ECONOMIC GROWTH 2 nd part : Applications

1. Baptiste Massenot Baptiste.massenot@unil.ch ECONOMIC GROWTH2nd part : Applications

2. Why are some countries richer than others? • Part 1: capital accumulation and innovation benefit economic growth • Next question: Why do some countries accumulate more and innovate more?

3. A few answers • Geography: latitude, climate, etc. • Institutions: political, legal, etc. • Culture: trust, values, etc. • United growth theory • Finance

4. Textbook • Aghion and Howitt, « The economics of growth », 2009

5. Organization of the course • Part 2 counts for half of the grade • No exam • 3 papers to review • Send the reviews to baptiste.massenot@unil.ch • Deadline: 1st June 2011 23:59

6. What is a review? • 1. Question of the paper • 2. Summary of the paper • 3. Main contribution of the paper and relationship to the literature (attending the class helps) • 4. Critique of the paper: • Limits • Extensions

7. What is a GOOD review? • 2-3 pages long • Clear and concise • Shows you understood the paper • Shows you understand the contribution and limits of the paper • Shows you worked on the material presented in class

8. The first paper • James Feyrer & Bruce Sacerdote, 2009. "Colonialism and Modern Income: Islands as Natural Experiments," The Review of Economics and Statistics, MIT Press, vol. 91(2), pages 245-262, November. • Can be found on the webpage of James Feyrer (Darmouth College)

9. The second paper • F. Allen, J. Qian and M. Qian, "Law, Finance and Economic Growth in China,” Journal of Financial Economics, 77 (2005), 57-116. • Can be found on the PERSONAL webpage of Franklin Allen (Wharton School, University of Pennsylvania)

10. The third paper • Davide Cantoni, « The Economic Effects of the Protestant Reformation: Testing the Weber Hypothesis in the German Lands » , Working paper, December 2010 • Can be found on the webpage of Davide Cantoni (University Pompeu Fabra)

11. Geography

12. Some facts

14. 1. Effort • The Spirit of the Laws, Montesquieu (1748): "The heat of the climate can be so excessive that the body there will be absolutely without strength. So, prostration will pass even to the spirit; no curiosity, no noble enterprise, no generous sentiment; inclinations will all be passive there; laziness there will be happiness"

15. 2. Agriculture • Tropical climates are less appropriate for agriculture: • Too hot • Too dry • Diseases

17. 3. Diseases • Tropical climates are more prone to diseases, like malaria • Higher mortality/lower life expectancy • Lower saving and investment • Lower human capital

20. Caveats • All these theories are plausible • Major problem with this literature: • Correlations, not causality • Difficult to have natural experiments with geography

21. Institutions

22. What are institutions? • Institutions = rules of the game • Market (barriers to entry) • Property rights • Constitutions • Courts

24. Institutions vs geography • Institutions and geography are both correlated with GDP • BUT, do they cause GDP? • We need natural experiments to answer that question

25. The Korean experiment

26. The Korean experiment • After 1948, Korea was divided in two countries • North Korea was socialist • No property rights • South Korea was democratic • Property rights • Geography was held constant • BUT, need for more evidence

27. The colonial experiment • Starting from the 15th century, Europeans colonized many countries • They installed different institutions • Geography was held constant

28. The Colonial experiment • Two papers by Acemoglu, Johnson, and Robinson exploited this experiment: • “The Colonial Origins of Comparative Development: An Empirical Investigation”, (2001) (Part I) • “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”, (2002) (Part II) • The literature on legal origins also exploits it (Part III) • Colonized countries adopted the legal origins of their colonizer • Common law: anglo saxon world • Civil law: French (South America+french speaking Africa+latin Europe), Scandinavian, German (german speaking + Japan+Korea+Eastern Europe)

29. Culture

30. What is culture? • Religion • Values • Preference for Redistribution (Alesina & coauthors) • Corruption and Civic Attitudes (Fisman & Miguel 2007) • Female Labor Force Participation (Raquel Fernandez & coauthors) • Beliefs • Pro-Market Attitudes (DiTella et al, QJE 07; Landier, Thesmar and Thoenig, Economic Policy, 2008) • Trust • Etc.

31. How do you measure culture? • You ask people what their culture is • Biggest database: World Values Survey • -267'870 individual observations from 82 countries spread over 4 waves 1981-84 (21), 1989-93 (43), 1994-99 (54) & 2000-04 (70) • Sample size: between 1000 and 1400 individuals by country/wave • 817 questions in total + individual characteristics! • available for free on the Internet • Example: Trust • “Generally speaking, would you say that most people trusted or that you can't be too careful in dealing with people?”

32. Brief history • Max Weber (1905): The Protestant Ethic and the Spirit of Capitalism • Protestants are more motivated by economic gains than catholics • Otherwise, culture and economics is a NEW field

37. Economic consequences of culture • Arrow (1972): “Virtually every commercial transaction has within itself an element of trust.” • Gambetta (1988) on trust: “When we say we trust someone or that someone is trustworthy, we implicitly mean that the probability that he will perform an action that is beneficial … is high enough for us to consider in engaging in some form of cooperation with him.”

45. Caveat • Again, correlation, not causality • Solutions: • Inherited trust (Algan Cahuc 09) • Use theory to predict (not prove) causality (Doepke Zilibotti 08)