Ghosts of Economies Past
The Economics of Speed: The Electrification of the Streetcar System and the Decline of Mom-and-Pop Stores in Boston, 1885-1905
Wei You
American Economic Journal: Applied Economics, forthcoming
Abstract:
Small firms dominated the American economy in the nineteenth century, and still dominate in many developing economies today. This paper tests whether geographic market segmentation due to underdeveloped intracity transportation technology precludes the emergence of large retail/wholesale stores. I exploit the natural experiment of Boston's rapid electrification from its previous horse-drawn streetcar system, which occurred between 1889 and 1896. Analyzing newly digitized data, I find that rail-connected locations experienced a sharp decline in the share of sole proprietorships among food retail/wholesale establishments after the electrification relative to off-rail locations. Changes in market access due to streetcar electrification can explain this effect.
Fighting for Growth: Labor Scarcity and Technology Adoption in Industrializing Britain
Joachim Voth, Bruno Caprettini & Alex Trew
University of Zurich Working Paper, November 2020
Abstract:
Can labor shortage accelerate technological change? In this paper, we show that military recruitment led to labor shortages in England during the Napoleonic Wars (1793-1815); this, in turn, went hand-in-hand with more rapid adoption of labor-saving technology. We collect new data on recruitment by the Royal Navy. Since each captain was responsible for manning his own ship, access by RN warships to coastal parishes was a key determinant of the geography of recruitment. Based on this intuition, we present IV evidence suggesting a causal effect of labor scarcity on technology adoption. Finally, we show that by 1850, the structural transformation was greater in parishes that adopted new technologies for exogenous reasons half a century earlier.
Banking on the Confucian Clan: Why Did China Miss the Financial Revolution?
Zhiwu Chen, Chicheng Ma & Andrew Sinclair
University of Hong Kong Working Paper, August 2020
Abstract:
What made finance develop in the West but not in China? We argue that long before modern finance, China chose to rely on the kinship-based Confucian clan, whereas the West chose the corporate entity combined with impersonal instruments, to deal with the challenges of interpersonal risk sharing and resource pooling. That difference in choice led to two distinct institutional-development paths. Pre-modern China was ordered hierarchically around patrilineal clans that each served as an informal internal financial market for members, where intra-clan pooling and sharing obligations were rigidly enforced through Confucian rules and rituals. For more than two millennia, institutional innovations focused almost exclusively on solidifying the clan system to minimise the uncertainty and transaction costs of implicit intra-clan exchange. By the early nineteenth century, the clan as an internal financial market and as a business corporation served China well. However, it came at the cost of ignoring the development of the impersonal institutions needed for formal finance. Even when formal finance was transplanted in the late nineteenth century, its adoption was not smooth. We provide empirical evidence that the Confucian clan competed with and indeed inhibited the development of modern banking in the early twentieth century, and that Confucianism continues to limit finance in contemporary China.
The corruption-growth relationship: Does the political regime matter?
Shrabani Saha & Kunal Sen
Journal of Institutional Economics, forthcoming
Abstract:
Corruption is widely believed to have an adverse effect on the economic performance of a country. However, many East-and-Southeast-Asian countries either achieved or currently are achieving impressively rapid economic growth despite widespread corruption - the so-called East-Asian-Paradox. A common feature of these countries was that they were autocracies. We re-examine the corruption-growth relationship, in light of the East-Asian-Paradox. We examine the role of political regimes, in mediating corruption-growth relationship using panel data over 100 countries for the period 1984-2016. We find clear evidence that corruption-growth relationship differs by the type of political regime, and the growth-enhancing effect of corruption is more likely in autocracies than in democracies. The marginal effect analysis shows that in strongly autocratic countries, higher corruption may lead to significantly higher growth, while this is not the case in democracies. Alternatively, democracy is not good for growth if there is a high level of perceived corruption. We provide suggestive evidence that the mechanism by which corruption is growth-enhancing in autocracies is through the perceived credibility of the commitment of ruling political elites to economic freedom, thereby providing confidence to the firms to invest, leading to long-term growth.
Persistence and Path Dependence in the Spatial Economy
Treb Allen & Dave Donaldson
NBER Working Paper, November 2020
Abstract:
How much of the spatial distribution of economic activity today is determined by history rather than by geographic fundamentals? And if history matters for the distribution, does it also affect overall efficiency? This paper develops a tractable theoretical and empirical framework that aims to provide answers to these questions. We derive conditions on the strength of agglomeration externalities, valid for any geography, under which temporary historical shocks can have extremely persistent effects and even permanent consequences (path dependence). We also obtain new analytical expressions, functions of the particular geography in question, that bound the aggregate welfare level that can be sustained in any steady-state, thereby bounding the potential impact of history. Our simulations - based on parameters estimated from spatial variation across U.S. counties from 1800-2000 - imply that small variations in historical conditions have substantial consequences for both the spatial distribution and the efficiency of U.S. economic activity, both today and in the long-run.
Things fall apart? Missions, institutions, and interpersonal trust
Dozie Okoye
Journal of Development Economics, forthcoming
Abstract:
This paper studies the links between changes in traditional communities, due to historical Christian missionary activities, and differences in interpersonal trust between Africans today. We use various data on Christian missions to show that missions are associated with lower levels of trust within countries formerly under British indirect rule, but increased trust for all other countries. This result is robust to a variety of confounders and fixed ethnic characteristics. Using data on native prisons and prisoners in Nigeria, and Pew surveys in Africa, we demonstrate that the negative effects may be explained by weakened traditional institutions, norms, and beliefs, due to missionary activities under indirect rule.
Long-term Effects of the Targeting the Ultra Poor Program
Abhijit Banerjee, Esther Duflo & Garima Sharma
NBER Working Paper, November 2020
Abstract:
This paper studies the long-run effects of a "big-push" program providing a large asset transfer to the poorest Indian households. In a randomized controlled trial that follows these households over 10 years, we find positive effects on consumption (1 SD), food security (0.1 SD), income (0.3 SD), and health (0.2 SD). These effects grow for the first seven years following the transfer and persist until year 10, consistent with the alleviation of a poverty trap. One main channel for persistence is that treated households take better advantage of opportunities to diversify into lucrative wage employment, especially through migration.
Was the post-1870 fertility transition a key contributor to growth in the West in the twentieth century?
Jakob Madsen, Rabiul Islam & Xueli Tang
Journal of Economic Growth, December 2020, Pages 431-454
Abstract:
The fertility transition that took place in the West from approximately the 1870s to the 1970s is often suggested to have been instrumental for the shift from the post-Malthusian growth regime to the modern growth regime. Constructing a unique data set over the period 1820-2015 for 21 advanced countries, this paper tests whether fertility has had real economic effects through the channels of education, saving, investment and female labor force participation rates. The dairy-cereal price ratio and the pastoral-land ratio are used as instruments for fertility. The results indicate that the fertility transition has been a significant contributor to growth since the 1880s and, consequently, was pivotal for the transition to the modern growth regime.
Aid curse with Chinese characteristics? Chinese development flows and economic reforms
Samuel Brazys & Krishna Chaitanya Vadlamannati
Public Choice, forthcoming
Abstract:
The emergence of China as a major development partner requires a reassessment of traditional donor-recipient dynamics. In addition to adopting new rhetoric like "South-South cooperation" or "Win-Win," China has eschewed classifications and practices of the traditional donors of the Organisation for Economic Co-operation and Development's Development Assistance Committee. Yet the "new approach" and willful ignorance may not spare China from encountering traditional development challenges. In this paper, we consider whether Chinese development efforts have disincentivized difficult economic reforms by providing recipient governments with alternative resources for building support. Using an instrumental variable approach with panel data covering 106 countries during the 2000-2014 period, we find that when comparing Chinese development flows to several Western donors, the former's flows inhibit broader economic reform. The findings are robust to alternative specifications, data, instruments, and approaches.
Corporate Governance, Business Group Governance and Economic Development Traps
Luis Dau, Randall Morck & Bernard Yeung
NBER Working Paper, November 2020
Abstract:
Every firm in a developed economy relies on the mere existence of countless other firms to keep prices competitive up and down all supply chains. Without this network externality, no firm forms; and without many firms, no network forms; locking in a low-income trap. Business group governance supersedes corporate governance in most developing economies and in the rapid catch-up development phases of most high-income economies by hierarchically coordinating firms in multiple industries, internalizing this network externality. High-income economies grow via creative destruction - creative firms imposing a negative externality upon firms they destroy or disrupt, but a larger positive innovation-related externality upon the whole economy. Business groups avoid creative self-destruction, innovation by one group firm that disrupts another. Corporate governance supersedes business group governance in high-income economies to facilitate productivity growth. If business group governance does not retreat, productivity growth is impaired and a middle-income trap can result.
Misperceived quality: Fertilizer in Tanzania
Hope Michelson et al.
Journal of Development Economics, forthcoming
Abstract:
Fertilizer use remains below recommended rates in most of Sub-Saharan Africa, contributing to low crop yields and poverty. We explore the role of fertilizer quality. We interviewed fertilizer sellers in an important agricultural region in Tanzania and sampled their fertilizer to establish that the nutrient content of fertilizers is good, meeting industry standards. However, we find farmers' beliefs to be inconsistent with this reality. Beliefs about adulteration push down farmer willingness-to-pay for fertilizer; with farmers willing to pay more if quality is verified. In addition, we find some evidence of a quality inference problem: many fertilizers have degraded appearance, and farmers appear to rely on these observable attributes to (incorrectly) assess unobservable nutrient content. Market prices reflect neither nutrient content nor degradation in appearance, even in competitive markets. Our results suggest the existence of an equilibrium where farmer beliefs about fertilizer are inconsistent with the truth, and seller incentives to invest to alter beliefs are limited, motivating future research into the origins and persistence of such an equilibrium.
The Mechanisms of Direct and Indirect Rule: Colonialism and Economic Development in Africa
Natalie Wenzell Letsa & Martha Wilfahrt
Quarterly Journal of Political Science, October 2020, Pages 539-577
Abstract:
A number of studies have found that British colonialism - specifically its policy of indirect rule - improved local economic development relative to the French policy of direct rule. There is less consensus, however, as to why indirect rule would produce better economic outcomes. This article proposes three mechanisms linking indirect rule to development: the devolution of power to local communities, the empowerment of traditional authorities, and the reification of ethnic identities. Using a geographic regression discontinuity research design on Cameroon's internal anglophone-francophone border, a legacy of the country's dual colonial heritage, the article finds the most evidence for the first mechanism, that citizens on the anglophone side of the border are more likely to act locally and, indeed, see their local institutions as more legitimate. In contrast, we find mixed evidence for the other two mechanisms regarding the power of chiefs and ethnic identities.