Demography is Destiny (or why two heads are better than one)

Bradford DeLong has a fantastic blog post on the relationship between population size and economic growth and development. He writes:

In Kremer’s model, population will grow and eventually population will be high enough that research and development will proceed fast enough to push income per capita high enough to trigger the demographic transition and thus break the Malthusian proportional link between resources and technology on the one hand and population on the other. After that link is broken, economic growth will predominantly take the form not of Malthusian increases in population but rather Industrial Revolution and Modern Economic Growth increases in living standards and labor productivity.

The breakthrough to an Industrial Revolution, Modern Economic Growth, and our present prosperous global post-industrial economy is therefore baked into the cake. It is an all-but-inevitable event in human history produced by the simple fact that when it comes to generating useful ideas two heads are better than one: “the fundamental nonrivalry of technology as described by Paul Romer (1986)…”

DeLong then tests an alternative theory in which the economic takeoff of WENA countries after 1750 could have been a fluke, and concludes that the British industrial revolution at most saved the world 150 years — that is, “if you take the association between global populations and global economic growth back before the British Industrial Revolution seriously, as a causal relationship.

The whole post is worth reading. The empirical bits are clear and easy to follow. See also here.

In my Political Economy of Development class I make sure that my students understand the relationship between demography and human development — (i) the impact of demography on state development; and (ii) the impact of state development on markets and economic growth and development. To that end I often use these three illustrations.

Up until the mid 1990s tiny Europe had more people than all of Africa. In the next 30 years Africa’s population will grow by about 800 million people. By 2050 the Continent is projected to have 2 billion people; and half of the children being born in the world will be African. There is no reason to believe that the African experience after these demographic changes will not follow established correlations between population size, state development, and technological change.

An Update of Nunn’s “Slave Trades”

Recent studies on African economic history have emphasized the structural impediments to African growth, such as adverse geographical conditions and extractive colonial institutions. The evidence is mainly drawn from cross-country regressions on late 20th century income levels, assuming persistent effects of historical causes over time. But to which extent has African poverty been a persistent phenomenon? Our study sheds light on this question by providing new evidence on long-term African growth-trajectories. We show that slave trade regressions are not robust for pre-1970s GDP per capita levels, or for pre-1973 and post-1995 growth rates. We calculate urban unskilled real wages of African workers in nine British African countries 1880-1965, adopting Allen’s (2009) subsistence basket methodology. We find that real wages were above subsistence level, rose significantly over time and were, in major parts of British Africa, considerably higher than real wages in Asian cities up to, at least the 1930s. We explain the intra-African variation in real wage levels by varying colonial institutions concerning land alienation, taxation and immigration.

….slave export intensity is highly and significantly (at the 1% level) correlated to GDP per capita in 2000, but not to income levels in 1950 or 1960. In 1970 the effect is significant at the 10% level, but the coefficient is much smaller than in 2000. Column 4 to 6 shows the regression on growth rates including initial GDP per capita (ln). A regression of slave exports on per capita GDP growth is only statistically significant for the period 1973-1995, which explains why the regression on GDP per capita in 2000 is so robust. However, for the periods 1950- 1973 or 1995-2008 the correlation is insignificant and after 1995 the coefficient turns positive. Hence, the claim that Africa’s slave trades affect current economic performance is multi-interpretable.

That is Northwestern’s Marlous van Waijenberg and Utrecht’s Ewout Frankema in an interesting paper on the issue of structural impediments to economic growth in Africa.

I also found this paragraph interesting:

The welfare ratios of urban unskilled workers in pre-modern London and Amsterdam were obviously higher than in late nineteenth century British Africa. However, the average annual growth rates in Accra between 1880 and 1965 (1.17%) were comparable to the average growth rates in London (1.14%, 1840-1900). Welfare growth rates in some other countries were even higher, although it has to be said that these growth rates were affected by very low starting points. In Mauritius we observed the highest long-term growth rate (1.58%), which suggests that the Mauritian ‘Miracle’ is not just a post-colonial phenomenon.31 In sum, we find little evidence that suggests that four generations of African urban wage workers in the colonial period were trapped into persistent poverty. Welfare improvements were certainly not confined to very specific regions in British Africa or brief periods of time (such as 1945-1960). In fact, the whole idea that Africa has been the poorest and most slowly growing region since the Industrial Revolution is based on a backward extrapolation of post-1960 growth experiences without a historical empirical foundation.

The paper is not about the Nunn thesis per se, but investigates more generally whether historical moments (like the slave trade period) produced structural impediments that have made Africa perennially the slowest growing region of the world (hence the need for explaining the “Africa” dummy in popular research and thought).

I wish development economists read more history, especially economic history.

Africans Covered 98% of the Cost of Administering Colonial French West Africa (AOF)

Elise Huillery writes in the Journal of Economic History:

What share of French expenditure was allocated to West Africa? What share of West Africa’s revenue was provided by France? These two questions are crucial since scholars and politicians who claim colonization had a “positive role” make essentially the two arguments that the colonies benefited from imperial public investments and that mainland taxpayers sacrificed local investments for investments in the colonies.

I find that the costs of AOF’s colonization for the metropolis were low. From 1844 to 1957 France devoted on average 0.29 percent of its public expenditures to AOF’s colonization. Colonization of French West Africa was profitable for France to the extent that the impact on cumulative domestic production exceeded 3.2 billion 1914 francs. The military cost of conquest and pacification accounts for the vast majority (80 percent) of the average annual cost. The cost of central administration in Paris accounts for another 4 percent. So subsidies to AOF account for only 16 percent of the average annual cost, meaning that less than 0.05 percent of annual total metropolis public expenditures were devoted to AOF’s development.

For French West African taxpayers, French contribution was not as beneficial as has been argued. From 1907 to 19578 the metropolis provided about 2 percent of French West Africa’s public revenue. Local taxes thus accounted for nearly all of French West Africa’s revenue. These resources supported the cost of French civil servants whose salaries were disproportionally high compared to the limited financial capacity of the local population. Administrators, teachers, doctors, engineers, lawyers, and so on, were paid French salaries and got an additional allowance for being abroad. Thus, in the colonial public finance system, most revenues were collected on an African basis while being spent on a French basis. To illustrate this point, I show that colonial executives (eight governors and their cabinets) and district administrators (about 120 French civil servants) together accounted for more than 13 percent of local public expenditures.

The rest of this very fascinating paper is here.

Besides the headline finding, also interesting in the paper are: (i) the extent to which Paris subsidized private firms involved in the colonial enterprise; and (ii) the structure of the public finance system that allowed the AOF administration to borrow directly from French banks with the full backing of Paris (which allowed for lower rates). This might explain the persistence of the monetary relationship between former AOF territories and Paris in the form of the CFA and a common central bank (BCEAO).Screen Shot 2015-07-05 at 12.05.23 AM

As I keep saying, Economic History is hot again. And sooner rather than later it’s going to become more apparent to more people that African political and economic history did not begin in 1960, or for that matter in 1884-5. And neither was it just about the unimaginably catastrophic Atlantic experience.

Review: Why Economists Miss the Point on Economic Growth in Africa

Africa continues to be a fertile ground for economic research. A significant number of economists in the development economics subfield have made careers explaining the “Africa” dummy variable in cross-national growth regressions — that is, explaining Africa’s “growth tragedy.”

In his latest book, Africa: Why Economists Get it WrongMorten Jerven argues that this is a misguided approach. Instead of explaining African exceptionalism (why is Africa poorer than the rest of the world?), Jerven argues that scholarly inquiry ought to focus on explaining fluctuations in African growth, and intra-Africa variation in general economic performance. Jerven persuasively argues that explaining African poverty and trying to find ways to fix it have distracted researchers and policymakers alike from the more useful endeavor of understanding how economic growth (and decline) happens in Africa. The former approach accepts as a stylized fact the lack of meaningful growth in Africa’s economic history; while the latter more realistic approach acknowledges that African economic history has been characterized by periods of both growth and decline.

Screen Shot 2015-06-24 at 4.52.42 PMJerven is an economic historian, and it shows (see also here). He begins by reminding readers that African economic history did not begin in 1960, the time around which aggregate national economic data became available for a large number of African countries. Jerven then shows that economic growth in Africa has been cyclical, characterized by periods of both growth and decline. At the same time, periods of growth in Africa have not necessarily coincided with the implementation of “good” policies as the literature suggests. The “lost decades” of the late 70s and much of the 80s (due to oil and commodity shocks and associated debt problems) were a period of decline that also coincided with the “good” policies implemented under structural adjustment programs (SAPs). Without getting into the details of the specific policies in question, Jerven makes the point that African states’ experiences in the 70s and 80s are not representative of the full history of economic growth and development in the region.

Yet, according to Jerven, it is the growth record from these two decades that has become accepted as the “stylized fact” of Africa’s growth experience. The idea of an African growth tragedy has been so sticky that most economists (with a few exceptions) did not notice the uptick in growth in the region over the last decade and a half. A quick survey of syllabuses on African political economy will reveal this fact.

Why is Africa poor?” is a question common on course descriptions in many American political science and economics departments, giving the impression that the region has always had a growth deficit to be explained.

Second, Jerven takes on the quality of data that have historically been used to study African economies (remember Poor Numbers?). In this part of the book he pokes holes through major papers in the economic growth literature. The data he looks at range from widely used stats on African economies from sources like the Bank, the IMF, country statistical departments, and other academic sources. He also questions the validity of outcome variables (such as institutional quality, property rights protection, et cetera) that are often found on the left hand side in cross-national growth regressions. Jerven does not seek to provide a review of the development economics literature. Instead, his focus is on the substantive implications of statistical models widely employed by economists to explain relative growth between different regions of the world. In doing so he challenges social scientists to think more careful about issues of measurement and the substantive meanings of regional dummies.

Jerven’s critique of what he calls the “Wikipedia With Regressions” style of academic research is welcome, and hopefully will inspire more students of economics and politics (not just in Africa) to invest in acquiring useful knowledge on the specific countries they study. The basic point here is that the cocksure certainty of findings in scholarly studies on the determinants of growth is unwarranted, given the shaky (data) foundations on which many of them stand. Jerven drives the point home by citing Durlauf, Johnson, and Temple who in their review of the growth literature found 145 different regressors that were found to be statistically significant determinants of economic growth.

Lastly, Jerven takes head on the claim that institutions and good governance cause economic growth. His core argument in this section is that “good” institutions are typically the result of, rather than the cause of economic growth. He gives examples of countries that have experienced sustained economic growth without having the typical bundle of institutions that scholars attribute to be the fundamental cause of long-run growth. I am partially persuaded by this argument, especially after having read Working With the Grain (see review here).

This latter section is the least strong part of the book, and may be the result of trying to do too much in one short text. As a student of institutions I am keenly aware of the importance of elite political stability and institutions that lock in intra-elite commitments for sustainable economic growth. It is not enough to claim that the view that institutions cause growth is misguided because some economies elsewhere have achieved growth without the hypothesized good institutions. I would argue, for instance, that a key difference between the “Asian Tigers” and their African counterparts (some of which we are often reminded were relatively richer in 1960) was the level of stateness (i.e. institutionalization of centralized rule) on account of a much longer experience with statehood. Jerven would have helped his argument by providing alternative explanations for Africa’s economic collapse in the late 1970s and much of the 1980s.

What kinds of institutions matter in “late” economic development? Why did African states almost uniformly fail to contain the oil and commodity shocks and the resultant debt problems that visited them during this period? Has there been institutional variation within Africa over time, and can it explain intra-Africa variation in growth?

Overall, Africa: Why Economists Get it Wrong is a fantastic quick read for anyone (whether in the academy or not) interested in understanding economic growth in Africa. Besides being a brilliant economic historian, Jerven is also an engaging writer with an ability to make even the most technical arguments accessible to the reader. I did not have the book on my original summer reading list but couldn’t stop once I started reading it.

In my view this book is the economics companion to Thandika Mkandawire’s excellent critique of scholarship on African politics. It also raises several very interesting questions that will inspire or reinforce a few dissertations in the field of development economics.

A short reading list for development economists and practitioners

Below is a list of books I am currently reading and that I think most development economists (and anyone interested in development) would benefit from reading. The reading list is America-centric and provides a mix of economic history and the history of governance in the US.

Let’s make this a year in which development economists and practitioners read more economic history.

  1. The Tycoons: Charles Morris’ book outlines American economic history from the perspective of four of the country’s most celebrated businessmen: Jay Gould, John D. Rockefeller, Andrew Carnegie and J. P. Morgan. You think corruption is bad for development? Can industrial policy help poor countries overcome the poverty trap? And how exactly do countries become rich? These are some of the questions that are implicitly addressed in this rather easy to read book.
  2. FDR by Jean Edward Smith: If America ever had a developmental president, it was FDR. His big push to help regular folk with the New Deal and other government programs took water and electricity to many corners of America that had previously been forgotten by mainstream politics. The story of American development is a caution agains the prevailing fascination in the development community with small-scale pro-poor initiatives that largely sidestep the state. Development is political (because it creates relative distributional winners and losers) and those who ignore this fact will always fail.
  3. The Search For Order, 1877-1920: Want to know more about how America became modern? This book provides a glimpse of the period in American history between the era when robber barons ran the show and when formal institutional arrangements became commonplace in business and government alike. The book provides an excellent account of the dynamics of institutional development both in the public and private sectors.
  4. The Evolution of American Legislatures: Want to know how US State Legislatures have evolved from the colonial times to the present? The you must read Squire’s book. I loved reading this book [yes, because I study African legislatures myself] precisely because it gives a detailed account of the very undemocratic origins of the democratic institution of the legislature(s) that we associate with modern United States. The book is a caution to institutionalists who peddle the false idea that good institutions are born good and stable. The lesson from American history is that it is all about how checks are enforced, and that sometimes to guarantee enforcement you might need to limit political participation and choice.
  5. Abraham Lincoln by Lord Charnwood: I now live in the land of Lincoln and so this was a must read for me. The big development lesson from this book is that civil wars are complex and that sometimes nations ought to be left to recover autonomously. Just imagine how the history of the US would have played out if the UN already existed (and at the time dominated by the UK, France, and Germany) and had sent in peacekeepers right after the Confederates seceded…. The book is also a nod to the Great Man theory by showing us how Lincoln’s personal life and conviction played a big role in determining the course of US history.
  6. 1913 The Eve of War: This is a random addition to the list, I know. But I added it to remind readers that things can always go wrong in the international system, with grave consequences for the entire global community. The book is also a good lesson on how Great Powers can sometimes be forced into conflict even when they would prefer not to fight.
  7. The Great Escape: I know I am late to the game on this one but Angus Deaton’s book (which got glowing reviews in the Fall) is a great account of the public health advances of the of the last century in both the developed and developing worlds. The book also reminds us that economic inequality is not always a bad thing, as long as everyone’s living condition is improving – which he says has been the case for much of the last century. Also, Deaton reminds us that aid is not the panacea to underdeveloped and that it might actually lead to more harm than good. But the solution he runs to – good governance – is equally problematic. 21st century good governance means zero tolerance on corruption, crony capitalism, and state capture by the business elite. Yet if you read the books above, you realize that because of the political risks involved in poor (or less institutionalized) countries, sometimes the habits associated with bad governance are the only means available for incentivizing investment. The point here is not that we should neglect the fight against bad governance, just that “Governance” shouldn’t be the only consideration when thinking of factors that retard economic growth. Just imagine how the Transparency International report on corruption in the US circa 1920 would have read like.

The decline of Economic History at MIT

What is the cost of not having economic history at MIT? It can be seen in Acemoglu and Robinson, Why Nations Fail (2012). This is a deservedly successful popular book, making a simple and strong point that the authors made originally at the professional level over a decade before (Acemoglu, Johnson and Robinson, 2001). They assert that countries can be “ruled by a narrow elite that have [sic] organized society for their own benefit at the expense of the vast mass of people” or can have “a revolution that transformed the politics and thus the economics of the nation … to expand their economic opportunities (Acemoglu and Robinson, 2012, pp. 3-4).”

The book is not however good economic history. It is an example of Whig history in which good policies make for progress and bad policies preclude it. Only transitions from bad to good are considered in this colorful but still monotonic story. The clear implication is that if countries can copy the policies of English-speaking countries, they will prosper. No consideration is given to Britain’s economic problems over the past half-century or of Australia’s relative decline for a century.

That is Peter Temin writing about the story of Economic History at MIT in the 20th century. For more click here (H/T Greg Mankiw).

Also, to be honest, one of the reasons I am into development (and the politics around it) is because of my fascination with economic history. I wish more development practitioners and theorists alike cared a little bit more about economic history. At the very least, looking at how things really actually worked out in the past serves to temper the urge to completely fall for the latest fad within the development industry. 

Rational Impatience and marshmallows (and development)

Back in 1972 Stanford psychologist Walter Mischel conducted experiments in which he claimed to show a correlation between patience and later success in life – in the experiment kids who could wait for 15 minutes before getting two marshmallows, instead of eating one immediately, were likely to be more successful and self-controlled later in life. Michel attributed patience and self-control to some of the kids’ innate capacities.

It turns out that that might not be the case after all. Researchers in Rochester revisited the experiment and show that kids’ choices over whether to wait or not are “moderated by beliefs about environmental reliability,” in other words, kids react rationally to the proposed deal based on prior experience.

According to Celeste Kidd (more on this here), a University of Rochester grad student and lead author on the study:

“Being able to delay gratification — in this case to wait 15 difficult minutes to earn a second marshmallow — not only reflects a child’s capacity for self-control, it also reflects their belief about the practicality of waiting,”

Adding that:

“Delaying gratification is only the rational choice if the child believes a second marshmallow is likely to be delivered after a reasonably short delay.”

This reminded me of the interesting works in economic history (gated, sorry) that try to tackle issues of culture and socialization and their role in economic development. The punchline from these works is that group-specific socio-cultural values have long-lasting effects on attitudes towards investment, saving, entrepreneurship and ultimately economic development (Think of the fabled frugality and self-discipline of Weber’s protestants). Putting some of the critiques of these works aside for a moment, they are a reminder of just how COMPLEX development is.

Because material conditions both shape and are a result of prevailing cultural norms and practices (both Marx and Weber were right!) it becomes difficult to change one thing while ignoring the other (And this is even before you open the pandora’s box, viz: POLITICS). To put it simply, you cannot increase the investment rate in a society simply by throwing money at people. They will spend it on a new shrine for their god or marry a third wife.

This is not to say that it is impossible to transform entire societies in a short while, just that it is not easy, and that we should be humble enough to accept this fact when thinking about how to promote economic development in the bottom billion societies of the world.

economic history… and some people’s lived experience

I am currently doing some research on the economic history of medieval Europe and came across an interesting quote from one Francesco Guicciar commenting on 16th century Spain:

... poverty is great here, and I believe it is due not so much to the quality of the country as to the nature of the Spaniards, who do not exert themselves; they rather send to other nations the raw materials which grow in their Kingdom only to buy them back manufactured by others, as in the case of wool and silk which they sell to others in order to buy them back from them as cloths of silk and wool

The quote reminded me of the thoughts I have whenever I buy Nescafe in Kenyan supermarkets or read about Nigeria importing refined petroleum products.