Chapitre 2: Fundamental determinants Rémi Bazillier
Chapter 2: Fundamental determinants of development Development Economics FESP - Panthéon Sorbonne Master in Development Economics Rémi Bazillier 1 1
[email protected] http://remi.bazillier.free.fr Université Paris 1 Panthéon-Sorbonne Ecole d’Economie de la Sorbonne
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Introduction
Chapitre 2: Fundamental determinants Rémi Bazillier
I An abundant literature on fundamental determinants of development (mainly empirical) I Years 2000: Debate on the respective contribution of geography, institutions and trade I Acemoglu, Johnson and Robison (AER 2001 ; QJE 2002) I Rodrik, Subramanian and Trebbi (JEG, 2002) I Dollar and Kray (JME, 2003)
I Years 2010: Historical explanations of development and underdevelopment I Algan et Cahuc (AER, 2010), role of trust I Nunn et Wantchekon (AER, 2011), role of slaves trade I Ashraf et Galor (AER, 2013), Hypothesis “Out of Africa” I Spolaore et Wacziarg (JEL, 2013), “How Deep are the Roots of Economic Development?”
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Why income per habitant is higher in some countries? I Traditional analyses: role of factors of production and productivity
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Source: Rodrik (2003)
Traditional factors
Chapitre 2: Fundamental determinants Rémi Bazillier
I Factors accumulation: I Diffences of physical capital accumulation: poor countries do not invest enough in physical capital I Differences of human capital: poor countries do not invest enough in education and knowledge
I Productivity: I Technological differences: poor countries do not invest enough in Research and Development and do not organize their production in an efficient way
I → But these differences are likely to be explained by more fundamental causes
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Traditional factors (I)
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Traditional factors (II)
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Fundamental determinants of development I Potential fundamental determinants: I Geography: exogeneous differences in the environment I Economic integration: market size and international trade I Institutions
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Role of history
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography
I These fundamental determinants are likely to be influenced by history I Only geography can be considered as an exogeneous factor I Institutions and Trade are explained by historical factors I Impact of colonization (and their characteristics) I Slavery I Older factors
Economic Integration Institutions
The Primacy of Institutions?
Outline
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Geography Economic Integration Institutions
The Primacy of Institutions?
Geography
Chapitre 2: Fundamental determinants Rémi Bazillier
I An abundant literature about the correlation between current level of GDP per cap and geographical variables: I Impact of climate and temperatures (Myrdal, 1968; Kamarck 1976; Masters & McMillan 2001 ; Sachs 2001) I Impact of climate-related diseases liées au climat (Sachs, Melligner et Gallup 2001; Sachs et Malaney 2002) I Impact of natural resources (Sachs et Warner 2001) I Resource curse
I But problems of Identification of the causal link
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Role of geography
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
I Spolaore and Wacziarg (JEL, 2013) I 44% of GDP/cap differential are explained by geographical factors I Strongest effects: Distance to equator
I But which causality? I Direct effects vs indirect effects
Institutions
The Primacy of Institutions?
A direct impact on productivity and development?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
I Myrdal (1968), Kamarck (1976), Sachs et al. I Sachs (2001, “Tropical Underdevelopment”) I Under-development in Tropics is explained by the current impact of their localization on productivity I Impact on agricultural productivity I Vulnerability to diseases (insects, bacteria) → Health and Human Capital
I In this literature, effects of geography are contemporaneous, immediate
Institutions
The Primacy of Institutions?
An indirect impact through historical conditions
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
I Geography may have an indirect impact on development today I Geography → Prehistorical geography and biologic conditions I → Development of agriculture and domestication (Diamond 1997) I → Effects of harvest and virus on european colonisation after 1500 (Engerman & Sokoloff 1997; Acemoglu, Johnson & Robinson 2001,2002 ; Easterly & Levine 2003)
Institutions
The Primacy of Institutions?
Diamond (1977), “Guns, Germs, and Steel: the Fates of Human Societies” I Main determinant of development: I Positive environmental conditions in Eurasia at the time of transition from fishing/hunting economy to an agricultural economy (10000 bc) I Large size of the Eurasian continent I Initial biological conditions: biologic and vegetal diversity I East/West orientation contributing to the diffusion of agricultural innovations I → Demographic boom et acceleration of technological progress I Main determinants of European success (“Guns, germs and steel”) would be explained by these favorable initial conditions (prehistoricial period)
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Olsson & Hibbs (EER, 2005), Biogeography and Long-Run Economic Development I Empirical analysis of the relation btw “biogeographical” initial conditions and contemporaneus development level I Several geographical and biologic variables: I Size of continents, east-west orientation, climatic factors, initial biological conditions (number of animal and vegetal species adapted to domestication and agriculture 120000 years ago) I To neutralize the effects of population movements after 1500: exclusion of “neo-european” countries (New Zealand, Australia, United States) and countries with current income is coming from natural resources
I Development differential explained by geography: 55-65%
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Geography Economic Integration Institutions
The Primacy of Institutions?
Role of integration and trade
Chapitre 2: Fundamental determinants Rémi Bazillier
I Abundant literature on trade and growth I In the 90s: Dollar (1992), Ben-David (1993), Sachs et Warner (1995), Edwards (1998) I Controversial results (Rodrik & Rodriguez, 1999)
I Frankel & Romer (1999) I Dollar & Kray (2003)
I Integration view: Market integration plays a major role in convergence between poor and rich regions I Endogeneity issue: economic performance has an impact on trade openness
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants
Endogeneity problem in the trade-growth relationship
Rémi Bazillier Fundamental determinants of development
I Instrumental variable (IV) approach
Geography
y = β0 + β1 x + β2 z1 + u
(1)
Economic Integration Institutions
The Primacy of Institutions?
x = φ0 + φ1 z1 + φ2 z2 + φ3 z3 + v
(2)
With E(v ) = (z1 , v ) + (z2 , v ) + (z2 , v )
I First step (OLS) xˆ = φˆ0 + φˆ1 z1 + φˆ2 z2 + φˆ3 z3
(3)
I Second step (OLS) y = β0 + β1 xˆ + β2 z1 + u
(4)
Frankel and Romer (1999, AER) “Does Trade Cause Growth?”
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
I Use Trade policy rather than trade flows does not solve endogeneity issues I Endogeneity of trade policy (other simultaneous policies and inverse causality) I Instrumentation of trade by geographical characteristics I Importance of distance I Argument: geographical characteristics are not impacted by economic performances
I Trade differential explained by geographical characteristics: Natural experiment that should allow the identification of causal effects of trade
Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
lnYi = α + βTi + γWi + i
(5)
(6)
Trade is a function of distance between countries Pi and other factors Wi = η + λSi + vi With Si size of the country
Economic Integration Institutions
with Yi income per cap., Ti international trade, Wi within country trade, i other factors impacting income Ti = ψ + σPi + δi
Geography
(7)
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography
I Frankel & Romer (1999) I An increase of 1% in trade leads to a 0.5% increase in GDP/cap I Impact on human capital, physical capital and increase in productivity
I Results are critized
Economic Integration Institutions
The Primacy of Institutions?
Trade endogeneity
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
I Rodrik, Subramanian et Trebbi (2005, JEG) I Non-significant impact after instrumentation I Use of the predicted value of trade proposed by Frankel and Romer (1999)
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Without taking into account endogeneity bias
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
After instrumentation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
I Here, the analysis is taking into account other fundamental determinants of development I ... And notably the role of institutions
The Primacy of Institutions?
Role of institutions
Chapitre 2: Fundamental determinants Rémi Bazillier
I Institutions. I Formal or informal rules of functioning of a society in politics, economics, and social interactions
I Main contribution: Douglas North (1990) and Daron Acemoglu I North (1990, p.3) I “Institutions are the rules of the games in society or, more formally, are the humanly devised constraints that shape human interactions. (...) They structure incentives in human exchanges, whether political, social, or economic”
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Which institutions? I Distinctions between formal and informal institutions (North 1991) and institutions aiming at improving coordination / aiming at regulating conflicts (Vatn 2006)
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Source: Baudassé, Bazillier et Issifou (2016)
I Distinctions btw political, social and economic institutions
Source: Baudassé, Bazillier et Issifou (2016)
Measurement of political institutions
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Source: Baudassé, Bazillier et Issifou (2016)
Measurement of social institutions
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Source: Baudassé, Bazillier et Issifou (2016)
Measurement of economic institutions
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Source: Baudassé, Bazillier et Issifou (2016)
Hall et Jones (1999, QJE), “Why Do Some Countries Produce So Much Output Per Worker than Others”
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
I Hypothesis of the paper: income differentials are explained by differences in social infrastructures I Social infrastructures: institutions and public policies determining the environment in which individuals accumlate knowledge and in which firms accumulate capital I Cross-country study: 127 countries. Determinants of income per cap. (and not growth)
Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants
Hall et Jones (1999, QJE)
Rémi Bazillier Fundamental determinants of development
I Model:
Geography Economic Integration
Yi = Kiα (Ai Hi )1−α
(8)
Labour is homogeneous and each unit of labour benefits from Ei years of schooling. Labour augmented by human capital is therefore: Hi = eφ(Ei ) Li yi = With h = H/L, α = 1/3
Ki Yi
(9)
α/(1−α) hi Ai
(10)
Institutions
The Primacy of Institutions?
Step 1: Productivity calculation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Measuring the effect of social infrastructures
Chapitre 2: Fundamental determinants Rémi Bazillier
I First-best proxy: spread between private and social returns of productive activities I Here: 1. Political risk index (International Country Risk Guide) 2. Trade openness (Sachs et Warner)
I Identification: log Y /L = α + βS +
(11)
S = λ + δ log Y /L + X θ + µ
(12)
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Instrumentation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
I Social infrastructures are endogeneous I Instrumentation by geographical and linguistic characteristics I Distance from equator I Share of english-speaking individuals I Predicted value of trade by Frankel and Romer (1999)
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Potential issues
Chapitre 2: Fundamental determinants Rémi Bazillier
I Geographical characteristics: exogeneous with income? I In contradiction with the literature showing a direct effect of geography on economic performances (diseases, productivity...) I Spoken languages are also likely to have a direct effect on economic performances I Network effects, international trade integration (see. Melitz, Melitz & Toubal) I Predicted value of trade by Frankel and Romer (1999) I Built from geographical variables also I → Today, we tend to consider that geographical variables are not valid instruments... I → look at historical characteristics explaining institutions
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Acemoglu, Johnson et Robinson (2001 AER), “The Colonial Origin of Comparative Development: An Empirical Investigation”
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
I Impact of Institutions on development I Innovative instrumental strategy I Measuring European influence through geographical characteristics is problematic
A “theory of institutional differences between colonized countries by Europeans”
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
I Different types of colonization leadds to very different institutions I “Extractivite colonies” (ex. Belgium Congo): no property rights protection / No protection agains expropriation risk by the state I “Settlement colony”: building of “neo-Europes” (Crosby 1986): settlers tend to duplicate institutions from their origin countries (ec. Australia, New Zealand, US)
Institutions
The Primacy of Institutions?
An original instrument
Chapitre 2: Fundamental determinants Rémi Bazillier
I Settlers mortality
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Source: Acemoglu, Johnson, Robinson 2001
Validity conditions of the instrument
Chapitre 2: Fundamental determinants Rémi Bazillier
I Settlers mortality 100 years ago should not have any other impact on current income, other than the one transiting through institutional development I Problem if settlers mortality is correlated with current probability of diseases (see identification problems of geographical variables I Settlers mortality was mainly due to malaria and yellow fever I Today, it is possible to be protected (vaccine for yellow fever, drugs for malaria) I Protection of the immune system. Local populare are better protected. I Authors argue that there is little probability that it explains under-development today
Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Mortality and colonization
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
I Settlers mortality has an impact on colonization
Geography Economic Integration Institutions
I Curtin (1964, 1998): French and British newspaper gave regular information on settlers mortality in colonies I Crosby (1986): “founding fathers” (US) chose to setlle in US rather than in Guyana because of the higher mortality rate in Guyana I Beauchamp Committee (1795): Where to send british prisonners: Australia rather than Lemane island (Gambia river) due to the mortality rate
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Results
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
I Settlers mortality explain more than 25% of institutional gaps between countries I Important effects on income: I If Nigeria had the institutions of Chile: I Its income with be multiplied by 7 I Today: Chile has an income 11 times higher
Geography Economic Integration Institutions
The Primacy of Institutions?
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development
I Article Rodrik, Subramanian, Trebbi (2004, JEG), “Institutions Rule: the Primacy of Institutions Over Geography and Integration in Economic Development” I Goal: measuring simultaneously the effect of three determinants (institutions, geography, integration) I Instrumental strategy: use of instruments developed in the literature I Empirical strategy taking into account all causality relations
Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
ϕ
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
log yi = µ + αINSi + βINTi + γGEOi + i
(13)
Instrumentation INSi = λSMi + φCONSTi + ϕGEOi + INS
(14)
INTi = θ + σCONSTi + ηSMi + ωGEO + INT
(15)
Institutions
The Primacy of Institutions?
After instrumentation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
After instrumentation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
After instrumentation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
After instrumentation
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
The Primacy of Institutions?
To sum up I Empirical literature (2000’) allows a better identification and quantification of fundamental determinants of development
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration
I Several questions still:
Institutions
The Primacy of Institutions?
I Other determinants of institutions I Older historical determinants I Role of trust and culture
I Literature based on identification through instrumentation I Other methods: I At the macroeconomic level: “quasi-natural experiments” I At the microeconomic level: “Randomized experiments”
References: historical development
Chapitre 2: Fundamental determinants Rémi Bazillier Fundamental determinants of development Geography Economic Integration Institutions
I “How Deep are the Roots of Economic Development”, Spolaore & Wacziarg (2013) I “Historical Development”, Nunn (2013)
The Primacy of Institutions?
