EFJK Growth

February 18, 2016
Ariel Burstein of the University of California, Los Angeles, and Nancy Qian of Yale University, Organizers

Solomon M. Hsiang, University of California at Berkeley and NBER, and Amir Jina, University of Chicago

The Causal Effect of Environmental Catastrophe on Long-run Economic Growth: Evidence from 6700 Cyclones (NBER Working Paper No. 20352)

Does the environment have a causal effect on economic development? Using meteorological data, Hsiang and Jina reconstruct every country's exposure to the universe of tropical cyclones during 1950-2008. They exploit random within-country year-to-year variation in cyclone strikes to identify the causal effect of environmental disasters on long-run growth. The researchers compare each country's growth rate to itself in the years immediately before and after exposure, accounting for the distribution of cyclones in preceding years. The data reject hypotheses that disasters stimulate growth or that short-run losses disappear following migrations or transfers of wealth. Instead, the researchers find robust evidence that national incomes decline, relative to their pre-disaster trend, and do not recover within twenty years. Both rich and poor countries exhibit this response, with losses magnified in countries with less historical cyclone experience. Income losses arise from a small but persistent suppression of annual growth rates spread across the fifteen years following disaster, generating large and significant cumulative effects: a 90th percentile event reduces per capita incomes by 7.4% two decades later, effectively undoing 3.7 years of average development. The gradual nature of these losses render them inconspicuous to a casual observer, however simulations indicate that they have dramatic influence over the long-run development of countries that are endowed with regular or continuous exposure to disaster. Linking these results to projections of future cyclone activity, the authors estimate that under conservative discounting assumptions the present discounted cost of "business as usual" climate change is roughly $9.7 trillion larger than previously thought.

Daron Acemoglu, MIT and NBER; Suresh Naidu, Columbia University and NBER; Pascual Restrepo, MIT; and James A. Robinson, University of Chicago and NBER

Democracy Does Cause Growth

Acemoglu, Naidu, Restrepo, and Robinson provide evidence that democracy has a significant and robust positive effect on GDP per capita. Their empirical strategy controls for country fixed effects and the rich dynamics of GDP, which otherwise confound the effect of democracy on economic growth. Moreover, to reduce measurement error, the researchers introduce a new dichotomous measure of democracy that consolidates the information from several sources. Their baseline results use a dynamic panel model for GDP, and show that democratizations increase GDP per capita by about 20% in the long run. They find similar results when estimating the effect of democratizations on annual GDP, controlling for the GDP dynamics linearly or using the estimated propensity to democratize based on past GDP dynamics. The researchers obtain comparable estimates when they instrument democracy using regional waves of democratizations and reversals. The results suggest that democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public goods provision, and reducing social unrest. They find little support for the view that democracy is a constraint on economic growth for less developed economies.

Lutz Hendricks, University of North Carolina, Chapel Hill, and Todd Schoellman, Arizona State University

Human Capital and Development Accounting: New Evidence from Wage Gains at Migration

Hendricks and Schoellman reconsider the role for human capital in accounting for cross-country income differences. The researchers contribution is to bring to bear new data on the pre- and post-migration labor market experiences of immigrants to the U.S. Immigrants from poor countries experience wage gains that are only 40 percent of the GDP per worker gap. This fact implies that "country" accounts for only 40 percent of cross-country income differences, while human capital accounts for the other 60 percent. This work deals with two well-known problems in the literature. It controls for selection by using data on the wages of the same individual in two different countries. The authors provide evidence on the importance of skill transfer by comparing pre- and post-migration occupations. Occupational downgrading at migration is common; corrections for this imply that human capital may account for as little as 50 percent of cross-country income differences.

David de la Croix, IRES - Université catholique de Louvain; Matthias Doepke, Northwestern University and NBER; and Joel Mokyr, Northwestern University

Clans, Guilds, and Markets: Apprenticeship Institutions and Growth in the Pre-Industrial Economy

In the centuries leading up to the industrial revolution, Western Europe gradually pulled ahead of other world regions in terms of technological creativity, population growth, and income per capita. De la Croix, Doepke, and Mokyr argue that superior institutions for the creation and dissemination of productive knowledge help explain the European advantage. The researchers build a model of technological progress in a pre-industrial economy that emphasizes the person-to-person transmission of tacit knowledge. The young learn as apprentices from the old. Institutions such as the family, the clan, the guild, and the market organize who learns from whom. The authors argue that medieval European institutions such as guilds and specific features such as journeymanship can explain the rise of Europe relative to regions that relied on the transmission of knowledge within extended families or clans.

Francisco J. Buera, Federal Reserve Bank of Chicago, and Roberto Fattal-Jaef, The World Bank

The Dynamics of Development: Innovation and Reallocation

This paper investigates aggregate and firm-level properties of the dynamics of economic development in a number of post-war growth accelerations. Buera and Fattal-Jaef show that while these episodes exhibit gradual and sustained growth in TFP, they differ substantially with respect to the evolution of the firm size distribution. To understand this behavior, the researchers provide a quantitative theory of transitions featuring endogenous innovation, entry and exit, and the dismantling of idiosyncratic distortions, which they calibrate to the experiences of Chile and China. The model features very protracted growth in TFP, and captures key aspects of firm dynamics in the data.

Pablo Fajgelbaum, University of California at Los Angeles and NBER; Eduardo Morales, Princeton University and NBER; Juan Carlos Suárez Serrato, Duke University and NBER; and Owen M. Zidar, University of Chicago and NBER

State Taxes and Spatial Misallocation (NBER Working Paper No. 21760)

Fajgelbaum, Morales, Suárez Serrato, and Zidar study state taxes as a potential source of spatial misallocation in the United States. The researchers build a spatial general-equilibrium framework that incorporates salient features of the U.S. state tax system. They use the observed changes in state tax rates between 1980 and 2010 to estimate key model parameters that determine how workers and firms reallocate in response to changes in state taxes. The researchers' results strongly suggest spatial misallocation from state taxes. Eliminating spatial dispersion in taxes accounting for 4% of GDP would increase welfare by 0.2%. The authors also find that the potential losses from greater tax dispersion can be large.

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