Saturday, June 30, 2012

How much do institutions matter

According to Acemoglu and Robinson’s Why Nations Fail (disclaimer - I’m going only by the book blurb and my previous reading of their papers), much of the failure can be attributed to institutions. While there is no doubt that institutions matter, the question is how much do they matter?

Jared Diamond writes a good review:
While institutions are undoubtedly part of the explanation, they leave much unexplained: some of those richer temperate countries are notorious for their histories of bad institutions (think of Algeria, Argentina, Egypt, and Libya), while some of the tropical countries (e.g., Costa Rica and Tanzania) have had relatively more honest governments.

Here are some other thoughts:
Consider the following tropical countries: Malaysia, Singapore, Indonesia and Philippines. Acemoglu et. al.’s previous work would indicates that these tropical locations would have similar rates of mortality from malaria and hence the colonial experiences would be similar in terms of the type of institutions that were set up. Their data set does not have Philippines and Malaysia and Singapore share the same mortality rate although the rate for Indonesia is 10 times the rate for Malaysia. (Why?  David Albouy notes that this is because there was a war in Indonesia.)

My prior would be that these mortality rates from disease would be fairly similar and that the data point for Indonesia is conflated by war - and assuming that they were, then these countries should all have the similar growth experiences. Yet they don’t. The obvious difference is Malaysia vs. Singapore - but the Philippines (colonized first by the Spanish and then the Americans) and Indonesia (by the Dutch) also have had different experiences.

The counterpoint to this would be that it is institutions just not the classification that Acemoglu et. al. assigns (i.e. extractive versus stable) and that would be cultural differences i.e. British vs. Dutch vs. Spanish. Of course this comparison could also mean that the Dutch and Spanish were more extractive in nature compared to the British.

No comments: