Geographic Endowments, Institutions, and Development POL 351
Prof. Tyson Roberts
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Lecture Goals How geographic factors affect economic growth and
institutional development How institutions affect economic growth
The resource curse economic and political
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Some ingredients for economic development Macroeconomic
policies that encourage private investment Institutions that
encourage private investment Public or private investment in
education, health care, infrastructure => More inputs, better
technology => development
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Some symptoms of low development Bad policies Poor institutions
Low investment in education, health care, infrastructure
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Income level & institutions
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Poor institutions, bad policy Low economic development
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Strong institutions or good policy High economic
development
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A solution: identify exogenous or first causes Colonial
experience Natural resource endowments Geography Ethnic
cleavages
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For example, Tropical Climate Weak post-colonial institutions
Low economic development Extractive colonial institutions
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Even these have problems Colonial experience Nations conquered
because of weak state capacity, institutions Natural resource
endowments Problem may be dependence, not endowments (Dunning) Ross
disagrees, but neg. effect on dem. only in poor countries Geography
Land-lock due to colonial legacy or weak state capacity Ethnic
cleavages Not really primordial influenced by colonization, etc.
Zambia Rwanda Somalia Bolivia
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Three explanations for economic development (or lack thereof)
Easterly & Levine 1.Geographic endowments 2.Political
institutions 3.Economic policies
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Geographic endowments & growth Sachs & Warner, Diamond,
etc. Tropics Disease, hot weather, humidity, poor soil*, irregular
rainfall Crops Sugar/rubber/bananas/coffee etc. vs. wheat Landlock
Mineral & oil endowments Dutch disease; deters
industrialization/investment in education, healthcare,
infrastructure, etc.
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Institutions & Development S&E, AJ&R Climate &
soil favorable to plantation crops => Mineral endowments =>
Tropical disease => Indigenous population density =>
Exploitative, extractive colonial institutions Weak national
institutions Low development
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Policy & growth Trade openness, low inflation, low
deficits, competitive exchange rate, capital mobility Economic
growth => High income level
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How to identify direct & indirect effect of geographic
endowments? First look at direct correlation between geographic
endowments & income level Geographic endowments Income level
Yes, correlation (ELF negative & s.s.)
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How to identify direct & indirect effect of geographic
endowments? Next, look at correlation between geographic endowments
& institutions Geographic endowments Institutional quality Yes,
correlation (French colony & ELF negative & s.s.)
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How to identify direct & indirect effect of geographic
endowments? Next, look at indirect effect of geographic endowments
on growth through institutions Geographic endowments Income level
Institutional quality Yes, correlation between geography-associated
institutions & development (Oil positive & s.s. effect on
income level)
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How to identify direct & indirect effect of geographic
endowments? Then check if correlation between geography &
income still significant when including indirect effect Geographic
endowments Income level Institutional quality Indirect effect of
geography through institns significant Controlling for indirect
effect, direct effect insignificant (Oil positive & s.s. effect
on income level) ?
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Economic policies After controlling for institutional quality,
policies have no effect on income level (Easterly &
Levine)
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Explanations for short-term growth Economic policy argument
Trade openness, low inflation, competitive exchange rate =>short
term growth Isham et al Narrow geographic base => Weak
institutional quality + economic shock =>Massive decline in
growth
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Manufacturing and Diffuse Agriculture tends to have high growth
rates and less volatility than point source sectors (e.g., oil,
minerals, plantation crops) From Isham et al.
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Point source exporters grew quickly pre-1975, when commodity
prices were high, but were surpassed by manufacture exporters when
commodity prices fell and productivity stalled From Isham et
al.
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Isham et al argument Primary exports/GDPEconomic Growth Primary
export composition Institutional quality
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Isham et al findings: Point source exporters are less likely to
have good institutional quality
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Isham et al. findings: High institutional quality (more common
in manufacturing & diffuse exporters) promoetes growth
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Isham et al findings Manufacturing & diffuse agriculture
(family farms): no effect on institutions Narrow base => poor
institutional quality High exports/GDP (primary or not) => good
institutional quality Narrow base => low growth via institutions
Narrow base: no direct effect on growth
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How narrow base endowments affect institutional quality Ross,
Isham et al Rentier effect: buy off citizens by providing them with
many benefits with virtually no taxation; suppresses modernization
& civil society formation Repression effect: oil wealth allows
autocrats to lavishly fund -- and buy the loyalty of -- their armed
forces Information effect: autocrats who get most of their funding
from national oil industries find it easier to keep their
countries' finances secret Entrenched inequality
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Angolas oil revenue does not rely on broad-based
development
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Result: Wealth for few, poverty for many
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Equatorial Guinea: Oil in the ocean, capital on an island;
government can ignore public goods and services for the people
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Equatorial Guineas Big Man Teodoro Obiang Nguema Mbasogo
Africas longest serving serving head of state (president since
1979)
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Oil wealth reduces the probability of democratization and early
democratic survival
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How narrow base endowments affect institutional quality Ross,
Isham et al Rentier effect: buy off citizens by providing them with
many benefits with virtually no taxation; suppresses civil society
formation & modernization Repression effect: oil wealth allows
autocrats to lavishly fund -- and buy the loyalty of -- their armed
forces Information effect: autocrats who get most of their funding
from national oil industries find it easier to keep their
countries' finances secret Entrenched inequality Inter-related Oil
=> delayed modernization, gender wage inequality, and govt
transfers => less female political influence
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Ross (2008): Oil, Islam, and Women Countries with high oil and
gas rents per capita tend to have fewer women in parliament in the
Middle East
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Source: Goldberg et al 2008 The Resource Curse (economic and
political) can also happen in the Global North, including the
US
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Source: Goldberg et al 2008
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Zaire Main sources of revenue? How did this affect its
institutional quality (economic and political)? How did
institutional quality affect growth? 38
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So does dependence on oil, minerals, plantations determine a
countrys destiny? Corruption, etc.
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No, but it creates strong currents in that direction
Corruption, etc.
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What are some possible solutions for the resource curse?
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Possible solutions Tracing production / embargos / consumer
action campaigns the Kimberley Process and blood diamonds Creating
greater transparency of who is paying what to whom and holding
govts to account for those funds (EITI) Developing national savings
mechanisms Privatization Anti-corruption commisions & improved
sector legislation and regulation. Direct distribution of benefits
to people Choosing not to exploit the resource in the first place
Reduce demand for oil from the US, etc. Clean Trade Acts &
Clean Hands Trusts Sources: www.sebstrategy.com,
www.cleantrade.org, Birdsall & Subramanian 2004, Ross
2011www.sebstrategy.com
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Solutions
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Pay oil revenues into independent escrow account for national
development Worked for Norway-- Didnt work for Chad Why?
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Solutions Anti-corruption commission Worked for a while in
Nigeria (Nuhu Ribadu) Until he arrested James Ibori
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EITI compliant & candidate countries
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A Clean Hands Trust to enforce a Clean Trade Act A proposal
(www.cleantrade.org) Implementing State Disqualified producing
countryPurchasing country (ignoring implementing states Clean Trade
Act) Sale of resources Trade duties collected Duties held in trust
for citizens
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Solutions Privatization didnt work so well in Russia
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Tax & redistn demands increase Low tax & redistribution
demands High tax & redistribution demands Depends on cost of
repression Source: Boix
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Can oil & mineral wealth help democracy? In countries such
as the DRC, clearly mineral wealth => bad institutions => bad
growth In Norway & Botswana, oil & diamonds help, but this
is because of good institutions Return of the chicken and the egg
And Botswanas ruling party has never lost In Bolivia, natural gas
should have helped redistribute to the poor, but In Venezuela, oil
wealth did help redistribute to the poor, but