EC336 Economic Development in a Global Perspective

1. EC336Economic Development in a Global Perspective Abhishek chakravarty 2013-14 Lecture 7

2. Lecture Outline • We will examine the role of institutions in economic development. • We will look at two specific examples involving the impact of democracy on infant mortality in Africa, and the role of cable television in improving women’s autonomy in India. • The material is from BBM chapter 2, and the starred papers in the reading list.

3. Geography vs. Institutions: Reversal of Fortunes • Differences in geography and differences in institutions are two competing explanations for why there are such large cross-country differences in income and development. • Geography hypothesis argues that geography, ecology, and climate determine development and growth via three main channels: • The poorest countries in the world are largely located near the equator, suggesting that tropical climate (hot weather and torrential rains) is bad for productivity and growth. • Soils in tropical areas suffer depletion from heavy rains, and there is not enough frost in these areas to clean the soil either. Therefore agriculture potentially suffers compared to temperate regions. • Tropical regions have a much higher disease burden than temperate regions, which harms economic growth.

4. Geography vs. Institutions: Reversal of Fortunes • But does this imply a causal relationship between geography and economic development? The answer is no, because while there is definitely a correlation between the two, there are likely to be omitted factors that drive this relationship. • E.g. before the nineteenth century, scientists believed that malaria was caused by mists, bad airs, and miasmas emitted by swamps and bogs because it was near such swamps that people got infected. But this was simply a correlation, as discovered later when the anopheles mosquito breeding in such swamps was found to be transmitting the parasite. • There is also a very strong positive correlation between the level of property rights enforcement, measured by protection against expropriation risk, and log per capita GDP across countries.

5. Geography vs. Institutions: Reversal of Fortunes

6. Geography vs. Institutions: Reversal of Fortunes • Crucial elements of good institutions are: • Enforcement of property rights for a broad cross-section of society, to creative incentives for investment without fear of profits or resources being expropriated. • Constraints on the actions of elites, politicians, and powerful groups to prevent them from expropriating others’ profits and resources, and creating an uneven playing field. • Equal opportunity for broad segments of society to invest in human capital and productive activities. • Hence we could argue that the correlation between good institutions (strong property rights enforcement) and income is causal, but again we cannot be sure due to omitted factors that could drive both.

7. Geography vs. Institutions: Reversal of Fortunes • How do we find conclusive evidence for a causal relationship? In the natural sciences one can carry out controlled lab experiments where samples of individuals are randomly assigned to “treatment” and “control” to explicitly remove the threat of omitted individual characteristics biasing the estimated effects of a treatment. • We cannot randomly assign countries to good or bad institutions, or tropical and temperate geography, and then assess the resulting impacts on income. • History however provides a natural experiment, which is the colonisation of many developing countries by European powers. This changed the institutions prevailing in these countries, but did not change the geography.

8. Geography vs. Institutions: Reversal of Fortunes • If geography is the key determinant of development, then the level of economic development should remain the same over time even after the arrival of European colonisers in the fifteenth century, as geography remained constant. • However if institutions are what matter for development, then we would see colonies that received good institutions be richer today, and those with worse institutions be poorer. • There were indeed diverse institutions set up by European colonisers in different colonies. At one extreme were very extractive institutions such as the slave trade in the Belgian Congo and forced labour in the Caribbean. At the other extreme, colonies such as New Zealand, Australia, and the US where Europeans settled benefited from institutions modeled on those Europe that protected private property.

9. Geography vs. Institutions: Reversal of Fortunes • Historical evidence shows that instead of persistence in economic prosperity as predicted by the geography hypothesis, there is a remarkable reversal of fortunes among countries that were colonised. • Societies such as the Mughals in India and the Aztecs in Central America were among the richest in the world before 1500, but these regions are currently among the poorest in the world. In contrast, New Zealand and Australia are much richer now than they were before colonisation. • This pattern can be seen using two proxies for development in pre-industrial societies, urbanisation and population density. These measures are good proxies because societies had to achieve a certain level of agricultural productivity and development in transport and commerce to sustain urban centres and a dense population.

10. Geography vs. Institutions: Reversal of Fortunes

11. Geography vs. Institutions: Reversal of Fortunes • The relationship between per capita income today and population density is strongly negative, indicating pre-industrial societies that were relatively more developed before colonisation are now less developed.

12. Geography vs. Institutions: Reversal of Fortunes • The same negative relationship is seen between per capita income today and urbanisation in 1500, showing the reversal in fortunes of colonies.

13. Geography vs. Institutions: Reversal of Fortunes • This evidence strongly favours the importance of institutions over that of geography. But can it be explained by a more sophisticated geography hypothesis rather than institutions? • For example, it can be argued that tropical regions had an initial advantage in agriculture, but this was eventually eroded by the advent of the heavy plow, crop rotation, and high-yield crops that favoured temperate climates. • However this would mean that the reversal in fortune would occur with the spread of European agricultural technologies to tropical areas as they are colonised. Instead the reversal occurs in the nineteenth century, and is closely related to the industrial revolution.

14. Geography vs. Institutions: Reversal of Fortunes • The institutions hypothesis is the best explanation for the reversal of fortunes. This is based on the argument that European colonisers set up institutions based on their best interests rather than that of indigenous populations. The historical evidence shows this is what took place. • In areas where Europeans did not settle, and there were large populations to enslave or coerce to work cheaply, extractive institutions were established. On the other hand in previously sparsely populated colonies that were settled by large European populations, good institutions were set up to protect property rights. • The timing of the reversal of fortunes also supports the institutions hypothesis. It begins in the nineteenth century with the industrial revolution, which is precisely when good institutions that create incentives for large-scale investments would become important.

15. Geography vs. Institutions: Reversal of Fortunes • The institutions hypothesis is given added support by the relationship between per capita income and property rights protection today and the historical mortality of European settlers in the colonies. • Due to the lack of immunity settlers had to malaria and yellow fever in tropical regions, they faced much higher mortality rates after settling than the local population. However colonies in temperate regions were more suited to European settlement due to no tropical disease prevalence. • Therefore the institutions set up in colonies reflect this fact. Tropical regions received extractive institutions as the colonial objective was resource and labour extraction rather than settlement. The colonies in temperate areas received better institutions as colonisers settled there and wished to develop the economy for their benefit.

16. Geography vs. Institutions: Reversal of Fortunes • The relationship between property rights protection today and settler mortality at the time of colonisation is negative, reflecting the poor institutions set up when mortality was high:

17. Geography vs. Institutions: Reversal of Fortunes • The same negative relationship is seen between per capita income today and settler mortality at the time of colonisation:

18. Cable TV and Women’s Autonomy in India • Jensen and Oster (2009) studies the impact of the introduction of cable television in rural areas in India on measures of female autonomy and fertility behaviour. The basis for the study is that television greatly increases the availability of information about life in the outside world, especially in remote rural villages. • Also female characters on television often come from urban settings where they have professional careers, smaller families, and more decision-making power; all of which differs greatly from the lives of rural Indian women. • The goal of the study is to therefore observe whether cable television actually alters previously existing levels of perceived acceptable gender discrimination.

19. Cable TV and Women’s Autonomy in India • The analysis relies on the SARI panel data covering 2,700 women in the five Indian states of Bihar, Tamil Nadu, Haryana, Delhi, and Goa, collected in the three years 2001-2003. Other than in Delhi, the sample was confined to rural areas. • This was also a phase of rapidly expanding access to cable television, with 21 of the 180 sample villages being newly introduced to cable television during this period. • Changing gender attitudes and behaviours are then compared between sample periods across villages, based on whether and when they began to have access to cable television.

20. Cable TV and Women’s Autonomy in India • The two main considerations for providing cable to villages appear to be the availability of electricity, and proximity to an urban centre to aid in collecting bill payments. This is borne out from the correlations in the data. • Hence these two variables are conditioned on in the main analysis to ensure that they do not simultaneously drive both access to cable and changing gender attitudes. • Conditional on these two variables, getting access to cable in the future is not significantly correlated with more liberal attitudes to gender autonomy in the present period, indicating that reverse causality or targeting of cable access to villages with more liberal gender attitudes is not driving the results.

21. Cable TV and Women’s Autonomy in India • Two of the outcome variables are measures of son preference and attitudes to domestic violence. For son preference, women who reported wanting to have more children were asked: “Would you like your next child to be a boy, a girl, or it doesn’t matter?” Son preference is defined as wanting the next child to be a boy. • For domestic violence, women were asked: “Please tell me if you think that a husband is justified in beating his wife in each of the following situations: If he suspects her of being unfaithful; if her natal family does not give expected money, jewellery, or other things; if she shows disrespect for him; if she leaves the home without telling him; if she neglects the children; if she doesn’t cook food properly.” • The final domestic violence outcome measure used is the number of situations in which the woman reports that beating is acceptable (0–6).

22. Cable TV and Women’s Autonomy in India • Two other outcome variables, household decision making (autonomy) and fertility , are also analysed. To measure autonomy, women were asked if they participate in decisions on “Obtaining health care for yourself; purchasing major household items; whether you visit or stay with family members or friends?” • Women were also asked whether they need permission from their husbands to visit the market , or to visit friends or relatives. Women were also asked whether they are allowed to keep money set aside to spend as they wish. Responses were coded on a scale of 1 to 3 (do not need permission, need permission, not permitted at all). • Finally, fertility is measured by asking female respondents if they are currently pregnant.

23. Cable TV and Women’s Autonomy in India • The empirical strategy uses the following econometric specification: • Here sivt is the outcome of interest for individual i in village v in year t, and cvt is an indicator for access to cable television in village v in year t. γiis a full set of individual fixed effects, δtis a full set of year dummies, and the other controls, Xivt , include household income and a quadratic in age. • The identifying assumption is that villages that added cable would not otherwise have changed differently than those villages that did not add cable.

25. Cable TV and Women’s Autonomy in India • Columns (1) and (2) show that adding cable is associated with a 12 percentage-point decrease in the reported preference for the next child to be a boy, and a 0.16 decrease in the number of situations in which it is considered acceptable for a man to beat his wife (from a base of 1.61). • Column (3) shows the autonomy effects; again, the effect of cable is positive and statistically significant, improving the autonomy index by 0.026, from a base of about 0.65. Column (4) shows getting cable leads to approximately a 3.7-percentage-point decrease in the likelihood of pregnancy. • To test statistically for the possibility of pre-existing trends driving the results more formally, an indicator for getting cable next year is included. The results in columns (1)–(4) of Panel B indicate that the effect of getting cable this year is largely unchanged, compared to Panel A, and that getting cable one year later does not predict changes in women’s status.

26. Democracy and Infant Mortality in SSA • Kudamatsu (2011) investigates whether the political institution of democracy promotes development, where the chosen indicator of development in infant mortality. • The data used allows for the impact of democratization to be estimated on the survival of children born to the same mother, removing concerns that results are driven by changing composition of the population. • A democracy in this study refers to a country satisfying the following two conditions: • (1) the chief executive of the government has been elected in multiparty elections with universal suffrage, without subsequently banning opposition parties. • (2) a new chief executive has assumed office by winning multiparty elections.

27. Democracy and Infant Mortality in SSA • Among 24 countries that had become independent by the 1960s, 12 were democratic at the time of independence. However, all these countries experienced a collapse of democracy either by a military coup or by the banning of opposition parties by the early 1970s. • Around 1980, three countries (Ghana, Nigeria, and Uganda) became democratic, but all of them saw military coups toppling democratic governments by the mid-1980s. • Since 1990, 11 countries have been democratized within the period for which micro data on infant mortality is available. Since dictatorships were tolerated during the Cold War, and much less so afterwards, results are separately calculated for countries that democratised during the war and those that did so afterwards in the nineties.

28. Democracy and Infant Mortality in SSA • 28 countries in sub-Saharan Africa are used in the study. The 28 DHS surveys used for individual data provide a sample of 643,846 children born to 161,876 mothers with the children’s birth years spanning 1960-2004. The empirical analysis uses the following linear probability model: • Here, yimact is a dummy that equals one if a baby who was born to mother m of birth cohort a in country c in year t dies before reaching the age of one year.

29. Democracy and Infant Mortality in SSA • Mother fixed effects, αm, and mother's birth cohort by child's birth year fixed effects, βαt , are included. • Dct is a dummy variable equal to one if country c is a democracy throughout year t. 1(.) is an indicator function that equals one if the argument holds true. • The term TRENDct represents a linear time trend specific to country c. ximact is a vector of exogenous covariates.

31. Democracy and Infant Mortality in SSA • Column (1) controls for country fixed effects instead of mother fixed effects. The coefficient on democracy since 1990 is negative and statistically insignificant. • Column (2) controls for mother fixed effects instead of country fixed effects. The post-Cold War democracy coefficient becomes larger in absolute terms and is now significant at the 10% level. • Column (3) replaces mother fixed effects with country fixed effects that are allowed to differ across different birth cohorts of mothers. The post-Cold War democracy coefficient is now of similar magnitude to the mother fixed effects estimate in column (2). • This suggests that the cohorts of women who give birth only after democratization may be unhealthier and thus face a higher chance of their infant's death.

32. Democracy and Infant Mortality in SSA • Column (5) shows that democratization after 1990 also reduces neo-natal death (child death within one month of birth). The additional columns add several covariates to check for omitted effects of variables such as country-specific birth order impacts, country-specific maternal age effects, and initial levels of mortality before democratization. The results stay the same with all these controls. • A crude calculation shows that the increased incidence of skilled delivery assistance, exclusive breastfeeding, and oral rehydration solution could each explain 13% to 42% of the fall in neonatal or infant mortality after democratization. • This suggests the beneficial health impact of democratization is through better public health service delivery, but it is not completely conclusive.