Tropics, Germs, and Crops - How Endowments Influence Economic Development

Abstract from William Easterly and Ross Levine paper:

Introduction:
Burundi today(in 2002) has a per capita income of $200, which is one-third lower than 4 decades ago. Burundi is poor despite a lush agricultural endowment that has three growing seasons, abundant rainfall, fertile volcanic soils, and suitability for cash crops such as coffee, tea, cotton, bananas, palm oil, and rice.
Burundi has other geographic endowments that place it at a disadvantage, however, according to some stories of economic development summarized below.

It is virtually on the equator, is landlocked, is far from rich trading partners, and has a disease environment that has left life expectancy today at only 47 years.

During the colonial period, mortality among the European settlers was a frightful 280 per 1000 per year.

The Belgian colonialists thus did not settle but exploited the colony through forced labor on coffee and other cash crop plantations and compulsory food crop quotas. The Belgians ruled indirectly through Tutsi chiefs, to whom they spuriously attributed “racial superiority” over the Hutu. Even the cash crops that could generate high export revenue are thought to be adverse for political economy and institutional development according to some studies.

Three Tutsi military dictators from the same commune in Bururi province have ruled Burundi for 32 out of the 38 years since independence, which has been marred by massacres of civilians, recurrent civil war, and as noted, economic decline.

Institutions have disastrously failed to protect the citizens’ lives or to establish any resemblance of the rule of law. Ndikumana (1998) describes how the elite “privatized” the state and enforced their control through violence. Nkurunziza and Ngaruko (2002) show how the rulers have systematically looted the economy, using mechanisms such as state subsidies to public enterprises controlled by the rulers, severe taxation of cash crops, lucrative civil service positions for the ruling clan (the mean government wage puts the civil servant in the richest 6% of the economy), acquiring consumer goods at controlled prices and reselling them on the black market, and acquiring foreign exchange at the official rate and reselling it at the much higher black market rate.

Canada today has a per capita income 107 times higher than Burundi’s. Canada is rich today despite being marginal for much of the colonial period. In the peace negotiations between Britain and France following the Seven Years War in the 18th century (which Voltaire described as “fighting over a few acres of snow”), the British seriously debated taking the island of Guadeloupe instead of Canada as reparations for the war.
Yet Canada has geographic endowments that some stories of economic development argue give it advantages. It is far from the tropics, has a long border with a rich trading partner, has access to the sea, and has a disease environment that gives it a life expectancy of 79 years. During the colonial period, mortality among European settlers was only one-seventeenth of Burundi’s. While Canada lacks lucrative cash crops like coffee, cotton, and tea, it is one of the world’s premier grain producers – and some studies suggest grain endowments are better for political economy and institutional development than tropical cash crops.

Canada has long been a democracy with the rule of law, has never had a civil war, and has one of the world’s best ratings on freedom from corruption.6 Canada’s boring rulers have perpetrated few of the egregious interventions in the economy seen in Burundi.

How much of Canadians’ 107-fold income advantage over Burundians is due to more favorable geographic endowments? How much is due to better institutions? How much is due to better policies? Do the alleged geographic advantages of Canada over Burundi directly affect income, or do they work through institutions or policies?

The purpose of this research is to assess empirically different theories of how geography, institutions, and policy influence economic development.


A. Geography/Endowment hypothesis
Argue for direct effects of tropics, germs, and crops on development and suggest that tropical location, landlocked location, and commodity dependence directly inhibit development or growth.

B. Institutions hypothesis
Suggest institutional quality as one component of their “social infrastructure and a fundamental determinant of economic development.

C. Policy hypothesis
The policy hypothesis is an amalgam of views that stress the importance of major national policies and de-emphasize the importance of endowments in determining economic development. The policy view holds that sound macroeconomic policies, openness to international trade, and the absence of capital account controls will tend to foster long-run economic success. This perspective is clearly imbedded in the policy recommendations adopted by major multilateral institutions. Indeed, a motivating factor for creating international financial institutions is to facilitate the adoption of sound national policies that foster economic development. According to the policy hypothesis, while tropics, germs, and crops may influence production technologies and institutions, the adoption of policies that foster low inflation, openness to international trade, and unchecked international financial flows will promote economic development.

Conclusions:

No strong support for the idea that tropical location and lack of access to the sea inhibit development through channels other than through their effect on human disease and on natural resource endowments.

Endowments exert an economically big impact on economic development.
For instance, Tanzania had very high rates of settler mortality and has a very low level of per capita GDP .... if Tanzania had a disease environment that produced settler mortality rates closer to that experienced in India, then Tanzania would enjoy income levels of more than double its current level and even greater than that enjoyed in India now...

Settler mortality and natural resources (germs and crops) are again more significant than tropical latitude or lack of coastal access (although only crops remain independently significant when other exogenous variables are included). Note that when settler mortality and latitude are included together, they jointly explain 45 percent of the cross-country variation in the institutions index (when not controlling for legal origin, religious composition, and ethnic diversity)....

The impact is economically substantial. For instance, Chile’s settler mortality rate is 4.23 while Singapore’s is 2.87.
If Chile had the disease endowments of Singapore, the results suggest that this would substantially close the gap between Chile’s level of institutional development (0.87) and Singapore’s (1.44).
Consistent with Acemoglu, Johnson, and Robinson(2001) and Engerman and Sokoloff (1997), endowments importantly shape institutional development....

Endowments explain institutions, which in turn explain economic development.
The data fail to reject the hypothesis that endowments only explain cross-country differences in the level of economic development through the ability of endowments to explain institutional development.

In sum, measures of tropics, germs, and crops explain cross-country differences in economic development through their impact on institutions. To answer some of the questions in the introduction, if Burundi’s endowments had been like those of Canada, it would have increased Burundi’s income per capita through institutions by a factor of 38.
Recalling the 107-fold difference between Canada and Burundi’s income, we can say that a variation of 38 times is explained by our story, while variation by a factor of 2.8 (107/38) is unexplained. (In log terms, 78 percent of the log income difference between Canada and Burundi is explained.)
Consistent with AJR (2001) and ES (1997), tropics, germs, and crops do not explain economic development beyond their impact on institutions. These findings are consistent with the institutions hypothesis and inconsistent with the geography hypothesis. Furthermore,
policies do not explain cross-country differences in GDP per capita once one controls for the impact of endowments on institutions and on to economic development. Thus, the results are inconsistent with the policy hypothesis but consistent with a view that stresses the role of endowments in shaping long-lasting and defining institutions.

There is a large literature that relates cross-country differences in per capita growth rates to economic policies. How do we relate our present findings on income levels to this literature?

It could be that episodes of bad policies are associated with a temporary decrease in income, which shows up in the growth rate over a limited period, but leave no long run impact on the income level (Bruno and Easterly, 1998, made this argument for inflation and output).

It could also be that bad policies are proxying for poor institutions, in those cases where they are not included in the growth regression. The policy implication of this latter explanation is that bad policies are only symptoms of longer-run institutional factors, and correcting the policies without correcting the institutions will bring little long-run benefit. Bad policies would be kind of like a high fever from a bacterial infection. Packing the patient in ice would bring down the fever but does not cure the infection. This kind of story could help explain the disappointing results in developing countries to the wave of macroeconomic policy reforms in the 1990s (Hausmann and Rodrik, 2002; Easterly, 2001).

We acknowledge the caveats that one should not put all one’s weight on a failure to reject a zero coefficient or an exclusion restriction. Nor does the kind of general indicator of institutional quality we use, while representing a valuable contribution by Kaufmann et al (1999), provide much actual guidance to officials making real laws and regulations.

This kind of result should be tested and illumined further with detailed historical case studies of institutional development like those conducted by Engerman and Sokoloff (1997) and coauthors, studies of the links between colonial experiences and later developments (Mamdani, 1996), and contemporary case studies like those in Rodrik (2002).

These kind of cross-country results are only a beginning to telling the story of colonial experiences, political conflict and consensus, institution-building, and economic development for each unique case. Still, we are struck by the way that endowments and policies have no independent effect once we control for institutions, contrary to a number of stories, and that institutional quality seems to be a sufficient statistic for accounting for economic development.