A2. Provide an example of a “natural experiment” in history. Explain why that example qualifies for a
natural experiment and what we can learn from it. Your example should be different from Acemoglu
et al’s paper that we covered in the lecture (Word limit: 300 words)
This natural experiment (Nunn 2008) will focus on the quality of institutions on modern GDP per
capita (pc) through the lens of intensity of the slave trade, with the dependent variable is modern
GDP pc and the independent variable being institutions. It is a natural experiment as the degree of
slave exports was conducted at different intensities across Africa.
The reverse causality problem was addressed through using distance of slave travel as an
instrumental variable, which is associated with slave export intensity but exogenous of GDP. The
omitted variable bias was addressed using coloniser effects and geography control variables. The
measurement error was addressed through applying Gennaioli and Rainer (2006) measure of state
development.
The assumptions are that export intensity reduced the quality of institutions during colonial times
and that quality of institutions are sticky.
In the lower panel, the coefficients are negative suggesting fewer slaves are exported when the
distance travelled is higher. In the upper panel of the tables, estimates for ln(exports/area) are
negative and statistically significant with 95% confidence when applying the control variables of
geography and coloniser effects, indicating causality between distance travelled and modern GDP
pc.
The causal chain is as follows. The smaller distance travelled, the higher the slave intensity is. This
leads to weakening of state institutions, through reduced accountability and transparency as seen
with the negative correlation in the graph below.
Since state institutions are sticky this continues to this day. Since these are deep causes of the
proximate factors of prosperity such as capital accumulation, modern GDP pc is lower. The graph
below shows a divergence in GDP pc following decolonialisation when state institutions were
needed most, highlighting the importance of looking at the wider picture.
A3. Is the Solow Growth Model compatible with the “pessimistic” view on population growth?
Explain. (Word limit: 300 words)
The pessimistic view on population growth is rooted in the idea of Malthaus and diminishing returns
to labour. It is thought that improvement in food productions is linear whilst population growth is
exponential. Therefore, population growth would have a negative impact on productivity due to lack
of resources.
The Solow Growth model (Romer 2006) suggest increases in the growth of output per capita is due
to capital accumulation and technological progress (which is exogenous in the model). Growth rates
increases due to increase capital investment are temporarily as the marginal product of extra capital
declines (diminishing returns). The steady state growth is achieved when all factor growth rates are
the same ie output, capital and population/labour as productivity per worker will be constant. This
suggests that improvements in productivity is exogenous and independent of capital growth.
Instead, it is technological progress that is the key as it would be able to increase capital growth for
the long term.
The simulation below shows that increase in population growth rate from 2% to 6% (Foltyn 2011)
leads to a reduction in the steady state level of output per capita (k*b > k*), holding the growth rate
of the other factors constant. This is in line with both the Solow Growth Model and the pessimistic
view on population growth. The population growth rate increasing to point beyond the capital
growth rate leads to diminishing return of labour as ratio of capital to labour reduces. As such, the
productivity of labour falls due to a lack of resources. Therefore, in the absence of technological
progress, the pessimistic view on population growth is compatible with the Solow Growth Model.
A4. Is the trajectory of growth and income inequality in the Soviet Union consistent with Thomas
Piketty’s model? Explain. (Word limit: 300 words)
Piketty’s (2014) model rests on three key concepts. The concentration of capital ownership is
significant. If capital income increases, unequal capital ownership would result in higher income
inequality. Capital-intensive growth is linked to this. Capital intensive growth indicates economies
becoming more dependent on capital accumulation rather than innovation. Substitution between
capital and labour also plays a role. Since physical capital is subject to diminishing returns, labour
saving technologies which increase the elasticity of substitution between capital and labour to
reduce the rate of diminishing returns, increases incomes of capitalists further. Therefore, capitalintensive growth and high substitution between capital and labour coupled with high concentration
of capital ownership will lead to high income inequality.
The graph above shows that the top decile’s income share fell from roughly 31% to a low of 21%.
Soviet Union growth was capital intensive. Table 3 shows how physical capital accumulation for
heavy industry and agriculture was the chosen path for growth. This is the quantity effect. Due to
autarchy particularly during the Cold war, the elasticity of substitution of labour and capital was low
due leading to strong diminishing returns due to a lack of innovation. This is the price effect. Since
the price effect outweighs the quantity effect (Garnsey 1982) reducing capital share of income, thus
reducing income inequality. However, the concentration of capital ownership is an interesting point
considering the communist ideology of abolition of private ownership. As such, the state owns the
capital, and the capital income is spread equally amongst citizens. Therefore, any changes in capital
income would have no impact on income inequality. This can be seen by the two stable period
where top decile income share remains constant. Therefore, Piketty’s model can explain the low and
stable income inequality of the Soviet Union.
A5. The process of fertility transition after World War Two has been conceptualised as an
“exogenous transition”. Explain the reason behind this conceptualisation. (Word limit: 300 words)
Conceptualising the fertility transition lies in the relationship between mortality and fertility rates.
The idea (Lee 2003) that parents aim to have a certain number of surviving children rather than a
certain number of births is key. Any changes to fertility are caused by an exogenous change in the
mortality rate of children. Therefore, to minimise the opportunity costs of spare children (Notestein
1945), parents will factor in exogenous changes to mortality rates to reach the desired number of
children.
Exogenous fertility transition can be seen following World War Two. Interventions by public health
bodies helped reduce infant mortality though better provision of health care, improvement of
infrastructures such as waste, water and better food safety and supplies. This exogenous change was
factored in faster post WW2 as through technological process and increased physical and human
capital, the value of time for parents was higher, increasing the opportunity costs of having children.
especially given the demise of child labour. Notestein (1945) and Becker’s Q-Q model point to
parents choosing to have less but higher quality kids, resulting in falling birth rates. The graph below
shows that following the initial baby boom, there was a continued fall in birth rates across the
developed nations in line with trends prior the war, as parents factored in this exogenous change.
However, the exogenous assumption can be questioned. Endogenous ‘health enhancing resources’
(Guinnane 2011, 599) also impact the mortality rates, such as investing more time into a child
through supervision, protection or breast feeding and investment into better nutrition. Becker’s Q-Q
model also question whether an exogenous mortality decline reduce fertility rates. A reduction in
infant mortality would reduce pregnancy and delivery costs (Guinnane 2011), making children
relatively cheaper resulting in increased fertility rates, as parents substitute towards a higher
quantity of children.
References
Garnsey, E. (1982). Capital accumulation and the division of labour in the Soviet Union. Cambridge
Journal of Economics, 6(1), 15-31
Foltyn, R. (2011). Dynamics in the Solow-Swan Growth Model. Wolfram Demonstrations Project,
accessed 27/07/2021
<https://demonstrations.wolfram.com/DynamicsInTheSolowSwanGrowthModel/>
Gennaioli, N. and Rainer, I. (2006). The Modern Impact of Precolonial Centralization in Africa.
Stockholm University.
Guinnane, T. (2011). The Historical Fertility Transition: A Guide for Economists. Journal of Economic
Literature, 49(3), 589-614.
Lee, R. (2003). The Demographic Transition: Three Centuries of Fundamental Change. The Journal of
Economic Perspectives,17(4), 167-190.
Notestein, F. (1945). Population—The Long View. In Food for the World, Chicago: University of
Chicago Press, 36-57.
Nunn, N. (2008). The Long-Term Effects of Africa’s Slave Trades. Quarterly Journal of Economics,
123: 139-176.
Piketty, T. (2014). Capital in the twenty-first century: The dynamics of inequality, wealth, and
growth. Cambridge Massachusetts: The Belknap Press of Harvard University Press
Romer, D. (2006). The Solow Growth Model. Advanced Macroeconomics, New York.