La Marimba

The geography-based view on underdevelopment identifies two broad categories of geographical factors that determine long-term income growth: transport costs and intrinsic productivity. While transport cost may not be invariant with respect to institutional variables, it is evident that geographical variables affect the ease with which regions or countries can trade with the rest of the world. Variables like coastal access, the presence or absence of navigable rivers, distance to major consumer or producer areas, but also mountain ranges, potentially have a large effect on transport cost. Africa, for example, has few navigable rivers and many landlocked countries, and is relatively far away from ‗core markets‘ in Europe (Gallup et al., 1999).

The geographical determinants of intrinsic productivity are potentially varied. For example, prevalence of infectious diseases, such as malaria, affects human productivity and lowers life expectancy (attenuating incentives to invest in various forms of capital). The prevalence of malaria and other infectious diseases is to an important extent determined by the ecology of the parasites (different species of malaria Plasmodia) and the vectors (different species of Anopheles mosquitoes). Geography also affects productivity via the direct link between agro-ecological conditions and agricultural output (Gallup and Sachs, 2001; Gallup et al., 1999; Sachs and Malaney, 2002; Sachs, 2003). Lastly, resource endowments affect income, albeit not necessarily in a positive sense (see Brunnschweiler and Bulte, 2009 on the resource curse).

How might institutions matter? Institutions refer to the social, economic, legal, and political organization of a society. They shape the incentive structure of economies, and determine economic performance via their impact on accumulation and investment decisions of economic agents. Institutions affect information flows, transaction costs, investment risk, and the ability of societies to coordinate on collective action to address social dilemmas. For example, secure private land rights may spur investments in land via a so-called ―assurance effect‖ (agents invest if they expect to collect the future returns); a ―collateralisation effect‖

(security enhances the scope for using land as collateral — facilitating access to credit and enabling productive investments); or a ―realisability effect‖ (capturing that investments in land may be encouraged if land can be rented out or sold). But the concept of institutions is broader, and also includes a political dimension (e.g., checks on the executive, degree of authoritarianism), governance-type of variables (e.g. corruption, rent seeking), and social capital (shared norms and values, trust).

Sometimes the dividing line between institutions (rules of the game) and policies (play of the game) is fuzzy. Glaeser et al. (2004) make the point that some of the so-called institutional variables commonly used in empirical studies reflect policy choices as much as they reflect constraints on decision-making. For example, Bhattacharyya (2009a) shows that both strong market-creating institutions, including effective contract enforcement, as well as market-stabilizing institutions, capturing macroeconomic stability and non-distortionary policies, are growth enhancing. However, such market-creating and stabilizing institutions arguably reflect both constraints for policy makers as well as choices made by them. That is, they are both inputs and outputs of the political decision-making process.

The African continent faces both geographical and institutional challenges. While the

―geography school‖ points to malaria, depleted soils and prohibitive transport costs as the main impediments to development, political scientists like Rowley (2000) emphasize the link between political culture and economic performance. Many economic problems of Africa have their roots in public-choice impediments (see also Bates, 2006; 2008). According to this view, African leaders and the elites that support them, have deliberately crafted governance systems to promote rent-seeking (see also Congdon Fors and Olsson, 2007).

Which perspective is correct? As hinted above, the evidence supporting one view versus another varies with the aggregation level. Cross-country evidence from a sample of former European colonies suggest that institutions predominantly explain cross-country variation in per capita incomes (e.g. Acemoglu et al., 2001; Easterly and Levine, 2003; Hall and Jones, 1999; Rodrik et al., 2004). After controlling for (predicted) institutional quality — often instrumented by settler mortality — these studies find no evidence that geography or policies matter. However, Bhattacharyya (2009b) pits geography versus institutions in the context of a much smaller, and more homogenous, sample. He focuses on African countries, and examines the relative contributions of the history of slave trade, the legacy of extractive colonial institutions and the prevalence of malaria in explaining variation in incomes.

Interestingly, for this sample malaria risk is a significant determinant of long-term economic development (or the lack of it), and the remaining factors — including the quality of institutions — do not enter significantly. The channel via which malaria affects growth could be reduced savings. Increased mortality and morbidity raise current consumption at the expense of savings and investments.

Scaling down the aggregation level, the logical next level of analysis focuses on intra-country income differentials. Since local data on income, geography and institutions are not readily available, combined with the fact that there are no ―routine‖ instrumental variables for institutions, it is no surprise that few such studies exist. Yet, it is likely that studies based on local variation in institutions would be especially informative for policy makers. Grimm and Klasen (2008) and Voors and Bulte (2010) focus on the local income determinants in, respectively, Indonesia and Burundi. Both papers identify tenure security as the critical institutional link fostering investment and higher incomes. Hence, moving from the global sample of former colonies via a sample of African nations and onwards to samples of villages within specific nations, we observe that the nature of the evidence swings — from institutions to geography, and then back to institutions, as the main determinant of income levels.