Geographic Endowments,
Institutions, and Development
POL 351
Prof. Tyson Roberts
Lecture Goals
• How geographic factors affect economic
growth and institutional development
• How institutions affect economic growth
• The “resource curse” – economic and political
Some ingredients for economic
development
• Macroeconomic policies that encourage
private investment
• Institutions that encourage private investment
• Public or private investment in education,
health care, infrastructure
=> More inputs, better technology =>
development
Some symptoms of low development
• “Bad” policies
• Poor institutions
• Low investment in education, health care,
infrastructure
Income level & institutions
Poor institutions,
bad policy
Low economic
development
Strong institutions or
good policy
High economic
development
A solution: identify exogenous or
“first” causes
•
•
•
•
Colonial experience
Natural resource endowments
Geography
Ethnic cleavages
For example,
Tropical Climate
Extractive colonial institutions
Weak post-colonial institutions
Low economic development
Even these have problems
• Colonial experience
– Nations conquered because of weak state capacity, institutions
• Natural resource endowments
– Problem may be dependence, not endowments (Dunning)
– Ross disagrees, but neg. effect on dem. only in poor countries
• Geography
– Land-lock due to colonial legacy or weak state capacity
• Ethnic cleavages
– Not really primordial – influenced by colonization, etc.
•
•
•
•
Zambia
Rwanda
Somalia
Bolivia
Three explanations for economic development
(or lack thereof)
Easterly & Levine
1. Geographic endowments
2. Political institutions
3. Economic policies
Geographic endowments & growth
Sachs & Warner, Diamond, etc.
• Tropics
– Disease, hot weather, humidity, poor soil*,
irregular rainfall
• Crops
– Sugar/rubber/bananas/coffee etc. vs. wheat
• Landlock
• Mineral & oil endowments
– Dutch disease; deters industrialization/investment
in education, healthcare, infrastructure, etc.
Institutions & Development
S&E, AJ&R
•
•
•
•
Climate & soil favorable to plantation crops =>
Mineral endowments =>
Tropical disease =>
Indigenous population density =>
Exploitative, extractive colonial institutions
 “Weak” national institutions
Low development
Policy & growth
Trade openness, low inflation, low deficits,
competitive exchange rate, capital mobility
Economic growth
=> High income level
How to identify direct & indirect effect
of geographic endowments?
• First look at direct correlation between
geographic endowments & income level
Geographic endowments
• Yes, correlation
• (ELF negative & s.s.)
Income level
How to identify direct & indirect effect
of geographic endowments?
• Next, look at correlation between geographic
endowments & institutions
Geographic endowments
Institutional quality
• Yes, correlation
• (French colony & ELF negative & s.s.)
How to identify direct & indirect effect
of geographic endowments?
• Next, look at indirect effect of geographic
endowments on growth through institutions
Geographic endowments
Income level
Institutional quality
• Yes, correlation between geography-associated
institutions & development
• (Oil positive & s.s. effect on income level)
How to identify direct & indirect effect
of geographic endowments?
• Then check if correlation between geography &
income still significant when including indirect effect
Geographic endowments
?
Income level
Institutional quality
• Indirect effect of geography through instit’ns significant
• Controlling for indirect effect, direct effect insignificant
• (Oil positive & s.s. effect on income level)
Economic policies
• After controlling for institutional quality,
policies have no effect on income level
(Easterly & Levine)
Explanations for short-term growth
• Economic policy argument
Trade openness, low inflation, competitive exchange rate
=> short term growth
• Isham et al
Narrow geographic base
=> Weak institutional quality + economic shock
=> Massive decline in growth
Manufacturing and Diffuse Agriculture tends to have
high growth rates and less volatility than “point source”
sectors (e.g., oil, minerals, plantation crops)
From Isham et al.
“Point source” exporters grew quickly pre-1975, when
commodity prices were high, but were surpassed by
manufacture exporters when commodity prices fell and
productivity stalled
From Isham et al.
Isham et al argument
Primary exports/GDP
Economic Growth
Primary export composition
Institutional quality
Isham et al findings:
Point source exporters are less likely to have good
institutional quality
Isham et al. findings:
High institutional quality (more common in
manufacturing & diffuse exporters) promoetes growth
Isham et al findings
• Manufacturing & diffuse agriculture (family
farms): no effect on institutions
• Narrow base => poor institutional quality
• High exports/GDP (primary or not) => good
institutional quality
• Narrow base => low growth via institutions
• Narrow base: no direct effect on growth
How narrow base endowments affect
institutional quality
Ross, Isham et al
• Rentier effect: buy off citizens by providing them
with many benefits with virtually no taxation;
suppresses modernization & civil society formation
• Repression effect: oil wealth allows autocrats to
lavishly fund -- and buy the loyalty of -- their
armed forces
• Information effect: autocrats who get most of their
funding from national oil industries find it easier to
keep their countries' finances secret
• Entrenched inequality
Angola’s oil revenue does not rely on
broad-based development
Result: Wealth for few, poverty for many
Equatorial Guinea: Oil in the ocean, capital on
an island; government can ignore public goods
and services for the people
Equatorial Guinea’s Big Man
• Teodoro Obiang
Nguema Mbasogo
• Africa’s longest serving
serving head of state
(president since 1979)
GNB
0
IDN
SEN
LSO
KEN
CIV
TKM
VNM
AFG
ETH
BDI TCD
MOZ
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BFA
ZAR
PRK
RWA
TZA
TGO
LAO
TJK
GMB
GIN
KHM
CHN
MRT
YEM
UZB
LBR
AGO
BTN
ZWE
AZE
CMR
SYR
GNQ
IRN
EGY
MAR
YUG
DJI
DZA
BIH
SWZ
LBY
KAZ
GEO
PRY
TUN
BLR
CUB
MDV
FJI
BWA
JOR
GAB
MYS
IRQ
OMN
MEX
SAU
QATBRN BHRKWT
SGP ARE
Oil wealth reduces the probability of
democratization and early democratic survival
5
6
7
8
9
Non-oil Income Per Capita (log), 1960-2002
10
Figure 2: Oil Income and Time Under Democratic Rule (for countries that were initially
authoritarian), 1960-2002
1
TUR
DOM
.8
PRT
.6
Fraction of
Years as
Democracy,
1960-2002 .4
ESP
BOL
THA
SLV
NIC
CPV
ARM
EST
LVA
MKD
BGD
SVN
PAK UKR
POL
ZMB
SVK
CZE
GUY KGZ BGR
NPL
BEN
MNG
MLI
CAF TWN
MDG
MWI
MDA
HTI
ZAF
COM
NER GHA
SDN
UGA
GNB
SEN
LSO
KEN
CIV
BDI
BFA
BIH
BWA
BTN
DJI
ERI
FJI
ETH
GMB
GIN
LBR
LAO
MDV
MRT
MOZ
PRK
PRY
SGP
SWZ
TGO
TZA
ZWE
RWA
JOR
TJK
MAR
GEO
KHM
YUG
ZAR
BLR
VNM
AFG
TCD
CUB
CHN
.2
0
0
HRV
HUN
ALB
IDN
LTU
ROM
RUS
MEX
CMR
YEMUZB
TUN
EGYAZE
SYR
KAZ
MYS
AGO DZA
IRN
TKM
GNQ GAB
IRQ
BHR
OMN
LBY
SAU BRN
ARE
KWT
QAT
2
4
6
8
Oil Income Per Capita (log), 1960-2002
10
How narrow base endowments affect
institutional quality
•
•
•
•
Ross, Isham et al
Rentier effect: buy off citizens by providing them with many
benefits with virtually no taxation; suppresses civil society
formation & modernization
Repression effect: oil wealth allows autocrats to lavishly
fund -- and buy the loyalty of -- their armed forces
Information effect: autocrats who get most of their funding
from national oil industries find it easier to keep their
countries' finances secret
Entrenched inequality
• Inter-related
Oil => delayed modernization, gender wage inequality, and gov’t
transfers => less female political influence
Countries with high oil and gas rents per capita tend to
have fewer women in parliament in the Middle East
Ross (2008): Oil, Islam, and Women
The Resource Curse (economic and political) can
also happen in the Global North, including the US
Source: Goldberg et al 2008
Source: Goldberg et al 2008
Zaire
• Main sources of revenue?
• How did this affect its institutional quality
(economic and political)?
• How did institutional quality affect growth?
38
So does dependence on oil, minerals,
plantations determine a country’s destiny?
Corruption, etc.
No, but it creates strong currents in
that direction
Corruption, etc.
• What are some possible solutions for the
“resource curse”?
Possible solutions
• Tracing production / embargos / consumer action
campaigns – the Kimberley Process and “blood diamonds”
• Creating greater transparency of who is paying what to
whom and holding gov’ts to account for those funds (EITI)
• Developing national savings mechanisms
• Privatization
• Anti-corruption commisions & improved sector legislation
and regulation.
• Direct distribution of benefits to people
• Choosing not to exploit the resource in the first place
• Reduce demand for oil from the US, etc.
• Clean Trade Acts & Clean Hands Trusts
Sources: www.sebstrategy.com, www.cleantrade.org, Birdsall & Subramanian 2004, Ross 2011
Solutions
Solutions
• Pay oil revenues into independent escrow
account for national development
– Worked for Norway
Why?
-- Didn’t work for Chad
Solutions
• Anti-corruption commission
– Worked for a while in Nigeria (Nuhu Ribadu)
– Until he arrested James Ibori
EITI compliant & candidate countries
A Clean Hands Trust to enforce a Clean Trade Act
A proposal (www.cleantrade.org)
Implementing State
Trade duties collected
Duties held in
trust for citizens
Disqualified producing country
Sale of resources
Purchasing country
(ignoring implementing state’s Clean
Trade Act)
Solutions
• Privatization didn’t work so well in Russia
High tax & redistribution demands
Tax &
redist’n
demands
increase
Depends on
cost of repression
Low tax & redistribution demands
Tax & redist’n demands increase
Source: Boix
Can oil & mineral wealth help
democracy?
• In countries such as the DRC, clearly mineral
wealth => bad institutions => bad growth
• In Norway & Botswana, oil & diamonds help, but
this is because of good institutions
– Return of the chicken and the egg
– And Botswana’s ruling party has never lost…
• In Bolivia, natural gas should have helped
redistribute to the poor, but…
• In Venezuela, oil wealth did help redistribute to
the poor, but …