Political Economics

Lecture 4
 Geography or institutions?
• So far we pointed out the primacy of
institutions as a fundamental explanation for
economic prosperity
• Is there any scope for geography to play a
role?
• Nunn and Puga (2012) show how geographic
features can result in historical accidents
which shape local institutions (and hence
economic growth)
 Ruggedness:
a blessing for Africa

• Nunn and Puga (2012) focus on one geographic

characteristic: terrain ruggedness
• They disentangle the direct and contemporaneous
effect of having a more rugged terrain from the
indirect historical effect of rugged terrain on slave
trade and its consequences on economic
performance
 Direct effect

• Rugged terrain is an economic handicap:

– It is more prone to erosion.
– It makes irrigation and in general the control of water more
difficult.
– Building costs are higher for irregular terrain.
– It increases transportation/trade costs.
• Countries with a more rugged terrain are expected
to display a negative direct effect on economic
performance.
Ruggedness: direct effect
 Indirect effect

• Indirect effect: among source countries of slaves for

European colonizers, those with a more rugged
terrain made slave trade more difficult:
– There exists strong negative correlation between slave
trade and current income (Nunn, 2008).
– Thus, more rugged countries should have higher incomes.
– But … this channel exists only for slavery source countries
(Africa).
Ruggedness: indirect effect
 Econometric framework
• We start with the following relationship:

• in which y is income/capita, r is ruggedness

(measured by the authors), q is a measure of the
efficiency of the organization of the society,
constants α, β>0, and e is the classical error term
(i.i.d. drawn from a normal distribution with zero
mean).
 Econometric framework
• Consider the expected negative consequences of
slave trade on the society as documented by Nunn
(2011; 2008) – institutions, trust, ethnic
fragmentation.
• Hence, q can be further specified as:

• where x denotes slave exports, γ>0 is a constant, and

u is the classical error term.
 Econometric framework
• Finally, since historical accounts document that
rugged terrain provided a partial protection from
slave trade:

• where r is again a measure of ruggedness, λ>0 is a

constant and v is the classical error term.
 Econometric framework

• If we rearrange the terms we obtain:

• where ζ and ξ are the new error terms.

• Notice that the specific effect of ruggedness on income
for Africa is given by the composite impact of
“ruggedness on slave trade”, “slave trade on quality of
the organization of the society”, and “organization of
society of income” (reduced form).
 Empirical model I

• Based on the previous equation, they estimate:

• where ε is the usual error term, and IAfrica is a

dummy variable equal to unity if country i is in
Africa.
• Alternative restricted version:
 Hypothesis: part I
1. A negative direct effect of ruggedness on income:
β1 <0
2. A positive indirect effect of ruggedness in Africa,
due to slave trade: β2 >0
3. Disregarding hypothesis 2 biases the direct effect
towards zero: β1 < β5 (recall that they are both
negative!)
 Empirical results I
H 1: verified!
Dependent variable: Log real GDP per person 2000

With IAfrica Without IAfrica

Ruggedness (β1 or β5) -0.203** -0.067

Ruggedness* IAfrica (β2) 0.393***

Observations 170 170

R2 0.357

***,**,* indicate significance at the 1, 5, 10 percent levels.

H 2: verified! H 3: verified!
 Omitted variable bias?
• There might be several omitted variables in the
estimated model, but…
• In order for an omitted variable to bias this estimate,
it must be that:
– Either the relationship between the omitted factor and income
is different inside and outside Africa,
– Or the relationship between the omitted factor and ruggedness
differs inside and outside Africa,
– Or both.
 Example
• Suppose that rugged terrain in Africa more fertile in
average (e.g. Rift Valley)
• Then, if you do not control for soil fertility:

- +
• It may be entirely driven by the omitted variable
(fertility)
 Omitted variable bias?
• Several factors are included for which these
conditions might be verified:
– Possible that rugged terrains have poorer soil quality but not in
Africa (for instance, Rift Valley rugged and fertile): “percentage
of fertile soil”.
– Natural resource curse literature (see, for instance, Mehlum et
al. 2006). If diamond deposits are located in rugged terrain and
they lead to larger income outside Africa and lower income in
Africa, this biases the estimate: “diamond extraction”, “oil
reserves”, “gold extraction”.

17
 Omitted variable bias?
– Rugged terrains might be less prone to tropical diseases in Africa
but not elsewhere: “percentage of the country in different
tropical climates”, “index of the malaria stability”, “distance to
the equator”.
– Since access to the sea might have a different impact in Africa
and elsewhere they also include “average distance to the
nearest coast”.
• The test consists in including all these controls and
check whether the previous hypotheses are still
verified.

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Empirical results I
 Potential objection
• How can we be sure that the effect of ruggedness
shown for Africa is indeed working through the
channel of slave trade?
• To fully answer this concern Nunn and Puga (2012)
also propose several strategies.
• Suppose you have data on income before 1400?
• …check impact of ruggedness before slave trade
(population density or urbanization rate).
 Urbanization and income today
.
USA
SGP
HKG
CAN
10 AUS
NZL

CHL
BHS
BRB
GDP per capita, PPP, in 1995

ARG
MUS VEN URY
9 KNA GABMYS BWA
ZAF PAN
MEX
CRI COL
TTO BRA
LCA
NAM TUN
ECU
GRD BLZ DZA DOM PER
GTMFJI VCT DMA
PRY
JAM
SWZ IDN PHL
MAR
SUR
8 EGY
SLV CPV BOL
GUY
LKA AGO
ZWE HND
GIN CMR NIC
COMPAK CIV
SEN MRT COG
VNM LSOIND
GMBSDN GHA
TGO CAF
LAO HTI BEN
KEN
7 UGA
NPL
BFABGDTCDMDG ZAR NGAZMB
NER
BDI ERI MLI
RWA MWI MOZ
TZA SLE

6
0 50 100
Urbanization in 1995
 Falsification exercise

Dependent variable Population density in 1400 Urbanization rate in 1400

Ruggedness*IAfrica -0.116 (0.117) -0.003 (0.007)

Observations 168 164

• Indeed, ruggedness has no specific impact on

African countries’ income before slave trade
occurred!
 Potential objection
• Secondly, they reason that if what underlies the
positive effect of ruggedness is really slave trade,
then it should not matter for other continents
• …and the effect should differ in the various regions of
Africa which experienced different level of slave
exports.
• To test this, they run their estimate adding dummies
for 5 African sub-regions to interact with the
ruggedness variable.
Africa vs. other continents
 As expected West Africa has a larger effect than average Africa

As expected North Africa has a smaller effect

 Empirical model II
• Finally, they propose an alternative empirical model
• The alternative is to leave “slave trade” as a control
in the main equation and estimate separately the
impact of ruggedness on slave trade.
• Formally:
 Hypothesis: part II
4. Ruggedness negatively influences slave exports: β12
<0
5. Slave exports negatively affects income: β10 <0
6. Once slave exports are taken into account, the
effect of ruggedness does not differ anymore in
Africa: β8 =0
7. Once slave exports are taken into account, the
effect of ruggedness on income is negative: β7 <0
 H 5: verified

H 7: verified

H 6: verified
H 4: verified
 Economic magnitude
• According to the estimates, if an hypothetical African
country with mean log GDP per capita and mean
slave exports would not have been affected by slave
trade at all, then its income would increase from
$1,784 to $4,149.
• One standard deviation increase in ruggedness
would reduce slave trade such that the income
increase from $1,784 to $2,531.
• Definitely, substantial effects!!
 Is institution the channel?
• Why slave trade influenced today’s economic
performance?
• Is it institutions/trust/culture?
• The authors shows that institutions are involved: larger
slaves exports imply lower level of the index of “rule of
law” today (influence of law in society, constraints on
government, etc.).
• However, the magnitude of this effect cannot fully
account for the differentials found.
• The effects on trust provide another powerful
explanation (Nunn and Wantchekon, AER 2011).
 Geography or institutions?

• Geographical features may play a key role for

economic performance, since they shape the
history of a country and its institutional
development.
• Current low economic performance (within
Africa). Is it more reasonable to blame:
– Flat terrain (low ruggedness)
– Slave trade?
 Summary
• Institutions are a crucial factor shaping
economic development
• Their effect persists over time, beyond major
experiences like colonialism
• Geography shapes economic performance
directly, and (more importantly) shapes
historical human decisions and institutions!