Category: History

This is from the 1970s, and with Lance Taylor:

The presumption that devaluation is expansionary is not supported by firm empirical evidence. Why, then, is it so widely accepted? Leftists have been known to suggest class bias — as we will argue later, devaluation does typically redistribute income from wages to profits — but this is too glib. We believe, instead, that the orthodox view of devaluation derives much of its strength from the persuasive power of the simple, elegant models in which it is presented. Since skeptics have mostly relied on Journalism or at best partial equilibrium analysis, it is not surprising that theoretical discussion is dominated by the belief that devaluation has an expansionary effect.

As just hinted, neglecting the contractionary impacts of devaluation amounts to ignoring income effects, especially those transferring real purchasing power toward economic actors with high marginal propensities to save. By redirecting income to high savers, devaluation can create an excess of saving over planned investment ex_ ante , and reductions in real output and imports ex_ post .

…Casual empiricism suggests that all three circumstances prevail in many countries, especially the less developed ones. In these
countries a deflationary impact from devaluation is more than a remote possibility; it is close to a presumption. The purpose of this paper is to show in a formal model how devaluation can cause an economic contraction. The results will come as no surprise to those concerned with policy in the underdeveloped world.

There is nothing wrong with changing your mind, as indeed I have myself on numerous issues.  The point is that most macro questions are not cut and dried, and opposing viewpoints are rarely stupid.  I also note a general tendency that, when critics attack other people, they are often attacking views they once held themselves.  I leave it to Adam Phillips and Darian Leader to tell us what that means.

The document you will find here.  For the pointer I thank Jay S.

Although inflation in the late 1970s was below the 1974-1975 level, it was high by post-Korean War standards.  It was up from 16% in 1977 to 22% in 1978 and 1979.  The average rate of inflation in Korea in the period 1962-1969 was 17.3%.  In the period 1970-1979 it was 19.3%.

You will note that  South Korea, during those years and subsequently, was one of the greatest growth marvels in all of human history.

The point is not that we should aim for such high rates of inflation today, rather that if growth is strong an economy can stomach more inflation than you might think.

That quotation is from Alice Amsden, Asia’s Next Giant: South Korea and Late Industrialization.

Greg Clark has argued that private property was secure in medieval England on the basis that

‘Medieval farmland was an asset with little price risk. This implies few periods of disruption and uncertainty within the economy, for such disruption typically leaves its mark on the prices of such assets as land and housing’ (p 158).

And on the basis of low taxes in medieval England, he goes on to claim that:

 ‘if we were to score medieval England using the criteria typically applied by the International Monetary Fund and the World Bank to evaluate the strength of economic incentives, it would rank much higher than all modern high-income economies—including modern England’ (p 147) . . .   If incentives are the key to growth, then some preindustrial societies like England had better incentives than modern high-income economies. And incentives may be much less important to explaining the level of output in economies than the Smithian vision assumes’ (p 151).

Even if most would not go so far as Clark, many economic historians now argue that property rights were secure in late medieval and early modern England, and that some property rights actually became less secure after the Glorious Revolution. Drawing on the work of Jean-Laurent Rosenthal, Dan Bogart, and Gary Richardson, Bob Allen summarizes these findings as follows:

‘Growth was also promoted by Parliament’s power to take people’s property against their wishes. This was not possible in France. Indeed, one could argue that France suffered because property was too secure: profitable irrigation projects were not undertaken in Provence because France had no counterpart to the private acts of Parliament that overrode property owners opposed to the enclosure of their land or the construction of canals or turnpikes across it’

See here, here and here for links to the academic work that underpins these claims. For the sake of argument let us agree that they are correct.   What does this finding mean?

It does not mean that insecure property rights are good for growth.

It does mean that feudalism was bad for growth.

The property rights that Clark and others describe as being secure in medieval Europe were feudal property rights.  Feudalism structured ownership rights in such a way as to channel rents to the king and the military elite.  Feudal property rights were designed to maintain concentrated holdings of land, large enough to support feudal armies.  Feudal laws limited land sales that would break-up large estates and bundled together rights over land with rights over individuals.

In a market economy, where rights are clearly defined, assets will be allocated to their highest-value user so long as transaction costs are not too high.  In this type of environment protecting asset holders from expropriation provides the best incentives for investment and growth. But this was not true of the medieval world.

What Bogart and Richardson establish is that these feudal rights impeded efficient land use in England and made it difficult to organize the provision of public goods.  They show how Parliament in the 18^th century was able to rewrite and override existing property rights.  Their work suggests that given the initial allocation of rights and the extremely high transactions costs associated with feudal land law, a reconfiguration of property rights was necessary for economic growth to begin.

In a recent book Besley and Persson 2011 argue that fiscal capacity is strongly correlated with economic performance across countries (see also here and here). They cite important historical work by Mark Dincecco who has shown that across Europe, between 1650 and 1900, higher taxes were associated with both limited government and economic growth (see here). The following graph is from Dincecco (2011) which contains similar figures for other European countries.

This finding can be interpreted in many ways. The state capacity literature emphasizes the idea that governments need an adequate tax system in order to provide the institutional preconditions necessary for economic growth.

Perhaps there is an alternative explanation for the historical correlation between higher taxes and economic growth. This has to do with selection bias in historical data sets. Modern states did not emerge out of nowhere.  They replaced pre-existing local systems of taxation, patronage, and rent seeking. We have a relatively large amount of information about what strong, central, governments were doing and what taxes they were collecting.  However, we do not have much information about local regulations or tax systems that existed before the rise of modern states because these local institutions were subsumed or destroyed by the state-building process. There is plenty of evidence that these local systems imposed large deadweight losses, although it is difficult to put together a database measuring how large these distortions were (see this paper by Raphael Frank, Noel Johnson, and John Nye or just read about the Gabelle; also see Nye (1997) for this point).

The implication of this argument is that an increase in the measured size of central government need not have been associated with an increase in the total burden of government. Rather the total deadweight loss of all regulations and taxes could have gone down in the 18^th and 19^th centuries, even as the tax rates  imposed by the central state went up.

(Note: the increase in per capita revenues in England depicted in the figure is largely driven by higher rates of taxation (notably the excise) and more effective tax collection and not by Laffer curve effects (although the growth of a market economy during the 18th century did make it easier for the state to collect taxes).

A long tradition claims that one factor that distinguished western Europe from China, the Middle East, and Russia was the presence of independent city-states.  Max Weber, Henri Pirenne, and John Hicks argued that city-states played a crucial role in beginning the long road to modern economic growth (see this earlier MR post on producer and consumer cities).

De Long and Shleifer (1993) argued that city-states ruled by merchants favored policies that protected property rights and markets and that they imposed lower taxes than princely states did. But historians have found that cities like Florence actually imposed much higher taxes than feudal states did (see Epstein 1991, Epstein 1993 [JSTOR links], or Epstein 2000). Until now, however, no-one (to the best of my knowledge) has provided systematic evidence on the economic performance of independent city-states across Europe. A new paper by David Stasavage attempts to do just this. Using city population as a proxy for economic development, he finds that  autonomous city-states overall didn’t grow faster than other cities. Interestingly, new city-states which had been independent for less than 200 years did grow faster.  After more than 200 years of independence, growth in these independent cities slowed and they grew more slowly than did ordinary cities.

Stasavage interprets this finding in terms of a model of oligarchies proposed by Acemoglu (2008). Oligarchies initially have an incentive to impose institutions that favor markets and economic growth. However, oligarchies also impose barriers to entry, and over time these barriers to entry lead to growth slowing down.  Other (complementary) mechanisms may also have been at work. In particular, Stasavage does not consider the role of external warfare. Once they became rich and prosperous, city-states were often attacked by neighboring territorial states. Many city-states then had to impose high taxes and other extractive policies in order to survive. In any case, these findings are significant for an argument that I will evaluate in subsequent posts that claims that the rise of state capacity played an important role in getting growth going in early modern Europe.

Jeff Sachs claims that Africa was always the poorest continent in the world, that many parts of Africa have never experienced economic growth, and that comparisons between African countries and Asian countries are highly misleading (see in this video for example).

Until recently it has been hard to establish basic stylized facts about African development because GDP data only goes back to 1960, but Ewout Frankema and Marlous van Waijenburg have been able to compile internationally comparable real wage estimates back to the 1880s (pdf). They follow Bob Allen’s influential methodology, constructing representative consumption bundles, and then seeing how many bundles an unskilled worker could obtain. The welfare ratios that result show that it simply makes no sense to talk about African economic performance in general in the colonial period.

There were at least two distinct economies in British colonial Africa, a comparatively high-wage, labor scarce, economy in West Africa, and a low-wage economy in East Africa.   Real wages in many West African cities grew more or less continuously, from the 1880s until the 1930s, as these economies enjoyed a boom in commodity exports, and West African wages exceeded wages in many Asian cities through the colonial period. The story of poverty and stagnation in modern West Africa is not a story of permanent stagnation, but of growth collapses and growth reversals (especially in the 1970s and 1980s).

In contrast, real wages were extremely low in British East Africa.  Many East African economies like Kenya never experienced rapid growth in the colonial period. It was the crisis of the 1970s that created the current view we have of all of sub-Saharan Africa as sharing a common set of problems. Modern Ghana, or the Gold Coast was roughly twice as rich as Kenya in the colonial period,  but by the 1980s per capita GDP in the two countries was the same.  Were the high real wages of the colonial period solely the rest of labor scarcity? (like the high wages recorded in medieval Europe after the Black Death) or did they represent a genuine moment of opportunity that could have led to sustained economic growth?

Consider this evidence in light of recent optimism about growth rates in Africa in the 2000s (see this MR post).  Like the increase in real wages that occurred in the colonial period, recent growth has been driven by an export boom and rising commodity prices.  These findings suggest that episodes of economic growth are less rare in African history than we might previously have supposed.  Instead, perhaps the real difficulty lies in sustaining economic growth, and not in getting growth going for a few years.