Trade, Development and Genetic Distance

Trade increases development but the main driver appears not to be comparative advantage and the standard microeconomic “gains from trade” but rather factors emphasized by Adam Smith and Paul Romer such as the increasing returns to scale that drives innovation and investment in R&D and also the ways in which trade increases exposure to and adoption of foreign ideas.

It’s much easier, however, to trade goods than ideas. The price of wheat shows strong convergence around the world by the 19th century but even simple ideas like hand-washing transmit much more slowly. Complex ideas like the rights of women, the rule of law or the corporate form transmit even more slowly. Thus, one of the barriers to development is barriers to the transmission of ideas.

Enrico Spolaore and Romain Wacziarg have done pioneering work uncovering some of the deep factors of development by using genetic distance as a measure of the difficulty of communicating ideas. Spolaore and Wacziarg have a short paper in Vox summarizing their methods and findings.

 [G]enetic distance is like a molecular clock – it measures average separation times between populations. Therefore, genetic distance can be used as a summary statistic for divergence in all the traits that are transmitted with variation from one generation to the next over the long run, including divergence in cultural traits.

Our hypothesis is that, at a later stage, when populations enter into contact with each other, differences in those traits create barriers to exchange, communication, and imitation.

…Our barriers model implies that different development patterns across societies should depend not so much on the absolute genetic distance between them, but more on their relative genetic distance from the world’s technological frontier. For example, when studying the spread of the Industrial Revolution in Europe in the 19th century, what matters is not so much the absolute distance between the Greeks and the Italians, but rather how much closer Italians were to the English than the Greeks were. Indeed, we show that the magnitude of the effect of genetic distance relative to the technological frontier is about three times as large as that of absolute genetic distance. When including both measures in the regression, genetic distance relative to the frontier remains significant while absolute genetic distance becomes insignificantly different from zero. The effects are large in magnitude – a one-standard-deviation increase in genetic distance relative to the technological frontier (the US in the 20th century) is associated with an increase in the absolute difference in log income per capita of almost 29% of that variable’s standard deviation.

Our model implies that after a major innovation, such as the Industrial Revolution, the effect of genealogical distance should be pronounced, but that it should decline as more and more societies adopt the innovations of the technological frontier (which, in the 19th century, was the UK). These predictions are supported by the historical evidence. The figure below shows the standardised effects of genetic distance relative to the frontier for a common sample of 41 countries, for which data are available at all dates. The figure is consistent with our barriers model. As predicted, the effect of genetic distance – which is initially modest in 1820 – rises by around 75% to reach a peak in 1913, and declines thereafter.

Figure 1. Standardised effect of genetic distance over time, 1820-2005


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