ECONOMIC GROWTH2nd part : Applications

Baptiste Massenot

Baptiste.massenot@unil.ch

Why are some countries richer than others?

• Part 1: capital accumulation and innovation benefit economic growth

• Next question: Why do some countries accumulate more and innovate more?

A few answers

• Geography: latitude, climate, etc.

• Institutions: political, legal, etc.

• Culture: trust, values, etc.

• United growth theory

• Finance

Textbook

• Aghion and Howitt, « The economics of growth », 2009

Organization of the course

• Part 2 counts for half of the grade

• No exam

• 3 papers to review

• Send the reviews to baptiste.massenot@unil.ch

• Deadline: 1st June 2011 23:59

What is a review?

• 1. Question of the paper

• 2. Summary of the paper

• 3. Main contribution of the paper and relationship to the literature (attending the class helps)

• 4. Critique of the paper:– Limits– Extensions

What is a GOOD review?

• 2-3 pages long

• Clear and concise

• Shows you understood the paper

• Shows you understand the contribution and limits of the paper

• Shows you worked on the material presented in class

The first paper

• James Feyrer & Bruce Sacerdote, 2009. "Colonialism and Modern Income: Islands as Natural Experiments," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 245-262, November.

• Can be found on the webpage of James Feyrer (Darmouth College)

The second paper

• F. Allen, J. Qian and M. Qian, "Law, Finance and Economic Growth in China,” Journal of Financial Economics, 77 (2005), 57-116.

• Can be found on the PERSONAL webpage of Franklin Allen (Wharton School, University of Pennsylvania)

The third paper

• Davide Cantoni, « The Economic Effects of the Protestant Reformation: Testing the Weber Hypothesis in the German Lands » , Working paper, December 2010

• Can be found on the webpage of Davide Cantoni (University Pompeu Fabra)

Geography

Some facts

1. Effort

• The Spirit of the Laws, Montesquieu (1748):

"The heat of the climate can be so excessive that the body there will be absolutely without strength. So, prostration will pass even to the spirit; no curiosity, no noble enterprise, no generous sentiment; inclinations will all be passive there; laziness there will be happiness"

2. Agriculture

• Tropical climates are less appropriate for agriculture:– Too hot– Too dry– Diseases

3. Diseases

• Tropical climates are more prone to diseases, like malaria

• Higher mortality/lower life expectancy– Lower saving and investment– Lower human capital

Caveats

• All these theories are plausible

• Major problem with this literature:– Correlations, not causality– Difficult to have natural experiments with

geography

Institutions

What are institutions?

• Institutions = rules of the game– Market (barriers to entry)– Property rights– Constitutions– Courts

Institutions vs geography

• Institutions and geography are both correlated with GDP

• BUT, do they cause GDP?

• We need natural experiments to answer that question

The Korean experiment

The Korean experiment

• After 1948, Korea was divided in two countries

• North Korea was socialist– No property rights

• South Korea was democratic– Property rights

• Geography was held constant

• BUT, need for more evidence

The colonial experiment

• Starting from the 15th century, Europeans colonized many countries

• They installed different institutions

• Geography was held constant

The Colonial experiment

• Two papers by Acemoglu, Johnson, and Robinson exploited this experiment:– “The Colonial Origins of Comparative Development: An

Empirical Investigation”, (2001) (Part I)– “Reversal of Fortune: Geography and Institutions in the Making

of the Modern World Income Distribution”, (2002) (Part II)• The literature on legal origins also exploits it (Part III)

– Colonized countries adopted the legal origins of their colonizer– Common law: anglo saxon world– Civil law: French (South America+french speaking Africa+latin

Europe), Scandinavian, German (german speaking + Japan+Korea+Eastern Europe)

Culture

What is culture?

• Religion• Values

– Preference for Redistribution (Alesina & coauthors)– Corruption and Civic Attitudes (Fisman & Miguel

2007)– Female Labor Force Participation (Raquel Fernandez

& coauthors) • Beliefs

– Pro-Market Attitudes (DiTella et al, QJE 07; Landier, Thesmar and Thoenig, Economic Policy, 2008)

– Trust• Etc.

How do you measure culture?

• You ask people what their culture is• Biggest database: World Values Survey

– -267'870 individual observations from 82 countries spread over 4 waves 1981-84 (21), 1989-93 (43), 1994-99 (54) & 2000-04 (70)

– Sample size: between 1000 and 1400 individuals by country/wave

– 817 questions in total + individual characteristics!– available for free on the Internet

• Example: Trust– “Generally speaking, would you say that most people trusted or

that you can't be too careful in dealing with people?”

Brief history

• Max Weber (1905): The Protestant Ethic and the Spirit of Capitalism– Protestants are more motivated by economic

gains than catholics

• Otherwise, culture and economics is a NEW field

Economic consequences of culture

• Arrow (1972): “Virtually every commercial transaction has within itself an element of trust.”

• Gambetta (1988) on trust: “When we say we trust someone or that someone is trustworthy, we implicitly mean that the probability that he will perform an action that is beneficial … is high enough for us to consider in engaging in some form of cooperation with him.”

Caveat

• Again, correlation, not causality

• Solutions:– Inherited trust (Algan Cahuc 09)– Use theory to predict (not prove) causality

(Doepke Zilibotti 08)