So last century
Human Capital and Industrialization: Evidence from the Age of Enlightenment
Mara Squicciarini & Nico Voigtländer
NBER Working Paper, June 2014
Abstract:
While human capital is a strong predictor of economic development today, its importance for the Industrial Revolution is typically assessed as minor. To resolve this puzzling contrast, we differentiate average human capital (worker skills) from upper tail knowledge both theoretically and empirically. We build a simple spatial model, where worker skills raise the local productivity in a given technology, while scientific knowledge enables local entrepreneurs to keep up with a rapidly advancing technological frontier. The model predicts that the local presence of knowledge elites is unimportant in the pre-industrial era, but drives growth thereafter; worker skills, in contrast, are not crucial for growth. To measure the historical presence of knowledge elites, we use city-level subscriptions to the famous Encyclopédie in mid-18th century France. We show that subscriber density is a strong predictor of city growth after 1750, but not before the onset of French industrialization. Alternative measures of development confirm this pattern: soldier height and industrial activity are strongly associated with subscriber density after, but not before, 1750. Literacy, on the other hand, does not predict growth. Finally, by joining data on British patents with a large French firm survey from 1837, we provide evidence for the mechanism: upper tail knowledge raised the productivity in innovative industrial technology.
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Intergenerational transfer, human capital and long-term growth in China under the one child policy
Xi Zhu, John Whalley & Xiliang Zhao
Economic Modelling, June 2014, Pages 275–283
Abstract:
We suggest that the demographic changes caused by the one child policy (OCP) may not harm China's long-term growth. This is because of the higher human capital accumulation induced by the intergenerational transfer arrangements under China's poor-functioning formal social security system. Parents raise their children and depend on them for support when they reach an advanced age. A decrease in the number of children prompted by the OCP results in parents investing more in their children's education to ensure retirement consumption. In addition, decreased childcare costs strengthen educational investment through an income effect. Using a calibrated model, a benchmark with the OCP is compared to three counterfactual experiments without the OCP. Output in 2025 without OCP decreases about 4% under moderate estimates. The output gain comes from a greatly increased educational investment driven by fewer children (11.4 years of schooling rather than 8.1). Our model sheds new light on the prospects of China's long-term growth by emphasizing the OCP's growth enhancing role through human capital formation under intergenerational transfer arrangements.
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Potatoes, Milk, and the Old World Population Boom
Justin Cook
Journal of Development Economics, September 2014, Pages 123–138
Abstract:
This paper explores the role of two foods, potatoes and milk, in explaining the increase in economic development experienced throughout the Old World in the 18th and 19th centuries. Nunn and Qian (2011) show the introduction of the potato from the New World has a significant explanatory role for within country population and urbanization growth over this period. I expand on this by considering the role of milk consumption, which is hypothesized to be a complement in diet to potatoes due to a differential composition of essential nutrients. Using a country-level measure for the suitability of milk consumption, the frequency of lactase persistence, I show that the marginal effect of potatoes on post-1700 population and urbanization growth is positively related to milk consumption. As the frequency of milk consumption approaches unity, the marginal effect of potatoes more than doubles in magnitude compared to the baseline estimate of Nunn and Qian.
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Is there a Corruption-effect on Conspicuous Consumption?
Omer Gokcekus & Yui Suzuki
Margin: The Journal of Applied Economic Research, August 2014, Pages 215-235
Abstract:
This study empirically explores the following issue: Does corruption fuel conspicuous consumption? It examines the existence and magnitude of any potential corruption-effect on conspicuous consumption expenditure. Regression analyses of an unbalanced panel data for 20 OECD countries between 2004 and 2010 indicate that luxury car sales are higher by 191 per cent in a country with a high perceived corruption level, for example, CPI score of 4.5, as compared to a country with a low perceived corruption level, for example, CPI score of 9.0, ceteris paribus.
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Income Inequality and Violent Crime: Evidence from Mexico's Drug War
Ted Enamorado et al.
World Bank Working Paper, June 2014
Abstract:
The relationship between income inequality and crime has attracted the interest of many researchers, but little convincing evidence exists on the causal effect of inequality on crime in developing countries. This paper estimates this effect in a unique context: Mexico's Drug War. The analysis takes advantage of a unique data set containing inequality and crime statistics for more than 2,000 Mexican municipalities covering a period of 20 years. Using an instrumental variable for inequality that tackles problems of reverse causality and omitted variable bias, this paper finds that an increment of one point in the Gini coefficient translates into an increase of more than 10 drug-related homicides per 100,000 inhabitants between 2006 and 2010. There are no significant effects before 2005. The fact that the effect was found during Mexico's Drug War and not before is likely because the cost of crime decreased with the proliferation of gangs (facilitating access to knowledge and logistics, lowering the marginal cost of criminal behavior), which, combined with rising inequality, increased the expected net benefit from criminal acts after 2005.
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Mortality versus Morbidity in the Demographic Transition
Anna-Maria Aksan & Shankha Chakraborty
European Economic Review, October 2014, Pages 470–492
Abstract:
The link between the mortality and epidemiological transitions is used to identify the effect of the former on the fertility transition: a mortality transition that is not accompanied by improving morbidity causes slower demographic and economic change. In a model where children may die from infectious disease, childhood health affects human capital and noninfectious-disease-related adult mortality. When child mortality falls from lower prevalence, as it did in western Europe, labor productivity improves, fertility falls and the economy prospers. When it falls mainly from better cures, as it has in sub-Saharan Africa, survivors are less healthy and there is little economic growth. The model can quantitatively explain sub-Saharan Africa's experience. More generally it shows that the commonly used indicator, life expectancy at birth, is a poor predictor of population health and economic growth unless morbidity falls with mortality.
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Is global social welfare increasing? A critical-level enquiry
John Cockburn, Jean-Yves Duclos & Agnès Zabsonré
Journal of Public Economics, forthcoming
Abstract:
We assess whether global social welfare has improved in the last decades despite (or because of) the substantial increase in global population. We use for this purpose a relatively unknown but simple and attractive social evaluation approach called critical-level generalized utilitarianism (CLGU). CLGU posits that social welfare increases with population size if and only if the new lives come with a level of living standards higher than that of a critical level. Despite its attractiveness, CLGU poses a number of practical difficulties that may explain why the literature has left it largely unexplored. We address these difficulties by developing new procedures for making partial CLGU orderings. The headline result is that we can robustly conclude that world welfare has increased between 1990 and 2005 if we judge that lives with per capita yearly consumption of more than $1,248 necessarily increase social welfare; the same conclusion applies to Sub-Saharan Africa if and only if we are willing to make that same judgement for lives with any level of per capita yearly consumption above $147. Otherwise, some of the admissible CLGU functions will judge the last two decades’ increase in global population size to have lowered global social welfare.
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Deals and Delays: Firm-Level Evidence on Corruption and Policy Implementation Times
Caroline Freund, Mary Hallward-Driemeier & Bob Rijkers
World Bank Working Paper, June 2014
Abstract:
This paper examines whether demands for bribes for particular government services are associated with expedited or delayed policy implementation. The "grease the wheels" hypothesis, which contends that bribes act as speed money, implies three testable predictions. First, on average, bribe requests should be negatively correlated with wait times. Second, this relationship should vary across firms, with those with the highest opportunity cost of waiting being more likely to pay and face shorter delays. Third, the role of grease should vary across countries, with benefits larger where regulatory burdens are greatest. The data are inconsistent with all three predictions. According to the preferred specifications, ceteris paribus, firms confronted with demands for bribes take approximately 1.5 times longer to get a construction permit, operating license, or electrical connection than firms that did not have to pay bribes and, respectively, 1.2 and 1.4 times longer to clear customs when exporting and importing. The results are robust to controlling for firm fixed effects and at odds with the notion that corruption enhances efficiency.
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A refinement of the relationship between economic growth and income inequality
Fadi Fawaz, Masha Rahnama & Victor Valcarcel
Applied Economics, Summer 2014, Pages 3351-3361
Abstract:
There is mixed evidence in the literature of a clear relationship between income inequality and economic growth. Most of that work has focused almost exclusively on developed economies. In what we believe to be a first effort, our emphasis is solely on developing economics, which we classify as high-income and low-income developing countries (HIDC and LIDC). We make such distinction on theoretical and empirical grounds. Empirically, the World Bank has classified developing economies in this manner since 1978. The data in our sample are also supportive of such classifications. We provide theoretical scaffolding that uses asymmetric credit constraints as a premise for separating developing economies in such a way. We find strong evidence of a negative relationship between income inequality and economic growth in LIDC to be in stark contrast with a positive inequality–growth relationship for HIDC. Both correlations are statistically significant across multiple econometric specifications. Using international data from 1960 to 2010, this article explores the effect of income inequality on economic growth using dynamic panel technique, such as system generalized method of moments (GMM) that is believed to mitigate endogenous problem. These results are strikingly contrasting to the previous estimation results of Forbes (2000) displaying significant positive correlation between two variables in the short to medium term.
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Direct Estimation of Hidden Earnings: Evidence from Russian Administrative Data
Serguey Braguinsky, Sergey Mityakov & Andrey Liscovich
Journal of Law and Economics, May 2014, Pages 281-319
Abstract:
We employ unique administrative data from Moscow to obtain a direct estimate of hidden incomes. Our approach is based on comparing employer-reported earnings to market values of cars owned by the corresponding individuals and their households. We detect few hidden earnings in most foreign-owned firms and larger firms, especially state-owned enterprises in heavily regulated industries. The same empirical strategy indicates that up to 80 percent of earnings of car owners in the private sector are hidden, especially in smaller companies and industries such as trade and services, where cash flows are easier to manipulate. We also find considerable hidden earnings in government services. Our approach sheds new light on the decline in the gross domestic product (GDP) in Russia after the collapse of communism and subsequent recovery; in particular, we argue that a good deal of these changes might represent changes in income reporting rather than actual changes in GDP.
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Cultural Change, Risk-Taking Behavior and Implications for Economic Development
Mariko Klasing
Journal of Development Economics, forthcoming
Abstract:
This research studies the dynamic interplay between the evolution of risk attitudes and the process of economic development. This is achieved by integrating an endogenous growth model with a cultural transmission mechanism that captures how parents shape the risk attitudes of their children in response to economic incentives. The model predicts that in an economy in which the material benefits associated with risky entrepreneurial activity are high, agents will over time develop more risk tolerant attitudes, which in turn will speed up the rate of economic growth. It is shown that policy interventions aiming at supporting entrepreneurial activity can play an important role for overcoming the forces of risk aversion and promoting long-run economic growth. Furthermore, the paper highlights how by inducing cultural change, such policy interventions may quantitatively have larger effects than what would be predicted by more standard models of endogenous growth.
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Forging then Taming Leviathan: State Capacity, Constraints on Rulers, and Development
Jonathan Hanson
International Studies Quarterly, June 2014, Pages 380–392
Abstract:
Empirical research in the New Institutional Economics tradition has concentrated on the degree to which institutional constraints on rulers protect property rights and foster growth through private investment. This view of institutions is overly narrow, neglecting the role of state capacity in particular. Both state authority and constraints on rulers matter for economic performance, but the relative strength of these effects depends upon a country's distance from the frontier of the world economy. Tests using a panel data set that covers up to 84 countries from the period 1960 to 2005 reveal that, in countries that have low Gross Domestic Product (GDP) per capita, constraints on rulers in the form of checks and balances affect neither the rate of productivity growth nor the growth of capital stock per worker. Basic state authority, however, has a strong, positive effect on both of these outcomes. The story is different for advanced industrial economies, where the effects of checks are positive, especially with respect to productivity growth. Institutional checks on rulers are thus not an agent of investment-based growth but support continued growth based upon innovation at the leading edge.
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Naomi Lamoreaux
NBER Working Paper, June 2014
Abstract:
The legal rules governing businesses’ organizational choices have varied across nations along two main dimensions: the number of different forms that businesses can adopt; and the extent to which businesses have the contractual freedom to modify the available forms to suit their needs. Until the last quarter of the twentieth century, businesses in the U.S. had a narrower range of forms from which to choose than their counterparts in these other countries and also much less ability to modify the basic forms contractually. This article uses the case of Pennsylvania to argue that the sources of this “American exceptionalism” reside in the interplay between the early achievement of universal (white) manhood suffrage and elite efforts to safeguard property rights.
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Geography or politics? Regional inequality in colonial India
Tirthankar Roy
European Review of Economic History, August 2014, Pages 324-348
Abstract:
Explaining regional inequality in the nineteenth-century world forms a major preoccupation of global history. A big country like India, being composed of regions that differed in geographical and political characteristics, raises a parallel set of issues to those debated in global economic history. With a new dataset, the paper attempts to tackle these issues, and finds evidence to suggest that regional differences, and divergence, were significantly influenced by geographical conditions.
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Hye Jee Cho
International Studies Quarterly, June 2014, Pages 308–321
Abstract:
This article examines whether the impact of International Monetary Fund (IMF) programs on the perceived creditworthiness of a country is conditional on government partisanship. Left-of-center governments tend to suffer from greater credibility problems in financial markets than right-wing governments, because they are typically believed to pursue expansionary policies and have less respect for debt obligations. Applying the conventional wisdom held as “Only Nixon can go to China,” I argue that adopting IMF programs can benefit leftist governments more than other types of governments. The logic of the Nixon paradox implies that market-oriented reforms have greater credibility when implemented by a left-of-center party, whose ideologies do not accord well with the IMF's neoliberal policies, than when implemented by a right-wing party. This is because market participants interpret the action by a leftist government as driven more by a willingness to commit to market-oriented reform than by ideological affinity. Using sovereign credit rating data for almost 90 emerging market countries from 1980 to 2004, I find robust evidence consistent with the “Nixon-Goes-to-China” hypothesis. The findings suggest that adopting IMF programs improves the perceived creditworthiness of leftist governments, whereas no such benefit is found among non-leftist governments.
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Dani Rodrik
NBER Working Paper, June 2014
Abstract:
Africa’s recent growth performance has raised expectations of a bright economic future for the continent after decades of decline. Yet there is a genuine question about whether Africa’s growth can be sustained, and if so, at what level. The balance of the evidence suggests caution on the prospects for high growth. While the region’s fundamentals have improved, the payoffs to macroeconomic stability and improved governance are mainly to foster resilience and lay the groundwork for growth, rather than to generate productivity growth on their own. The traditional engines behind rapid growth, structural change and industrialization, seem to be operating at less than full power. If African countries do achieve growth rates substantially higher, they will have to do so pursuing a growth model that is different from earlier miracles based on industrialization. This might be agriculture-led or services-led growth, but it will look quite different than what we have seen before.
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The Effects of Exposure to Hyperinflation on Occupational Choice
João De Mello, Caio Waisman & Eduardo Zilberman
Journal of Economic Behavior & Organization, October 2014, Pages 109–123
Abstract:
We use data on immigrants who live in the United States to study the effects of exposure to hyperinflation on occupational choice. To do so, we calculate the number of years an individual had lived under hyperinflation before arriving to the US. We find that its marginal effect on the probability of being self-employed instead of wage-earner is 0.87 percentage point. This finding suggests that the macroeconomic environment one lives in permanently affects his economic behavior. The estimated effect depends on the age individuals had when exposed to hyperinflation. In particular, it vanishes for those over the age of 40.
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Rafael La Porta & Andrei Shleifer
NBER Working Paper, June 2014
Abstract:
We establish five facts about the informal economy in developing countries. First, it is huge, reaching about half of the total in the poorest countries. Second, it has extremely low productivity compared to the formal economy: informal firms are typically small, inefficient, and run by poorly educated entrepreneurs. Third, although avoidance of taxes and regulations is an important reason for informality, the productivity of informal firms is too low for them to thrive in the formal sector. Lowering registration costs neither brings many informal firms into the formal sector, nor unleashes economic growth. Fourth, the informal economy is largely disconnected from the formal economy. Informal firms rarely transition to formality, and continue their existence, often for years or even decades, without much growth or improvement. Fifth, as countries grow and develop, the informal economy eventually shrinks, and the formal economy comes to dominate economic life. These five facts are most consistent with dual models of informality and economic development.
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T.H. Gindling, Nadwa Mossaad & Juan Diego Trejos
University of Maryland Working Paper, June 2014
Abstract:
In August 2010 the Costa Rican government implemented a comprehensive program to increase compliance with legal minimum wages, the Campaign for Minimum Wages. To evaluate the impact of the Campaign, we use a regression discontinuity approach, which compares what happened to workers who before the campaign had been earning below the minimum wage to those who before the Campaign had been earning above the minimum wage. We analyze a panel data set with information on workers from before the Campaign began (July 2010) and after the Campaign had been in operation for some time (July 2011). We find evidence that the Campaign led to an increase in compliance with minimum wage laws in Costa Rica; the mean earnings of those earning less than the minimum wage in 2010 increased by approximately 10% more than the earnings of those who had been earning more than the minimum wage. The Campaign led to the largest increases in the wages of women, younger workers and less-educated workers. We find no evidence that the Campaign had a negative impact on the employment of full-time workers whose wages were increased. We find some weak evidence that the Campaign had a negative impact on the employment of part-time private sector employees. Although increased inspections were mainly targeting minimum wage violations, we also observe an increase in compliance with a broader set of labor standards and a positive spillover effect relative to other violations of labor laws.
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Hannes Öhler & Peter Nunnenkamp
Kyklos, August 2014, Pages 420–446
Abstract:
The regional allocation of aid within recipient countries has been largely ignored. We use geocoded data on the location of aid projects financed by the World Bank and the African Development Bank within a sample of 27 recipient countries to assess the claim of donors that their aid targets needy population segments. We also assess whether political leaders in these countries direct aid funds to their home region. We do not find that the multilateral institutions take regional needs into account. Instead, favoritism appears to play an important role for location choices, in particular for physical infrastructure projects.
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Orazio Attanasio & Britta Augsburg
NBER Working Paper, July 2014
Abstract:
In a recent paper, Anagol, Etang and Karlan (2013) consider the income generated by these owning a cow or a buffalo in two districts of Uttar Pradesh, India. The net profit generated ignoring labour costs, gives rise to a small positive rate of return. Once any reasonable estimate of labour costs is added to costs, the rate of return is a large negative number. The authors conclude that households holding this type of assets do not behave according to the tenets of capitalism. A variety of explanations, typically appealing to religious or cultural factors have been invoked for such a puzzling fact. In this note, we point to a simple explanation that is fully consistent with rational behaviour on the part of Indian farmers. In computing the return on cows and buffaloes, the authors used data from a single year. Cows are assets whose return varies through time. In drought years, when fodder is scarce and expensive, milk production is lower and profits are low. In non-drought years, when fodder is abundant and cheaper, milk production is higher and profits can be considerably higher. The return on cows and buffaloes, like that of many stocks traded on Wall Street, is positive in some years and negative in others. We report evidence from three years of data on the return on cows and buffaloes in the district of Anantapur and show that in one of the three years returns are very high, while in drought years they are similar to the figures obtained by Anagol, Etang and Karlan (2013).
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Having a Son Promotes Clean Cooking Fuel Use in Urban India: Women’s Status and Son Preference
Avinash Kishore & Dean Spears
Economic Development and Cultural Change, July 2014, Pages 673-699
Abstract:
Urban Indian households with a male first child are approximately 2 percentage points more likely to use clean cooking fuel than comparable households with a female first child. Given Indian son preference, there are at least two mechanisms by which child sex could affect fuel choice: by improving the intrahousehold status of women, who bear more of the costs of traditional fuels, or by presenting an opportunity to invest in children’s health, in the context of a preference for healthier boys. If child sex is not selected for by biased abortion or other processes, then the sex of a first child has an exogenous causal effect on household fuel choice. We show that the association between fuel choice and child sex is not driven by terminated pregnancies or by household wealth or family size. Among a range of outcomes we study, the effect of child sex is unique to fuel choice; our finding that there is no effect on other assets indicates that it is unlikely that the result is confounded by real or subjectively anticipated wealth. In addition to the National Family Health Survey NFHS-3, the main data source studied, we approximately replicate the result using the NFHS-2 and the District Level Health and Facilities Survey DLHS-3. Finally, we show evidence for a “first-stage” effect of having a first son on women’s social status: such women have a greater body mass index, on average.
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A West African experiment: Constructing a GDP series for colonial Ghana, 1891–1950
Morten Jerven
Economic History Review, forthcoming
Abstract:
There has been a recent surge in research on long-term African development. For this research agenda to be fruitful and its theories tested, it is crucial to have consistent estimates of economic change. However, there is a lack of reliable time series data for the colonial period in Sub-Saharan Africa. This article contributes new time series data for the Gold Coast and Ghana between 1890 and 2010 and in particular a new GDP time series for Ghana for the years 1891–1957. The series implies a sustained period of economic expansion from the late nineteenth century. This suggests a revision of some prevalent truths about the history of economic growth in Sub-Saharan Africa, and points the way forward for expanding the database to cover the colonial period for other African economies.
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The Effect of Content on Global Internet Adoption and the Global “Digital Divide”
Brian Viard & Nicholas Economides
Management Science, forthcoming
Abstract:
A country's human capital and economic productivity increasingly depend on the Internet as a result of its expanding role in providing information and communications. This has prompted a search for ways to increase Internet adoption and narrow its disparity across countries — the global “digital divide.” Previous work has focused on demographic, economic, and infrastructure determinants of Internet access that are difficult to change in the short run. Internet content increases adoption and can be changed more quickly; however, the magnitude of its impact, and therefore its effectiveness as a policy and strategy tool, has until now been unknown. Quantifying the role of content is challenging because of feedback (network effects) between content and adoption: more content stimulates adoption, which in turn increases the incentive to create content. We develop a methodology to overcome this endogeneity problem. We find a statistically and economically significant effect, implying that policies promoting content creation can substantially increase adoption. Because it is ubiquitous, Internet content is also useful to affect social change across countries. Content has a greater effect on adoption in countries with more disparate languages, making it a useful tool to overcome linguistic isolation. Our results offer guidance for policymakers on country characteristics that influence adoption's responsiveness to content and for Internet firms on where to expand internationally and how to quantify content investments.