Root Causes of African Underdevelopment

What is the root cause of Africa’s current state of under-development? Is it the long history of slave trade, or the legacy of extractive colonial institutions, or the fallout of malaria? A precise answer still eludes us. This paper investigates the relative contribution of these historical factors using an instrumental variable approach. The results show that malaria matters the most and all other factors are statistically insignificant. The mechanism through which malaria impacts economic performance is demonstrated by a strong negative relationship between malaria and national savings and a two period overlapping generation model. The model shows that high malaria incidence adversely affects growth by increasing both mortality and morbidity. Increased mortality from malaria induces households to increase current consumption and save less for the future. Increased morbidity on the other hand adversely affects labour productivity. The combined impact of these two effects is a slowdown of capital accumulation and economic growth.Malaria; Colonial Institutions; Slave Trade; Economic Development

Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions

We theoretically and empirically examine the relationship between natural resource revenues and financial development. In the theoretical part, we present a politico-economic model in which contract enforcement is low and decreasing in resource revenues when political institutions are poor, but high otherwise. As poor contract enforcement leads to low financial development, the model predicts that resource revenues hinder financial development in countries with poor political institutions, but not in countries with comparatively better political institutions. We test our theoretical predictions systematically using panel data covering the period 1970 to 2005 and 133 countries. Our estimates confirm our theoretical predictions. Our main results hold when we control country fixed effects, time varying common shocks, income and various additional covariates. They are also robust to alternative estimation techniques, various alternative measures of financial development and political institutions, as well as across different samples and data frequencies. We present further evidence using panel data covering the period 1870 to 1940 and 31 countries.Natural resources; political institutions; financial development

Natural Resources, Democracy and Corruption

We study how natural resources can feed corruption and how this effect depends on the quality of the democratic institutions. Our game-theoretic model predicts that natural resources lead to an increase in corruption if the quality of the democratic institutions is relatively poor, but not otherwise. We use panel data covering the period 1980 to 2004 and 99 countries to test this theoretical prediction. Our estimates confirm that the relationship between resource abundance and corruption depends on the quality of the democratic institutions. In particular, resource abundance is positively associated with corruption only in countries that have endured a nondemocratic regime for more than 60 percent of the years since 1956. Our main results hold when we control for the effects of income, time varying common shocks, regional fixed effects and various additional covariates. They are also robust to various alternative measures of natural resources, corruption and the quality of the democratic institutions. These findings imply that democratization can be a powerful tool to reduce corruption in resource-rich countries.Natural resources; democracy; political institutions; corruption

Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions

We theoretically and empirically examine the relationship between natural resource revenues and financial development. In the theoretical part, we present a politico-economic model in which contract enforcement is low and decreasing in resource revenues when political institutions are poor, but high otherwise. As poor contract enforcement leads to low financial development, the model predicts that resource revenues hinder financial development in countries with poor political institutions, but not in countries with comparatively better political institutions. We test our theoretical predictions systematically using panel data covering the period 1970 to 2005 and 133 countries. Our estimates confirm our theoretical predictions. Our main results hold when we control country fixed effects, time varying common shocks, income and various additional covariates. They are also robust to alternative estimation techniques, various alternative measures of financial development and political institutions, as well as across different samples and data frequencies. We present further evidence using panel data covering the period 1870 to 1940 and 31 countries. --Natural resources,political institutions,financial development

Distributional impact of commodity price shocks: Australia over a century

This paper explores the distributional impact of commodity price shocks over the both the short and very long run. Using a GARCH model, we find that Australia experienced more volatility than many commodity exporting poor countries between 1865 and 2007. A single equation error correction model suggests that commodity price shocks increase the income share of the top 1, 0.05, and 0.01 percent in the short run. The very top end of the income distribution benefits from commodity booms disproportionately more than the rest of society. The short run effect is mainly driven by wool and mining and not agricultural commodities. A sustained increase in the price of renewables (wool) reduces inequality whereas the same for non-renewable resources (minerals) increases inequality. We expect that the initial distribution of land and mineral resources explains the asymmetric result

Institutions and Trade: Competitors or Complements in Economic Development?

A recent paper by Dowrick and Golley (2004) finds that the impact of trade on growth varies with income. In particular, during the period 1980-2000, trade is observed to yield larger benefits for the more advanced economies. This result is backed up by Dejong and Ripoll (2005) who show that the richer countries benefit more from tariff reduction than the poorer countries. These findings raise the question, what is it about high levels of per capita income that enable richer economies to take better advantage of trade? It appears that the reason behind the success of the high income economies is the high quality institutions. These institutions not only boost growth directly but they impact economic performance indirectly by improving trade. We capture the complementarity between institutions and trade by estimating an empirical growth model which includes an interactive term involving these two variables. Better quality institutions are indicative of lower transaction costs which facilitates trade. It also ensures better distribution of the gains from trade paving the way for further trade and growth.

Natural resources and conflict in Africa: what do the data show?

The empirical relationship between natural resources and conflict in Africa is not very well understood. Using a novel geocoded dataset we are able to construct a quasi-natural experiment to explore the causal effects of oilfield and mineral discoveries on intra-state armed conflict in Africa at the grid-cell level corresponding to a spatial resolution of 0.5 x 0.5 degrees latitude and longitude. We find no evidence of resource discoveries triggering conflict after controlling for property rights institutions, past discoveries, grid-cell and year fixed effects, grid-cell specific trends, and country-year fixed effects. Resource discoveries are associated with improved local living standards and increased political patronage both of which reduce conflict. We observe little or no heterogeneity in the relationship across resource types, discovery size, distance to discovery and borders, and institutions. The relationship remains unchanged at higher grid-cell resolution, and regional and national levels

Theory and empirics of root causes of economic progress

The thesis revisits the debate over the relative contribution of root causes (institutions, geography, trade openness, religion and culture, and knowledge) in economic growth. The results show that institutions, market proximity, malaria and Catholicism have direct effects on economic progress. Catholicism is associated with poor institutions and is not good for trade. Malaria is the most important factor for Africa. The Africa result is explained by an overlapping generations model which shows that high malaria incidence encourages households to consume more at the current period and save less for the future which leads to a poverty trap. Among institutions, ‘market creating institutions’ and ‘market stabilising institutions’ are important. Strong ‘market creating institutions’ characterized by the adequate protection of private property and contract enforcement are growth enhancing. ‘Market stabilizing institutions’ that ensures macroeconomic stability and does not undertake distortionary policies boosts investor confidence and are also good for growth. I notice that there is a growth maximizing level of ‘market regulation’ beyond which it increases red tape and kills the incentive for investment. The effect of ‘market legitimizing institutions’ is statistically insignificant

Does climate aid affect emissions? Evidence from a global dataset

Donor countries have been using international aid in the field of energy for at least three decades now. The stated objective of this policy is to reduce emissions and promote sustainable development in the global south. In spite of the widespread use of this policy tool, very little is known about its effect on emissions. In this paper we perform an empirical audit of the effectiveness of climate aid in tackling CO2 and SO2 emissions. Using a global panel dataset covering up to 131 countries over the period 1961 to 2011 and estimating a parsimonious model using the Anderson and Hsiao estimator we do not find any evidence of a systematic effect of energy related aid on emissions. We also find that the non-effect is not conditional on institutional quality or level of income. Countries located in Europe and Central Asia does better than others in utilising climate aid to reduce CO2 emissions. Our results are robust after controlling for the Environmental Kuznets Curve, country fixed effects, country specific trends, and time varying common shocks