Title: Tropics, Germs and Crops: How Endowments Influence Economic Development
Author: William Easterly & Ross Levine
Scope: 4 stars
Readability: 2.5 stars
My personal rating: 5 stars
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Topic of Article
The authors attempt to assess the importance of geography, institutions and economic policy on current levels of economic development.
- Geography plays an important role in economic development, but it does so indirectly.
- Geography influences institutions. It is institutions that directly affect economic development. The causality is Geography > Institutions > Economic Development
- Economic policy does not have a statistically significant effect on economic development.
Important Quotes from Article
Does economic development depend on geographic endowments like temperate instead of tropical location, the ecological conditions shaping diseases, or an environment good for grains or certain cash crops? Or do these endowments of tropics, germs, and crops affect economic development only through institutions or policies? We test the endowment, institution, and policy views against each other using cross country evidence. We find evidence that tropics, germs, and crops affect development through institutions. We find no evidence that tropics, germs, and crops affect country incomes directly other than through institutions, nor do we find any effect of policies on development once we control for institutions.
The results clearly indicate that endowments explain economic development. Each of the four endowment indicators – settler mortality, latitude, land locked, and the crops/minerals indicators – significantly explain cross-country variation in the logarithm of GDP per capita.
Nevertheless, settler mortality and the crops/minerals variables remain independently linked with economic development even when all the endowment and control variables are included simultaneously. Note that settler mortality alone explains almost half of the cross-country variation in GDP per capita. The latitude and landlocked variables are not actually significant.
Endowments help explain cross-country variation in institutional development. Each of the endowment indicators is significantly associated with the aggregate institutions index. These relationships hold when controlling for legal origin, religious composition, and ethnic diversity.
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).
Settler mortality, latitude, and crops/minerals are always strongly correlated with institutional development even when controlling for legal origin, religious composition, and ethnic diversity (which are themselves significant in many of the regressions).
The coefficient on the Institutions Index is remarkably consistent… and economically large. For instance the regression coefficients indicate that if Mexico exogenously improved its level of institutional development from about the sample mean (–0.07) to the level in the United States, this would eliminate the huge GDP per capita gap between the two countries.
Endowments do not explain economic development beyond the ability of endowments to explain institutional development.
The results provide strong support for the institutions hypothesis but no evidence for the geography hypothesis. Endowments explain institutions, which in turn explain economic development.
The evidence suggests that macroeconomic policies do not help account for economic development after accounting for the impact of institutions on the level of economic development.
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.
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.