Public Policies and Persistence of Institutions

A fabulous series of works on institutional persistence emerged in the 2000s. To name a few:

This series has several things in common. First, the common narrative says that very old decisions influence current economic performance. Melissa Dell finds a 25% decline in current consumption due to forced labor in the 16-century mines. Nathan Nunn quantifies the impact of slavery on current output per capita in Africa. Abhijit Banerjee and Lakshmi Iyer report a 15% increase in current crop yields in territories owned by cultivators in the 19th century, compared to the territories of then-landlords:

Banerjee and Iyer, “History, Institutions, and Economic Performance.”

A passerby may say that, of course, slavery and ownership last — that’s our history. This position is so general that it’s always true. The authors did much more than that. They showed by how much history matters — and the numbers are serious.

One unintended consequence, though. These results reassure the pessimists in developing countries. The problem is, of course, that developing countries aren’t developing much. The countries have some economic growth — often induced by commodity prices and imported technologies — and few successful fundamental reforms. People out there rarely see changes and don’t ask for them, so the past matters because it actually equals the present.

Let’s see how economists can encourage these people.

In a sense, any persistent connection between the past and the present is a public policy failure. If a 18th century earthquake destroyed a bridge and the local community didn’t rebuild it since then, the earthquake naturally worsens the current village performance. This happens due to the earthquake and the (absent) mitigation policies.

The earthquake stands for any lasting factor of development. A lasting factor (earthquake) determines policies (endure the loss of the bridge) and these policies affect current outcomes (village output). This is the standard line in the literature. The lasting factor can be anything. Institutions just happened to be the group large enough to be statistically significant in small samples, which always constrain research in economic growth. This group is a big bunch of laws and rules, which wouldn’t manifest itself in regressions if taken separately.

What do we know about such lasting factors?

Well, sometimes they last. Of course, there’s a publication bias favoring historical persistence. Imagine, instead, the flow of publications enumerating historical factors that do not affect the present. A lot of boring reading, for sure. Instead, we have a few dozens of highly cited papers with robust positive results. These citations signal two things. First, authors brilliantly did their job. Second, few results of this sort exist. Perhaps, citations would be diluted if results could be tested in different settings. Just look at randomized trials, which are very important but authors basically no longer seek publishing there as they test same policies across countries.

Secondly, historical factors leave many questions. Are they resistant to public policies? Are they resistant to informed public policies? To exogenous policies, like international aid programs? To a different set of institutions?

These questions hint at the idea that some societies respond to challenges and, therefore, flourish. But for the other societies, the data always shows persistence. Especially to large exogenous shocks, which dominate the literature because they are nearly the only way to measure the impact.

I mean, all the papers I mentioned exploit a very strong “treatment”: A well-armed army of foreigners attack an indigenous population and establish particular rules. Why is it common in publications? Because such a situation is accompanied by a suitable identification strategy: invaders grab whatever comes first (that’s randomization) and divide previously homogeneous regions (that’s discontinuity). Still, these invasions are only one part of history.

So we need to know more about the economic significance of this sort of persistence. We may discover that persistence vanishes. For example, the conflict between relatively equal France and Germany in the Napoleonic Wars (1803−1815):

The Consequences of Radical Reform: The French Revolution
The Consequences of Radical Reform: The French Revolution

The treatment group includes the German territories occupied by the French. The French induced growth-enhancing reforms, so the treatment group grows faster:

The Consequences of Radical Reform: The French Revolution
The Consequences of Radical Reform: The French Revolution

The difference is becoming unimportant as both groups develop. The control group reaches the same level of reforms with a 10-year lag, but it does reach the same level. The gap in urbanization is also closing relative to the level of urbanization.

History matters until you find solutions to very specific problems. Returning to Melissa Dell’s 25% consumption gap in Peru, what would happen to this gap if Peru got richer? What would happen with persistence in growing India and Africa, featured in the other articles? The good question is, therefore, what can we do about this persistence?