Who was the representative consumer under Stalin?

I’ve never been a fan of growth accounting or TFP estimations.  Check out Jesus Felipe’s website for a variety of articles explaining the theoretical problems behind these exercises.  Given my anti-TFP bias, you can imagine my reaction to a working paper entitled “Was Stalin Necessary for Russia’s Economic Development?,” which calculates Soviet TFP numbers to evaluate Stalin’s legacy.  Here’s the abstract:

This paper studies structural transformation of Soviet Russia in 1928-1940 from an agrarian to an industrial economy through the lens of a two-sector neoclassical growth model. We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913. We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections of these estimated wedges imply that Stalin’s economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of Stalin’s policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. We provide three additional counterfactuals: comparison with Japan, comparison with the New Economic Policy (NEP), and assuming alternative post-1940 growth scenarios.

I’m not even sure where to start.  Is a two-sector neoclassical growth model appropriate in this circumstance? How much can we really trust the Russian data from the late 1800s and the Soviet data in the 20th century?  Who is the representative consumer?  How can we really talk about welfare under Stalin with a neoclassical growth model?  It’s no wonder economists have a bad name in the social sciences.  Is this really the right way to study welfare losses under Stalin?

Ok, I guess I did know where to start.

History & Economic Development, Part 2

Jared Diamond’s Guns, Germs, and Steel blew my mind when I first read it years ago and I continue to use it in my Graduate development course.  Among other things, he discusses which regions first moved from hunting and gathering to settled agriculture (called the Neolithic Revolution) and why.  He goes on to show how this revolution gave these regions a big jump up in terms of economic development, showing that early geography mattered a lot for regional development and led to some path dependence.  What’s also interesting, however, is that geography wasn’t fate.  The Fertile Crescent, the region which first moved to settled agriculture, is hardly a bastion of high economic development today.

Along those lines, Ola Olsson and Christopher Palk have an interesting new working paper entitled “Long-Run Cultural Divergence: Evidence From the Neolithic Revolution.”  It turns out that the early leg up has implications for current political development too.  Here’s the abstract:

This paper investigates the long-run influence of the Neolithic Revolution on contemporary cultural norms and institutions as reflected in the imension of collectivism-individualism. We outline an agricultural origins-model of cultural divergence where we claim that the advent of farming in a core region was characterized by collectivist values and eventually triggered the out-migration of individualistic farmers towards more and more peripheral areas. This migration pattern caused the initial cultural divergence, which remained persistent over generations. The key mechanism is demonstrated in an extended Malthusian growth model that explicitly models cultural dynamics and a migration choice for individualistic farmers. Using detailed data on the date of adoption of Neolithic agriculture among Western regions and countries, the empirical findings show that the regions which adopted agriculture early also value obedience more and feel less in control of their lives. They have also had very little experience of democracy during the last century. The findings add to the literature by suggesting the possibility of extremely long lasting norms and beliefs influencing today’s socioeconomic outcomes.

History and Economic Development

Cambridge University Press has a blog called 1584.  They asked me to write something about my book and I thought I’d post it here too:

Economists tend to forget our own countries’ history and make economic development seem much faster and easier than it really is. We forget that it took hundreds of years for Great Britain and the United States to become industrialized, rich, and democratic. As Hernando De Soto noted in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2000), we have seemingly forgotten how long and messy the history of property rights was in the US. For instance, when George Washington asked his lawyer how to evict squatters from his Virginia property, the latter advised against eviction, arguing that the squatters would likely return and burn his property down (p. 117). Or the US Supreme Court Justice Joseph Storey who in 1820 bemoaned the fact that US property law was so messy that it would likely “forever remain an unknown code” and never get disentangled (p. 129).

We forget those inconvenient facts and want countries to develop quickly and easily (just like we didn’t do). In the words of Lant Pritchett and Michael Woolcock, we want developing countries to “jump straight to Weber,” which they describe as a strategy that seeks to “quickly reach service delivery performance goals in developing countries by simply mimicking (or adopting through colonial inheritance) the organizational forms of a particular “Denmark”… The form did not emerge from an internal historical process of trial and error and a political struggle (as it did in most European and North American countries).”[1]

Now there is something to the old adage about not reinventing the wheel. But when we urge (or demand or expect) countries to “jump right to Weber,” we are ignoring history and reality.

In our book, we start with something really important that Douglass North recognized in his acceptance speech of the Nobel Prize in Economics in 1993. He argued that “How can one prescribe when one doesn’t understand how economies develop? … In the analysis of economic performance through time it [neoclassical economics] contained two erroneous assumptions: first, that institutions do not matter and, second, that time does not matter.”[2]

We think an ideal way to take institutions and time seriously is to focus on the subject of a long debate among comparative economists on why the economic and political performance of the United States and other similar English colonies was so much better after the independence than that of the Spanish colonies in Latin America.

Obviously the legacy of the colonial past must have affected the performance of the United States and Mexico, at least in the 19th century. Yet, comparative economists often focus on the differences between the colonial policies of England and Spain without examiningg the institutional development of the two powers themselves. In fact, England and Spain were at very similar levels of development in 1000, but by 1500, Spain was over 200 years behind England in creating an effective state. Clearly the level of constraints was reflected in the colonies of the two colonial powers and the policy they were able to follow.

Such a long-term perspective adds a number of important insights to our understanding of the English and Spanish legacy to their respective colonies. But, in addition, the perspective provides the opportunity to study the development of constraints not only in two of the most important powers in Western Europe over an 800-year period, but also in new states that became independent some 200 years ago. For reasons of simplicity, we focus on two of the former colonies, the United States and Mexico. Mexico was the most integrated and best performing Spanish colony, and it raises the question of the difference in performance with the United States most starkly.

We show that economic development of post-colonial US and Mexico was divergent in great part because of the types of market policies established by their mother countries, England and Spain. The former established a system of free trade within its New World colonial system, while the latter tried to highly regulate and bureaucratize trade in its sphere. The key though is that England was able to create such a system because of its high level of political development and centralization. Spain, in turn, adopted such a regulated system because it didn’t have the institutional development to support free trade. These findings have important policy implications for contemporary developing countries.

[1] The authors’ reference to “Denmark” does not refer to the country but rather to a typical developed country with an effective state and bureaucracy. Lant Pritchett and Michael Woolcock, “Solutions When the Solution is the Problem: Arraying the Disarray in Development,” World Development 32 (2004), 191-212, p. 193 and 201.

[2] Douglass North, “Economic Performance Through Time,” American Economic Review 84 (1994), 359-68, p. 359.

More self-promotion

I did my first ever podcast a couple of weeks ago with Marshall Poe of New Books Network.  Marshall is a historian of medieval Russia and we found a lot of similarities between early Spanish and Russian development.  The podcast was a lot of fun.  If you’re interested, here’s the link.

And remember, the book is now out in paperback and on Kindle!

Economics is hard, but not that hard

Maize crops were down by almost 50% in Zimbabwe, so the government is importing 700,000 tons of the crop to stave off a crisis.  The Parliament is mad about a lack of food security in the country and is searching for a culprit. They’ve been grilling technocrats from the omnibus agency known as the Ministry of Agriculture, Mechanisation and Irrigation Development.

There was a lot of hot air, excuses, and (probably empty) promises.  The kicker comes in the last sentence of the article though, which notes that “The Grain Marketing Board (GMB) is also under fire for failure to pay farmers for their grain, a situation that has led to most of them abandoning the crop.”  Doh!!  That’s what I call burying the lede.  I guess we have found the culprit.

h/t to George Ayittey (@ayittey) who does an excellent job of exposing government shenanigans in Sub-Saharan Africa.

The Culture that is China: Pimp My Ride Edition

My latest research paper (downloadable here) with my friend and colleague Daniel Hicks and my grad student Weici Yuan, studies how skewed sex ratios in China help promote conspicuous consumption in unmarried Chinese men.

It seems impossible, but there are parts of China where there are 132 men for every 100 women.  YIKES! Thats a heck of a policy, that one child policy (especially when combined with strong preferences for male children).

We study automobile purchases and use a diff in diff in diff approach to identify the effect. Here is the most basic results with no controls:

ddd graph

So going from the quartile with the most balance sex ratios to that with the most skewed raises the car spending of unmarried men by 7200 RMB or around $1200.

We also show that this status competition results in increased purchases of cars with lower gas milage and higher vehicle weight, meaning that it also creates negative externalities.

Poor, poor, pitiful Yoweri

Awesome AP interview with another African “president for life”, Uganda’s own Yoweri Museveni.

He heads what is effectively a one-party state, has ruled for 30 years and is running for another term that will take him over the constitutionally mandated age limit for dictators (a funny concept that).

But when called out on his authoritarian ways he responded, “If anybody has been bullied, it is me.”

Asked whether he’s grooming his son to follow him into power he said, “it is not what I like, it is what my party wants and what the country needs,”

He also said that his fiefdom of 30 million people had, “so much freedom that it is almost a problem in itself.”

Going (way) long on Mexico

Apparently my skepticism about Mexico’s growth outlook is not widely shared among international investors.  I learned this morning that Mexico has sold 100 year bonds denominated in euros!  That is some serious optimism, both about Mexico and the Euro.

So let’s get this straight.  Mexico, a country with a long history of default, issues 100 year bonds in a currency whose very survival is questionable.  Hmm, what could possibly go wrong?  Do investors study history at all?

The article goes on to note that these are not the only centennial bonds that Mexico has raised recently:

“Over the past five years they have extended the equivalent of more than $5 billion of 100-year bonds to Mexico in three currencies: dollars, sterling and now euros. It is the only country to have tapped the so-called centennial market since China and the Philippines in the 1990s, and it has done so at relatively low yields—of 6.1% on its dollar bond in 2010 and just 4.2% on its euro bond last month.”

One optimistic investor argues that Mexico “is one of the few countries that has been fixing the roof while the sun shines.”  A leading Mexico City economist, Gerardo Esquivel, has a decidedly less optimistic take on the situation, likening recent reforms to “putting a bright coat of paint on the exterior of the house, while the inside is rotting away.”  I was cautiously optimistic at the start of EPN’s term, but I’m leaning much more towards Gerardo’s view at this point.