Category Archives: Economic Geography

The postman always rings twice: measuring market access and endowment in the German Empire through postal data

It’s all in the Mail: The Economic Geography of the German Empire

by

Florian PLOECKL (florian.ploeckl@adelaide.edu.au) University of Adelaide

ABSTRACT

Information exchange is a necessary prerequisite for economic exchange over space. This relationship implies that information exchange data corresponds to the location of economic activity and therefore also of population. Building on this relationship we use postal data to analyse the spatial structure of the population distribution in the German Empire of 1871. In particular we utilize local volume data of a number of postal information transmission services and a New Economic Geography model to create two index measures, Information Intensity and Amenity. These variables respectively influence the two mechanisms behind the urban population distribution, namely agglomeration forces and location endowments. By testing the influence of actual location characteristics on these indices we identify which location factors mattered for the population distribution and show that a number of characteristics worked through both mechanisms. The model is then used to determine counterfactual population distributions, which demonstrate the relative importance of particular factors, most notably the railroad whose removal shows a 34% lower urban population. A data set of large locations for the years 1877 to 1895 shows that market access increases drove the magnitude of the increase in urban population, while endowment changes shaped their relative pattern.

URL: http://econpapers.repec.org/scripts/search.pf?aus=Florian%20Ploeckl

Review by Anna Missiaia

This paper was distributed by NEP-HIS on 2015-04-11. The work by Florian Ploeckl lays in the expanding branch of historical economic geography, which looks at, broadly speaking, the role of geographical factors in regional development. In particular, the author looks at the effect of actual location characteristics on the information exchange and endowment (calculated through two indices) in the German Empire between 1877 and 1895. The empirical model used in the paper uses the indices that describe market access and endowments effects as dependent variables and test which geographic, institutional and cultural characteristics shaped them.

220px-Bundesarchiv_Bild_146-1990-023-06A,_Otto_von_Bismarck

Otto Von Bismarck (1815-1898), First Chancellor of Germany

The paper relies on detailed data on the postal system to measure the diffusion of information across 41 districts in the Empire. The creation, after the German unification, of a common and homogeneous postal system with the same rates across locations allows the author to use postal flows as proxy for “information intensity”.   This measure tells us the level of information exchange for each location considered. The author meticulously identifies business related correspondence for each location by selecting specific types of mail for the analysis and relating it to the general mail. The empirical exercise appears very well engineered and executed.

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 Kaiserliches Postamt sign, about 1900

The next step is to relate this indirect measure of economic activity to the access to markets for any given location. Following a well-established practice in the discipline, Ploeckl relies on the concept of market potential. Market potential is a measure of the centrality of a given location and can be constructed in two main ways. The first option, when trade volumes among locations are available, is a gravity model. This is the method used nowadays by economic geographers but also economic historians lucky enough to have access to internal trade flows (see Redding and Venables, 2004 for the former and Wolf, 2007 for the latter). This method basically looks at actual levels of trade and derives from these the potential for a location. The second option, used when trade flows are unknown, relies on the methodology proposed by Harris (1954) which uses GDP of the locations weighted by the inverse of distance to calculate the potential levels of trade across the locations given the size of their economies. Examples of this estimation procedure are Crafts (2005), Schulze (2007) and more recently Crafts and Klein (2012). This paper approaches the issue in a very innovative way, escaping the dichotomy that normally characterizes the calculation of market potential. As we understand, neither trade volumes nor regional GDP are available for Germany in this period. Therefore the author relies on the assumptions that “market potential translates in commercial transactions” and that “each transaction causes the same amount of mail” to claim that the measure from step 1 is able to capture the access to markets of the locations. The first assumption is shared with the broader group of scholars that use gravity models for market access and is perfectly reasonable when dealing with trade volumes. The use of quantitative evidence on correspondence to proxy for economic activity is not new in the literature: Crafts (1983) provided GDP estimates based, among the others, on letters per capita. The method proved to be quite misleading applied for instance to the Italian case (Esposto, 1997). Because of the indirect measure used in the paper, the relationship between information flows, market potential and actual exchange is of course much more questionable. However, it must be pointed out that the empirical effort in this paper makes its use of postal data more convincing compared to other more dated attempts.

The paper is also very interesting in that it finds a way to split market access into firm market access and consumer market access. This is a crucial point in the analysis of market forces as the two measures could well be following very different trajectories.

The last step is to calculate an endowment index based on real wages and the trade cost matrix across locations (the details on the methodology are explained in Ploeckl, 2012).

The bottom line results of the paper are that important factors like railroads and coal were important in the location of population (and therefore economic activity) both through the market channel and the endowment channel. The impact of these channels is quantified through counterfactual analysis, leading for instance to a 30% impact of the removal of the railroads on the population level.

Summing up, this paper contributes to a very hot debate on the determinants of the location of economic activity. It does so by finding an innovative empirical method to overcome the chronic lack of data in historical research. The limitations of these indirect methods should not, as usual, be neglected. However, the exercise appears more than reasonable and some features of these papers could find fruitful applications in a variety of other lines of research in historical economic geography.

REFERENCES

Crafts, N., 1983, Gross National Product in Europe 1970-1910: Some New Estimates, Explorations in Economic History, Vol. 20, No. 4, 387-401.

Crafts, N., 2005, Market Potential in British regions, 1871-1931, Regional Studies, Vol. 39, pp. 1159-1166.

Esposto, A., 1997, Estimate Regional Per Capita Income: Italy, 1861-1914, Journal of European Economic History, Vol. 26, No. 3, p.585-604.

Ploeckl, F., 2012, Endowments and Market Access; the Size of Towns in Historical Perspective: Saxony 1550-1834, Vol. 42, p. 607-618.

Redding, S. and A. Venables, 2004, Economic Geography and International Inequality, Journal of International Economics, Vol. 62, No. 1, pp. 53-82.

Schulze, M. S., 2007, Regional Income Dispersion and Market Potential in the Late Nineteenth Century Hapsburg Empire, LSE Working Papers no. 106/07.

Wolf, N., 2007, Endowments vs. Market Potential: What Explains the Relocation of Industry after the Polish Reunification in 1918?, Explorations in Economic History, Vol. 44, (2007), 22-42.

 

 

Is it Possible to Escape the #ResourceCurse?

Mining and Indonesia’s Economy: Institutions and Value Adding, 1870-2010

By Pierre van der Eng, The Australian National University (Canberra) (pierre.vandereng@anu.edu.au)

Abstract: Indonesia has long been a major producer of minerals for international markets. Starting in 2014, it implemented legislation banning exports of unprocessed minerals and requiring producers to invest in processing facilities to add more value before export. This paper establishes what light past experiences in Indonesia with mining sheds on this recent development. It quantifies and discusses the growth of mining production in Indonesia since 1870. It analyses the institutional arrangements that past governments used to maximise resource rents and domestic value adding. The paper finds that production and exports of mining commodities were long dominated by oil, but increased and diversified over time, particularly since the 1960s. The development of the mining sector depended on changes in market prices, mining technologies and the cost of production, but particularly on the institutional arrangements that guided the decisions of foreign investors to commit to mining production and processing in Indonesia.

URL http://econpapers.repec.org/paper/hitprimdp/57.htm

Review by Miguel A. López-Morell

Mining is an economic activity that abounds with paradoxes and differs greatly from manufacturing and agriculture. Mining involves sourcing underground natural resources which, in turn, depends on the presence of certain minerals in the area, on the total costs of extraction, transport, refining, etc. and the current and expected demand for the mineral(s). The exact amount to be sourced is uncertain. Furthermore, mining is often environmentally unfriendly and as a rule, non-regenerative. It has a limited life as it ends the moment the material is exhausted. This unless new technologies or price hikes turn the extraction of any remanents profitable. Mining also associates with important negative externalities, as a consequence from the changes to the landscapes and the pollution it causes. Hence, teh potential market failures make case for state intervention and in regulating mining activity, the state has to strike a balance between wealth generation, employment and the ensuing negative factors. This sort of considerations and issues gain greater weight when extraction is to be carried out by foreign companies.

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There are two broad areas that encompass an ongoing debate around the degree of state intervention in mining. On the one hand, ownership and control of the deposits and, on the other hand, taxation. The debates around taxation dwell on the extent to which the state can generate revenue through compulsive contributions based on local production and/or exports. The debate about ownership and control essentially starts with the idea that, regardless of who owns the top soil, whatever is underground belongs to the state. The discussion that ensues deals with how the state should enable individuals and/or companies to explore and exploit underground riches by ceding rights of explotation through concessions and permits. For instance atttutes towards mining in Germany, Peru, Mexico, Japan and Uruguay at the beginning of the 20th century resulted in a system of almost absolute freedom for domestic and foreign individuals and companies to make claims and exploit their mines. Examples of restrictive policies include the nationalization of oil in Mexico (1938), tin in Bolivia (1952) as well as that of copper in the Democratic Republic of Congo (1967 and again 2010) and Chile (1971).

Dewi Sukarno (also spelled Soekarno)  (1901-1970). President of Indonesia, 1945 to 1966.

Dewi Sukarno (also spelled Soekarno) (1901-1970). President of Indonesia, 1945 to 1966.

A large number of studies on the mining sector have emphasized the role of lobby groups in achieving better legislative conditions for exploiting and exporting mineral resources. At the same time, however, these studies also document how widespread administrative corruption has given rise to what is known as the “mineral resource curse” hypothesis or the apparent paradox that countries endowed with large mineral resources have not seen this wealth reflected in their GDPs. Morover, that these same countries often suffer sinificant imbalances in the distribution of the income, with mining districts falling into abandonment or in a precarious state. These are countries that have been unable to develop alternative economic activities to mining, suffer from poor infrastructure, and pollution from mining.

Haji Mohammad Suharto (also spelled Soeharto) (1921-2008). President of Indonesia,  1967 to 1998.

Haji Mohammad Suharto (also spelled Soeharto) (1921-2008). President of Indonesia, 1967 to 1998.

The paper by Pierre van der Eng, distributed by NEP-HIS on 2014-09-25 offers an important contribution to better understanding the “mineral resource curse”. Van der Eng takes a long-term view to address the policies undertaken by the Indonesian authorities to maximize income form their mining, be it through direct or shared exploitation or through specific tax policies. Over a 140 year period he establishes the various historical stages that have characterized the evolution of the Indonesian mining industry in terms of employment, exports, production and generation of added value and, most importantly, income absorbed by the national economy through the various types of mining.

Pierre van der Eng

Pierre van der Eng

At is birth in 1945, the Indonesian Republic inherited a system of tight control over the deposits in the region (as excercise by th Dutch through the former monopoly of the Chartered East Indies Company). In the decades following independence, the Indonesian governments maintained and reinforced the policy of tight control. At the same time, it set up an interesting shared management model of the deposits between a specialized public body and foreign mining companies (known as Contracts of Work or CoW). The CoW resulted in a significant improvement in both the control of production and revenue from taxes.

The CoW legally ceased to exist in 2009. Since then Indonesia began to decentralized a significant part of the collection of mining taxes. The loss of this revenue has been compensated with measures designed to increase the effort of the mining companies in the country and by retaining higher percentages of the added value generated by the mining industry. For example, in early 2014 the Indonesian government introduced a prohibition on mining firms exporting raw or concentrated minerals, which effectively force multinationals like Freeport-McMoRan to develop copper refineries inside the country while, at the same time, compensate for the lost revenue assosiated with the fall of the international oil price.

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The Indonesian case is considered “paradigmatic” example of a good management policy of mineral resources. This thanks to Indonesia avoding the state-monopoly model (popular amongst oil producing countries). The Indonesian approach also shows that it is possible to find ways for the country to absorb a high proportion of the value added by mining productions while, at the same time, direct or manage investment in a strategic sector. The Indonesian approach seems to suggest that it is possible to align the incentives and outcomes of state companies and foreign multinationals. Specially as the latter complement a lack of capital and the country’s know-how. In the Indonesian case the lattter occurred while relating to a number of Japanese investments, which contributed to the Indonesian economy with capital, workers and technology. In these circumstances, the Indonesian government was able to supply oil and other raw material needs of the Japanese, who in turn reduced their dependence on more distant suppliers.

In short, the paper by Pierre van der Eng is opportune. A much welcome contribution to the world of mining history. There are few historical economic studies available on the micro and macroeconomic effects of mining on the economies of countries rich in mining resources. The view offered may also set off deeper reflection about how much pressure can be brought to bear on the profits of businesses whose presence in an area is fleeting. It may also inspire more comparative studies by countries.

References

Crowson, P. (2008) Mining Unearthed: The definitive book on how economic and political influences shape the global mining industry. London: Aspermont.

Harvey, C. and Taylor, P. (1987) “Mineral Wealth and Economic Development: Foreign Direct Investment in Spain, 1851 – 1913”. Economic History Review, XL(2): 185-205.

Hillman, J. (2010) The International Tin Cartel. London: Routledge.

Pérez de Perceval Verde, M. Á. (2006) “Minería e instituciones: papel del Estado y la legislación en la extracción española contemporánea”, in M. Á. Pérez de Perceval Verde, M. Á. López-Morell, and A. Sánchez Rodríguez (Eds.) Minería y desarrollo económico en España. Madrid: Síntesis/IGME, pp. 69-93.

Schmitz, C. (1986) “The rise of Big Business in the World copper Industry 1870-1930”. Economic History Review, 2ª serie, XXXIX(3): 392-410.

Schmitz, C. (ed.) (1995) Big Business in Mining and Petroleum. Cheltenham: Edward Elgar.

White, N. (1996) Business, Government & the End of Empire: Malaya, 1942-57. Oxford: Oxford University Press.

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.

Technology and Financial Inclusion in North America

Did Railroads Make Antebellum U.S. Banks More Sound?

By Jeremy Atack (Vanderbilt), Matthew Steven Jaremski (Colgate), and Peter Rousseau (Vanderbilt).

Abstract: We investigate the relationships of bank failures and balance sheet conditions with measures of proximity to different forms of transportation in the United States over the period from 1830-1860. A series of hazard models and bank-level regressions indicate a systematic relationship between proximity to railroads (but not to other means of transportation) and “good” banking outcomes. Although railroads improved economic conditions along their routes, we offer evidence of another channel. Specifically, railroads facilitated better information flows about banks that led to modifications in bank asset composition consistent with reductions in the incidence of moral hazard.

URL: http://econpapers.repec.org/paper/nbrnberwo/20032.htm

Review by Bernardo Bátiz-Lazo

Executive briefing

This paper was distributed by NEP-HIS on 2014-04-18. Atack, Jaremski and Rousseau (henceforward AJR) deal with the otherwise thorny issue of causation in the relationship between financial intermediation and economic growth. They focus on bank issued notes rather deposits; and argue for and provide empirical evidence of bi-directional causation based on empirical estimates that combine geography (ie GIS) and financial data. The nature of their reported causation emerges from their approach to railroads as a transport technology that shapes markets while also shaped by its users.

Summary

In this paper AJR study the effect of improved means of communication on market integration and particularly whether banks in previously remote areas of pre-Civil War USA had an incentive to over extend their liabilities. AJR’s paper is an important contribution: first, because they focus on bank issued notes and bills rather than deposits to understand how banks financed themselves. Second, because of the dearth of systematic empirical testing whether the improvements in the means of communication affected the operation of banks.

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In 19th century north America and in the absence of a central bank, notes from local banks were substitutes among themselves and between them and payment in species. Those in the most remote communities (ie with little or no oversight) had an opportunity to misbehave “in ways that compromised the positions of their liability holders” (behaviour which AJR label “quasi-wildcatting”). Railroads, canals and boats connected communities and enabled better trading opportunities. But ease of communication also meant greater potential for oversight.

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ACJ test bank failure rates (banks that didn’t redeem notes at full value), closed banks (ceased operation but redeem at full value), new banks and balance sheet management for 1,818 banks in existence in the US in 5 year increments between 1830 and 1862. Measures of distance between forms of communication (i.e. railroads, canals, steam navegable river, navegable lake and maritime trade) and bank location emerged from overlapping contemporary maps with GIS data. Financial data was collected from annual editions of the “Merchants and Bankers’ Almanac”. They distinguish between states that passed “free banking laws” (from 1837 to the early 1850s) and those that did not. They also considered changes in failure rates and balance sheet variance (applying the so called CAMEL model – to the best of data availability) for locations that had issuing banks before new transport infrastructure and those where banks appear only after new means of communication were deployed:

Improvements in finance over the period also provided a means of payment that promoted increasingly impersonal trade. To the extent that the railroads drew new banks closer to the centers of economic activity and allowed existing banks to participate in the growth opportunities afforded by efficient connections.(p. 2)

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Railroads were the only transport technology that returned statistically significant effects. It suggested that the advent of railroads did indeed pushed bankers to reduce the risk in their portfolios. But regardless of transport variables, “[l]arger banks with more reserves, loans, and deposits and fewer bank notes were less likely to fail.” (p.20). It is thus likely that railroads impact banks’ operation as they brought about greater economic diversity, urbanisation and other measures of economic development which translated in larger volume of deposits but also greater scrutiny and oversight. In this sense railroads (as exogenous variable) made banks less likely to fail.

But ACJ note that means of transportation were not necessarily exogenous to banks. Reasons for the endogeneity of transport infrastructure included bankers promoting and investing in railroads to bring them to their communities. Also railways could find advantages to expand into vigorously active locations (where new banks could establish to capture a growing volume of deposits and serve a growing demand for loans).

Other empirical results include banks decreased the amount of excess reserves, notes in circulation and bond holdings while also increased the volume of loans after the arrival of a railroad. In short, considering railroads an endogenous variable also results in transport technologies lowering bank failure rates by encouraging banks to operate more safely.

Comment

The work of AJR is part of a growing and increasingly fruitful trend which combines GPS data with other more “traditional” sources. But for me the paper could also inform contemporary debates on payments. Specifically their focus is on banks of issue, in itself a novelty in the history of payment systems. For AJR technological change improves means of payment when it reduces transaction costs by increasing trust on the issuer. But as noted above, there are a number of alternative technologies which have, in principle, equal opportunity to succeed. In this regard AJR state:

Here, we describe a mechanism by which railroads not only affected finance on the extensive margin, but also led to efficiency changes that enhanced the intensity of financial intermediation. And, of course, it is the interaction of the intensity of intermediation along with its quantity that seems most important for long-run growth (Rousseau and Wachtel 1998, 2011). This relationship proves to be one that does not generalize to all types of transportation; rather, railroads seem to have been the only transportation methods that affected banks in this way.(p4)

In other words, financial inclusion and improvements in the payment system interact and enhance economic growth when the former take place through specific forms of technological change. It is the interaction with users that which helps railroads to dominate and effectively change the payments system. Moreover, this process involves changes in the portfolio (and overall level of risk) of individual banks.

The idea that users shape technology is not new to those well versed in the social studies of technology. However, AJR’s argument is novel not only for the study of the economic history of Antibellum America but also when considering that in today’s complex payments ecosystem there are a number or alternatives for digital payments, many of which are based on mobile phones. Yet it would seem that there is greater competition between mobile phone apps than between mobile and other payment solutions (cash and coins, Visa/Mastercard issued credit cards, PayPal, Bitcoin and digital currencies, etc.). AJR results would then suggest that, ceteris paribus, the technology with greater chance to succeed is that which has great bi-directional causality (i.e. significant exogenous and endogenous features). So people’s love for smart phones would suggest mobile payments might have greater chance to change the payment ecosystem than digital currencies (such as Bitcoin), but is early days to decide which of the different mobile apps has greater chance to actually do so.

Wall Street (1867)

Wall Street (1867)

Another aspect in which AJR’s has a contemporary slant refers to security and trust. These are key issues in today’s digital payments debate, yet the possibility of fraud is absence from AJR’s narrative. For this I mean not “wildcatting” but ascertaining whether notes of a trust worthy bank could have been forged. I am not clear how to capture this phenomenon empirically. It is also unlikely that the volume of forged notes of any one trusted issuer was significant. But the point is, as Patrice Baubeau (IDHES-Nanterre) has noted, that in the 19th century the technological effort for fraud was rather simple: a small furnace or a printing press. Yet today that effort is n-times more complex.

AJR also make the point that changes in the payments ecosystem are linked to bank stability and the fragility of the financial system. This is an argument that often escapes those discussing the digital payments debate.

Overall it is a short but well put together paper. It does what it says on the can, and thus highly recommended reading.

Immigration and the Economy: An Interdisciplinary Subject

Immigrant Diversity and Economic Development in Cities: A Critical Review

By Thomas Kemeny (London School of Economics)

Abstract: This paper reviews a growing literature investigating how ‘immigrant’ diversity relates to urban economic performance. As distinct from the labor-supply focus of much of the economics of immigration, this paper reviews work that examines how growing heterogeneity in the composition of the workforce may beneficially or harmfully affect the production of goods, services and ideas, especially in regional economies. Taking stock of the existing literature, the paper argues that the low-hanging fruit in this field has now been picked, and lays out a set of open issues that need to be taken up in future research in order to fulfil the promise of this work.

URL: http://econpapers.repec.org/paper/cepsercdp/0149.htm

Revised by: Anthony C. Evans (final year graduate Business Studies & Marketing, Bangor University – Wales)

Summary

Kemeny’s paper was circulated by NEP-HIS on 2013-12-06 and it seeks to understand the relationship between immigrant diversity and economic performance, primarily by considering the effects of “interactions among a diverse populace” (p.1).

The review is motivated by the theory that “immigrant-diverse individuals could simultaneously improve economic outcomes by bringing together different perspectives and heuristics, and reduce performance by making co-operation more costly.” (p.2) This additional cost of co-operation is associated with Tajfel’s (1974) Social Identity theory, and is supported by the quoted findings of Richard et al. (2002), Bandiera et al. (2005) and O’Reilly et al. (1989); that teams who share few commonalities find it hard to integrate and suffer from reduced co-operation and higher staff turnover. Empirical studies by Hoffman and Maier (1961) and Joshi and Roh (2009) are cited, and display a modest positive economic impact of workplace diversity.

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Kemeny quotes Ottaviano and Peri’s (2006) findings that a 0.1 increase in the Fractionalization index increased native wages by 13% and rents more so within the US. Kemeny (2012) and Spaber (2010) find similar results, as does Bellini et al.’s (2013) European work. Alesina et al.’s (2013) global study finds birthplace diversity is positively related to GDP per capita and total factor productivity, with the strongest association in rich countries for high-skill workers.

However, Kemeny notes that many studies, including Suedekum et al.’s (2009) study of Germany and Nathan’s (2011) study of the UK, have demonstrated a negative economic effect of immigrant diversity, especially upon those in lower skilled jobs.

Citing empirical studies by Stephan and Levin (2001), Bosetti et al. (2012) and Hunt and Gauthier-Loiselle (2010), immigrant diversity is found to be positively linked to the number of research papers published and to the number of patent applications for highly skilled industries.

Kemeny finds that there is inconsistent evidence as to the link between immigration and entrepreneurship in Mariano et al. (2012), Audretsch et al. (2010) and Cheng and Li’s (2011) extant work.

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Through his review Kemeny identifies a number of stylised facts across the relevant literature. Some of these follow.

The paper refers to a growing body of work supporting Bakens et al.’s (2013) findings that the individual’s characteristics emerge as the primary determinants of variation in wages and rents. Kemeny proposes individual heterogeneity may overstate diversity’s positive impact upon productivity, as immigrants may self-select areas based upon higher wages, personal interests and their skill level. The validity of the shift share instruments used to address reverse causality rely upon initial waves of immigrants having chosen locations based upon extra-economic concerns, which likely may not be the case.

Kemeny’s (2012) previous work finds that wages in areas with high levels of social capital, often promoted by regional institutions, are typically 7% higher than those living in equally diverse areas with lower levels of social capital, a consideration not accounted for by other authors.

Overall the paper finds little consensus as to the impact of team diversity within the organizational literature.

Several issues with the measurements currently used are highlighted. Productivity gains for lower-skilled labour may not necessarily result in wage increases, and process innovation within this segment may not be patented. Kemeny cites Alesina et al.’s (2013) findings that skin colour or language spoken at home are less likely to result in production complementarities than social values are. Their research finds ethnic fractionalization and birthplace diversity are largely unrelated, whilst birthplace also fails to capture the importance of second-generation immigrants. Under Roback’s (1982) Spatial Equilibrium, higher wages may either reflect greater productivity brought about by diversity, or compensate workers for the disutility of living in a diverse area. Because of this paradox one cannot determine from wages alone how productivity and diversity may be linked.

Kemeny condemns an inherent assumption of urban studies; that “bio-diversity reflects intellectual diversity” (p.35) and contends “the idea that national culture shapes heuristics and perspectives ought to be subject to empirical validation.” (p.37)

Kemeny argues, that based upon the literature reviewed, diversity is generally positively related to wages, and either rents, productivity or cultural amenities, with least square analysis’ demonstrating the direction of causality is from diversity to economic gain. It is reasoned that this indicates the productivity augmenting effects of immigrant diversity outweigh the cost of transacting across cultures.

Kemeny proposes that further work into the role of institutions, the relative importance of city specific manifestations of diversity and the differing impact of diversity between skill levels and industries would advance this modern field.

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Critique

Value and Implications of the Research

Kemeny provides a useful viewpoint by combining the findings of both economic geography and organizational theory. In identifying limitations in the methodologies of both fields, future work can seek to address these issues and generate a better understanding of the relationship between immigrant diversity and economic development. This understanding may help inform frequently inaccurate (Economist, 2013) popular debates on immigration, which argue that immigration results in fewer jobs for natives (Kemeny, 2013) and a drain on state welfare (Economist, 2013). Furthermore greater understanding of how immigration affects the economy should result in better-informed immigration policy. The finding that institutions can augment economic gains may be beneficial to both immigrants and natives, and represent a pragmatic way to enhance the quality of life for both parties.

Limitations and Future Research

By omitting the level at which quoted results were found to be statistically significant, the paper makes it difficult to interpret the frequently contradicting results of the various research cited.

One issue Kemeny fails to address is whether mild racial or cultural preferences can produce extreme segregation in urban areas, as is illustrated by Schelling’s (1978) famous checkerboard model. Becker (1971) observed that the economic penalty to employers who display taste-based discrimination increased as the size of the group being discriminated against increased, therefore larger populations of immigrants should experience less discrimination and thus higher wages than smaller populations. Further discussion of the link between immigration and discrimination, and the economic impact of the latter may provide valuable insight to public policy debate and formulation.

Whilst Kemeny addresses the fact that many studies fail to acknowledge that individual competencies play a significant role, an issue the research does not expand upon is difference between immigrants of different cultural backgrounds. Immigrants from nations with similar language and cultural values will experience lower transactional costs (Rokeach, 1979), which correspond with Hofstede’s (2001) organizational research findings. Goodhart (2013) finds significant differences in economic prosperity between immigrants of different national origin in Britain during the 20th Century.

Whilst a controversial topic it must be noted that the recent consensus in psychology research is that there is a strong heritability of “intelligence” (Bouchard, 2004). As measures of “intelligence” have been shown to be linked to wage differentials (Benjamin et al. 2012), then it should be considered that the economic prosperity brought by immigrants may be related to their genetic makeup and enhancing genetic diversity (Ashraf and Galor, 2013; Ager and Bruckner, 2013). There is a growing body of work in this field of genoeconomics, broadly covered in Benjamin et al. (2012) and Navarro’s (2009) reviews of the existing literature, which could further enhance Kemeny’s spatial economics paper.

An additional source of heterogeneity is the individuals’ decision to emigrate. Ruiz and Vargas-Silva’s (2013) work finds that forced migration produces different economic effects to that of voluntary migration. An improved understanding of the reason for immigration may help explain the differences between skilled and unskilled labour, as one could hypothesise that those in skilled segments may be moving due to prearranged employment. The effect of capital stock brought by immigrants is also not considered, which would increase the steady state under the Solow (1956) model.

With the growing economic importance of Asia and Latin America (Mpoyi, 2012) future research considering immigration from the West to these nations would be of value to this field.

References

Ager, P.; Bruckner, M.; (2013) Immigrants’ Genes: Genetic Diversity and Economic Development in the US. Munich Personal RePEc Archive. Paper No. 51906

Ashraf, Q. and Galor, O. (2013) The ‘Out of Africa’ Hypothesis, Human Genetic Diversity, and Comparative Economic Development. American Economic Review. Vol. 103(1) pp.1-46

Becker, G. (1971) The Economics of Discrimination. 2nd Edition. University Of Chicago Press. Chicago.

Benjamin, D.; Cesarini, D.; Chabris, C.; Glaeser, E.; Laibson, D.; Guðnason, V.; Harris, T. et al. (2012) The promises and pitfalls of genoeconomics. Annual Review of Economics. Vol. 4 pp.627-662.

Bouchard, T. (2004) Genetic Influence on Human Psychological Traits: A Survey. Current Directions in Psychological Science. Vol. 13(4) pp.148-151

Goodhart, D. (2013) The British Dream: Successes and Failures of Post-war Immigration. Atlantic Books. London.

Hofstede, G. (2001) Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. 2nd Edition. Sage Publications. Thousand Oaks, CA.

Kemeny, T. (2013) Immigrant Diversity and Economic Development in Cities: A Critical Review. Spatial Economics Research Centre. London School of Economics. Discussion Paper 149

Mpoyi, R. (2012) The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East? Journal of Applied Business & Economics. Vol. 13(3) pp.36-47

Navarro, A. (2009) Genoeconomics: Promises and Caveats for a New Field. Annals of the New York Academy of Sciences. Vol. 1167 pp. 57–65

Rokeach, M. (1979) Understanding Human Values. The Free Press. New York. NY.

Schelling, T. (1978) Micromotives and Macrobehavior. Norton. New York, NY.

Solow, R. (1956) A Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics. Vol. 70(1) pp. 65-94

The Economist (Dec 21st 2013) British immigration. You’re Welcome.

The Economist (Nov 9th 2013) Little England or Great Britain.

Zhang, J. (2009) Tipping and residential segregation: a unified Schelling model. IZA Discussion Papers. No. 4413