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Lecture 6 Identification of Roles of Institutions in Economic Development Se Yan

Lecture 6 Identification of Roles of Institutions in Economic Development Se Yan. Dell, Melissa, “The Mining Mita: Explaining Institutional Persistence” , March 30th, 2008.

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Lecture 6 Identification of Roles of Institutions in Economic Development Se Yan

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  1. Lecture 6Identification of Roles of Institutions in Economic DevelopmentSe Yan

  2. Dell, Melissa, “The Mining Mita: Explaining Institutional Persistence”, March 30th, 2008 AJR’s paper suggests that understanding the persistence of institutions (good and bad) over time is important to understanding development. Dell’s paper closely examines the long-run impact of a particular institution: the coercive labor institution of the mita in Peru. The mita was a forced-labor arrangement that applied to individuals in a specific, well-defined area over 200 years ago. Individuals in this area today are poorer than individuals outside the mita area. The importance of this paper empirically is in linking the mita to the income differences today in a causal, convincing way (using microdata); and, in specifying channels through which bad institutions in the distant past can leave individuals worse off for centuries.

  3. Background: Peru • GDP per capita (PPP): $7,800. • China at $5,300. • Independence from Spain in 1821.

  4. Historical background From 1573-1812, a set of Peruvian towns was required to send 1 out of 7 adult men to work in silver and mercury mines every year. The work was difficult—mining at a high elevation—and work was involuntary. A classic example of extractive colonial institutions.

  5. The Mita The mita was established to provide a labor force to extract silver and mercury, from mines in Potosi and Huancavelica.

  6. The Mita Importantly, distance to the mines was a major determinant of whether a town was included in the mita area. Empirically, Dell exploits the fact that smooth distance (statistically) explains assignment to the mita, while there is a sharp cut-off at the defined boundary.

  7. Empirical model • Dell estimates: • (1) • Where the outcome of interest is household consumption in 2001, and this is a function of distance to the Potosi silver mine, an indicator of being inside the mita boundary, and controls for different effects at and around different boundaries, along with a range of control variables. • When considering which factors mediate between the mita period and contemporary times, Dell considers other outcomes (haciendas, education, roads, agricultural employment and market usage).

  8. Identification “The key RD identifying assumption is that all relevant factors besides treatment vary smoothly at the mita boundary.” Intuitively, Dell examines outcomes of individuals on each side of the mita boundary, and thinks of one side as a treatment area and the other side as a control area. For differences in outcomes to be attributable to the mita, at the boundary, everything about these individuals should be the same in the absence of treatment. This is more likely to be true closer to the boundary. And, some boundaries will work better than others.

  9. Evaluating the identification strategy (1) How arbitrary was the boundary? It depends on the boundary . . .

  10. Evaluating the identification strategy (2) Looking at the boundaries that do not coincide with major geographic discontinuities, we find that characteristics are similar in mita and non-mita districts:

  11. Evaluating the identification strategy (3) It is always smart to run a placebo test: in this case, the mita boundary should have no effect on outcomes from the period before the mita: here Dell estimates model (1) using Tribute amounts in 1572 as the outcome: These results suggest that there was no pre-existing discontinuous change that coincided with the mita boundary.

  12. Consumption results • Under a variety of specifications, being in the mita area is associated with lower consumption in 2001:

  13. Mediating variables:landed elites Here Dell is telling a story, supported by discontinuities at the mita boundary in variables that might determine current outcomes:

  14. Mediating variables:education and public goods

  15. Mediating variables:roads, farm work, and markets

  16. Conclusions Dell presents convincing evidence that individuals living in the mita area are significantly poorer than individuals in very similar areas nearby. She suggests a plausible channel through which coercive institutions from 200 years ago might affect incomes today: the absence of landed elites in mita areas resulted in less provision of public goods, which limited economic opportunities today.

  17. Why do we need to think about ‘social conomics’? • Economic Growth = Natural Capital + Physical Capital + Human Capital + ε • Model overlooks the interaction of economic actors • ‘Classical and neoclassical economics operates…with an atomised and undersocialised conception of human action…The theoretical arguments disallow by hypothesis any impact of social structure and social relations.’ (Granovetter, 1973) • Decomposing the Solow residual ε • EG = Natural Capital + Physical Capital + Human Capital+ Social Capital+ ε • Social capital - the missing link? • ‘Social’ as it involves social interactions • ‘Capital’ because its effects might have persistence just like physical or human capital

  18. Love and GDP • Stevenson and Wolfers (2008): Cross-country measures of Recalled Feelings and GDP, based on Gallup World Poll data

  19. What is social capital? • Social capital considers the manner in which economic actors interact • Considerable debate about what it is actually • Institutions, relationships, attitudes and values governing interactions among people • Putnam (1993): Horizontal associations which can be either positive or negative • Coordination and cooperation for the mutual benefit of an association’s members • A simple definition: Social capital comprises the networks and the associated norms of reciprocity which have value

  20. What are the different kinds of social capital? • Formal and informal social capital develop reciprocity • Formal social capital (PTA, labour union) and informal social capital (friends) • Nature of networks can be dense and interlaced, or sparse • Experimental evidence suggests that even this might generate reciprocity • ‘Bonding' social capital or ‘strong ties’ • ‘Bonding’ social capital links sameness and enables cooperation between groups • For example, horizontal associations such as networks and clubs • The bigger the group that sustains it, the more powerful is bonding social capital • ‘Bridging' social capitalor ‘weak ties’ • Links between disparate social sub-groups – the strength of weak ties • Returns to social capital rise in the level of community investment in social capital

  21. How do we measure social capital? • Indicators needed at both the micro or individual level and at the macro or country level • Participation data • Membership of organisations is possibly the best single measure of social capital • Putnam suggests that membership in the USA has gone down in the 20th century • Figure 1. Americans are increasingly ‘bowling alone’ (Putnam, 2000) • Attitudinal data • Questions on ‘trust’ are used in social capital surveys • For example, ‘Do you think that most people can be trusted?’ • Problems with interpreting questions on trust

  22. Figure 1. Average membership rate in US voluntary associations between 1900 and 1997 • Source: Putnam (2000) World War 2 World War 1 Mean membership rate for the 20C Great Depression 1900 1910 1920 1930 1980 1990 2000 1940 1950 1960 1970

  23. Does social capital have an impact empirically on development? • Membership and development • Northern Italy’s economic success relative to southern Italy as a consequence of higher density of voluntary associations among northern people (Putnam, 1993) • Trust and economic growth • Studies using World Value Survey data show that trust is important (Knack and Keefer, 1997) • Knack and Keefer: A one standard deviation increase in country-level trust increases economic growth by more than one-half of a standard deviation • Transition economies in Eastern Europe and the former USSR: 'A hundred friends are worth more than a hundred roubles.‘ • Ethnic diversity • Affects public goods choice (Poterba 1996) and leads to weaker social participation (Alesina and LeFerrara 2000; Iyer, Kitson and Toh, 2005)

  24. How is social capital related to human capital? • Association between social capital acquisition and human capital acquisition is very robust • Strong association between education and trust; education and voluntary activity • Why? • Book-learning and social skills • Human capital acquisition creates a strong positive externality for social capital acquisition

  25. Adam Smith Emile Durkheim Max Weber Religion as one form of social capital • 'Man shall not live on bread alone' (Matthew 3:16-4:4) • Classical social scientists all devoted significant efforts to understand religion and its effect on society and economy

  26. Figure 2. World Values Survey data on religion, income and happiness

  27. Protestant religious doctrine Macro Capitalism Calvinist doctrine encourages certain values Changes in economic behavior bring about Capitalism Micro Value Appropriation of certain kinds of orientations to economic behavior Economic behavior • Weber even went as far as saying that Protestant religion had a causal influence on the rise of western capitalism

  28. Max Weber’s view of the “industrious revolution”: “The old leisurely and comfortable attitude toward life gave way to a hard frugality in which some participated and came to the top, because they did not wish to consume but to earn, while others who wished to keep on with the old ways were forced to curtail their consumption” (p. 30).

  29. Involution versus Industrious Revolution versus Weber Thesis

  30. The Weber Thesis • The Protestant Reformation revolutionized the idea of a calling • Under Catholic church, only godly calling was the priesthood—required withdrawal from the world. • Protestants believed that one could do God’s work in any job, so long as worked hard for good of community. • Protestants believed that pursuit of wealth for own sake was evil—fostered a personal asceticism that led to high savings rather than more consumption. • Tendencies toward pursuit of calling and ascetism exacerbated by Calvinist doctrine of predestination.

  31. Source: Jacques Delacroix and François Nielsen, “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe,” Social Forces, 80 (Dec. 2001): 523.

  32. Source: Jacques Delacroix and François Nielsen, “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe,” Social Forces, 80 (Dec. 2001): 532.

  33. Source: Jacques Delacroix and François Nielsen, “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe,” Social Forces, 80 (Dec. 2001): 536.

  34. Source: Jacques Delacroix and François Nielsen, “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe,” Social Forces, 80 (Dec. 2001): 537.

  35. Source: Jacques Delacroix and François Nielsen, “The Beloved Myth: Protestantism and the Rise of Industrial Capitalism in Nineteenth-Century Europe,” Social Forces, 80 (Dec. 2001): 539.

  36. Religion still matters! • Until early 1980s, most social scientists assumed religion to be just a “fading vestige of pre-scientific times” • Revival of religion everywhere since early 1980s • Return to traditional faith in Eastern Europe • Rapid spread of conservative Islamism • Explosion of Protestantism in Latin America

  37. Effects of Economic development on religion • Secularization hypothesis • Economic development causes people to become less religious • Economic development causes organized religion to play a lesser role in political decision-making and in social and legal processes more generally

  38. Alternative view to secularization: supply side • A greater diversity of religions promotes greater competition, hence, a higher quality religion product and one that is tailored better to individual preferences. Thus, more religious diversity stimulates greater religious participation and beliefs • State regulation on religious activities

  39. Ekelund, Hébert, and Tollison argue that Protestantism was endogenous. • They model believers as consumers of a Becker-type Z good—spiritual services. • They model the medieval Roman Catholic Church as a firm—a monopolistic supplier of the Z good. • They argue that the Church’s high prices attracted entry by competitors (Protestants), who were most likely to succeed in regions that were already the most economically dynamic.

  40. Ekelund, et al., offer answers to two questions: • How can one explain the timing of Protestant Reformation? • How can one explain its geographical pattern?

  41. Timing question • Argue that the medieval church was “a vertically integrated, dominant firm, capable of engaging in product innovation, differentiation, and development” • Argue that beginning in the 12th century, the church innovated doctrinally in ways that facilitated price discrimination.

  42. Doctrinal Innovations • New distinction between venial and mortal sins • Invention of purgatory • Granting of indulgences • Requirement of auricular confession

  43. Source: Robert B. Ekelund, Jr., Robert F. Hébert, and Robert D. Tollison, “An Economic Analysis of the Protestant Reformation,” Journal of Political Economy, 110 (June 2002): 655.

  44. Ekelund, et al.’s answer to the geography question: • “Ceteris paribus, rent-seeking societies would reject Protestantism, whereas profit-seeking societies would embrace it.” • Why? Because the church helped rent-seeking elites maintain their position. E.g., kept primogeniture viable by providing extra offspring with jobs.

  45. Source: Robert B. Ekelund, Jr., Robert F. Hébert, and Robert D. Tollison, “An Economic Analysis of the Protestant Reformation,” Journal of Political Economy, 110 (June 2002): 660.

  46. Source: Sascha O. Becker and Ludger Wöβmann, “Was Weber Wrong? A Human Capital Theory of Protestant Economic History” (2007).

  47. Religion also matters for development! • Development goals cannot be achieved without the commitment and willing participation of local actors (Dar and Cooke 2008; Thomas 1996) • Mobilizing local actors requires better appreciation and understanding of what is important to the local population. • For people who adhere to a religion, it is often the most important thing in their lives. • In religious societies, religion dictates almost every aspect of a person’s life from deciding what to eat and buy to how to interact with others in society. Therefore, it would be difficult fully to understand or facilitate the process of development without considering religion.

  48. Studies on Religion and Development • 1990s – Revival of academic interest in religion • Cross-country analysis of the relationship between religion and economic development • La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999): Protestant countries have more effective governments than Catholic or Muslim countries (measured by interventionism, public sector efficiency, quality of public goods provision, government size, and political freedom) • Barro and McCleary (2003): Religiosity is positively related to economic performance • Religion’s effect on individual attitudes or values. • Guiso, Sapienza and Zingales (2003): religion was positively associated with the development of good economic attitudes

  49. Studies on Religion and Development • Countries differ greatly in adherence rates to major world religions: • U.S., Australia, South Korea, many sub-Saharan African countries have great diversity of religion affiliation. • Spain, Italy, Scandinavian countries, many majority Muslim countries have concentration within single type. • Concentrations are more striking if one ignores persons with no religion and considers only major categories (such as counting Muslim as one type).

  50. Does religiosity affect economic growth? • Barro and McCleary (2003): Effect of influences of religious participation and beliefs on a country's rate of economic progress • Six international surveys conducted between 1981 and 1999 to measure religiosity - church attendance and religious beliefs - for 59 countries • Measures of religiosity are positively related to education, negatively related to urbanization, and positively related to the presence of children • Overall, religiosity declines with economic development • Greater diversity of religions is associated with higher church attendance and stronger religious beliefs • For given church attendance, increases in some religious beliefs - notably belief in heaven, hell and an afterlife - tend to increase economic growth

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