Why does underdevelopment persist?

by on March 14, 2006 at 9:07 am in Economics | Permalink

Who better to ask than Rajan and Zingales:

Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain why poor education is so persistent. This paper tries to reconcile these two views by arguing that the underlying cause of underdevelopment is the initial distribution of factor endowments. Under certain circumstances, this leads to self-interested constituencies that, in equilibrium, perpetuate the status quo. In other words, poor education policy might well be the proximate cause of underdevelopment, but the deeper (and more long lasting cause) are the initial conditions (like the initial distribution of education) that determine political constituencies, their power, and their incentives. Though the initial conditions may well be a legacy of the colonial past, and may well create a perverse political equilibrium of stagnation, persistence does not require the presence of coercive political institutions. We present some suggestive empirical evidence. On the one hand, such an analysis offers hope that the destiny of societies is not preordained by the institutions they inherited through historical accident. On the other hand, it suggests we need to understand better how to alter factor endowments when societies may not have the internal will to do so.

In other words, for a long time the Mexican government didn’t want to educate rural campesinos for fear they would capture a greater share of the rents.  Low human capital, initial monopolies, and overly strong interest groups create an intersecting triple whammy to oppose the sacrifices necessary for development.  There is much of interest in the theory, including a discussion of when democracy is superior to dictatorship.  Here is the paper.

Jeff Burton March 14, 2006 at 9:53 am

“…we need to understand better how to alter factor endowments when societies may not have the internal will to do so”

Sounds ominous.

joshg March 14, 2006 at 11:05 am

It’s the memes, not just the government policies.

Taeyoung March 14, 2006 at 12:15 pm

Low human capital, initial monopolies, and overly strong interest groups create an intersecting triple whammy to oppose the sacrifices necessary for development.

Does the paper consider the case of South Korea in the first 20 years or or so after the occupation? Because at that time, there was extremely low human capital (the Japanese had closed all the Korean schools, so apart from a sliver of the elite, who had been educated in Japanese schools, universities, and military academies, two generations had gone uneducated). I suspect there were also strong interest groups at the time (e.g. the traditional landowning classes, who suffered through land redistribution; also the intense regional favouritisms and prejudices), and in the 60s, when Park came to power, he set up enduring monopolists (or oligopolists, at least), in the chaebol. And for all that, South Korea has been remarkably successful in developing a dirt-poor land.

I am too cheap to buy the download at the link, but since in Korea, as in most of the other East Asian countries, there has been great success in bringing development, and that development has proceeded in the face of a mostly uneducated population, against the interests of ancient landowning interest groups, and via state-created monopolies (following the Japanese model), and succeeded for all that, the conclusion you report is sort of in conflict with how I’ve always understood development to work (i.e. that state-directed development works, if it occurs in a conducive cultural environment).

How do the authors look at Korea and the other developing Asian powers?

I know the legal scholar Ramseyer has challenged the traditional view of Japanese development as having occured via top-down decisionmaking (promoting massive oligopolist conglomerates like the zaibatsu, later the keiretsu), but it seems pretty clear that Japan’s imitators — Korea among them — went on the traditional understanding and tried to engage in outright top-down industrialisation of their economy. And succeeded.

Alex Ambroz March 14, 2006 at 2:42 pm

I’ll branch off on what Tae said, “(i.e. that state-directed development works, if it occurs in a conducive cultural environment).” and say that the cultural institutions and mores of a society need to be included in discussions about the economic development of a state. I’ve only looked into one source on this, “Culture Matters: How Values Shape Human Progress” (and it’s been a few years since I read it) but I say it’s definitely something that 1. should be included in econ. dev. discussions and 2. something that people usually don’t want to bring up in these discussions.

spencer March 14, 2006 at 3:41 pm

Taeyoung — I was always under the impression that a significant factor in the development of Korea and Taiwan in the 1960-70s era was that the population had been educated under the Japanese school system and when development took off in the 1960s-70s the population of both was highly literate.

rob March 14, 2006 at 8:26 pm

Wasn’t this same theory proposed or hinted at in “Theory of the Leisure Class”

Russell Nelson March 15, 2006 at 1:06 am

May I recommend Dr. John Powelson’s book _Centuries of Economic Endeavour_? The book is also available online as _A History of Wealth and Poverty_ at:

http://tqe.quaker.org/wealth-and-poverty/

John puts forward the thesis that it is the relationship between the rich and the poor which determined how poor the poor are. If the rich have historically been able to ignore the poor, and if the poor have been able to ignore the rich, then they don’t work together and both are worse off for it.

My own opinion on the matter (completely independent of John’s theory) is that in the colder climates, people have had to rely on each other more. You can see this by plotting revolutions versus latitude. The smaller the magnitude of the latitude, the more frequent the revolutions.

Steve Sailer March 15, 2006 at 4:24 am

Clearly, the increasingly important driving force in differences in economic development is average national IQ. For example, China’s schools were largely shut down for something like a half dozen years during the Cultural Revolution, yet a decade later China began a dazzling economic ascent into ever more sophisticated manufacturing.

One of the crippling euphemisms of current intellectual discourse is the assumption that education causes intelligence, when we all know the arrow of causality often points in the opposite direction — smarter people tend to stay in school longer.

On the other hand, Mexico does seem to be an example of a country that could benefit from more education. According to Lynn and Vanhanen’s essential “IQ and the Wealth of Nations,” Mexico’s national average IQ is pretty close to the world average. But Mexicans don’t get very much schooling. Paying for sending all kids to school until they were, say, 14, would require the rich in Mexico to stop cheating so much on their taxes, and they don’t want to do that.

Unfortunately, I’m not sure that Mexican apathy about education can be blamed solely on Mexico’s corrupt ruling class. A recent study by the Public Policy Institute of California found that even 3rd-generation in America Mexican Americans have much worse educational attainments than whites: 22% drop of 3rd generation Mexican-Americans drop out of high school vs. only 6% of whites. And only 11% graduate from college, vs. 35% of whites.

Perhaps the IQ gap (which appears to be about 9-10 points between whites and Mexican-Americans) accounts for all this, but my impression is that apathy about education is more rampant among Mexican-Americans than among, say, African-Americans, who have lower average IQs.

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