Archive | January 28, 2014

Malaria might have determined the economic trajectory of the world…. through institutions

SettlersIt’s an old paper, but I just came across The Colonial Origins of Comparative Development: An Empirical Investigation
by Daron Acemoglu, Simon Johnson and James A. Robinson, originally published in the The American Economic Review back in 2001.

They take rough data of settler deaths back in the seventeenth and eighteenth centuries and plot them against the GDP of several countries from 1995. I’ve included the plot on the right. What they found was that a higher number of European settler deaths was associated with a long term decline in economic output.

Settling in the seventeenth and eighteenth centuries was a dangerous business, particularly in Sub-Saharan Africa and less so in what is now the United States, New Zealand and Australia. Malaria and yellow fever were responsible for killing up to 100% of groups brave enough to attempt the journey.

Acemoglu, et al.’s argument is as follows:

1. There were different types of colonization policies which created different sets of institutions. At one extreme, European powers set up “extractive states,” exemplified by the Belgian colonization of the Congo. These institutions did not introduce much protection for private property, nor did they provide checks and balances against government expropriation. In fact, the main purpose of the extractive state was to transfer as much of the resources of the colony to the colonizer. At the other extreme, many Europeans migrated and settled in a number of colonies, creating what the historian Alfred Crosby (1986) calls “Neo-Europes.” The settlers tried to replicated European institutions, with strong emphasis on private property and checks against government power. Primary examples of this include Australia, New Zealand, Canada, and the United States.
2. The colonization strategy was influenced by the feasibility of settlements. In places where the disease environment was not favorable to European settlement, the cards were stacked against the creation of Neo-Europes, and the formation of the extractive state was more likely.
3. The colonial state and institutions persisted even after independence.

They argue that the disease environment determined the nature of settlements, which determine the nature of institutions which, in term, determined the economic trajectory of a country.

Interestingly, they control for all of the things that one might control for, such as distance from the equator and the percentage of inhabitants that were European, being landlocked and the ruling power, ruling out the effect of some obvious potential influences. Property rights, a solid judiciary and limits on political power in the colonies and upon independence, they argue, had a greater effect on long term GDP, and the development of those institutions was enabled or inhibited by early settler mortality.

It’s a fairly compelling argument, though not without its critics.

A few gems from the paper interested me. One, the return on investment in the British colonies during the nineteenth century was a whopping 25%, far more than one could have expected domestically. In the late 19th and early 20th centuries, this dropped so that returns on colonial and domestic investments were the same.

I found (finally!) a reference to indicate the willful choosing of high altitude and thus less malarious areas for colonial settlements. Note that in Europe and the US, the location of cities is often along river ways and sea sides, where in Africa large cities tend to be placed inland (with some exceptions). There has been no industrial revolution in Africa and little regional trade (a condition which persists to this day) so that cities along water based shipping routes are not necessary. Extraction in Africa was largely done by rail, further alleviating the need to be close to rivers.

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Egyptian instability is crushing Kenya’s economy

Coffee prices since 2000

Coffee prices since 2000

One of the problems with African economies, is that they tend to rely on receiving export revenues from just a few items. Some economies, like Nigeria and Angola, rely on oil. Oil economies are expecially problematic as the extraction process creates very few jobs, and revenues tend to flow directly into the pockets of corrupt politicians and middle men.

Kenya, lacking mineral or oil resources, is an agricultural economy. Specifically, they are really good at growing tea, and, to a lesser extent, coffee. This helps explain why Kenya’s developmental trajectory has been far more successful than that of other economies. Tea production is labor intensive and often depends on small and mid-sized farms which employ lots of people. Instead of money flowing in the pockets of the corrupt, who often squirrel it away in overseas accounts, money goes directly in the pockets of growers.

Kenya is the UK’s biggest tea supplier, but Egypt buys more tea by volume from Kenya than any other country. A piece in Think Africa Press today wrote on the dual problem of falling demand for tea from Egypt due to prolonged unrest, and that of falling commodity prices worldwide.

The cause of the farmers’ problems lies far to the north of the cool, tea-covered slopes of the Aberdares, in the heat of Cairo and the continuing fallout from the Arab Spring. In 2010, the last year before the uprising in Egypt, Kenya supplied the tea-obsessed UK with around half of its tea, but Egypt was the the single largest destination for Kenyan tea exports, buying nearly a fifth of what the factories around Nyeri produce. With the overthrow of President Mohammed Morsi in July 2013 and the ongoing campaign against the Muslim Brotherhood causing continued political instability, demand has plummeted and prices have gone with them.

“It’s a supply and demand issue,” says Chai Kiarie, Field Services Manager at Gitugi Tea Factory. “We produced more tea this year, but we still made nearly $2 million less than we did last year. With these problems abroad, the demand just isn’t there.”

This isn’t an isolated problem. Coffee prices, once riding high on a boom in commodity prices have been steadily falling since the financial collapse. The commodity boom was a winning sitaution for African economies and helped drive much of the rapid growth seen throughout the 00’s. Regulation has started curbing speculative practices that drove the increases, removing a source of destructive volatility which drove up food prices in developing countries, but has also decreased badly needed foreign exchange revenues.

I visited a few farms the last time I was in Kenya. Farmers aren’t waiting around for subsidies to help pull them out of a potential mess. All of the farmers I spoke with are looking for new ways to diversify their operations and meet potentially lucrative world wide demand for competitive products. All of them wanted to think of ways to increase productivity while decreasing the cost of inputs. The pressures from falling tea demand could help push them to find ways to innovate and increase both revenues and stability.

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