Tuesday, January 5, 2010

Comment on Acemoglu...

Brad DeLong assigns his students an Acemoglu article.

It's wrong, of course. Acemoglu wrote:
How do we know that institutions are so central to the wealth and poverty of nations? Start in Nogales, a city cut in half by the Mexican-American border fence. There is no difference in geography between the two halves of Nogales. The weather is the same. The winds are the same, as are the soils. The types of diseases prevalent in the area given its geography and climate are the same, as is the ethnic, cultural, and linguistic background of the residents. By logic, both sides of the city should be identical economically.

And yet they are far from the same.

On one side of the border fence, in Santa Cruz County, Arizona, the median household income is $30,000. A few feet away, it's $10,000. On one side, most of the teenagers are in public high school, and the majority of the adults are high school graduates. On the other side, few of the residents have gone to high school, let alone college. Those in Arizona enjoy relatively good health and Medicare for those over sixty-five, not to mention an efficient road network, electricity, telephone service, and a dependable sewage and public-health system. None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.

The key difference is that those on the north side of the border enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. On the other side, the inhabitants have institutions that perpetuate crime, graft, and insecurity.
Except, of course, another big difference is that, on the north side of Nogales, if the labor market there is bad, a person could easily move to Texas, New York, or California, whereas on the Mexican side, they could move to Chiapas... (Another difference is that on the American side, they could probably get a job w/ a US defense contractor, which they could not get on the Mexican side...)

Hence, you've got to compare the geography of the US as a whole compared to that of Mexico as a whole. And the geography of the US is similar with the geography of Europe and contains an ocean with trade winds which make it effectively close to europe. the only part of mexico similar to europe are the central highlands. these highland areas are among the most developed in Mexico, and also extremely remote from Europe.

The problem is that Acemoglu has cherry-picked his example. Why not compare Harlem to SoHo in NYC? They've got the same institutions, yet couldn't be more different, no? Or Watts to Orange county? San Fran to Oakland? Or almost any inner city to the surrounding suburbs? We're talking huge income differences across short distances, w/ institutions fixed. One can hardly infer from any of these examples that institutions and geography don't matter...

Acemoglu's example just doesn't say what he thinks it says.


  1. Research on how public institutions affect the macroeconomics of a country indicate that political crises and macreconomic policies are institutionally driven. Weak institutions will affect the economic performance of a country. The research finds that institutions influence economic volatility, although the channel through which this occurs is not identified.

  2. I think this whole debate of institutions vs. geography vs. whatever that goes on in developmental economics is a bit silly.

    Firstly, I don't understand why both can't play a role. Surely geography effects your ability to trade and your manufacturing capabilities. But also surely institutions effect how well you can manipulate your geography, resources, etc. Although, then you have to explain why countries have bad institutions and what causes that. One could argue that other factors lead to the poor institutions, that it's not the institutions themselves that are at the heart of the problem. Here's an interesting thought experiment for Acemoglu though about geography vs. institutions, although an extremely absurd one. Let's say Antarctica has several million people. And let's say they set up the best institutions and government on the entire planet. Does Acemoglu think that is all that is needed to make Antarctica a world power? Yes, I know it's an extreme, silly example, but it illustrates the point that institutions literally cannot play the only role. That makes no sense. I'm certain they play a role, and certainly a fairly large one at times, but it's not as though geography plays absolutely no role. I mean, if a countries natural resources are located high up in the mountains where it's difficult to extract and transport - yeah, they are gonna have a problem. While I guess this is more climate than geography, surely Africa's frequent droughts poses, oh I don't know, maybe a problem? Maybe it makes sustained agricultural development difficult? Just a thought. It's not to say institutions and government play no role (see Robert Mugabe destroying property rights), but they don't play the only role.

    Second, why is some grand theory of development is even attempted? I think this almost has to be a country-by-country analysis. What causes growth or prolongs stagnation in Zimbabwe is not necessarily the same as what causes growth or prolongs stagnation in Belize. I find it quite probable that each nations growth may be dependent on something else.

    Third, why is the mention of history so little? I find it particularly odd that those that view institutions and government as being the key to growth treat history like a cute side note. It's not really a coincidence that the overwhelming number of colonized nations had shitty, weak governments post-colonial rule and that those initial crappy governments have made it difficult for those nations to emerge from continuing to have crappy governments because opportunists exploit the weakness of those governments over and over again. Even a fair few of the wars which devastated infrastructure and production could be blamed on colonialism because the colonizers (especially the British) regularly exploited ethnic tension by propping up a minority group and when independence was given the impoverished group was not too pleased.

    Fourth, we should recognized the damaging role that continues to be played by the west. I think Stiglitz made the best case for explaining why the policies that the World Bank and the IMF have imposed on poor nations has been disastrous. Furthermore, getting back to "infant industry", as we continue to send our fancy goods to those nations, it's hard for their country to develop their own comparative advantage.

  3. Part 2, stupid character limitations

    Fifth, just infant industry and infant nation problems. It seems as though the West, and economists, have apparently forgotten that for several hundred years the economy of England was virtually unchanged, and quite poor. Then slowly with various factors building up, the industrial revolution came about. It's like economists have apparently not realized that almost all of the wealthiest European countries were living in a Malthusian trap for centuries. Why would this model not apply to Africa when the conditions are fairly similar (parts of Asia are a bit different)? Let me say while I find development aid is important (although it sometimes is counterproductive), I think the most helpful thing we could do is just divert money to developing their industry. For example, I think Guinea-Bissau fits my infant industrious nation argument perfectly. Guinea-Bissau is one of the poorest nation, but Guinea-Bissau has huge potential for exploiting things like hydropower and they have large unexploited petroleum deposits off their coasts. Why don't they exploit this? It costs a lot to set up, especially because what little infrastructure they had was devastated in the 98-99 civil war (which wasn't really a civil war since it was funded by Senegal). There haven't been a lot of specifics why outside oil producers haven't been invited in, but I primarily suspect it might be that they fear the wealth won't be distributed to the people. Considering the recent experiences of companies like Chevron-Texaco in the Niger Delta though, this probably isn't an unreasonable assumption. The point is, they don't have the money to exploit their resources because they are a relatively young, poor nation. What I think would be the very best development aid possible is just set up a very transparent system to prevent corruption (though, to be frank, I wouldn't be entirely against giving the leaders a little on the side if it prevented them from ruining the whole project) with a low-interest loan for oil extraction to Guinea-Bissau. Why we don't do that? I have no idea.

    Also, interesting, Guinea-Bissau also has a pretty large geography problem. They are mostly agriculture dependent (it's sad when a decline in cashew prices causes a huge economic shock) , but because of where they are located they experience severe harmattan haze which hurts agricultural production (if you can't see the field, it's hard to produce) and the brush fires also do them no favors and that happens all because of where they are located.

    Anyway, my point is, I don't understand why developmental economists think their must be one reason why growth happens some places and others don't. I feel it's institutions, it's geography, it's government, it's history, it's that many nations fit the Malthusian trap description which takes a long time to rise up from historically. Furthermore, it probably depends which nation we are talking about to determine which plays the largest role.

    /end rant.

  4. Nation borders are geographical objects, right? I mean, at least economic geography is all about borders, transport infrastructures and the like. I mean, in taking geography as being all about "natural" conditions Acemoglu is just building a straw man.

  5. Lol, yep, exactly right. National borders are like an artificial "geographic" variable... Definitely not clear how this example implies trade costs don't matter...

  6. Humm, I think you discount the importance of institutions way too much though all factors contribute to success or failure. However a country can't change its geography, it can change its institutions. And geography hasn't prevented former backwater countries from becoming dominant leaders over time. England was a backwater region, and both the United States and Mexico were frontier nations at first.

    Developing countries have to be able to attract capital. And the more socialist the country, the more capitalist will be wary and demand a higher return for the extra perceived risk of seizure.

  7. Um, I do think institutions are important. Leadership is important. Culture is important. Legal institutions and tax codes are important. I believe if Ben Bernanke were replaced with Joe Gagnon, America would be a richer place in six months... That has nothing to do with Geography.

    But, in explaining why America is rich today, a big (exogenous) factor is the geographical endowment. This geographical endowment partly operated thru institutions...

    England is a temperate island nation located in close contact with Eurasia -- hard to imagine a better geographic scenario. The US was originally endowed with a large landmass which could employ European agricultural technology and few people -- probably the only place on Earth where geographical endowment is even better than England...

    Keep in mind, there are two geography theories which are both important -- 1)New trade theory, and 2) the crosby-diamond...

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