In the first post of this series I described recent work in empirical institutional economics and why I thought the work pursued a virtuous end but was compromised by the use of poor institutional measures. Today I will introduce a specific paper of this type that had drawn my attention and talk briefly about the other types of institutional variables that have been tried in country level regressions.
I had come into the current empirical literature whilst researching the resource curse for my honours dissertation. A Norwegian trio, Mehlum, Moene and Torvik, had created a model that predicted that a resource curse would happen only if institutions were below a certain threshold of quality. The resource curse occurred, they said, because natural wealth provided an easy source of unearned wealth; economic rents. It made becoming or usurping a thief, or a warlord or an oligarch much more attractive (and easier) compared to productive activity such as working or becoming an entrepreneur. This doesn’t help the country grow economically. The attractions towards kleptocracy and rentseeking can be mitigated or averted by good institutions, so that Australia, Norway or even Botswana could avoid the curse and even prosper from their resources, but in places like The Congo or Venezuela the gains from seizing something and sitting on it were just too great relative to alternatives.
This was very interesting, and had strong intuitive appeal. It promised insight into one of the most vexing of development issues and gave a distinct hypothesis. They even crunched data in support of this hypothesis.
Unfortunately of course, they used those damn indices.
This was little enough reason to discard an intriguing hypothesis. So I went hunting for a better measurement of institutions.
There had been other methods, but they were also abysmal. Most followed in Weber’s wake, using religion as the explanatory factor. Of course they’d have to change the variable from Protestantism to Christianity (as opposed to Islam) as some Catholic countries had become disrespectfully successful. They could also use Confucianism depending of the flavour of the time and the author’s predilections.
The fact that justifications were in flux was a big turn off. Confucianism was once blamed for China’s seemingly intractable poverty (both by Westerners and Mao) but quickly was described as the secret of Singapore’s success under Lee (albeit coded as Asian Values). Japanese values of seniority, hierarchy and group orientation went from being a unique source of economic superiority to Japan’s tragic flaw almost overnight in the early 90s. If the same belief system was used to explain both failure and success, could it explain either?
What is Protestantism/Confucianism/ Christianity anyway? The successful spread of these beliefs related to their ability to adapt to local institutions and cultures across wide expanses of the globe. Their mere presence doesn’t tell you much about the institutions they had adapted to and are now enmeshed in. Not surprisingly, the empirical work that used religious variables either gave no significant results, or sometimes found the wrong religion performing better.
Similar problems occurred with attempts to do empirical work on the legal origins theory. Whilst it was more concrete in what it was describing, the mere background of a legal system (either Common Law or Civil Law) was not sufficient to describe how it worked in practice and was only a small part of the institutions that I thought were relevant. The results were not encouraging, despite the enthusiasm of an Austrian adviser (eclectically paired with a Post-Keynesian).
Most of the empirics in these areas weren’t helped by the fact that the relevant “good” factor was generally coded as a binary variable. There’s only so much juice you can squeeze out of such an orange.
The most promising avenue appeared to be literature describing colonialism’s effect on institutions and economic development. Apart from the occasional (OK, many more than occasional) Anglophile’s preconceptions, they provided a plausible source, or at least indicator, of bad economic institutions. Whilst this would only account for a limited amount of the relevant institutions, the concept would be less circular and would still provide “degrees” of “badness”.
Because the purpose of colonialism was mercantile, extractive and usually based on zero-sum logic, it was argued that colonialism would either leave extractive institutions, or be most enmeshed where indigenous institutions would be least able to withstand such behaviour. Either way, if you could measure colonial penetration (Freudian imagery was quite explicit in the Post Colonialism literature) you should be able to get a measure of bad institutions. This measure would be exogenous to the post colonial era where the modern growth question had arisen and furthermore, this badness was the same kind of grabbing institutions that the Norwegians had described.
There were some interesting, but weakish results using the length of the colonial period and the size of trade relative to GDP (since the coloniser was presumably the sole trading partner). The promise was certainly there for the use of a real-world data source to be used as a proxy for institutions. The context was limited, but it did provide a interesting test case.
In the absense of better data, proxies seemed the best way forward and I hypothesised that I would be able to use the most basic and fascinating of social institutions: Language.
In the next post I will describe why, and talk about the results I found but I’m also eager to hear if I was too dismissive of observable cultural traits like religion. I’m sure that the resident Austrians will think I was too dismissive of the legal origins theory, but I’m open to ideas on how the concept could cover actual practice as well as legal theory, or whether it could genuinely reflect broader institutions in the relevant society.