilated that they don’t exist any more. In Africa, central states were just not as successful in eliminating competing cultural groups, so they remain viable sources of conflict. Africa’s problem, perhaps, was a lack of conclusive wars in the past.

The Industrial Revolution and Modern Development

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I’m not an economic historian, but like most growth economists I am an avid consumer of economic history. Maybe it’s our version of “physics envy”. Regardless, it isn’t always obvious why growth economists look backwards so much for motivation, examples, and inspiration. Let me try to give an example of the usefulness of economic history by looking at recent “big theories” of the British Industrial Revolution (IR).

If you have any interest in learning about the IR, then you could do a lot worse than reading the following two books:

Mokyr’s theory is that there was a unique intellectual environment created in Britain during the Enlightenment, and that this generated cultural conditions that valued innovation as a valuable activity in and of itself, as well as a supply of trained engineers that took advantage of these conditions. What made the IR British was its adoption of science and reason as tools of economic progress.

Allen’s theory has to do with relative factor prices. The IR was British because Britain had a unique combination of high wages (persisting after the Black Death) and low fuel costs (due to cheap coal) that made labor-saving and fuel-using innovations (e.g. the steam engine) profitable. Other countries failed to adopt, or lagged in adopting, because they had different relative prices for labor and fuel.

There is some sense that these two have set up competing explanations of the Industrial Revolution, diametrically opposed. Mokyr does tend to downplay the “coal made the IR” idea. Allen does tend to downplay the notion that Britain was unique in its potential for innovation. But there is more subtlety to their arguments than that. The theories do not contradict each other, because they are fundamentally concerned with explaining different phenomenon.

There are two different questions about the IR in Britain that we want to answer. First, why did several particularly important innovations take place in Britain, and not in other places? Second, of all the innovations available, why were they adopted first (or with greater speed) in Britain than in other areas of Europe?

Mokyr’s theory is very much an answer to the first question, and provides a sound answer to the second. Newcomen and Watt and Arkwright and Darby and Hargreaves were all British. Perhaps more important than these noted innovators, according to Mokyr, is the small army of highly skilled engineers that patiently but steadily made improvements to the steam engine, spinning jenny, coke smelting, and other technologies. What set Britain apart from China (where most of the big innovations had occurred earlier) or France (which quickly had knowledge of the big innovations) were those engineers. Without them, you have curiosities. With them, you have industrialization. Britain led the IR because the Enlightenment took hold and produced both the original innovators and that army of engineers.

Allen’s theory is very much an answer to the second question, but is relatively weak on the first. That is, we can use factor prices to understand why Britain adopted the steam engine or spinning jenny first, but they don’t explain why those things were invented in Britain. Allen suggests that those same factor prices played a role in inducing innovation, but that is shakier ground. Anton Howes just posted a reaction to Allen’s work that focuses precisely on that failure.

So Mokyr’s theory is more comprehensive, but it lacks a compelling explanation for the failure of other countries to follow Britain quickly into industrialization. Allen’s work is really a theory of growth and development, articulated with examples from the British IR. We can easily adopt his concepts for other time periods and places, whereas Mokyr’s work is far more context-specific. Thus Allen’s theory is more relevant than Mokyr’s to thinking about the general process of development. The second question above – why do some places fail to adopt or lag in adopting new innovations? – is in some sense the central question of development.

Research on development has been focusing a lot lately on the distribution of productivity across firms (see my reading list on misallocation). In China, India, or Mexico, for example, the ratio of labor productivity of the top firms to bottom firms is on the order of 10-1 or more. Even in the U.S. there are productivity gaps of something like 2-1 between the best and worst firms. Not all firms use the best techniques. Poor countries have particularly bad distributions, with the vast majority of their firms using low productivity technologies.

If we could understand that distribution, we could understand a lot about the gap in income per capita between poor and rich countries. So far, most of the explanations hinge on firms facing some implicit distortion to factor costs, which makes them choose a sub-optimal level of inputs. Firms that may be very productive perhaps face high distortions, making factors expensive, and leading them to be too small. Firms that are unproductive face low distortions, making factors cheap, leading them to be too big.

What this literature could learn from Allen is that the choice of technology itself is in play when factor prices are distorted. In particular, distortions that change the costs of materials relative to capital or labor could be instrumental in keeping firms from adopting leading technologies in poor countries. Cheap labor may make a firm inefficiently large in a poor country, yes. But it also removes the incentive to adopt a capital-using, labor-saving high technology production technology, even if the firm has full knowledge of the technology.

This isn’t a brand new idea by Allen. Hicks talked about it in 1932. Hayami and Ruttan talked about induced innovation and the choice of technology with respect to agriculture in developing countries long ago. Banerjee and Duflo’s chapter on distortions considers the role of borrowing constraints (i.e. expensive capital) in generating a fat tail of small labor-intense firms in India. Daron Acemoglu‘s theory of directed technical change is basically induced innovation based on differentials in factor prices.

Allen, though, provides a clear and compelling story about the power of factor prices in technology adoption. Think of his work as a “proof of concept” that induced innovation has a lot of explanatory power for differences between rich and poor countries. It is an excellent example of how studying economic history can produce insights into modern questions about development and growth. Factor price differences created decades-long lags in technology adoption across Europe, perhaps we shouldn’t be surprised at decades-long delays in adoption in developing countries. Relative factor prices may be a worthwhile avenue to explore, possibly as the lever on which institutions (hypocrite!?) or geography push to generate differences in living standards.

[I appear to have slighted Mokyr’s work here in favor of Allen, but right now someone else is reading his book and gleaning from it some idea about culture and development that I missed completely. From the growth economist’s perspective, the purpose is not to decide who’s right in these economic history debates, it is to mercilessly steal all the good ideas.]

Trust, Familes, and Growth

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Warning: this post is too long and wildly speculative.

Culture has (re)-emerged as one of the proposed “deep determinants” of economic development. A good place to get a feel for this literature is a piece in J. of Economic Perspectives by Guiso, Sapienza, and Zingales (GSZ). They define culture as “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation.” Keep in mind, this is what GSZ a narrow definition of culture. Culture is like institutions; we seem to know it when we see it, but can’t define it.

Regardless, one of the stronger results that pops up in the culture literature that GSZ review (and often authored in the first place) is the relationship of “trust” and economic success. Population groups that tend to trust others also tend to be economically successful.

This one figure from GSZ is particularly striking. Using data from the U.S. and self-reported ethnic backgrounds, they plot “trust” for each group relative to people who report as being descended from British ancestors. Trust is measured by asking individuals if “most people can be trusted (yes/no)”. The way to interpret the figure is that the percentage of Japanese-descended answering “yes” is 24.7 percentage points higher than whatever the British-descended answered.

Guiso etal 2006 fig 2

What do we see? The Japanese and Scandanavians are must more trusting than the British, while other Western Europeans are just about as trusting as the British. Southern Europeans are less trusting, and as we get to African and Indian-descended Americans, trust falls off a cliff. Patterns like this show up if you alternatively look at the World Values Survey at individual countries. In general Western Europeans (and their descendants in places like the US and Australia) report a higher degree of trust than other regions of the world. They also tend to have much more economic success wherever they live – see my recent post on population groups and development.

Now, there is no way for me to tell you that this is causal. It could well be that a lack of economic success leaves you less likely to trust others. But pending a definitive study on this, let me leap ahead on the assumption that there is a strong relationship of trust to economic success.

Why? The basic model here would be that economic exchange is a repeated game you play with strangers. In each round, you can either cooperate or cheat (you can pay your bar tab or you can slink out the back). Everyone is better off if you and all the strangers you interact with continually play “cooperate”. But at any given moment, you could take a stranger for a sucker by playing “cheat”. Once someone plays “cheat”, though, everyone plays “cheat” and we are all worse off. A culture of trust – and in particular trust in non-kin strangers – means that people take “cooperate” as their default option. We grab all the win-win exchanges possible.

Trust in non-kin strangers is such a powerful force for economic success because it scales so well. There are a nearly limitless number of strangers to make win-win trades with. If you restrict yourself to only your kin-group, the number of trades is severely limited. How do you build up complex networks of exchange and division of labor with, at best, a few hundred people you trust? Trust opens up economic possibilities.

So where did Western Europeans get this culture of trust, and in particular trusting non-kin? (If you already thought this post was highly speculative, then buckle up). Let me propose that the origins of this may be located in the re-organization of northwestern European society that occurred around 800-1100 AD. There was a fundamental shift away from kin-groups as the organizing principle for families towards households in this period. The alternative that arose was a “household” that centered around a smaller core of kin (the nuclear family) but also included non-kin members. This meant that NW European households were constantly exposed to, and interacting with, non-kin “strangers”. The NW European “culture of trust” was built on that foundation.

There are two books that I’ll suggest you read on this if you want to get some real depth on this idea. Whatever I say after this is culled in large part from these works.

  1. The First European Revolution: c. 970-1215 (The Making of Europe) by R.I Moore. This tends to be more about the changes taking place at the top levels of the aristocracy and church.
  2. Why Europe?: The Medieval Origins of Its Special Path by Michael Mitterauer. This gets more finely into the changes in economic organization occurring at the “low” levels that led to changes in family structure for the peasants. Chapters 1-3, in particular.

Mitterauer lays out the basic concept (p. 96):

The fundamental form of the European family is not the lineage group but the household. Its members do not necessarily have to be related through descent or marriage. This makes the system very flexible and adaptable to other situations.

He also makes the case that this was a particularly important social change (p. 93):

The loosening of lineage ties created some leeway for striking up new social relationships beyond the family circle. Ties to people other than one’s kin played an important part in European social history and made a major contribution to Europe’s social dynamics.

Moore finds this same process going on in the upper reaches of society (p. 70):

Upon his accession the eldest son became head of what was now conceived as a dynastic family, capable of being depicted by the diagram or `tree’ in which the European aristocracy has invested its identity ever since. The dynastic family…gradually superseded the more loosely articulated kinship group in much of northwestern Europe for the purpose of controlling and transmitting landed property.

We’ve got a process going on by which the wider kin-group is being put aside in favor of nuclear families, and these nuclear families are incorporating non-kin strangers into their households.

Why was this happening? Let’s start with the peasants. The non-kin strangers tended to be young adults. They were farm hands (both male and female), apprentices, or servants in the manor house, and they left these positions once they married. “Working as a life-cycle servant…seems to have been the defining experience of European youth” (Mitterauer, p. 94). This was not just a case of young adults working as servants for a lord. Farm hands were prevalent on most of the smaller hides (farms) that made up a lords estate.

The origin of this structure for households is located by Mitterauer in the particular agricultural system that developed as NW Europe went from being a frontier to being settled. This “cerealization” of NW European agriculture was most productive in the hide system. Simply put, there is an efficient scale to operate at if you are growing rye and oats (“Rye and Oats” is the title of Mitterauer’s first chapter). That scale is fit best by a nuclear family accentuated by some farm hands. Most importantly, you want to keep the scale of the hide constant, so you cannot have families splitting them up across children. But you need something for all those children to do, so the lords shuffled them around as farm hands and apprentices and servants between households. This is an atrocious over-simplification of Mitterauer’s argument, but I think it gets the main points right. The non-kin-based families of NW Europe arose because of a peculiar agrarian system in that area. The lingering effect of these families was to build up trust in non-kin strangers.

At the top end, a similar change was taking place. Moore does not place as much weight on the nuances of agricultural production as he does on the closing up of the frontier. He paraphrases George Duby (p. 63, no cite given, but I think he means this book):

..described the social history of this period as one of disorder in transition between two ages of order, that of the Carolingian world where a large but loosely defined and structured nobility supported itself with a haphazard combination of plunder and booty….and that of the precisely articulated society of orders, sustained by legal and social domination…which..remained familiar in western Europe until the age of revolution.

Once you could not keep you wider kin-group happy by plundering some new corner of France, you had to get serious about dividing up what you did have.

As Moore notes (p. 66), the crisis arising from having multiple kin-group claims to inheritance was not unique to NW Europe. It happens everywhere. It was not this problem that made Europe unique, it was the solution. Europe honed in on strict dynastic succession, eliminating disputes over inheritance by telling everyone in the extended kin-group (uncles and male cousins in particular) to go f*** off. Moore does a nice job of explaining how this was accomplished with the collusion of the Church. This post is already too long, so I’ll push you off to his book for the details.

The end result was that at the top level of society, the households of kings, dukes, and such were no longer kin-based. Sure, they were gigantic. But they were filled with non-kin “strangers”. Pages and servants and advisors and priests who were not related by blood or marriage, but owed their allegiance to the lord nonetheless.

So at both top and bottom levels of society in NW Europe in the years between 800-1100 we have all of these people learning to trust non-kin strangers. Perhaps unwillingly at first, but the mere exposure to non-kin strangers in economic relationships would have to build up some trust over time. Once that trust is built into these households, it gets passed on. It becomes “culture” as GSZ would describe it. But that culture of trust allowed the populations of NW Europe to take advantage of more win-win exchanges between strangers, and contributed to their on-going economic advantage.

New Growth Resources

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First, great reading lists from Anton Howes and Pseudoerasmus on economic history, often from a very broad perspective. These are all books that I (and you, if you’re reading this) should have read already, but I promise I’ll be good next year and get to it.

Also, I put up a new section of maps that I use when I teach economic growth. Will attempt to get around to putting together slides and post those some day too.

The Skeptics Guide to Institutions – Part 4

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The final installment of my series on the empirical institutions literature. Quick summary of the prior posts:

  1. Part 1: cross-country studies of institutions are inherently flawed by lack of identification and ordinal institutional indexes treated as cardinal
  2. Part 2: instrumental variable approaches – settler mortality included – are flawed due to bad data and questions and more identification problems.
  3. Part 3: historical studies show that there is path dependence or a poverty trap, but not that institutions themselves are central to underdevelopment

You have to be very careful with what you conclude from the institutions literature or from my three posts. We are dealing with empirics here, so we are not able to make any definitive statements. There is a null hypothesis, and we either reject or fail to reject that null.

So what is that null hypothesis? For the institutions theory, as with any theory, the correct null hypothesis is that it is wrong. Specifically, the null hypothesis is “institutions do not matter”. What does the empirical institutions literature tell me? I cannot reject that null. We do not have sufficient evidence to reject the idea that institutions do not matter.

But failure to reject the null is not the same as accepting the null. Having failed to reject the null, I cannot conclude that institutions do *not* matter. They may matter. 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*. As I said in the last post, there may be a working paper out there right now that offers a real definitive rejection of the null.

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, I’m not sure that even if that mythical working paper did appear to solidly reject the null that the right advice would be to “improve institutions”. I say this because even the institutions literature tells you that it is impossible to make an exogenous change to institutions. 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”, or at least would have made the elite powerless to stop the masses from enacting reforms. South Korea got good institutions in part because it changed the distribution of wealth. [Good institutions for economic growth don’t appear to overlap with good institutions for personal freedom, though – South Korea was a dictatorship until 1988.]

The point is that even if we acknowledge that “institutions matter”, that does not imply that we can or should propose institutional reforms to generate economic development. It’s a mistake to think of ceteris paribus changes to institutions. They are not a thing that we can easily or independently alter. If they were, then they wouldn’t be *institutions* in the way that Douglass North uses the term.

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.

[But the distribution of economic power *is* an institution, you might say. Okay, sure. Define institutions broadly enough and it will become trivially true that institutions matter. Defined broadly enough, institutions are the reason my Diet Coke spilled this morning, because gravity is an “institution governing the interaction of two masses in space”.]