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 Weak post-colonial institutions Low economic development Extractive colonial institutions

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 Income level Yes, correlation (ELF negative & s.s.)

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/GDPEconomic 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)

Oil wealth reduces the probability of democratization and early democratic survival

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

Ross (2008): Oil, Islam, and Women Countries with high oil and gas rents per capita tend to have fewer women in parliament in the Middle East

Source: Goldberg et al 2008 The Resource Curse (economic and political) can also happen in the Global North, including the US

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: Birdsall & Subramanian 2004, Ross 2011www.sebstrategy.com

Solutions

Pay oil revenues into independent escrow account for national development – Worked for Norway-- Didn’t work for Chad Why?

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 ( Implementing State Disqualified producing countryPurchasing country (ignoring implementing state’s Clean Trade Act) Sale of resources Trade duties collected Duties held in trust for citizens

Solutions Privatization didn’t work so well in Russia

Tax & redist’n demands increase Low tax & redistribution demands High tax & redistribution demands Depends on cost of repression 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 …