An International Comparison of #Inherited #Wealth (#OldEurope vs the #USA)

Inherited Wealth over the Path of Development: Sweden, 1810–2010

by Henry Ohlsson (henry.ohlsson@riksbank.se), Jesper Roine (jesper.roine@hhs.se) and Daniel Waldenström (daniel.waldenstrom@nek.uu.se)

Abstract: Inherited wealth has attracted much attention recently, much due to the research by Thomas Piketty (Piketty, 2011; 2014). The discussion has mainly revolved around a long-run contrast between Europe and the U.S., even though data on explicit historical inheritance flows are only really available for France and to some extent for the U.K. We study the long-run evolution of inherited wealth in Sweden over the past two hundred years. The trends in Sweden are similar to those in France and the U.K: beginning at a high level in the nineteenth century, falling sharply in the interwar era and staying low thereafter, but tending to increase in recent years. The levels, however, differ greatly. The Swedish flows were only half of those in France and the U.K. before 1900 and also much lower after 1980. The main reason for the low levels in the nineteenth century is that the capital-income ratio is much lower than in “Old Europe”. In fact, the Swedish capital-income ratio was similar to that in the U.S., but the savings and growth rates were much lower in Sweden than in the U.S. Rapid income growth following industrialization and increasing savings rates were also important factors behind the development of the capital-income ratio and the inheritance flow during the twentieth century. The recent differences in inheritance flows have several potential explanations related to the Swedish welfare state and pension system. Sweden was “un-European” during the nineteenth century because the country was so poor, Sweden is “un-European” today because so much wealth formation has taken place within the welfare state and the occupational pension systems.

URL http://econpapers.repec.org/paper/hhsuulswp/2014_5f007.htm.

Review by Guido Alfani (Bocconi University, Milan)

Summary

The paper by Ohlsson, Roine and Waldenström was distributed by NEP-HIS on 2014-08-25. It provides annual estimates of inheritance flows and of the share of inherited wealth over total wealth for Sweden covering fully two centuries, from 1810 to 2010. In this period, Sweden changed deeply: originally a relatively poor and mostly agrarian country, by the 1970s it was one of the wealthiest areas of the world. It also became known for its particularly extensive welfare state.

Artillerie1810_Schiavonetti6

Building upon earlier research conducted by Roine and Waldenström on wealth concentration and on the wealth-income ratio in Sweden, the paper points out a striking difference between such country and other European areas: while in nineteenth-century France and U.K. the wealth-income ratio was in the 600-700 percent range, in Sweden it stayed within the 300-500 percent range until the early twentieth century. These values are similar to those characterizing the U.S., and the authors argue that they go hand in hand with the limited importance of inheritance flows in nineteenth century Sweden and the U.S. compared to France and the U.K. In both Sweden and the U.S., limited historical accumulation of wealth explains initial low wealth-income ratios.

However, the similarities stop here as the authors describe the first as a poor country characterized by sustained out-migration, and the second as a “land of opportunity”. By 1950, in all the four countries wealth-income ratios had converged to low levels (generally speaking, in the 200-400 percent range, with Sweden even falling below 200 in the 1970s). In recent decades, all four countries experienced a tendency to the increase in the wealth-income ratio. In Sweden, however, the increase has been smaller and what is more, it has resulted into an only minimal increase in inheritance flows.

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The core of the paper consists in an attempt to reconstruct the long-term evolution of inherited wealth (b), which is shown to have been around 11 percent of the national income throughout the nineteenth century (half the figure for France and the U.K.), later dropping to just 5 percent around 1970. Following Piketty’s approach, the authors decompose the inheritance flow into its determinants which comprise, apart from the wealth-income ratio (β), the ratio of the average wealth at death to the average wealth of the living (μ) and the mortality rate (m). This can be described with a simple formula:

b= β·μ·m

The reason why we are interested in the share of inherited wealth is that, according to what Piketty (2014) suggests, if the share of inherited wealth is too high then it may result incompatible with the principles of meritocracy and social justice which characterize modern democracies. The authors find that in Sweden, in the long run the wealth-income ratio was the main driver of changes in the share of inherited wealth (in its turn, the wealth-income ratio was influenced by changes in private savings and by fluctuations in the growth rate). However in recent decades, an increase in the wealth-income ratio has only partially translated into an increase in the share of inherited wealth, essentially due to a decline in the ratio of the average wealth at death to the average wealth of the living. The authors provide two possible explanations for this: the fact that new wealth was accumulated among the relatively young, or the retirement savings pattern which, in comparison to France and the U.K., would lead the Swedish to be keener on decumulating private wealth.

Comment

Ohlsson, Roine and Waldenström provide a novel perspective on an old story – how Sweden became an exceptionally “egalitarian” Western society – by making excellent use of the analytical tools produced by the recent wave of research on long-term changes in inequality. They provide many interesting and useful insights into two centuries of Swedish history, although sometimes more detail would be useful. For example the statement, that maybe the recent increases in the wealth-income ratio translated only partially into an increase in the share of inherited wealth because new wealth was accumulated mainly by the relatively young, would probably require more supporting evidence.

Particularly interesting is the analysis of the role played by the public in transferring wealth inter-generationally, by means of an exceptionally generous welfare state which basically replaces part of the private inheritance (and influences the pattern of private savings). Perhaps this aspect would have been worthy of further discussion, clarifying for the international reader how such welfare state system came into being, but also pointing out at possible cultural differences between the Swedish and others which might explain a preference for both a more developed welfare state, and lesser wealth (and income) inequality in general. Instead, Ohlsson and colleagues simply suggest that Sweden was «un-European» essentially because «old wealth was not as important in Sweden as it was in France and the U.K. in the 1800s», this in turn being due to the fact that «Swedes were so poor that they simply needed to eat almost all their income in the pre-1900 era» (pp. 21-22). But, looked at from the view point of continental Europe, Sweden has many other peculiarities which might be relevant in explaining the dynamics that the authors so convincingly reconstruct. This being said, the paper is clearly an important contribution to current debates on long-term changes in inheritance and inequality, pointing out many aspects which would well be worthy of more international research.

References and Suggested Further Reading

Alafani, G. (2014) “Economic Inequality in Northwestern Italy: A Long-Term View (Fourteenth to Eighteenth centuries)”, Dondena Working Paper, n. 61, March 2014.

Atkinson, A.B. (2012) “Wealth and Inheritance in Britain from 1896 to the Present”, Working Paper, Oxford University.

Lindert, P.H. (1991) “Toward a Comparative History of Income and Wealth Inequality”, in Y.S. Brenner, H. Kaelble, M. Thomas (eds.), Income Distribution in Historical Perspective (Cambridge: Cambridge University Press), pp. 212-231.

Piketty, T. (2014) Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press).

Piketty, T., G. Postel-Vinay, and J-L Rosenthal (2006) “Wealth Concentration in a Developing Economy: Paris and France, 1807-1994”, American Economic Review, 96(1): 236-256.

Piketty, T. and Zucman, G. (forthcoming 2014), “Capital is Back: Wealth-Income Ratios in Rich Countries 1700-2010″, Quarterly Journal of Economics 129(3).

Roine, J. and D. Waldenström (2009), “Wealth Concentration over the Path of Development: Sweden, 1873-2006″, Scandinavian Journal of Economics , 111(1): 151-187.

Putting Round Pegs in Square Holes

Economía Neoinstitucional: Prueba Falsable a las Hipótesis de Douglass North en Colombia
(Neoinstitutional Economics: The Falsification of Douglas North Hypothesis in Colombia)

by Fernando Estrada (Universidad Externado de Colombia)

Abstract: This article aims to propose a reading of political (dis) order in Colombia, using as a theoretical source Douglass North’s reflections on the economic formation of political institutions. The contributions of this letter are very preliminary in nature and can better be understood taking into account two objectives of the research project: (1) explain why, in Colombia there are very limited conditions for coordinating collective action, (2) what direct and indirect effects has the armed conflict and civil war had on the political (dis) order.

URL: http://econpapers.repec.org/paper/pramprapa/58515.htm

Revised by Stefano Tijerina

This paper was distributed by NEP-HIS on 2014-11-17. In it Fernando Estrada argues that a historically weak state, the prolonged civil war, political corruption, institutional failure, the lack of political accountability, a culture of dishonesty, and the numerous armed conflicts currently succumbing Colombia have led to citizen’s loss of credibility on its institutions, thus today’s “political (dis) order.” He uses the case of Colombia to test the falsifiability of the theory on political order developed by Douglass North, William Summerhill, and Barry R. Weingast in Order, Disorder, and Economic Change, concluding that there is an urgent need for political and institutional structural change, accountability, and an effective and firm implementation of the rule of law, in order to achieve the political and economic stability necessary for the effective implementation of a market economy. If these positive initiatives are achieved, says Estrada, then it will be possible for Colombians to construct a long-term political order that will “foment credible commitments” between citizens and their political institutions.

Throughout the paper Estrada focuses on current issues that illustrate why Colombia is suffering from a systemic political (dis) order. Through the use of commentaries from Colombian public and academic figures, he points out that private-public relations within the market system have failed due to political corruption and institutional failure, and that there is an urgent need for social, political, and institutional reform that sets the course for what North, Summerhill, and Weingast refer to as consensus based political order that provides the necessary conditions for the advancement of a market economy.

Fernando Estrada

Fernando Estrada

Implicitly, Estrada reveals that the theory of political order withstood the falsifiability test since his conclusions on citizenship rights, the absence of economic, political and judicial guarantees, the predominance of political corruption and dishonesty, and the lack of “productive and entrepreneurial” incentives, have resulted in a complete loss of credibility on the political system. Colombia, according to the theory on political order, is not democratic or able to effectively function within a market economy, it is a country with an “authoritarian” political order where “political officials cannot sustain a set of universal rights, and instead abuse the rights of a major portion, if not all of the citizenry.”

Estrada however does not question the reasons why the nation’s economic, social, and political development has followed the “authoritarian” path for the construction of political order. His disregard for historical evidence impedes him from better understanding and explaining the realities of the development of Colombia’s political order. An analysis on Path Dependency would have allowed Estrada to center on the historic constrains imposed on the definition of citizenship, why economic, political and judicial status quo has prevailed over time, why political corruption and dishonesty has been perpetuated over time, and why economic and political regional elites have opposed the expansion of the market economy. The historical analysis would have provided a local explanation to a local reality and would have allowed Estrada to move away from the generalizations of imported models and theories that only partially explain the outer layers of the nation’s realities.

Douglass North

Douglass North

A historical analysis would have provided clarity that seems to be missing in Estrada’s argument. This would have provided empirical evidence that showed that Colombian citizens distrust their institutions because they were never part of the process of creating them in the first place. It was the case of democracy, policy, and the majority of the key institutions that have shaped the national distributive, financial, and security policies, including the Departamento Nacional de Planeación (DNP), Banco de la República, and the Departamento Administrativo de Seguridad (now known as Agencia Nacional de Inteligencia Colombiana – ANIC); all the result of foreign mandates to fit the needs of both domestic “power individuals” and the international system.

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

Walter Kemmerer and President Pedro Nel Ospina during the Kemmerer Mission 1923

It is important to look at theoretical models but it is more important to contextualize the theory and situate it within its local reality. There is a need to develop local theoretical models and explanations based on a self-evaluation of the nation’s particular historical trajectory and experiences. The solution lies in analyzing the uniqueness of Colombia’s institutional and programmatic development and the historical implementation of the idiosyncratic definition of democracy and capitalism.

Political (dis) order has been one of the pillars of nation building since independence. It has been the political and economic elite’s way of securing their own personal sources of livelihood, and it has been the formula used by foreign capitalist interests to secure resources and influence in Colombia. Their preservation over the control of the political order has relied on the state, its institutions, and policies that throughout the twentieth century achieved a high level of sophistication and arte now capable of disenfranchising sectors of society and limiting the rights of citizenship and personal security vis-à-vis one of the most progressive and pluralist constitutions in the international system.

Contrary to North, Summerhill, and Weingast fundamental requirements for the creation of political order within a market economy, Colombia’s historical trajectory shows that political order may also be achieved by constricting and limiting citizen’s access to institutions that guarantee their personal security, economic security, and that of their families, yet capable of guaranteeing institutional security to local elites and foreign interests. For example the land use policies of the 1920s that guaranteed access of the Colombian subsoil to Tropical Oil or the current mining policies and the supportive institutions and programs that provide access to foreign transnational corporations while at the same time limiting the rights of local artisan miners; past and present realities that allow the effective operation of the market system while at the same time limiting the actions of citizens within the political order.

Colombia’s founding fathers, the leaders that carried the nation into modernity, and those of the present time have never had as their central objective the construction of an open society or political order based on consensus. Citizen’s credibility on the political system and its institutions never impeded economic and political elites from insisting on the implementation of their own and unique political order, even after the emergence of guerrilla movements in the 1950s, the escalating pressure of labor unions throughout the Cold War, the indigenous movements, the emergence of narcotics trafficking as a parallel economy, the emergence of highly sophisticated criminal organizations, and the current array of armed conflicts that are asphyxiating Colombia’s society. Surprisingly, what seems to have mounted pressure on Colombia’s elites to consider moving toward a political order based on consensus has been the international system and their demand for a change in the political order that will allow Colombia to effectively integrate itself into the market system.

Foreign investors, transnational corporations, global resource extraction companies, and the powers of the global market system require new nurturing grounds for the expansion of capitalism, narrowing in on nations such as Colombia. It is these forces that are pushing for changes in the structural nature of the nation’s political order. Aware or unaware, Estrada advocates for changes that could transform Colombia’s political and institutional system into North, Summerhill, and Weingast’s consensual based political order.

Following a neoliberal line of thought, Estrada concludes that Colombia needs to move toward the consensus model in order to effectively navigate the international system and fully immerse in the complexities of a market economy, and that it must bring to an end the civil war and the numerous other armed conflicts that impede the nation from moving forward. What is ultimately recommended is that Colombia finds its own unique ways of establishing and securing political order, even it if means constructing a reality that projects institutional and programmatic order, and that generates civil credibility under a system that favors the interests of the international system.

The problem of constructing realities that project institutional and programmatic order.

The problem of constructing realities that project institutional and programmatic order.

Estrada uses the falsifiability test on North, Summerhill, and Weingast’s theory on political order to justify the promotion of neoliberal institutional change in Colombia. He suggests changes that apply to the particular idiosyncrasies of Colombia, including greater accountability, eliminating clientelism from political relations, the establishment of a system that fosters political and economic competition, consensus among elite groups, society’s unquestionable trust on the consensus based political order, a decreasing role of the state in economic and social matters, cultural change toward a model of meritocracy and self-discipline, and judicial, programmatic, and institutional adjustments aimed at improving investor’s confidence. These changes however do not guarantee the “creation of credible commitments” that, according to North, Summerhill, and Weingast, are necessary for the transition from an authoritarian political order to a consensus based political order.

The theorists suggest that in order to achieve this transition, citizens’ own belief systems must “translate into the institutions that shape performance.” Legitimacy and credibility may only be achieved if constructed by the majority; in other words, if Colombian’s collectively decide to move forward with a market economy. However this is impossible to achieve under current distributive realities. Politicians, representatives, and the bureaucracy must “honor” the rights and norms that regulate the consensus based political order, leading to the “self-enforcement” of the model. This, in the Colombian context, is impossible based on current realities and it would require a revision of the status quo, something that has historically lead to armed conflict. According to the theory, credibility on political and economic policies and institutions may only be achieved if the system guarantees citizens the rights and freedoms to prosper economically; security of income and investment become the crucial drivers of national economic growth. This again would require political and economic elites to accept a change in the status quo as well as the international system’s acceptance of a non-commodity supply role for Colombia, changes that seem utopic at this time.

The implementation of consensus based political order in Colombia seems unrealistic today. The foreign model does not fit with the nation’s current reality. Estrada’s approach forces us to question how effective is the implementation of foreign models and theories to explain local phenomena, knowing well that theorists like North are developing ideas and solution to complex problems that depart from their own cultural and social biases? Why rely on foreign solutions and explanations to resolve and transform local realities when it is clear that they are not a perfect fit? As in the case of Colombian political institutions, the dependency on foreign models at the end result in a frustrating experience of “putting round pegs in square holes.” The falsifiability test fails when one does not compare apples with apples; when one tries to force external realities into local contexts. The consensus-based model of political order fits well with the realities of the United States but not in Colombia. This is a country in the early stages of nation building, in the one hand closing the long chapter of a civil war while on the other juggling the complex realities of the market system.

The problems of importing foreign models to solve local problems of economic development.

The impact of importing foreign models to solve local economic development problems.

Further Readings

North, Douglass C.; William Summerhill, and Barry R. Weingast. (2000) ‘Order, Disorder, and Economic Change: Latin America Versus North America’. In Bruce Bueno de Mesquita and Hilton L. Root (eds) Governing for Prosperity. New Haven: Yale University Press, pp. 17-59.

North, Douglass C.; John Joseph Wallis, and Barry R. Weingast. (2012) Violence and Social Order: A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press.

Page, Scott E. (2006) ‘Path Dependence’ Quarterly Journal of Political Science, 1: 87-115.

#Productivity, #Employment and #Structural Change in #Developing Countries

Patterns of Structural Change in Developing Countries

by Marcel Timmer (University of Groningen), Gaaitzen de Vries (University of Groningen), Klaas de Vries (The Conference Board, Brussels)

Abstract This paper introduces the updated and extended Groningen Growth and Development Centre (GGDC) 10-Sector database. The database includes annual time series of value added and persons employed for ten broad sectors of the economy from 1950 onwards. It now includes eleven countries in Asia (China has been added compared to the previous release), nine in Latin America and eleven in Sub-Saharan Africa. We use the GGDC 10- Sector database to document patterns of structural change in developing countries. We find that the expansion of manufacturing activities during the early post World War II period was related to a growth-enhancing reallocation of resources in most countries in Asia, Africa and Latin America. This process of structural change stalled in many African and Latin American countries during the mid-1970s and 1980s. When growth rebounded in the 1990s, workers mainly relocated to market services industries, such as retail trade and distribution. Though such services have higher productivity than much of agriculture, they are not technologically dynamic and have been falling behind the world frontier.

URL: http://econpapers.repec.org/paper/dgrrugggd/gd-149.htm

Review by Sebastian Fleitas

As economies evolve and develop tremendous changes in the composition of goods and services take place. For instance, by start of World War II, one in three workers in the United States were employed in manufacturing and agriculture. A steady shift towards the service sectors since then, means that today manufacturing and agriculture only employ approximately one in eight workers. These structural changes imply the reallocation of resources and particularly labor across sectors with different productivity levels. The rate and intensity of these process has important impact on economic growth. Structural changes, therefore, have important implications for economies mainly because of three factors:

a) technological changes occur at different paces for different goods,

b) there are different patterns of demand for different goods, and

c) relative prices in the world economy do not fully reflect relative marginal productivities and marginal utilities among goods.

Industrialised nations have, generally speaking, closely followed the United States in increasing the weight of the service sector since the 1980s (if not before). It is also widely known that during the same period, recently industrialised nations such as Brazil, Mexico China, Korea or other Asian Tigers expanded employment in their domestic manufacturing sector at the same time as their GDP was increasing. But what happened with the rest of the world? The short answer is that it is remarkable how little we know about the process in the rest of the world.

Structural Change in the US Economy (taken from The Atlantic http://goo.gl/WvRIHu)

Structural Change in the US Economy (taken from The Atlantic http://goo.gl/WvRIHu)

In the paper distributed by NEP-HIS 2014-09-25, Timmer, Vries and Vries describe similarities and differences in the patterns of structural change across developing countries in Asia, Africa, and Latin America since the 1950s. In order to do that, Timmer and colleagues created, updated and (more than once) expanded the Groningen Growth and Development Centre (GGDC) Sector database. This database includes data from 1950 onwards on value added and persons employed for ten broad sectors of the economy for a group of countries. In its current version, the database includes eleven Asian countries (with the good news that China is now included!), nine Latin American countries, and eleven from Sub-Saharan Africa.

There are some important stylized facts that can be learned from the paper. First, since the 1950s workers relocated from agriculture into the manufacturing and to a lesser extent the (formal and informal) services sectors. Second, employment in manufacturing grew in the 1960s and early 1970s in the three continents. These changes responded to policies through which individual countries pursued to promote industry development. Along the same lines, an result from the study by Timmer and colleagues is that there has been a clear decline of the manufacturing employment share in Africa and Latin America since the mid 1970s while production and employment increasingly originate from services activities. In 2010, only 7 percent of the African and 12 percent of the Latin American workforce was employed in manufacturing. These figures contrast with what happened in Asia, where the share of manufacturing in value-added was on average 20 percent of GDP for the same year.

According to the productivity measures by Trimmer et al., the gaps for developing countries are still huge and increasing for most countries. On one hand, the authors find that labor productivity in agriculture is much lower compared to services and even lower in relation to manufacturing. In 2010, for example, the agricultural value added share in Africa was 22 percent, while the employment share was 51 percent. This suggests agricultural labor productivity is about half of that of the average in the economy. In contrast, the services value added share was 50 percent while the employment share was 37 percent, and the shares for manufacturing are 10% and 7% respectively. On the other hand, productivity levels in manufacturing and market services have been falling behind the technology frontier (US in this paper) in Latin America and Africa, and they have been increasing (at a lower rate than I would expect, though) in Asia.

Word Cloud of the introduction of the paper (made using Wordle.com)

Word Cloud of the introduction of the paper (made using Wordle.com)

Finally, Timmer et al. follow Fabricant (1942) in decomposing the change of productivity in three factors namely:

a) the change in productivity of the sector holding the share of employment fixed (within-effect),

b) the change of employment in sectors with different productivity holding the productivity fixed (static-effect), and

c) the effects of the interaction between the changes in sector productivity and employment share per sector (dynamic effect).

Their results suggest that the within-effect as well as the static reallocation effect are both positive. However, the authors find that the dynamic effect is substantially negative in Africa and Latin America suggesting the reallocation of employment to sectors (services) where the productivity increase is lower. In other words, this fact suggests that the marginal productivity of additional workers in these expanding sectors was below the productivity of existing activities.

this_is_file_name_1700The paper has two main contributions. First, it is hard to stress enough how valuable the contribution of these authors is of constructing this new database. This task is not always valued at its worth. Creating a new database from different sources takes a large amount of work in order to achieve the consistency of concepts and definitions used in various primary data sources. Thanks to the authors, these data and documentation are now freely and publicly available online and it encourages us to continue the study of these issues. Second, the authors focus on the comparison of the productivity among these developing countries with the productivity of the technological leaders. This is the main point in this literature given that we still observe dynamic losses of relative productivity in many countries. The main challenge in order to make productivity comparisons is how to convert real value added into common currency units. To do this, the authors use this database and combine it with previous work or their own (mainly Inklaar and Timmer, 2013) to construct sector specific purchase power parity (PPP) prices. In their comparisons, they use United States as the frontier country and measure labor productivity relative to the frontier using the sector-specific PPPs.

 

1171bwcThe bottom line of the paper is that most of these developing countries have failed to generate dynamic increases in relative productivity since they reallocated workers into the sectors where productivity grows at a lower rate. Thus, the main challenges are to reallocate excess agricultural workers if they exist, and to increase the productivity in the manufacturing and services sectors. With the agricultural and (sometimes) manufacturing sectors shrinking in their employment share, the relative dynamic productivity performance of the sectors where these workers are going to locate is the crucial part of the process of convergence. The decomposition of the economies in ten sectors provides a necessary step to understand the process of structural change and its effects on productivity. However, the change in the composition of what a country produces is a result of changes at the firm level in particular markets. This stresses the need for more studies at the firm level on the determinants of the productivity relative to the frontier by sector. This is even more important in the services sector where the evidence seems to suggest the existence of a duality, where some services have a high productivity level and others are informal activities with very low productivity that just hide unemployment.

In sum, this paper adds to other excellent previous work from the same authors and gives us the big picture of structural change over the last 60 years for a larger set of developing countries. In addition, the authors have made available a new database that, combined with other data sources, can help to answer important development questions. As usual, we have made progress but still more work is needed to understand the key topic of structural change. This knowledge is necessary to implement policies that boost the productivity of firms in developing countries and, therefore, to improve the standard of living of their populations.

The Trespassing Thinker: Albert #Hirschman & #economic #development

The working paper used to source this post was found to have

PLAGIARISED

its contents from work by Michele Alacevich (Loyola) and Ana Maria Bianchi (Sao Paolo). Further details are to be found here:

RePEc plagiarism accused offender: Pier Giorgio Ardeni

This finding does not demerit Beatriz Rodríguez-Satizábal’s review below. But do bear in mind that any reference to Ardeni should in fact read as pointing to the ideas of Alacevich and Bianchi.

– Bernardo Batiz-Lazo, General Editor NEPHIS (2015-01-12).

Being a Consultant “Expert” in a Developing Country: the Legacy and Lessons of Albert Hirschman

By Pier Giorgio Ardeni, Department of Economics, University of Bologna

URL: http://d.repec.org/n?u=RePEc:spa:wpaper:2013wpecon14&r=his

Abstract

After more than half a century, the reflections of Albert O. Hirschman on development assistance, the role of consultant “experts” in providing policy advice and the “visiting economist’s syndrome” are still very current. In as much as Hirschman argued against all-encompassing policy frameworks, overall development plans and universal models, “one-size-fits-all” models abstracting from the local, historical, geographic and institutional conditions have remained the prevailing modus operandi of international development agencies and governments in development assistance. In spite of Paul Krugman’s criticism of Hirschman’s lack of a mathematically-consistent approach in favour of an ad hoc pragmatism, Hirschman’s avoidance of assuming a toy model to deal with practical issues and the specificities of development problems in different countries – while still using rigorous and detailed analysis– appears to be a promising attitude of enormous relevance even today. If the rejection of large-scale models of the hey days of development theory was due to the neoliberal policy wave that led to the “Washington consensus” – more market and less State –, development assistance has remained firmly entrenched in the principles of balanced growth, all-encompassing liberalizing policy reforms and diffused marketization with an increasingly limited role for the State. Development assistance approaches have maintained a standard list of prescriptions, policy-reform recipes for all sectors, social, institutional and even political objectives, under the justification that “everything depends on everything”. In this paper, I briefly review the evidence regarding the active pursuit of a paradigm that, sidelining Hirschman’s unorthodox approach, has confirmed that we have “forgotten nothing and learned nothing”, as Hirschman once said. While Hirschmanian concepts like “linkages” and “leading sectors” and some of his famous parables – like the “tunnel effect” on inequality – have left an enduring mark on economists’ perspectives, his “unbalanced-growth” has been dismissed on ineffectual grounds, while his “empirical lantern” has been derided and abandoned. The lessons of Hirschman’s consultant experience in the tropics have left a legacy that goes beyond his prescriptions: it is a philosophy, a conception of the world, a guiding sets of principles that survives time. From that wilderness where Hirschman led his followers, it is only by re-igniting that lantern that we can wisely contribute to the “development” of others as savvy and informed “experts”.

Review by Beatriz Rodríguez-Satizábal

Since his death in December 2012, Albert Otto Hirschman (1915-2012) his life’s work has been celebrated by specialists and the mass media: a great lateral thinker, an optimist economist and resistance figure, a planner who believed in doubt, and a worldly philosopher are just some of the adjectives used to describe him. But perhaps his contributions to theories of economic development and other useful views to approach economic behaviour have yet to receive all the attention they deserve. Hirschman was an economist who gently trespassed to other disciplines, while consulting for governments in developing countries (i.e. Colombia).Through these efforts he offered a unique strategy for economic development.

His approach began by understanding the conditions of each country, disregarding generalizations based on mathematical, one size fits all, models. Hirschman argued that disequilibria should be encouraged to stimulate growth and to help mobilize resources. Moreover, he noted that developing countries required more than financial capital to implement important economic decisions. He understood economic development as the product of successful habits, which began by observing, identifying and tackling “economic needs”. This view again departed from recipes emanated from general equilibria models. Moreover, he argued that a strategic, opportunistic approach, enabled making the best of what was available in each country. Including elements such as the latent entrepreneurial activity and what government policy could realistically achieve.

Pier Giorgio ArdeniInspired by his own experience studying at Berkeley in the 1980’s and, later, as a development economist in Africa, Pier Giorgio Ardeni’s paper (distributed by NEP HIS on 2014 09 29) explores the potentialities of Hirschman work for future discussions on how to promote development in countries that have had a taste of all the known formulas. The first half of the essay, combines a concise summary of Hirschman’s work with a critical review of Ardeni’s own experience. The second half, discuses broadly the evolution of the development debate and the lessons from Hirschman’s work.

Moving on from Krugman’s (1996) criticism about the lack of a mathematical consistent approach in Hirschman’s work, Ardeni brings together the resilience of Hirschman’s strategy with the reigniting interest in specialized consultancy. As a follower of Hirschman, Ardeni uses his empirical work as an example that working in the field is not overrated for a development economist. Concluding (p. 25) that after more than a half century, Hirschman’s reflections on the role of consultant experts on development assistance are still current.

Hirschman asked more from the so-called consultant experts. On his books, and in Adelman (2013) biography, the emphasis is on their role as educated readers of reality. These ‘readers’ will avoid the use of ‘models’ to later championship the creation of specific strategies, which will include diverse sectors of the society in similarly diverse activities. Nowadays, this assumption is more relevant than ever.

The main challenge in bringing Hirschman back to the scope of twenty-first century development discussions, is to call the attention over the need to witness, being that the one who is invited as a ‘consultant’, what other ways are proliferating around the world. Does each country can reach its potential their own way? As Hirschman recalled, if any country developed in a certain way, that does not mean that other countries will do it the same way. However, each country should be able to learn from the mistakes witnessed in other more advanced countries.

Drawing on Hirschman’s work, Ardeni brings three lessons which are useful today for those planning on economies that have not still reach the highest possible level of development (hopefully, a level measured in their own terms): 1) large-scale development models should be rejected, 2) local and historical conditions matter, 3) the empirical lantern remains very much needed.

Further readings:

  • Adelman, J. (2013) Worldly Philosopher: The Odyssey of Albert O. Hirschman. Princeton, NJ: Princeton University Press.
  • Hirschman, A. (1995) A Propensity to Self-subversion. Cambridge, MA: Harvard University Press.
  • Hirschman, A. (1970) Exit, Voice, and Loyalty Responses to Decline in Firms, Organizations, and States. Cambridge, MA: Harvard University Press.
  • Hirschman, A. (1958) The Strategy of Economic Development. New Haven, Yale University Press.
  • Krugman, P. (1994) ‘The Fall and Rise of Development Economics’, pp. 39-58. In Rodwin, Ll. and Schon, D.L. (eds) Rethinking the Development Experience. Essays Provoked by the Work of Albert O. Hirschman. Washington, D.C.: The Brookings Institution.

Coming back to @PostOffice #Savings? The #east-west comparative.

Postal financial services, development and inclusion: Building on the past and looking to the future

By

Gonzales d’Alcantara (gonzales.dalcantara@ua.ac.be) Emeritus Professor of Econometrics at the University of Antwerp and d’Alcantara Economic Consulting

Paul H. Dembinski (pawel.dembinski@unifr.ch ) University of Fribourg, Switzerland

Odile Pilley, (odile.pilley@blueyonder.co.uk) International Consultant, formerly with International Bureau of the Universal Postal Union

Abstract: Post offices, inherited from the Industrial Revolution, were monolithic telephone and postal administrations. They were intimately linked to the fabric of nations and made significant contributions to state finances. From the 1960s onwards, integrators, such as UPS and FEDEX, started offering end-to-end express services, thus challenging the postal monopoly in new high added value services. Gradually, the liberalization paradigm gained ground. Telecommunications and sometimes financial services were spun off from postal operations. More recently, new policies and priorities started to emerge especially on the development agenda where financial inclusion has become a top priority in the developing world. The question to be addressed is which role, if any, the posts play or could play in ensuring inclusion. Despite an exceptionally scarce research in the field, this paper provides an overview of how these shifts in paradigm have affected postal policy, the postal financial services regulatory framework, the status of the organizations delivering those services and the offerings themselves in developing as well as in developed countries. After a research review, including the regulatory dimension, the paper focuses on how postal financial services institutions in their legal framework have developed bringing to the fore a panorama of a dozen of promising transformations of financial postal services in developing countries.

URL http://EconPapers.repec.org/RePEc:fri:fribow:fribow00451

Review by Mark Crowley

This paper by d’Alcantara, Dembinski and Pilley was circulated byNEP-HIS on 2014-09-12. The approach is unique in the sense that it seeks to compare the nature of Post Offices in Europe and the developing world, focusing primarily on their role in the savings movement. Its historical approach shows how the western Post Offices developed as a movement that sought to encourage thrift among a profligate working class, whereas in the developing world, the development of a Postal Savings movement was more in line with the growing financial markets across these nations, and the desire for individual customers to express choice in their banking processes. Moreover, it effectively shows how, following a crisis in trust experienced in the banking industry, more people across both the developed and developing world are turning to the government-backed Post Office as a safe haven for their savings in response to the perceived dangers of investing in private banks.

Summary

Citing the latter nineteenth century as the beginning of the Post Office savings movement, with British Prime Minister William Gladstone’s initiative to open a Post Office Savings Bank, this paper demonstrates that the influence of the government over consumer spending has long roots. The authors deftly show that certainly in its embryonic stages, the Post Office savings movement in developed countries focused on the provision of a secure place for working-class savings, while also encouraging thrift. Building on the lack of trust displayed by the working-class towards other alternatives, such as friendly societies, and their exclusion from private sector banks, the savings option offered by Post Offices had fertile ground on which it could flourish.              
 
gladstone 2

The paper also documents the differences between the supervisory natures of the Post Office Savings activities in developing countries, comparing them to that in the developed world. Citing the Asian and Latin American examples, the authors show that the levels of government control over the activities of postal savings banks were significantly more than that in the developed world, with the respective central banks exerting a supervisory role over postal and financial affairs. In the developed world, following with the liberalisation of financial services, the level of central government control over deposits made in postal savings banks has significantly diminished, with initiatives to delegate the administration of post office banking activity to private banks. Although responsibility is still being underwritten by central government (with Bank of Ireland UK as the example for postal savings in the UK) the level of micro-management previously present has now diminished.

d’Alcantara, Dembinski and Pilley also document the necessity of a world legal framework and understanding to evolve with the growing influence of the postal savings movement, especially in the developed world. Citing the aim for legal and financial autonomy to be awarded to postal savings institutions as part of the United Nations millennium goals, it effectively demonstrates the challenges that both the developed and the developing world face in terms of striking the right balance to facilitate the effective supervision of the financial system at a time when the role of private investment banks have been criticised for their excessive risk taking. While many countries in the west still pride themselves on liberal nature of their governments and markets, the definition of this is likely to change in the name of ensuring proportionality and responsibility concerning financial affairs in an age when consumer confidence in private banks is at an all-time low.

imgres

While seeking to emphasise the differences between the postal savings movement in the developed and developing world, this paper also draws on examples of convergence. In the period after the 2008 world financial crisis, there has been evidence that consumers, once more, have come back to the government-backed Post Office savings banks in response to not only their anger about the actions of private banks, but also the perception that government-backed savings institutions are safer in terms of securing deposits during periods of financial crisis. For example, in 2008, much resentment was created in the UK when the government bailed out banks deemed “too big to fail”, costing the taxpayer billions of pounds. While such action ensured that the deposits of savers were guaranteed, many responded angrily that taxpayer’s money was being used to save banks that had shown financial irresponsibility on such a grand scale.

post office uk

The paper ends on an optimistic note for the savings movement in Asia, with particular reference to China. In noting that the Chinese Postal Savings Bank is the fourth largest in China, with its customer base expanding beyond the traditional labouring classes to include students and businesspeople, the authors argue that this has been a triumph for the postal savings movement in the world’s most populous country. While it is worth noting that the level of central government control over all banks in China is possibly significantly more than in any other developed nation, it is a point well made that in a country with a flourishing middle class population, it is the postal savings movement that seems to be gaining the biggest traction.

posb china

Critique

d’Alcantara, Dembinski and Pilley covered a huge chronological and geographical period in their analysis, and have effectively compared the nature of the postal savings movement in the developed and developing world. Perhaps an area that could be explored further is the western government’s ideas of financial liberalisation as a principle that stops short of a full-scale privatisation of Post Office counters (which include financial services)? For example, Margaret Thatcher, despite pursuing a very ambitious privatisation programme in the 1980s, stopped short of privatising Post Office counters, despite taking steps to remove the ‘Giro’ from government control. Deeming the issue to be too much of a political hot potato, Thatcher left financial services at the Post Office largely untouched, encouraging only the intervention of private banks to compete for the option of underwriting (with the support of government) Post Office financial services. Today, both in the US and the UK, Post Office counters, and individual postmasters complain vehemently about their struggle for survival in the face of growing competition from private banks that now include the offers of financial services by supermarkets, and initiatives that have reduced the numerous functions of Post Office counters, including direct debit payments. Perhaps the question the authors could explore is why do western governments, while taking efforts to remove services from the Post Offices (such as bill payments) do not embark on a full scale privatisation, whereas in developing countries, where the extent of government control over the savings movement, including postal savings, is significantly stronger, the movement appears to be going from strength to strength?

Further Reading

Booth, Alan and Mark Billings, ‘Techno-nationalism, the Post Office and the creation of Britain’s National Giro’ in B Bátiz-Lazo, J.C. Maixé-Altés and P. Thomes Technological Innovation in Retail Finance: International Historical Perspectives (Abingdon: Routledge, 2011).

Campbell-Kelly, Martin, ‘Data Processing and Technological Change’ Technology and Culture, 39, 1 (Jan. 1998), pp. 1-32.

Campbell Smith, Duncan, Masters of the Post: The Authorized History of Royal Mail (London: Penguin, 2011).

Crowley, Mark J. Saving for the Nation: The Post Office and National Consumerism, c1860-1945’ in Erika Rappaport, Sandra Dawson and Mark J Crowley (eds.), Consuming Behaviours: Identity, Politics and Pleasure in Twentieth Century Britain (forthcoming Bloomsbury, 2015).

Failed by #EconomicGrowth?

Asia’s Little Divergence: State Capacity in China and Japan before 1850

by Tuan-Hwee Sng (National University of Singapore) and Chiaki Moriguchi (Hitotsubashi University)

Abstract: This paper explores the role of state capacity in the comparative economic development of China and Japan. Before 1850, both nations were ruled by stable dictators who relied on bureaucrats to govern their domains. We hypothesize that agency problems increase with the geographical size of a domain. In a large domain, the ruler’s inability to closely monitor bureaucrats creates opportunities for the bureaucrats to exploit taxpayers. To prevent overexploitation, the ruler has to keep taxes low and government small. Our dynamic model shows that while economic expansion improves the ruler’s finances in a small domain, it could lead to lower tax revenues in a large domain as it exacerbates bureaucratic expropriation. To test these implications, we assemble comparable quantitative data from primary and secondary sources. We find that the state taxed less and provided fewer local public goods per capita in China than in Japan. Furthermore, while the Tokugawa shogunate’s tax revenue grew in tandem with demographic trends, Qing China underwent fiscal contraction after 1750 despite demographic expansion. We conjecture that a greater state capacity might have prepared Japan better for the transition from stagnation to growth.

URL: http://econpapers.repec.org/paper/hithitcei/2014-6.htm

Reviewed by Joyman Lee

Summary

This paper was distributed by NEP-HIS on 2014-09-25 and 2014-10-03. In it Sng and Moriguchi ask why China – with its large population and high levels of technological prowess – was not the first country to industrialize. Existing studies of “divergence” have not explained differences in economic performance between China and Japan. Despite the similarities between the two economies in levels of proto-industrialization, political and legal structures, and living standards. Sng and Moriguchi argue that differences in public finance accounted for important differences in the two countries’ ability to promote economic growth.

In this paper Sng and Moriguchi focus on the important question of size and geography as the central explanatory variable. In particular, the authors develop a context-specific model which suggests that rulers’ need to rely on agents to govern (principal-agent problem) in a pre-modern dictatorship meant that “agency problems increase with its geographical size and heterogeneity” (p5), owing to information challenges which precluded close supervision by rulers of their agents. The model predicts that the larger the polity, the higher the corruption rate, and the lower the tax rate out of fear that subjects will revolt, as expropriation reduces the ruler’s ability to provide social goods commensurate to the tax levied. The higher level of corruption also reduces rulers’ incentives to invest, and hence the provision of public goods per capita. Graft and inefficiencies mean that population and economic growth actually reduces the proportion of the economic surplus available to the ruler. As a result, the size of the polity lowers the tipping point where the negative effects of growth outweigh the positive effects.

Qing military officials. Qing China had a chronic corruption problem.

Qing military officials. Qing China had a chronic corruption problem.

Sng and Moriguchi test their hypothesis against a pool of primary and secondary data, which confirms that tax rates were higher in Japan than China, averaging around 34% in Japan (rising to 50-55% in some domains, p29): more than twice of China’s level in 1700 and approximately six times by 1850. Population growth was far greater in China than Japan, where the population stagnated after 1700. Compared to the Qing, Tokugawa Japan enjoyed a higher level of public services in terms of coinage, transportation, urban management, and environmental management (forestry), and in famine relief the Qing’s strengths were cancelled out by 1850. The authors conclude that the large size of China “imposed increasingly insurmountable constraints on the regime’s capacity to collect taxes and provide essential local public goods as its economy expanded,” and that “this factor alone might have been sufficient in holding back China’s transition from stagnation to growth even in the absence of Western imperialism” (p38). In line with the existing scholarship, Sng and Moriguchi contend that Japan’s healthier tax system provided the Westernizing Meiji regime (1868-1912) with revenues to conduct far-reaching reforms.

Comment

Despite its significance in global history, the comparative history of China and Japan is surprisingly overlooked. The “California school,” for instance, has focused largely on the economic “divergence” between China and the West, whereas Japanese economic historians have labored over Japan-Europe differences (Saito 2010). Sng and Moriguchi’s focus on the comparative history of China and Japan is thus relatively new. The authors join political scientist Wenkai He, whose recent book Paths toward the Modern Fiscal State also explores China’s failure to develop a modern fiscal state in the nineteenth century, in comparison with early modern England and Meiji Japan (He 2013). China’s “failure” is especially puzzling in view of the Qing’s overall success in raising revenue in the late nineteenth century (Wong 1997, 155-56).

Sng and Moriguchi’s argument that a state’s ability to increase revenue is inversely affected by size is persuasive. In the absence of institutions to monitor graft, China had seldom been able to pursue rational fiscal strategies – especially at the county level – since the Tang-Song transition (Hartwell 1982, 395-96). In contrast, Japan’s decentralized polity in the early modern period bore close resemblance to Europe. Perhaps unsurprisingly, early modern Japan’s experiences of proto-industrialization and industrious revolution had clear parallels both in England and in the Netherlands.

A magistrate's office in Jiangxi province. Arguments on the Qing's inadequacies hinge partly on the Qing's ideological goals.

A magistrate’s office in Jiangxi province. Arguments on the Qing’s inadequacies hinge partly on the Qing’s ideological goals.

What this narrative does not explain, however, is why China pursued such an inefficient mode of fiscal management. Given the challenges of graft and the fear of revolt, Sng and Moriguchi assume that it was the most rational or “optimal” course. The authors point to but dismiss lightly the question posed by Qing historians that the goals of the late imperial Confucian state might not have been compatible with “rational” state expansion. In other words, rather than fearing peasant revolt, the choice of tax rate might have to do with ideological reasons. Similarly, the idea that the Japanese state shared a “Confucian” outlook (p4) is overly simplistic, especially as consistently high levels of taxation in Tokugawa Japan undermine the idea that Tokugawa Japan was a “benevolent” state.

While size might have been a key variable in China’s state “weakness,” this does not in itself explain the strengths or weaknesses of China’s overall economy. The large size of China’s internal market, for example, allowed differentiation and specialization which appear to have sustained economic growth even in the absence of an active state. This was true both in the Qing and more recently in China’s informal and private sectors since 1978. Thus there is no reason to assume that the adoption of a “modern” fiscal apparatus was a natural goal for the Qing before 1850. Similarly, by focusing on the state’s fiscal abilities to the exclusion of other factors, Sng and Moriguchi also sidestep an important Japan-centered literature that considers how similarities in economic structures between China and Japan enabled the results of Westernizing experiments in Japan after 1850 to be transferred to China. This point is important because revenues from Japan’s trade with Asia propelled Meiji Japan’s economic growth, no less than the revenues collected by Japan’s indigenous tax structures. Moreover, this was a form of self-sustaining growth built upon constant competitive pressures from below, i.e. from China which was rapidly reproducing strategies developed in Japan (ed. Sugihara 2005).

Despite these criticisms, Sng and Moriguchi’s model offers clear quantitative analysis on an important aspect of a greatly understudied topic, and is recommended for anyone interested in the longue durée economic development of the two countries.

Additional References

Hartwell, R. 1982. “Demographic, Political, and Social Transformations of China, 750-1550,” Harvard Journal of Asiatic Studies, vol. 42, no. 2, pp. 365-442 [Dec, 1982].

He, W 2013. The Paths toward the Modern Fiscal State: Early Modern England, Meiji Japan, and Qing China. Cambridge, MA: Harvard University Press.

Saito, O. 2010. “An Industrious Revolution in an East Asian Market Economy? Tokugawa Japan and Implications for the Great Divergence,” Australian Economic History Review, vol. 2010, vol. 50, issue 3, pp. 240-261.

Sugihara, K. (ed.) 2005. Japan, China, and the Growth of the Asian International Economy, 1850-1949. New York: Oxford University Press.

Wong, R. 1997. China Transformed: Historical Change and the Limits of European Experience. Ithaca, NY: Cornell University Press.

On #Trade, #Globalization, #Development and Steamships

The Wind of Change: Maritime Technology, Trade and Economic Development

by

Luigi Pascali (L.Pascali@warwick.ac.uk) University of Warwick (UK) and Pompeu Fabra University (Spain)

ABSTRACT

The 1870-1913 period marked the birth of the …first era of trade globalization. How did this tremendous increase in trade affect economic development? This work isolates a causality channel by exploiting the fact that the steamship produced an asymmetric change in trade distances among countries. Before the invention of the steamship, trade routes depended on wind patterns. The introduction of the steamship in the shipping industry reduced shipping costs and time in a disproportionate manner across countries and trade routes. Using this source of variation and a completely novel set of data on shipping times, trade, and development that spans the great majority of the world between 1850 and 1900, I …find that 1) the adoption of the steamship was the major reason for the …first wave of trade globalization, 2) only a small number of countries that were characterized by more inclusive institutions bene…fited from globalization, and 3) globalization exerted a negative effect on both urbanization rates and economic development in most other countries.

URL: http://econpapers.repec.org/paper/wrkwarwec/1049.htm

Review by Natacha Postel-Vinay

The 1870-1913 period saw the first significant wave of trade globalization, which introduced important economic and social changes throughout the world. Despite an abundant literature on the causes of globalization at the time, there are significant methodological issues with these studies. Even more surprisingly, very little has been said about the impact of globalization in this era on the economies of countries around the world. In particular, an essential question to ask seems to be whether the increase in trade witnessed at the time was conducive to greater economic development worldwide.  In a highly ambitious move, Luigi Pascali’s paper (distributed by NEP-HIS on 2014-07-13) tackles both issues at the same time, and in so doing contributes significantly to the larger debate on the causes and consequences of trade globalization.

The main challenge in answering these two questions is to deal in each case with an endogeneity problem. Start with the causes of the trade boom. In their attempts to determine whether the rise in international trade could be due to transportation costs, authors have often used freight rates as a proxy for these costs. The problem with this approach is that freight rates are the actual price of transportation. They may be affected by factors which are themselves related to the state of trade (such as demand for goods or economic activity). So causation may not actually run from freight rates to trade – but from other factors related to trade to freight rates.

A similar issue arises when looking at the causal relationship (if any) from trade to economic development. As economic activity may itself have a positive impact on trade – and not just the other way around – a researcher dealing with this question may find a positive correlation between the two but will eventually be faced with a potential endogeneity problem.

Pascali found a creative solution to these difficulties. He did so by making use of the fact that the steamship introduced asymmetric changes (ie. exogenous variation) in trade distances between countries.  Before the steamship, shipping times by sail were mainly determined by wind patterns. The steamship therefore introduced greater changes in shipping times between some countries than between others. Such changes were purely independent of other factors affecting trade, and only linked to such things as the direction of wind and water currents. It thus became possible for the author to examine the effect of a large change in shipping time on trade, independent of other factors linked to trade such as economic activity or market structure.

Clipper ship from the 1850s.

Clipper ship from the 1850s.

To compute such a variable, Pascali built an enormous dataset on sailing times (using such variables as velocity and direction of sea-surface winds) and calculated the likely effect of the adoption of the steamship on shipping times for 129 countries between 1850 and 1900. He also expanded available datasets to include more than 5,000 entries on imports and exports and data on urbanization for more than 5,000 different cities.

What he found was that the introduction of the steamship had a much larger (positive) impact on trade than was previously thought.

Pascali also found that he could use the steamship variable to search for causal links running from trade to greater income levels and development. As mentioned above he had isolated changes in shipping times including the influence of countries’ economic activity. But these changes were strongly related to trade itself. They were then used as instrumental variable in a two-stage least squares (2SLS). In other words, this variable effectively dealt with the endogeneity problem in the analysis of the effects of trade on development.

His results were somewhat surprising. Using this variable as an instrument, the regression of development (urbanization, population density and per-capita GDP) on trade yielded mostly significant but negative coefficients on the explanatory variable. It therefore appears that variation in the intensity of trade between two locations does not have a large impact on development – and may even have a negative one.

Even more interestingly, his findings suggest that whether an increase in trade has a positive impact on development depends on a country’s institutions:  only a few countries having a better established rule of law (as measured by “constraints on the executive” – taken from Acemoglu and Johnson (2005)) benefited from an increase in international trade in terms of development. This finding can be related to relatively recent literature (such as Krugman (1991) or Crafts and Venables (2007)) according to which a reduction in trade costs is only beneficial to a certain set of countries (in particular, those specializing in manufacturing).

A steamship from the 1900s.

A steamship from the 1900s.

Pascali’s paper thus contributes to questioning the positive effects of lowering trade barriers, which are too often taken for granted. He carefully suggests that trade may have a differential impact depending on countries’ institutions. Perhaps some elaboration and discussion on how exactly these relationships play out would have been welcome.  Nevertheless the author’s questions, creative methodology and findings all make for a fascinating read.

Additional References

Acemoglu, D. and S. Johnson (2005). “Unbundling institutions”. Journal of Political Economy 113(5): 949–995.

Crafts, N. and A. Venables (2007). Globalization in Historical Perspective. University of Chicago Press.

Krugman, P. (1991). “Increasing returns and economic geography”. Journal of Political Economy 99: 483-499.