Divided We Stand, United We Fall: The Hume-Weber-Jones Mechanism for the Rise of Europe

The "great divergence" in incomes between Europe and the rest of the world occurred relatively recently. Why was it that Western Europe, once a backward outpost on the fringes of the Eurasian continent, able to dominate in terms of income and technology the previously successful Eastern economies? Several mechanisms have been identifed to account for the rise of Europe. This paper formalizes one important mechanism, the intellectual origins of which can be traced back to Hume and Weber and which was fully, though informally, articulated by E.L. Jones. This mechanism emphasizes the contrast between the European states-system and the Eastern empires. Political competition for a mobile tax-base in a states-system forces rulers to expropriate less from their subjects and to supply relatively more "public services". By effectively limiting the "exit" options of the ruled, an empire rewards its ruler with a captive tax-base that can be subjected to relatively higher levels of expropriation without a similar rise in "public services" provided. The states-system thus encourages higher levels of capital accumulation, while the empire stifles it. The successes of the Eastern empires in their consolidation phase are due to the competition they initially faced from neighboring states. Since Europe escaped such consolidation, the process of accumulation there never faced the impediments its Eastern counterparts did. The paper, thus, also provides a structural explanation for the emergence of institutions in Europe that led to relatively secure property rights.public goods, inequality, redistribution, political economy

"Romes without Empires": Primate Cities, Political Competition, and Economic Growth

Many developing economies are characterized by the dominance of a super metropolis. The coexistence of a primate city with a low level of economic development is not an accident, the former being symptomatic of the causes of the latter. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate different mechanisms that relate political competition to economic outcomes. The "voice" model shows that rent-seeking by di?erent interest groups (localized in different specialized cities/regions) will lead to low investment and growth when the number of these groups is low. Increased political competition in the form of more organized groups engaged in countervailing activity leads to more secure property rights and higher growth. The "exit" model allows political competition among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized, tax rates would be higher and growth rates lower. When political power is decentralized across different self-interested rulers in diverse jurisdictions, the competition over the mobile resources leads to lower tax/expropriation rates, raising the long-run rate of growth of the economy.public goods, inequality, redistribution, political economy

Romes without Empires : Primate Cities, Political Competition, and Economic Growth

Many developing economies are characterized by the dominance of a super metropolis. The coexistence of a primate city with a low level of economic development is not an accident, the former being symptomatic of the causes of the latter. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate different mech-anisms that relate political competition to economic outcomes. The voice model shows that rent-seeking by different interest groups (localized in differ-ent specialized cities/regions) will lead to low investment and growth when the number of these groups is low. Increased political competition in the form of more organized groups engaged in countervailing activity leads to more secure property rights and higher growth. The exit model allows political competi-tion among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized, tax rates would be higher and growth rates lower. When political power is decentralized across different self-interested rulers in diverse jurisdictions, the competition over the mobile resources leads to lower tax/expropriation rates, raising the long-run rate of growth of the economy. 1

Property Rights and The First Great Divergence: Europe 1500-1800

Recent literature on developing countries has revived interest in structural change involving the reallocation of resources from agriculture to industry. Here, we focus on the first such historically important structural transformation in which some parts of Europe escaped from the Malthusian trap centuries earlier than the Industrial Revolution, while others stagnated. There is as yet no consensus as to the causes of this First Great Divergence. The paper advances the thesis that what lies at the root of different paths is the type of property rights inherited. As populations everywhere in Europe recovered from the catastrophes of the late medieval period, what mattered for the direction taken was the size of the landlord class and their landholdings. In western Europe where peasant proprietors tilled small plots, increases in population levels led to lower real wages. Given the low incomes of landlords and peasants, demand for manufactured goods remained low. At the other extreme, in eastern Europe, second serfdom kept wages low, and rents high. Yet given the small size of the land-owning class, these rents could not generate enough demand for high-end manufacturing processes either. Northwestern Europe, being in the middle in terms both of the size of the landholding classes and their properties, prospered as wages failed to decline even when population levels rapidly rose. Combined demand from landlords and workers kindled an expansion of the manufacturing sector

Romes without Empires: Urban Concentration, Political Competition, and Economic Growth

Many developing economies are characterized by the dominance of a super metropolis. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate different mechanisms that relate political competition to economic outcomes. The "voice" model shows that rent-seeking by different interest groups (localized in different specialized cities/regions) will lead to low investment and growth when the number of such groups is small. The "exit" model allows political competition among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized in relatively few urban nodes, tax rates would be higher and growth rates lower. Our empirical work exploits the connection between urban wealth (with the political power it affords) and national soccer championships. By using a cross-country data set for 103 countries for the period 1960-99, we find strong and robust evidence that countries with higher concentrations in urban wealth-as proxied by the number of different cities with championships in national soccer leagues-tend to have lower long-run growth rates.

Romes without Empires: Urban Concentration,Political Competition, and Economic Growth

Many developing economies are characterized by the dominance of a super metropolis. Taking historical Rome as the archetype of a city that centralizes political power to extract resources from the rest of the country, we develop two models of rent-seeking and expropriation which illustrate di?erent mechanisms that relate political competition to economic outcomes. The "voice" model shows that rent-seeking by different interest groups (localized in di?erent specialized cities/regions) will lead to low investment and growth when the number of such groups is small. The "exit" model allows political competition among those with political power (to tax or expropriate from citizens) over a footloose tax base. It shows that when this power is centralized in relatively few urban nodes, tax rates would be higher and growth rates lower. Our empirical work exploits the connection between urban wealth (with the political power it affords) and national soccer championships. By using a cross-country data set for 103 countries for the period 1960-99, we ?nd strong and robust evidence that countries with higher concentrations in urban wealth¨Cas proxied by the number of di?erent cities with championships in national soccer leagues¨Ctend to have lower long-run growth rates.

State Owned Enterprises and Redistribution: An Empirical Analysis

In the past decade many developing economies started to privatize their state owned enterprises. Recently, however, this process seems to have slowed down in some economies and have completely been stalled in others. Here we formalize the view that this is so because these enterprises are major instruments of income redistribution and, in economies with significant degrees of income inequality, segments of the population that benefit from this redistribution would use whatever political power they may have to oppose its abandonment. We find strong and robust empirical support for this hypothesis using cross-country data on the relative size of the state-owned-enterprise sector and different measures of inequality. We also find support for the propositions that dictatorships as well as democracies use this redistributive tool and that left-wing governments tend to redistribute more than right-wing governments through state owned enterprises.state-owned enterprises, inequality, redistribution, political economy

The Role of Productivity, Transportation Costs, and Barriers to Intersectoral Mobility in Structural Transformation

The process of economic development is characterized by substantial reallocations of re-sources across sectors. In this paper, we construct a multi-sector model in which there are barriers to the movement of labor from low-productivity traditional agriculture to modern sectors. With the barrier in place, we show that improvements in productivity in modern sectors (including agriculture) or reductions in transportation costs may lead to a rise in agri-cultural employment and through terms-of-trade effects may harm subsistence farmers if the traditional subsistence sector is larger than a critical level. This suggests that policy advice based on the earlier literature needs to be revised. Reducing barriers to mobility (through reductions in the cost of skill acquisition and institutional changes) and improving the produc-tivity of subsistence farmers needs to precede policies designed to increase the productivity of modern sectors or decrease transportation costs.

Trade and Cities

Many developing countries display remarkably high degrees of urban concen-tration, incommensurate with their levels of urbanization. The cost of excessively high levels of urban concentration can be very high in terms of overpopulation, con-gestion, and productivity growth. One strand in the theoretical literature suggests that such high levels of concentration may be the result of restrictive trade policies that trigger forces of agglomeration. Another strand in the literature, however, points out that trade liberalization itself may exacerbate urban concentration by favoring the further growth of those large urban centers that have better access to international markets. The empirical basis for judging this question has so far been weak: in the existing literature, trade policies are poorly measured (or not mea-sured as when trade volumes are used spuriously). Here, we use new disaggregated tariff measures to empirically test the hypothesis. We also employ a treatment-and-control analysis of pre- versus post-liberalization performance of the cities in liberalizing and non-liberalizing countries. We find evidence that, controlling for, among others, largest cities that have ports and, thus, have better access to ex-ternal markets, liberalizing trade does lead to a reduction in urban concentration. Finally, by using a cross-country level of analysis we provide some external validity to the more careful empirical studies that rely on single country data

State-Owned Enterprises, Political Ideology, and Redistribution

Many economies have undergone the process of privatizing their state-owned enterprises. Recently, however, this process has slowed down in some economies and has been completely stalled in others. Here we formalize the view that this is so because these enterprises are major instruments of income redistribution and, in economies with significant degrees of income inequality, segments of the population that benefit from this redistribution would use their political power to oppose its abandonment. We find strong empirical support for this hypothesis using cross-country data on the relative size of the state-owned-enterprise sector. We also find robust evidence that left-wing (vis-à-vis right-wing) governments are associated with greater redistribution in more unequal societies. Further, this effect is non-linear, implying that redistribution becomes more costly at higher levels of inequality. We also find the same result for authoritarian (vis-à-vis democratic) governments.