Trade, Institutions and Religious Tolerance: Evidence from India By Saumitra Jha

Introduction The paper tries to explain how economic incentives can foster inter-ethnic cooperation It uses 1000 years of history as a natural experiment Background 7th to 17th century India Rise of Islam Complementarity of skills Muslim advantage in Indian Ocean shipping Created incentives for inter-ethnic exchange, most strongly in medieval trading ports Incentives for building institutions fostering inter-ethnic cooperation

Questions Did medieval trade foster later religious tolerance in India? Is it due to the development of persistent institutions?

Outline Theoretical Framework Empirics Hypotheses Some econometrics tools (OVB, Bad Proxy Control) Saumitra’s results Discussion of internal validity Omitted Variables? Bad Proxies?

Theoretical Framework Dynamic Agents Locals (Hindus) & Non-locals (Muslims) Non-locals have better outside options Strong (good at attacks) and Weak agents Actions Stay or leave Produce for exchange Attack any other agent (capture profits) Markets, non-perfect

Key Factor #1: Complementarity A low degree of complementarity between local and non-local production then incentive for strong local to attack non-local: ethnic violence Why? Induces the non-local to leave, which reduces future competition and raises profits Locals not likely to leave

Key Factor #2: Replicability A high degree of production replicability Lowers complementarity over time Increases likelihood of attack Necessary to have low replicability

Key Factor #3: Minority size A smaller non-local minority Less competition in trade therefore higher profits More tempting to attack and capture More muslims makes violence less likely Redistributing institutions important Low barriers for non-locals to enter markets

Medieval Indian Trading Ports All three factors beneficial High Complementarity Trade through islamic pilgrimages, The Hajj Islamic law conducive Low Replicability Trade networks hard to steal Minority Size High intra-muslim competition Low barriers to muslim entry

Institutional Development This should induce high demand for institutions Two types evolved Replicability-reducing institutions Ethnic-specific apprenticeships Social sanctions (Kaala-Paani) Profit sharing institutions Joint ventures Political delegations Commercial taxation

Empirical Strategy Selection-on-observables IV/2SLS Assumption: conditional on initial controls (time t-1), trading ports are as good as randomly assigned Reduced Form: What is the link between t & t-1? t-1 = 700-1700 BC t = 1850-1950, 2002 IV/2SLS ”Natural harbours” instrument for trading port. What hypothesis are we testing?

Omitted Variable Bias Suppose, for example, that the true relationship is If the medieval (time t-1) %-of-muslims (ethnic) is unobserved Then the omitted variable bias is: Where the last coefficient comes from the regression: So if more muslims causes less violence and trade is correlated with more muslims, we have a downward bias (overestimate trade’s effect on peace).

Bad Proxy Control If we use the contemporary (time t) %-of-muslims as a proxy for the medieval ratio And the proxy measures Then the bias will be: Hence, if more muslims causes more violence, and trade is positively correlated with ratio of muslims, we have a downward bias (overestimate trade’s effect on peace)

IV/2SLS ”Natural Harbours” (protected inlets) as an instrument for medieval trading port Key assumption: Natural Harbours increases the likelihood of becoming a trading port, and is uncorrelated with all other factors that determine violence. Do we believe in the instrument? Problems Consistent, but not unbiased The ”weaker” is the instrument, the more it is biased towards the OLS estimate

Results 1 Main Results Table 3 Do we have any bad proxy controls? Can we think of omitted variables? Why is the 2SLS effect 80-90% larger than OLS? Why do we need controls when using 2SLS?

Results 2 Alternative hypotheses (i.e. not institutions) Table 5 Outcomes Contemporary Income Lower contemporary income (insign.) Contemporary Trade Lower value of trade (insign.) %-Muslims More muslims What if %-Muslims is an omitted variable? Bad Proxy Control Table 7, See OLS, % Muslims Lower OLS point estimate (Compare to Table 3) Why?

Concluding Interpretations These are reduced form results How do we know that the mechanism is institutions? (We don’t) Why not other persistent mechanisms Changing values? Or migration of tolerant individuals into trading ports? Or that trade weakens religious identity? Is it only ethnic violence, or crime in general? If there is an effect on the latter, then it could be that trade induced the development of rule of law. Then religious tolerance has nothing to do with it.