The following content is provided under a Creative
Commons license.
Your support will help MIT OpenCourseWare continue to
offer high quality, educational
resources for free.
To make a donation, or view additional materials from
hundreds of MIT courses, visit MIT OpenCourseWare at
ocw.mit.edu.
PROFESSOR: So as you might have noticed, much of for this
class, and much of our work, in a sense, is about designing
good policies, given the particular challenge and
environment--
the policies functioning in it.
So that's a lot of what we do.
If you look at a lot of how policies are made in the
world, it has less to do with the problem then to do with
other priorities.
So the example we give in the book is
emphasized here, is Egypt.
Egypt became a major recipient of US aid in 1979, when Egypt
essentially broke ranks with the Arab countries, and signed
the Camp David accord with Israel.
And the Camp David accord was not quite a declaration of
friendship, but it was enough of a change in the
relationship that Egypt was then on seen as a major ally
for US/Israeli interest in the Middle East.
So it was a very substantial political change.
As a reward, in a sense, for agreeing to that, Egypt was
offered a lot of aid every year.
So Egypt the biggest recipient, other than Israel,
of US aid over this period.
And that was not based on the idea that either that Egypt
was a country that was particularly poor--
Egypt is one of the richest countries in Africa--
or on the idea that Egypt was going to do a lot of
good with the money.
There's no such presumption, no such idea was ever mutated.
It was very clear that the money in Egypt was supposed to
be a payoff for being friendly--
a payoff not necessarily to the President, but a payoff to
maybe, to some extent, to the military
establishment in Egypt.
So a payoff nonetheless.
So it was very much seen as a payoff.
So as a result, when basically, if
you take the amount--
enough aid was given to Egypt every year to pay $20 per
African child under five.
So just to get a magnitude of that--
Egypt is one of the richest countries in Africa.
The aid given to Egypt was so large that if it was given to
the rest of Africa, it would be $5 for
every child under five.
So that's a significant amount of money.
It was not given based on the idea that Egypt was going to
make very good use of this money.
And it was not really development aid.
It was just aid as a price for being our friends.
And that's an important example, because it
underscores the point that even though we may work very
hard, and come up with policies that make sense,
often money is spent for reasons which have nothing to
do with sense--
or may have sense, but sense in some other calculus.
And that's related to a separate point, which is-- so
one point that comes up in that process is that, what's
the point of knowing anything if money will not be given
where the information is?
So the information says that you should do this policy, but
in fact, Egypt gets all the money because it happens to be
the country that's willing to be nice to Israel.
So that's one question.
Related question is some countries just don't have a
functioning state.
Right now, prominent example is Cote d'Ivoire.
Cote d'Ivoire, if you noticed, has an ongoing civil war where
the president is supposed to have lost the election, but
doesn't seem to want to leave.
And there's a French army in there, which may or may not
succeed in re-establishing order, et cetera.
So at this point, we might discover a very efficient way
to find people will get people to immunize their children,
but that might be beside the point in Cote d'Ivoire.
It's true that in Cote d'Ivoire right now, there is
no state, and therefore, if you think of a policy that's
going to be adopted by the state, who's going to do the
state that adopts that?
So a lot of people have made that point
against us, if you like.
And I think the most articulate version of that is
this paragraph by Bill Easterly, who says,
"Randomized controlled trials are infeasible for many of the
big questions in development, like the economic-wide effects
of good institutions or good macroeconomic policies.
Embracing randomized control trials has led development
researchers to lower their ambitions." So basically, the
big issues are not being touched here.
What we are doing is we're solving--
it's a small problem, and the implied argument is that if
you don't solve the big problems, there's no reason to
salve the small ones, that we should start by solving the
big problems of state formation, of good
macroeconomic policies, getting an effective
functioning state, and then solve the other problems.
So there's a lot of people who are, I think, are very fine
economists who believe in this position, which is what I
would call the institutionalist view.
And really two separate, possibly independent claims.
One is that without good politics, you cannot have good
policies; and the second is that with good politics, good
policies will follow.
So their claims in two directions, right?
One is a positive claim, the other's a negative claim.
That is, it's hopeless to try to do anything if
you have bad politics.
And you here, what people really mean by politics is not
just that you should have a good leader or something, but
you need a whole package of what people think of as
appropriate institutions.
So the basic vision is that the appropriate institutions--
and the things like property rights.
Basically, is it private property or not?
Is private property well secured?
That's one thing people focus on.
The second thing people focus on is whether the political
system is relatively open.
There's some constraints on the executive, or whether
there is basically absolutism, so the guy who's running in
power can do whatever he wants.
So those are the kinds of things.
So I'm going to keep using institutions with
capitals for awhile.
And you'll see why later.
So I'm going to use it in capital for the time being.
So let me say what I'm trying to get at.
These are not only institutions--
MIT is an institution, too-- but it's not institution in
the same sense as property rights is an institution.
I'm sure, it might be as [? venerable ?], respected
institution, but it would not count in the same sense as
institutions in this sense.
This is institutions meaning these big things that define
how the economic and political system jointly functions.
There are institutional, few kind of structural features of
the economy, which drive everything else.
And those are things like property rights, political
system, et cetera.
So I think one interesting place to start is to look at
the work of Acemoglu, Johnson, and Robinson.
Acemoglu and Johnson are both MIT professors.
This is a really interesting book.
And what I'm going to try to--
what they claim in their book is that countries succeed or
fail based on institutions as defined by property rights--
few things like the nature of property rights, the nature of
the political system, et cetera.
And what they have done, I think, very compellingly is
provide some very interesting evidence along these lines.
So I'm going to start by presenting the evidence.
And then, we'll think about what, given that evidence, how
should we think about the world?
Now the first reason why this evidence is difficult is
because institutions are androgynous.
What do I mean when I say institutions are androngynous?
AUDIENCE: [INAUDIBLE]
wanted a place that's very distractive, or had a very
[INAUDIBLE] infrastructure.
It would tend to stay the [INAUDIBLE] of time.
PROFESSOR: So you're saying that it's the opposite, saying
that institutions are not affected by local conditions.
AUDIENCE: Well, they're initially [INAUDIBLE].
PROFESSOR: Sorry?
AUDIENCE: They are initially [INAUDIBLE] by something.
But once they're in place.
PROFESSOR: They're formed by something.
That's the key.
AUDIENCE: [INAUDIBLE]
instituations was created by [INAUDIBLE].
PROFESSOR: Do you want to add to that?
AUDIENCE: Yeah.
I wanted to say that the state of the society [INAUDIBLE]
determines which institutions it [INAUDIBLE].
But at the same time, the institutions contribute to
[INAUDIBLE]
the state of the society.
PROFESSOR: Right.
So you might say that, for example, to have effective
property rights, we need effective courts.
To have effective courts, we need effective judges.
To have effective judges, we need an
effective education system.
To have an effective education system, we might need good
properties.
So all of these things are related.
The investment in the education system may not be
effective without property rights, so all of these things
are related.
So basically, institutions are androgynous in the sense that
lots of things that matter for other aspects of the economy
also affect institutions.
Institutions are a result of what else is happening in the
economy they also cause.
So that's what makes it difficult.
So how do you study the effects?
Problem with things that are androgynous is that, how do
you study the effects of those?
Because in some sense, the basic rule of us studying the
effect of something is what we want to do is we want to say,
here's two countries.
One country has better institutions than the other
entirely by chance, not because this country has some
other aspect that makes it better, right?
The problem is, we're worried that if I say that Spain has
better institutions than Portugal, then I would need to
argue that this is not a result of the fact that Spain
was, to start with, a stronger economy, and that's why the
institutions came out.
We want to say there are two countries essentially
identical, and by an act of chance, Portugal got worse
institutions than Spain.
And those acts of chance are difficult to find.
That's basically the challenge.
So how does anybody solve this problem?
Well, here's a very nice insight.
The very nice insight is that in former colonies--
so take the counties that were European colonies.
It's a lot of countries--
pretty much all of Africa, and most of Asia, and most of
Latin America.
All of Latin America, most of Asia, and most of Africa were
former colonies of either Britain, France, Holland,
Portugal, Spain, or Belgium.
So essentially, these six countries were between them--
Germany to a very small extent--
had most of the world carved up.
So most countries were colonies of these countries.
And it turns out, not surprisingly--
it's what was said a little while ago--
institutions are persistent.
So if the institutions were good institutions were set up
in this country a long time ago, they still remain
relatively good.
And if bad institutions were set up-- so
good and bad here--
I'm not telling you what would good and bad are, yet I'll
tell you what they mean in a minute.
But the basic theory is that whatever institution was set
up a long time ago, that's how they stay.
So institutions are persistent.
That's step one.
Step two is to observe that when Europeans settled in a
country, they were very clear about what kinds of
institutions that wanted to set up, and that has a lot to
do with whether they want to live in the country or not.
If they didn't want to live in the country--
so they just wanted to go there, control the country,
and make some money from it, then this institution they set
up enabled making money quickly in the country.
So they were not very protective of the local
population.
They were what are extractive institutions--
institutions which basically take the shape of--
it's easy to kind of bully people, not a lot of legal
protection, so that you could extract whatever you wanted.
You want the mines to be very profitable.
You don't really want legal rights for the workers,
because if you have legal rights for the workers, then
they will complain, and then you wouldn't get very
profitable mines.
So if you want mines to be profitable, the best way to do
it is to not have very many legal rights for workers.
If you want labor to be cheap, you don't want to educate the
labor force.
If you want people to be docile, you don't want to have
a lot of democracy.
On the other hand, if Europeans were going to stay
there, then the vision for the country was very different.
They wanted it to be livable, and kind of like
their lives in Europe.
And then the set of institutions, which were much
less directly extractive.
And that happens to be true, sadly enough.
So what are countries where Europeans did settle?
And what are countries where they didn't settle?
Examples.
AUDIENCE: The United States, Australia, Canada, Argentina,
[INAUDIBLE].
PROFESSOR: Those are good examples.
What are countries where they didn't settle?
And you can start to see what the pattern is going to be.
What are countries where they didn't settle?
Yeah?
AUDIENCE: [INAUDIBLE].
PROFESSOR: Sorry?
AUDIENCE: Oh, sorry.
Well, [INAUDIBLE]
PROFESSOR: Where did Africa get their [INAUDIBLE]?
South Africa.
To some extent, Zimbabwe.
To some extent, Kenya.
Those were three countries where they settled, and most
other countries, they didn't settle.
Now one reason--
so here's what's nice about the paper.
They claim that one reason this happened was because of
settler mortality.
So if you look at these early colonies in the first years of
settlement, there are massive mortality rates.
Really massive, like four out of five people died within
five years.
That kind of mortality rates.
Because Europeans were encountering new diseases,
basically--
new tropical diseases of all kinds-- so the mortality rates
were massive.
And so therefore, the places where they did agreed to
settle were places where the mortality rates were
relatively low.
And so one good predictor of what happens whether you get
one good predictor, or whether you get a European settlement
or not, is settler mortality in the early days.
And so, what they did, which is very creative, is to find a
data set of settler mortality in these places.
So basically, the idea is, let's look at what happens.
Let's compare places where the settlers died in droves with
places where they didn't.
So here's a set of pictures that underpin their paper.
So let's start with the first one.
This is the picture of GDP per capita on expropriation risk.
Expropriation risk is how secure are property.
So expropriation is the opposite of property rights.
So expropriation risk is just how likely is it that if you
have a private property, it will just be
taken away by the state.
And you see that countries where it varies a lot is
Haiti, in Mali, in Niger, Nigeria.
It's low in the US, Singapore, Australia, New Zealand.
So if you look at the colonies that do well, they tend to be
relatively--
the richer colonies are also the ones which had lower
expropriation risks.
Now this is androgynous regression, because you could
have almost shown this regressions
the other way around.
You could have asked, is it the case that rich countries
have lower expropriation risks?
This is not a regression that can be causally interpreted by
itself, because it's exactly saying that expropriation risk
is high in these countries.
But is that because rich countries are safer, or is it
because safe countries are richer?
We don't know.
Now before I come to a-- well, actually, let me skip these
two pictures, come back to them later.
Here's a more maybe revealing picture.
So this picture says, what's the relationship between
settler mortality and GDP per capita?
Now this is kind of a dramatic fact, which is that if settler
mortality was high, like in the Gambia, GMB, Nigeria,
Mali, Togo--
those countries are poor.
Countries which are rich tended to have
had low settler mortality.
So if we think that settler mortality has nothing to do
with GDP today, then that's a surprising fact.
Why was it that settlers, when they came to settle-- when did
they come to settle in the Americas?
When were the Americas settled?
16th and 17th century.
When was Africa settled?
19th century.
So these are all the long time.
When was Asia settled?
When was Asia conquered?
18th and 19th, mostly.
Everything that we are talking about is saying that, what
happened before 1850 or 1880, basically, has a strong
consequence on outcomes today.
So if were in a country where Europeans died in droves in
1870, like in Gambia or--
I don't know, whenever that was, 1860--
people died in droves in 1860.
Then Gambia is still a poorer country.
So that's sort of an interesting correlation.
And here's why they think--
then ask the question, now that I told you that Gambia is
poorer than the US, and even 120 years ago I could have
predicted this, you say why?
Why would that be the case?
How could you?
What's the link between 120 years and now?
And their claim is that this is the persistence of
institutions.
So Gambia is a place where Europeans didn't settle.
And as a result, they set up extractive institutions, and
extractive institutions are very persistent.
So the reason why we see this mapping from settler mortality
to expropriation risk to GDP is the reason why we have the
persistence.
Settler mortality affected institutions when the country
was set up, which affected institutions now.
And it's very dramatic again.
The quality of institutions goes down very fast with
settler mortality.
So that's the basic argument.
The basic argument in the paper is these two facts,
which is that, look, countries with a high settler mortality
are poorer, and they have poorer institutions.
And there's no reason why something that happened so
long ago would affect outcomes today, and therefore it must
be institutions.
Now, they do something else that's actually very
interesting.
In fact, they do more than this.
One thing they do is to argue that in the world of like,
let's say, 1500 or 1600, we don't know GDP in 1600.
So what they are going to try to argue is not just that we
see this pattern, but that this pattern doesn't reflect
fixed geographical characteristics of these
countries, because if you have fixed geographical
characteristics of these countries, then the countries
where you had low settler mortality would have been
countries which were richer already in 1500.
So one thing they wanted to show is that this is not the
effect of some long-term, historical difference.
It is not that the countries that have low settler
mortality were rich countries already.
So the US, which had low settler mortality, was
actually a poor country in 1500.
How do they show that?
Well, they can't actually measure GDP in 1500 very well.
But one thing they can do is they can use urbanization
rates, or population density.
Historically, richer countries had more population.
So let's start with this.
Start with this picture.
This picture says that you look urbanization and GDP per
capita, these are extremely correlated, right?
Extremely, tightly correlated.
So then they're making the point that therefore
urbanization rates in 1500 are a reasonable
proxy for GBP in 1500.
OK, that's the second step in the argument.
So this picture says organization rates in 1500--
if you assume that's a predictor of GDP in 1500, then
look at that relationship.
What does that say?
Yeah?
AUDIENCE: [INAUDIBLE].
PROFESSOR: The richer the country was in 1500, the
poorer it is now.
AUDIENCE: Sorry.
I'm not sure I understand the niche.
Wouldn't initial population density play a huge role?
So maybe the populated areas were kind of [INAUDIBLE]
the temperate zones that were colonized later, and then
settlers set up their own settlements.
And any one of those [INAUDIBLE] talked how not
having a population in the first place was one of the
reasons they settled there, as well.
And also, if you're looking at urbanization rates, shouldn't
you care the tropical colonies, before they were
organized to European countries that did the
colonization, and you see higher organization rates in
the temperate zones that have a [? purple ?]
population densities.
PROFESSOR: OK, those are both good points.
Hold them.
We'll come back to them, OK?
You're asking questions on whether this argument is--
you're trying to pick holes in this argument.
Let's wait on that.
I want to understand the argument before picking holes
in it
So I think both points you made are interesting.
But hold them.
We will repeat them in a minute, OK?
So right now, they're making the case---
look, it's not that there's a persistence of poverty.
It is not the case that the countries that were poor in
1500 are poor now.
If urbanization is a good measure poverty, of being
wealthy, then those countries were rich countries then, and
are poor countries now.
And the US, for example, was a poor country then, and a rich
country now.
Indeed, famously, there's a claim that the reason why the
British didn't manage to take back the US in 1776.
The US was very weak, relative to Britain in 1776.
How did the US colonies manage?
Well, there was a threat of another attack to, I think, to
Jamaica, which was a much wealthier area--
sugar-growing, much wealthier area.
So that's why the British government had to decide
whether to protect Jamaica, or to predict the US.
And it decided that Jamaica was more worth than
protecting the US.
May have not been the right judgement historically.
But nonetheless, so they made this call on it, based
apparently on the fact that Jamaica was a wealthier area.
This is another one.
This is a [INAUDIBLE] population density, which is
another classical measure of wealth.
So typically, historically, more populated countries have
been richer countries.
Indeed, historically, people have suggested a very simple
model, which is sometimes called the Malthusian model,
which is that if countries are more productive, they can
sustain a bigger population, because if you're not more
productive, then you have a bigger population,
you starve to death.
So basically, the Malthusian model says that more
productive countries had bigger populations.
And you see that if you believe that, then once again,
richer countries in 1500 are poorer countries now.
Finally, population density in 1500, you can see, is a
negative predictor of expropriation risks now.
So more dense countries in 1500 was protected against
risk expropriation.
So they had less property rights.
And what this is saying is that you look at the economic
outcomes of the higher urbanization countries and the
lower urbanization countries in 1500, you can see that the
higher urbanization countries actually fall below the lower
urbanization countries in the middle of the 19th century.
This is GDP.
So they call this the reversal of fortune.
So two claims being made.
One is that rich countries became poorer, and the reason
why they became for poorer is because of the paternal
settlement, which generated better institutions, which
generated better economic outcomes.
Then they go on to claim that if Zaire had the same
institutions as the US today, it'd be five times richer.
So that's a huge claim, right?
It's huge.
The magnitudes they're talking about are immense.
So now coming back to the question.
You were trying to start asking
questions about this evidence.
What are possible ways in which this evidence might be
misleading?
So let's go back to you.
AUDIENCE: One was that I thought maybe they're
dismissing the geography explanation if you compare
tropical countries before they were colonized to European
countries before they actually colonized the other countries,
because it might be in North America and New Zealand and
Australia, they had better institutions, didn't really
have populations settled there in the first place.
It's probably one of the reasons that European
colonizers set up camp there.
PROFESSOR: So you're saying empty may be different.
The development patterns may be different for a variety of
reasons, which may not have to do with institutions.
It may well be that if you start with an empty place, you
can have a different development pattern, even if
you have the same institutions.
That sort.
One of the things.
Is that you're saying?
AUDIENCE: Kind of, but also that if you're trying to
totally dismiss that the fact that climate may have played a
role, you shouldn't compare places with similar population
densities to start off with.
So you should compare Europe to--
PROFESSOR: Why would that make sense?
[INAUDIBLE].
AUDIENCE: Because in comparing Latin America and Saharan
Africa, one of the papers talked about how there already
were rich cultures thriving there, and that it was a
reversal of fortune.
But if you're comparing those places to, say, North America
and New Zealand, the population of North America
and New Zealand were small.
There wasn't a lot going on.
So maybe you should compare it to Europe.
I think Europe would have been a lot more prosperous if you
compare it to the Incas, Aztecs.
PROFESSOR: I see.
You're saying that maybe comparing with the empty place
is misleading, because those places are--
but still, isn't the point that this is misleading
because empty places, for some reason, would have a different
development path.
After all, the empty places across the [INAUDIBLE]
become better.
So you're saying that even without good institutions,
empty places might have had a different path, because maybe
it is the case that just the population
composition is different.
If there's no one else living there, and I go and settle,
I'm 100% of the population, whereas if there's a lot of
people living there, then if I go settle, I'm a different
fraction of the population.
OK, you were-- yes?
AUDIENCE: Do you think the countries that actually
colonized--
the ones who actually go and settle--
do you think [? depending ?] on the country, does that make
a difference on how well the colony does?
For example, all the colonies that ended up doing well were
British colonies.
And of course, you have India, which--
PROFESSOR: There's a lot of British colonies
that didn't do well.
Nigeria, Ghana, Uganda, Sierra Leone.
Lots of British colonies.
Burma.
AUDIENCE: Right, but most of the other ones, those happened
at different times, right?
Like many of the--
a lot of the [INAUDIBLE]
happened later on, and the love of
exploration happened in Africa.
Of course, there was already traffic in terms of slavery
and things like that.
I'm thinking into 1600 or so.
But a lot of the colonies that have been in Africa were in a
different time.
[INAUDIBLE] history spectrum.
So I just think that the big market was just different.
The world was very different at the time.
PROFESSOR: Yeah, but I don't see why that's
another good point.
I agree with everything you said--
whoops.
You want to add to that?
I don't understand exactly why that's a criticism what
they're doing.
I understood if you said--
AUDIENCE: [INAUDIBLE]
I was just asking a question actually, because that's just
something that comes up when I--
PROFESSOR: Well, that's absolutely true.
I think everything you said is true.
But I don't see why.
So they were definitely colonized in different times,
but still, two things they do.
One is the compare within Africa.
They can compare within Africa.
It's not quite statistically as solid as it should be.
But you can still do it.
You can compare Zimbabwe, South Africa, Kenya with the
rest of Africa-- the countries that have high settlement and
low settlement, and you see some of the same difference.
Mostly different by South Africa, unfortunately, which
is rather special.
But the second thing you can do is you can control for the
identity of the colonizer, and that doesn't change anything.
So you can compare only British colonies with British
colonies, and that doesn't change anything.
That's much more solid.
So you could compare just French colonies with French
colonies, and British colonies with British
colonies, and average.
AUDIENCE: So even within Africa--
PROFESSOR: I don't know whether you can do that
[INAUDIBLE] that becomes two small a data set.
So if you compare only Spanish colonies within Africa, there
will be two.
And that's not going to be a lot.
AUDIENCE: I'm not saying within Africa.
Would you say that British colonies are probably better
off then, let's say, Portuguese colonies where you
have Angola and [INAUDIBLE]?
PROFESSOR: It's probably true, actually.
AUDIENCE: Whereas you compare that to South Africa, South
Africa's much better off.
PROFESSOR: It's probably true.
But that's not what they do.
They're worried about--
that comparison is difficult, because British colonies are
not randomly chosen.
Britain was one of the leaders.
In African colonization, Britain
was one of the leaders.
Britain got all of the most productive countries.
So if you look at--
sorry?
AUDIENCE: What about France?
PROFESSOR: France was a follower.
And so, France ended up with the less productive countries.
So Britain targeted some countries, and then grabbed
the best ones.
So this is not an accident.
Yeah?
AUDIENCE: So to follow on the earlier point that emptier
places versus more heavily populated places that
[INAUDIBLE]
if a place is more populated, then it already has some kind
of institutions.
And if some institutions already exist, whether they're
equitable or not equitable, I think it would be much easier
to establish institutions would not be equitable,
because the system is already set up.
PROFESSOR: That's a point, but that they won't
disagree with, obviously.
Imagine that they said that places which have no one
there, or very low population density in the beginning, it
was easier to set up fresh institutions, and fresh
institutions persists.
Would you say that's not a version of the
institutionalist argument?
That's just a slight variant of their argument.
I don't think it's that different.
AUDIENCE: Well, I don't think that if it's an empty place,
then the probability that you could settle and then
procreating an institution would be lower.
PROFESSOR: That's absolutely true.
I think they would say that that's still an argument for
expropriating institutions are bad.
You're just making a slightly different argument of why
expropriation institutions are bad.
AUDIENCE: Yeah, just getting back to the point [INAUDIBLE].
So when you say, yeah, that's correct, the British empire
was sort of the leader of political lines in Africa.
However, that's not the case when you're talking about the
Americas, right?
Right, so even though Spain and Portugal were the leaders
in this case, it's not like they did invite a
colonization.
And when you even referenced the paper, if British empire
chose the regular countries in Africa [INAUDIBLE], wouldn't
that imply that they would have a [INAUDIBLE] more
aspiration-based, and therefore maybe South Africa
would be in a worse position?
Does that make sense?
Or does it show that--
PROFESSOR: It's not so clear.
They might have chosen-- we're getting off point.
Let's say just to comment, the British might have picked
better places, and better places might be more
productive.
It might also be more attractive to be
expropriating, but those two factors are going in opposite
directions.
So if you started with better places, that
already helps you a lot.
And maybe they knew exploit a bit more, instead of slavery
or something.
But still, it might well be on balance that you do less
damage there.
It's not clear, because you start with a better place,
then you do a little more damage.
I don't know which way it goes.
But you're right.
That's a certainly good point.
Any other concerns?
AUDIENCE: [INAUDIBLE]
if you could just [INAUDIBLE]
geographical argument, because it's [INAUDIBLE].
[INAUDIBLE].
PROFESSOR: Well, to be honest, I think if you look the world
in 1800s, the United States doesn't look like a more
valuable economy.
It looks like a less valuable economy, because the idea was
that places that could grow sugar were the
most valuable places.
So when you compare places to the Americas, they typically
compare Jamaica with the US.
And Jamaica was a place which looked more valuable then.
US was actually a good place to settle, because no one was
empty, and no one wanted to come there.
So it was empty, and no, not much competition.
The British were very worried that the
Spanish would take Jamaica.
Yeah, keep going.
AUDIENCE: [INAUDIBLE]
America [INAUDIBLE]
South America [INAUDIBLE].
And North America [INAUDIBLE].
I mean, it is or Asia, [INAUDIBLE]
but it's [INAUDIBLE] in Africa [INAUDIBLE]
least favorable, in terms of the land.
[INAUDIBLE]
is a very poor [INAUDIBLE].
The institutions point [INAUDIBLE].
PROFESSOR: But that's the point about the reversal of
fortune, in the sense that the reversal of fortune is exactly
point that these were richer places.
In 1500, the places which are poor now were rich places.
So somehow, you need to argue that geography has a different
effect then than it does now.
It's not implausible, so one point you could make is that
geography is not some fixed thing.
These countries were richer then, because this was a
period when it turned out that agriculture mattered.
And then, they invested a lot in agriculture.
Turned out that by some accident, industry became the
big thing later, and so places that started later were more
able to jump on the industry bandwagon than the places
that-- so geography that helped you originally might
hurt you later.
Because Jamaica specialized in sugar.
Sugar was great in 1800, but not so great now, because
something better was discovered.
So maybe what happened was that these places that were--
it was not the institutions.
It was just the specialization in certain products that
really mattered.
You want to continue?
AUDIENCE: [INAUDIBLE]
Africa [INAUDIBLE] more resources [INAUDIBLE]
just going to pick [INAUDIBLE]
agricultural countries.
PROFESSOR: But in some sense, why is that--
find.
But isn't that just a version of the institutional argument,
that where you want to extract diamonds, you don't create any
institutions, you just extract?
And that's exactly their point, in a sense, is that you
create extractive institutions.
That doesn't seem any different from--
seems like a variant on the argument, that where you set
up extractive institutions, you get bad outcomes.
Yeah?
AUDIENCE: [INAUDIBLE].
So could it be the case--
[INAUDIBLE]
because they had invested a lot in agriculture and that
was the thing back then.
They were well off, and as times changed, there became
less of an emphasis that other countries would invest
[INAUDIBLE].
It could also be the case that other countries, the ones in
temperate environments, were forced to look at other things
early on because they knew that agriculture wasn't there
[INAUDIBLE] and that was a bet they made not knowing how the
future would be [INAUDIBLE].
PROFESSOR: That's an excellent point.
So it could be that just if you have very easy access to
the very productive agriculture, then you'd be in
a society which is not looking forward to solving certain
types of problems.
So that's an excellent point.
I don't know if it's true or not, but it's an extremely
interesting observation, and part of that.
And more generally, one concern with this kind of
evidence is, that, as you might imagine, the most
compelling examples turn out to be Hong Kong, Singapore,
South Africa, plus US, Canada, New Zealand, Australia.
The regression's driven by very few countries, though I
think if you look at this picture, it's less true than
you might imagine.
Yeah, we can do this one.
So we look at this picture.
It's not entirely driven by--
so if we look at that square in the middle, even there,
there's a slight downward slope.
So leave out US, New Zealand, Canada,
Singapore, Hong Kong, Malaysia--
those are on the left--
and just South Africa and whatever, one other country.
I don't know what it is.
And look at the block in the middle where India is the top
left-hand point, and whatever--
MLI is Mali--
is the bottom right point.
Even within this square, there's clear
downward slope, I think.
So even if you left out the very rich countries, you do
get a weaker but significant relationship.
And that still tells you, if you just took that
relationship, you still will get a big effect of settler
mortality, even if you left out the few really
exceptionally rich countries, or something.
You still get reasonable good fit.
I guess one concern I have is whether or not expropriation
risk is something that we have assign to
countries based on success.
So one worry I have is that it may well be that the countries
that have high settler mortality are
poor whatever reason.
And then we think it's because of expropriation risk, but
expropriation risk is just based on our perception of
economic success.
So India and Pakistan saw very different expropriation risk.
One is at eight and the other is at six.
I'm not sure that those are based on anything in
particular.
I think there might well be a legitimation of success.
So countries which are successful
are assigned better--
with these numbers, who knows what expropriation risk is.
It's some number somebody made up.
And we may worry that this number isn't quite right.
And maybe all it does is it just reflects the fact that
richer countries are richer.
So people assign them higher--
these countries are richer, they must have
good property rights.
I don't know how much of that's what's going on.
But I still think that, in some sense, I guess I'm more
inclined to take this evidence as telling us something
interesting.
But I think one should take it really seriously.
So first point it's making-- if you take it seriously, it's
not just the institutions that are important.
It's not saying just that institutions are important.
It's saying something much more specific than that.
It's saying that institutions that were set up a long time
ago, and evolved slowly over time in countries where there
was low settler mortality are very different from
institutions that were set up a long time ago, and evolved
for a long time in high settler mortality countries.
So it's not saying that if I suddenly took Mali, and gave
it the institutions of the US, the institutions will
automatically start functioning.
That's not in this data.
It's not saying anything about whether or not we can be
replace institutions in one place or the other, right?
It's in fact saying quite the opposite.
It's saying that all we can tell is that places that good
institutions because of a lucky accident 200 years ago
or 400 years ago are better off now.
That's not necessarily a big helpful policy.
It's not that it says that we could change institutions
today successfully.
That's not what it implies.
It could be true that we could change it, but that's not what
we learn from this evidence.
What we learn from this evidence is if we happen to
have been lucky 400 years ago, then we are lucky today.
But that's a very different point from saying that we are
able to fix institutions today, and if we give Mali the
same institutions the US had.
And I'm not just making a debating point.
Think about what the US constitution means.
The US constitution means a lot of things, but it also
means every school who goes to school in the US learns about
the constitution.
It creates a certain set of loyalties to the constitution
that are very important.
It is emphasized that this
constitution has a long history.
there were lots of battles about this constitution in the
Supreme Court and other courts.
All of these things are part of the effectiveness of the
constitution.
It's not just the constitution that is effective.
The US constitution is given content by all the judgments
of the Supreme Court.
The famous judgments of the Supreme Court is what makes
the constitution what it is today.
So it's not clear that you can just transplant a constitution
without the history that goes with it.
So that says that if you believe this point of view,
you should be very pessimistic, because it's not
actually saying that we just have to fake good
institutions.
This is where I think it still is wrong.
Even if you believe this point of view, it doesn't say much
about development policy, because it actually doesn't
tell you that you can fix institutions today in Mali,
and you'll get good outcomes.
And as Acemoglu and Robinson are very consistent in their
book, they basically explicitly state this
pessimistic position.
They say, God knows how to fix countries,
let's not even bother.
Mostly that's their the position, and that's a very
internally consistent position.
Now there are other people who take a less consistent
position, who want to say that the
institution is an important.
This is the evidence from Acemoglu and Robinson, and now
we're going to go fix countries, which is a very
different plan, that we're going to fix institutions,
evidence doesn't say that you can fix institutions.
It says if you had the right institutions 400 years ago,
then it would be good.
That's very different from saying we can fix
institutions.
You see that?
Yeah?
AUDIENCE: [INAUDIBLE]
appropriate it would be with history, time changes going on
in the world, but can you kind of take this as if we could
transition towards better institutions in some
countries, then maybe in 400 years those, countries would
be better
PROFESSOR: Maybe, but not tomorrow.
So I have nothing useful to say about 400 years from now,
but if we can.
But what it clearly doesn't say is if a fixed institution
thing would be better today.
That's it does not say.
AUDIENCE: [INAUDIBLE]
Africa, [INAUDIBLE]
nations [INAUDIBLE]
can't really have institutions [INAUDIBLE].
PROFESSOR: Right.
So that's also true.
I think the point that you're making is also important, and
we don't know how to [INAUDIBLE] institutions.
It's not that people don't live in [INAUDIBLE].
So here's a fact that I know isn't in [INAUDIBLE].
Whoever owns any country, take a taxi--
I'm talking about in many countries.
Get off from the taxi.
You either agreed an amount when you got on the taxi, or
there's a meter.
You read the meter, you give the person the amount.
And at that point, the person takes the money.
He shuts the meter off, and he says, here's your change.
This happens in many, many countries.
Now what's remarkable about that?
What's remarkable is why did I pay him?
I could have said no.
So what if it says $20?
I'm going to give you $5.
What's to stop me?
There's nobody else was that's there.
Usually when I get off in front of a house, there's no
one else there.
I can walk off.
By the time the taxi driver can find the
policeman, I'll be gone--
on one side.
So the response has to be that I'm afraid of the taxi driver
beating me up, which may be true.
But if the taxi driver can beat me up, why isn't the
reverse true?
As soon as the taxi stopped, why isn't he trying to beat me
up, and saying you have to give me $40 instead of $20, or
I'll beat you up, and claim that you owe me $40.
How is it that we manage to negotiate this space in many,
many countries successfully?
If I'm paying the taxi driver who's a taxi driver who beat
me up, then he should beat me up in any case.
And otherwise, if he can't beat me up, then I shouldn't
pay him in any case.
So why do I pay him?
And why do these transactions--
thousands of millions of these transactions--
always happens?
So it must be that even societies
that don't have good property rights distribution enforced
up top have figured out ways to enforce lots of contracts
on the ground.
That has to be true.
That a lot of what we call property rights must live in
other forms than the form that we think of as
the official form.
Yeah, you had a comment?
AUDIENCE: [INAUDIBLE]
if there's no policeman standing there, you sort of
assume [INAUDIBLE]
there's a certain trust that you have [INAUDIBLE].
PROFESSOR: Absolutely.
Trust, or something like that is important.
The only point I'm making here, that's
not a property right.
That's something else that is important.
So there's lots of substitutes.
Yeah?
AUDIENCE: [INAUDIBLE]
in terms of game theory, if you play this game just one
time, of course you can say that, oh, either way
you can have it.
But if you think of it as playing a game over and over,
you could sustain--
PROFESSOR: Well, I don't want to play with
the same taxi driver.
Next time, I'm going to cheat the next taxi driver.
AUDIENCE: [INAUDIBLE]
for every taxi driver to beat you up that one time, then all
the taxi drivers are going to start beating people up, and
people will stop using taxis.
PROFESSOR: That's a bad outcome, but that is the
outcome predicted by the game, that there will be no taxis.
In fact, taxis exist because we have trust, we have norms.
We have all kinds of things which live outside this
institution frame.
So one point that I think is important is to think of, if
you want to transplant institutions, you have to
realize that institutions already
exist in these countries.
Even the ones which you think don't have institutions have
tons and tons of them.
And you're always trying to turn existing institutions to
other institutions.
You're not creating issues in a void ever, anywhere, ever.
So we'll pick that up next time.