I think of this as a simple descriptive exercise to compare two alternative hypotheses: (1) Divergence Big Time was due to a savings/technology poverty trap or (2) it was due to bad government/institutions. The stylized facts emerging from this exercise support (2) strongly over (1), confirming previous literature on institutions and development.What do I mean it's not just Africa? For openers, I'm a believer in Strategy Page's long running take that corruption in the Middle East is at least a comparable obstacle to the terror masters themselves to the progress of freedom and democracy there.
I use three widely used measures of institutions: (1) the Polity IV measure again, now averaged over 1960-2002, (2) the Freedom House measure of political liberties (with the sign reversed, since an increase in this measure means less liberty), averaged over all available years, which are 1972-2002, and (3) Economic Freedom in the World from the Fraser Institute, averaged over all available years, which are 1970-2002. All measures of institutions are strongly significant predictors of growth 1960-2002, and make initial income negative in the regressions (significantly so in the IV regressions). The institutions story makes Divergence go away in the more recent data as well.
So which is it, bad government or the poverty trap? When we control for both initial poverty and bad government, it is bad government that explains the slower growth. We cannot statistically discern any effect of initial poverty on subsequent growth once we control for bad government. This is still true if we limit the definition of bad government to corruption alone. The recent stagnation of the poorest countries appears to have more to do with awful government than with a poverty trap, contrary to the Sachs hypothesis.
And NOLA has a long and well-earned reputation in the U.S. as a corrupt gangland. Is the long-term poverty and recent abysmal leadership just a coincidence?
Posts
