Material on Growth Part III: Institutions, History,and Identi�cation

David N. Weil

Brown University and NBER

Prepared for AEA Continuing Education, January 2014

Institutions, History, and Identi�cation

Much of what we saw in the last lecture pushes us toward an�institutions� view of income di�erences among countries.

The institutions view is both a story about why the world isthe way it is, and approach to using well identi�ed analyses totell this story.

In this sense, it is a branch of the broader identi�cationrevolution in empirical economics

Note that the story and the �well identi�ed estimate� of thestory in principle exist separately. One may believe the storywithout believing the particular estimate.

The Institutions Story in a Nutshell

Some institutions are good for economic growth, some are badfor growth

rule of law, corruption, property rights, lack of freedom ofmobility, central planning, arbitrary government power, etc.

Acemoglu and Robinson call these �inclusive� and �extractive�institutions

bad institutions centralize power in a narrow elite, and allowthat elite to extract revenues and maintain power

This induces a huge degree of persistence:

events in the past �> bad institutions in the past �> badinstitutions today �> low income today

Read the Book

Or read the reviews online by Bill Gates, Je� Sachs, Jared Diamond,Francis Fukuyama, William Easterly as well as A&R responses

Engerman and Sokolo� (2002)

Institutional persistence and the e�ect of institutions ongrowth

Focus on the Americas: think US vs. Haiti or Argentina

sugar islands richest parts of new world (Guadalupe vs Canadastory)

dense populations in S. America used for mineral exploitations

Most European immigration was to tropics

E&S claim there was no ex-ante distinction between the typesof migrants who went to �settler� vs non-settler colonies

Then they trace through the institutions that resulted fromexploitative or extractive settlements

low literacy, late extension of voting rights, etc.

Narrative approach, but very convincing.

The Identi�cation Revolution in Economics

We have data on X and Y

We would like to �nd the structural e�ect of X on Y

Why not just regress Y on X ?

reverse causationomitted variables that a�ect both Y and X

This issue was not discovered in 1990, but it sometimes seemsthat way

Approaches to Identi�cation

technique considerations problem

OLS 1) control for omitted variables beware the identifcation2) have story for variation in X police

RCT the gold standard hard to apply in growth setting

DD measure e�ect of treatment better be convincing onnetting out omitted variables parallel trends

IV �nd source(s) of variation in X better be convincing onalso cleans up attenuation bias exclusion restriction

RD natura non facit saltus better be convincing ondiscontinuity

The Canonical History-Institutions-Growth Empirical Paper

Find something that a�ected institutions in the past

Show that it is correlated with institutions today

Show / argue that it does not a�ect economic outcomes todayother than through institutions

Show that it is correlated with economic outcomes today

Acemoglu, Johnson, and Robinson (2001)

�The Colonial Origins of Comparative Development: An EmpiricalInvestigation� AER

This is the IV version of the above stories.

Want to look at the e�ect of institutions on growth (or level)of income.

Suppose that we regress income on a measure of institutionalquality. Problems

1) institutional quality is endogenous (usual endogeneity bias)

2) institutional quality is poorly measured (attenuation bias)

Both are solved if we have an instrument for institutionalquality

Settler Mortality as an Instrument

AJR look only among former European colonies.

Their story is that in some colonies, Europeans had goodsurvival, in others not.

many gruesome examples of the latter.

Where Europeans could survive, they put down roots,established good institutions, etc. Where they were dying like�ies, they set up extractive institutions.

extractive institutions designed to get resources quickly[monopolies, trade restrictions, non-representative government,etc.]

These institutions persisted after decolonialization (localelites/thugs took over from the Europeans).

The Exclusion Restriction

The story is

health environment �> settler mortality �-> European settlement�-> early institutions �> current institutions �> output today

Their key assumption will have to be that setter mortality does nota�ect output today by any other channel.

Candidate failings of the exclusion restriction (�threats toidenti�cation�):

health environment might a�ect output today directlymaybe having European settlers a�ects output through somechannel other than institutions (language, human capital,genes)

Income and Settler Mortality

Descriptive Statistics

Income and Expropriation Risk

Income and Protection Against Expropriation Measure

First-Stage Relationship between Settler Mortality andExpropriation Risk

Determinants of Institutions (1/2)

This shows that there is historical continuity betweeninstitutions today and various intermediate steps in the causalchain

Determinants of Institutions (2/2)

And this shows that settler mortality and the presence ofEuropeans caused those intermediate steps

IV Regression of Log GDP per capita

Robustness Checks

Control for latitude because it's just so correlated witheverything

drop the four neo-Europes

Control for identity of colonizing power

Maybe settler mortality just means bad disease environment

can't put e.g. life expectancy on RHS because clearly this isendogneousput in measures of temperature and humidity meant to capturedisease environment

now instrument is part of settler mortality not explained bythose temp and humidity measures

Also put in measures of soil quality

Also put in percent of population in 1975 that is of Europeandescent (to rule out one threat to identi�cation)

IV result survives all of these robustness checks.

Critiques of Acemoglu, Johnson, and Robinson

Albouy (2012): critiques both the methodology forconstructing settler mortality data and the applicaiton of thatmethodology in practice.

says when he does things right, their results go awaythey have an extensive replymy view: if you had an ideal measure of �hostility ofenvironment to Europeans, holding technology constant� itwould look a lot like the AJR settler mortality data.

I think that the bigger �aw is the exclusion restriction

Sachs and co-authors have a whole series of papers saying thatthe tropics are bad for economic development (diseaseenvironment, bad for agriculture).The climate controls that AJR put on the right hand side tocontrol for this do not really capture disease environment.The Acemoglu-Johnson paper on �Disease and Development�(covered in lecture 4) is another blow in this �ght.

Colonialism

Former colonies are poor on average, and almost all poorcountries are former colonies

Maybe colonialization made them poor

exploitation, bad institutions

Or maybe being a colony was good

infrastructure, language, trade links, good institutions

Inference is hard because it is possible that the characteristicsthat led to countries being colonized continue to a�ect incometoday

Bias could go both ways:

resources that led to colonization could make countries bettero� todayCharacteristics that led to countries being easy to colonizecould make them poor today

We need exogenous variation in colonization!

Iyer (2010)

�Direct vs. Indirect Colonial Rule in India: Long TermConsequences� (RESTAT )

Direct rule: British administer like a colony

Indirect rule (native states or princely states): Indian king withconsiderable local autonomy; British handle defense andforeign policy

see or read �The Jewel in the Crown� by Paul Scott

1911: native states constituted 45% of the area and 23% ofthe population of British India (map)

1947: both types become parts of India or Pakistan

This is not the same as �colony vs. non-colony,� but it ispretty darn close.

Of course we still have to solve the selection issue!

British India and Native States

Very Short History

1613 East India company establishes trade outpost (�factory�)in India

military victories in 1757 and 1764; beginning of empire

1765-1818: �The Ring Fence�

East India Company annexes many native states, butcautiously, due to power of native empires

1818-1858 �Subordinate Isolation�

British dominant power, administrative control through EastIndia Company.all native states accept British as paramount power; most paytributeannexations continue

Nonannexation with right of intervention (1858-1947)

Sepoy mutiny (1857-58)East India Company replaced by British Crown as ruling powerend of annexation of princely states

Growth of The British Empire in India

Why Would Direct vs. Indirect Rule Matter?

Two theories:

After independence in 1947, ruling families in former princelystates continued to play a role in local politics. Maybe thisa�ected modern outcomes.

Iyer says no: in the post 1947 period, di�erences betweenformer direct and indirect ruled states got smaller, so thedi�erence has to be due to stu� that happened before 1947

Direct rule was like non-settler colonies

short time horizon of administrators

Native states had on average between 4 and 5 kings over theperiod 1848-1947British India had 24 Governor Generals over the same period;lower level o�cials turned over more frequently

native princes who did a bad job could be replaced (by theBritish). British administrators promoted on the basis ofseniority and those who did a bad job were just reassigned.

Three-Slide Aside on a Related Paper

Banerjee and Iyer �History, Institutions, and EconomicPerformance: The Legacy of Colonial Land Tenure Systems inIndia� AER 2005

Land revenue (tax) provide majority of revenue for both Britishand native rulers. Two types of land tenure systems:

Landlord based (Zamindar): Landlord responsible for �xedpayment to higher-up authority. In turn, he is free to setrevenue terms for peasants and dispossess them from land fornon-payment. Gets to keep any extra revenue. Landlord statusis bequethable or transferrable.Cultivator based: government imposes directly on cultivator atax burden calculated to be a share of estimated annualoutput. Adjusted to re�ect land productivity.Village based: a village corporation responsible for �xedpayment to higher-up authority. More like cultivator basedsystem.

Banerjee and Iyer � second slide of aside

Di�rences in incentives: Not clear. Both landlord and revenueo�cial have incentive to maximize revenue; however, by end ofthe 19th century British are no longer focused on squeezingland rents out of India.

Arbitrary power of landlords (probably) does more todiscourage productivity improving investments by farmers.British state more incentivized to invest in e.g. irrigation,railroads, schools, etc. in areas with cultivator based systems,since they could collect more of the resulting productivityincrease.

Persistent e�ects:

more inequality in landlord areas (a priori expect this and isborne out by the data)Class-based resentment in landlord areas carries on topost-independence era

class struggle undermines collective action to provide publicgoods

Banerjee and Iyer � third slide of aside

Banerjee and Iyer construct �non-landlord share� of land bydistrict (sub-unit of Indian states).

Historically (limited data)yields were lower in non-landlorddistricts than in landlord districts (this is presumably selection)

today: yields, fertilizer use, high-yield variety use, irrigation �all are higher, the higher is the non-landlord share in a district.

Di�erential in outcomes grows partiuclarly rapidly in periodafter 1965, as India state becomes intensively involved in ruraldevelopment

in the landlord areas, they are spending their time and energy�ghting about land redistribution

Echoes the Engerman and Sokolo� story about Americas.

Like Engerman and Sokolo�, Banerjee and Iyer does not fallinto the �clever identi�cation� camp.

Back to the Iyer Paper: OLS Results

Regress modern outcome variables on British dummy (directrule)

Positive coe�cients [next slide]

but do they indicate that British were good, or that they chosethe desireable territories to annex?

mean land quality better in direct rule territories

Note that areas annexed due to �lapse� don't do as well asthose annexed by other means

Di�erences in Agricultural Investments and Productivity:OLS Estimates

The Doctrine of Lapse

Lord Dalhousie (Governor General 1848-1856) instituted the�doctrine of lapse�

�I hold that on all occasions where heirs natural shall fail, theterritory should be made to lapse and adoption should not bepermitted, excepting in those cases in which some strongpolitical reason may render it expedient to depart from thisgeneral rule.�

During his rule, 8 rulers died w/out heir; 4 of their states wereannexed.

Those not annexed may di�er from those that weren't, butthat is OK: she will do �intention to treat� design

Sample will be those states not annexed before 1847 (eligibleto be treated).

Big question: why did Lord Dalhousie institute this policy?

threat to identi�cation is that he had his eye on the state of ason-less king.

Deaths of Indian Rulers without Natural Heirs

Other than lapse, Lord Dalhousie was not more annexationprone than average

Rulers were no more likely to die intestate on his watch thanotherwise

Dying intestate during the Dalhousie era is the instrument fordirect rule!

First Stage of IV Strategy

Di�erences in Agricultural Investments and Productivity: IVEstimates

OLS in post-1847 already smaller than OLS in full; and IVsmaller (or negative)

Feyer and Sacerdote (2009)

�Colonialism and Modern Income: Islands as Natural Experiments�

81 islands

Less than 150,000 square kilometers

require open-ocean sailing to get there from Europe

Islands are not �typical� of colonized places, but maybe theyare more homogeneous than your general cross-country sample.Also, at least it is not the same old sample: only 13 of theislands are in the Penn World Tables

The hook: during the �age of sail� wind patterns a�ectedwhere it was easy to sail to, and so which islands were likely tobe discovered �rst!

This stu� hasn't mattered for 100 years, so only e�ect onoutcomes today should be through colonization

Colonialism and Modern Income

Circles represent islands in the Atlantic, triangles are islands in the Paci�c, and squares are islands in theIndian Ocean.

Upward slope holds within each ocean

The Identi�cation Story

During the age of sail, island in areas with weak wind were lesslikely to be discovered, revisited, or colonized by Europeans.

Also, ships had a lot of trouble tacking (sailing into the wind)

Consistent downwind routes between useful destinations wereparticularly likely to be followed

islands along these routes were very likely to be discoveredearly on

example: Guam, on the Spanish route to the Philipinnes,discovered in 1521, settled by 1600

Also, before mid 18th century, longitude not well measured,but latitude was. As a result, a good strategy was sailing alonglatitude lines until you hit your target.

This made East-West corridors of consistent wind very useful.

They use the East-West vector of wind and its standarddeviation as instruments

Colonization and Westerly Wind

Circles represent islands in the Atlantic, triangles are islands in the Paci�c, and squares are islands in theIndian Ocean.

Outcomes Regressed on Years of Colonization

Results from IV Regressions

More years a colony raises current income!

holds true in regression limited to just Atlantic or just Paci�c(not shown)

The IV result is bigger than OLS.

Opposite of Iyer!

Result is driven by �rst year colonized.

including last year a colony does not a�ect result, and that isendogenous anyway.

When they split �years colonized� into pre- and post-1700components (1700=Enlightenment), only post-1700component has a positive coe�cient.

Non-Island Results

Since for islands, OLS and IV give the same results, why nottry for non-islands.

Use the AJR sample, minus the three members of that samplewhich are islands.

[see table] get that centuries colonized positively correlatedwith income

Even contolling for settler mortality or institutions doesn'tmake this go away.

I don't really see what is going on here. Seems terribly proneto selection into colonization, measurement error in settlermortality, etc.

Colonialism and GDP within Non-Island DevelopingCountries

Log GDP per capita Log GDP per capita Log GDP per capita Log GDP per capita

Number of centuries as colony 0.401 0.358 0.287 0.232

(0.097)*** (0.090)*** (0.072)*** (0.084)***

Abs (latitude) 2.952 1.406 1.825

(0.883)*** (0.746)* (0.822)*

Mean temperature - 0.023 - 0.013 0.005

(0.023) (0.019) (0.021)

Expropriation risk 0.404

(0.067)**

Log settler mortality (AJR) - 0.403

(0.093)***

Constant 7.276 7.344 4.873 9,034

(0.215)*** (0.686)*** (0.682)*** (0.728)***

Observations 64 64 64 60

R-Squared 0.22 0.40 0.63 0.56

We started with the Acemoglu-Johnson-Robinson (2001) database and added our own measure of lengthof colonial period. We dropped the three island countries that were in AJR and our island database.Robust standard errors in parentheses. * signi�cant at 10%. ** signi�cant at 5%. *** signi�cant at 1%.

Feyrer and Sacerdote vs. Everyone Else

F&S say colonization is good (or, to be more precise, givencolonization, more time colonized is good)

Everyone else other way

Maybe islands are not typical of countries in general

Nunn and Puga (2012)

�Ruggedness: The Blessing of Bad Geography in Africa� (RESTAT )

Rugged terrain is usually a bad thing (hard to farm, travel,etc.)

In Africa, it provided an advantage during the period of theslave trade

African slave trades (1400-1900)

Atlantic (2/3 of total), Saharan, Red Sea, Indian Oceanforce migration of 18 million people, with many more dying inthe processcompared to population of 50-70 million through this periodcollapsed political institutions, fragmented society

In that setting, ruggendess was advantageous

That advantage no longer relevant � so if ruggedness is good,it must be through something persistent like culture, trust, orinstitutions.

Background

Background is in Nunn (2008), �Long Term E�ects of Africa'sSlave Trades�

African slavery unique in that indivuals of same or similarethnicities enslaved each other

social and ethnic fragmentation, political instability, weakeningof states, corruption of judicial institutionsmost common source of slaves was villages raiding each other;this broke down larger political entitiesincreased ethnic di�erntiation; may be responsible for highdegree of fractionalization todayeven selling members of own community

insecurity �> need for weapons from Europeans �> slaveraiding �> more insecurity

More on Nunn (2008)

Nunn constructs measure of slave export intensity by country(will be used in this paper as well).

Shows that slave export intensity negatively correlated withincome today

Instruments for slave export intensity with distance to slaveports (on the coast) and areas that demanded slaves (e.g.sugar islands)

Finds negative causal e�ect

Also �nds positive e�ect of slave intensity on modern ethnicfractionalization

Schematic of the Terrain Ruggedness Calculation

Boxes are 30 arc-seconds (roughly 1 km) on a side

Ruggedness measure is square root of sum of squared altitudedi�erences

Ruggedness Sample Values

They average grid cell ruggedness up to the level of countries

Netherlands: .097

Zimbabwe: 1.194

Italy: 2.45

Nepal: 5.043

Lesotho: 6.202

Would be better to do population weighted or something

The Di�erential E�ect of Ruggedness in Africa

Ruggedness is bad elsewhere but good in Africa!

Income and Ruggedness among African and non-Africancountries

The above was the reduced form story (ruggedness �>outcomes today)

Now we test the pieces of the story

1 E�ect of rugedness on slave trade

2 E�ect of rugedness on outcomes, holding �xed the slave trade

If the story is right, this should now not di�er in Africa vs. restof world

Slave export meaure (draws on Nunn's previous paper):slave export intensity = ln(1 + slave exports / area)

equals zero for all non-African countries

The Impact and Determinants of Slave Exports

The Impact and Determinants of Slave Exports

A Misguided Final Table

Last exercise is to think about channels

Focus on Rule of Law

(Columns 3 and 4 on next slide):

slave export intensity has negative e�ect on rule of law (OK)holding slave export intensity constant, ruggedness still havenegative e�ect on rule of law

contrary to GDP results, where slave export intensity maderuggedness go away

Columns 1 and 2 seem to undermine the view that ruggednesshas independent bad e�ect on income, but not really since ruleof law is endogenous.

A Misguided Table

Another paper (Nunn and Wantchekon xx) uses modern surveydata (Afrobarometer) to show that there is a negativerelationship between historical slave trade intensity and trusttoday.

Dell (2010), The Persistent E�ects of Peru's Mining Mita

Mita: a forced labor system instituted by the Spanishgovernment in Peru and Bolivia in 1573 and abolished in 1812.

Required over 200 indigenous communities to sendone-seventh of their adult male population to work in thePotosí silver or Huancavelica mercury mines. (Men supposedto serve once every seventh year).

Discrete change at the boundary: on one side, all communitiessent the same percentage of their population, while on theother side, all communities were exempt.

[see map] Study area is places where Mita boundary does notrun along ridge line

This is where boundary runs through homogenous (ethnic)areas, so good Regression Discontinuity

Should we Worry About the Location of the Boundary?

the one out of seven rule for labor drafts pre-dated the Mita

Considerations in drawing the boundary were elevation andtravel costs to sites where labor was needed.

Seems reasonable that having some areas in and some out wasa convenient administrative rule

Testing the Discontinuity

For RD to work, all determinants of outcome variables, otherthan the thing with the discontinuity, should vary smoothlyfrom one side of the border to the other.

Of course we can only look at observable characteristics, but ifthese vary smoothly, we are hopeful that unobservedcharacteristics do as well.

elevation, ruggedness, percent indigenous (in modern surveydata) � no statistically signi�cant di�erence

Due to worry that tributes imposed on peasants were too high(leading to depopulation) Spanish authorities did a survey toestimate reasonable tribute rates of di�erent areas. These varyonly a little on one side vs. the other.

Basic Results

Living standards 25% lower inside the Mita boundary

stunting of children 6 to 11 percentage points higher (baselineis 40%)

Haciendas

Large landed estates with attached labor force

Hacienda system was not yet established in Peru at time ofinstitution of Mita

During the Mita, government discouraged the formation ofHaciendas within the Mita

Landlords were naturally reluctant to send their peasants forforced laborLandlords tried to extract that surplus that state wanted to beused to support Mita workersLocal authorities were allowed to exract surplus in return forsupplying workers to Mita

E�ect of the Mita on Haciendas

Haciendas

Being in Mita results in fewer Haciendas and more equal landdistribution (higher Gini) in present.

Seems to say that Haciendas are good!

Engerman and Sokolo�: Haciendas are part of thetransmission channel from bad colonial institutions to badcurrent extractive institutions, elite rule, etc.

Banerjee and Iyer: landlord based tenure system worse thencultivator based.

Dell reconciliation: alternative to large landowners was notsecure small holders, as in New England, but insecurepeasantry (no property rights, still subject to exploitation).

At least large landowners had secure property and someincentive to invest.

More on Haciendas

Also, note in table that precentage of population in haciendasrose 1845-1940, and that the Mita e�ect got smaller

Mita no longer in place, no state bias against haciendas informer Mita areawould-be landlords trying to take over peasants in Mita

resulting lawlessness holds back development

Dell (2012)

�Path Dependence in Development: Evidence from the MexicanRevolution� (working paper)

The Story:

During Mexican Civil War (1910-18), districts experiencedrought were more likely to engage in insurgency

de�ned as sustained use of violent force by local residents tosubvert representatives of the government

Why would this be?Miguel, Satyanath, and Sergenti (2004) �nd rainfall �>growth �> con�ict in Africalow opportunity cost, desperation, French Revolution, etc.

Story continues below, but before that, let's check out the �rststage

Drought Severity

Insurgency

First Stage

Moving from half of average rainfall to average rainfalldecreases the probability of insurgent activity by 38 percentagepoints.

Sample Splits (1/2)

rainfall a�ects insurgency more in more agrarian areas � makessense

Sample Splits (2/2)

Placebo Checks

The Story, Continued

After end of civil war, central government very weak

In areas where there was insurrection, more likely to engage inland reform to placate agrarian insurgents

Land reform very big after Civil War

Over half the surface area of the country redistributed in thedecades following war.

OLS and IV (bigger) estimates show that there was moreagrarian reform where there had been more insurgency.

Agrarian Reform

The Story, Continued Again

Nature of land redistribution: ejidos, farms comprised ofindividual and communal plots that were granted to a group ofpetitioners.

Individuals had inalienable usage rights to ejido plots as longas they remained in the community, but ejidal lands could notbe sold, rented, or legally converted to non-agricultural use, asthe state maintained ultimate control over them.Ejidos today account for 54% of Mexico's land area and abouthalf of its rural population.

Problems arising from ejido system:

reduced mobility o� the land � lose usage rightsdistribution of ejido lands a key patronage tool for the PRI,which dominated Mexican politicsbecause land could not be used for collateral, individuals forcedto borrow from highly corrupt state bank

Public Employees

IV estimates say no e�ect on size of government � so that isnot an important channel

Economic Outcomes Today

IV estimates say that insurgency had big negative e�ect oncurrent outcomes.

Economic Organization

Consistent with the story that insurgency led to reducedprobability of people leaving agriculture. Consistent with thestory that the channel is land reform.

Political Competition

Insurgency leads to less political competition, as evidenced byalternations in power.

Droughts in other periods