Tag Archives: Acemoglu

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.

Acemoglu on Past, Present, Future and Beyond

The World our Grandchildren Will Inherit: The Rights Revolution and Beyond

By Daron Acemoglu (daron@mit.edu)

URL: http://econpapers.repec.org/paper/nbrnberwo/17994.htm

(a free download version is available in Acemoglu’s profile)

Abstract

Following on Keynes’s Economic Possibilities for Our Grandchildren, this paper develops conjectures about the world we will leave to our grandchildren. It starts by outlining the 10 most important trends that have defined our economic, social, and political lives over the last 100 years. It then provides a framework for interpreting these trends, emphasizing the role of the expansion of political and civil rights and institutional changes in this process. It then uses this framework for extrapolating these 10 trends into the next 100 years.

Review by Anna Missiaia

This NBER working paper by Daron Acemoglou was distributed by NEP-HIS on 2012-04-23. The contents covers 200 years of worldwide economic life, 100 from the past and 100 from the future. The grip for this reflection on the past and future economic, social and political trends is the birth of the author’s second child. Acemoglu develops several conjectures on what world we will leave to his grandchildren, who will probably be in their 40s or 50s a century from now. The most interesting feature of this paper is the ambitious connection established between past and future. Acemoglu attempts a quite punctual forecast of what the next generations to come should expect.

The hit parade of the main trends he considered is, in order of importance, as follows: the increasing spread of civil rights; the sweep of technology; the sustained economic growth; the uneven growth; the geographic division of labour; the widespread improvement of health; the globalization of technology; the decline in wars; the rising success of “counter-Enlightment” in politics and finally the explosion of the world population.

The trend that is judged to be the most important is the expansion of civil and political rights, which took place over the 20th century and according to Acemoglu will continue in the 21st. Acemoglu connects this trend to a specific type of institutions, which he calls inclusive institutions. Inclusive political institutions are the ones that have both a “pluralistic, broad-based distribution of political power” and a

sufficient state centralization, so that there is a sort of monopoly of violence in the hands of the state […] upon which order and security […] can be grounded.

Opposed to these, there are political extractive institutions, where the power is in the hands of few and the majority is subject to their power. Political institutions of the two types lead to inclusive and extractive economic institutions. The trend of wide spreading civil and political rights is seen as happening in the context of inclusive institutions and is closely connected to the second trend of spreading technology. The diffusion of technology is shaped by the spread of inclusive institutions. These two are the main trends to look at, while other trends like economic (uneven) growth, shift of jobs towards low wage areas and increase in health conditions all generate from the first two trends.  The globalization of technology and the end of wars are also made possible by the rights revolution. The last two trends are two for which we should be worried with respect to our grand-children’s future.

As for the role of the so-called “counter-Enlightment” movements, which are for the author mostly religious movements (above all fundamentalist Christians and fundamentalist Islamists) and possible neo-fascist movements. The threat their represent is downplayed by Acemoglou by saying that although it is possible that these threats “are largely far-fetched”. The last trend is concerned with population rising to the point that resources will be scarce and the environment will not be able to cope anymore. This point is neutralized by again bringing up technology: the transition to clear energy will be able to solve both the scarcity of resources (namely fossil fuels) and emissions caused by the increase in population. Politically, this will be viable only by

international agreement [that] can ensure the transition to alternative energy sources – even if this means higher costs in the short term for participating countries.

Daron Acemoglu

There are many possible critiques often moved to institutions as explanation to economic and social development. It is beyond the scope of this post to do the usual laundry list of these critiques. Leaving aside this debate, what strikes the most about this work by Acemoglou is it pervasive optimism. All the “positive” trends are described as well established and mostly likely to continue while the main two negative are underplayed and seen as temporary. In particular, Acemoglou claims that “bad” extractive institutions tend to disappear as the majority has an incentive to rise up against the extractive elite. His prediction for the spread of civil rights is that it will continue, as the spread of technology, the end of wars, the increase in health and the continuing economic growth. All these in Acemoglou’s view are actually  emanated by the rights revolution. Very often it is the author himself offering to the reader the main critique to each of this claims. For example, extractive institutions often persist because of the political and economic power of the elites and civil rights have been undermined by the rise of religious extremism in many parts of the world. The paper concludes with a reflection on climate change and fossil fuel consumption, which are closely correlated and appear to be Acemoglou’s main concern on his grandchildren’s future. The author claims that “only an international agreement can ensure the transition to alternative energy sources” which are crucial to winning this battle. The predictions that appear more hazardous are the ones on the end of wars in spite of the affirmation of unconventional wars in the last decade, the fundamental harmlessness of religious extremism when this has been fuelling the former for about a decade if not more and the agreement on the development of alternative energy in spite of the “higher costs in the short term for participating countries” when the same countries have been unable to reach most environmental agreements that would have had these effects (see Kyoto protocol).

In principle there is no reason why all the trends described by Acemoglou cannot evolve in the way optimistically described here. However, Acemoglou’s grandchildren, as our own, will surely need a lot of luck and possibly, optimism.

See the link below to follow Professor Acemoglu’s (along with Professor James Robinson) discussion on the origin of power, prosperity and poverty, whynationsfail.com