Islam and economic performance: historical and contemporary links

An interesting looking article by Timur Kuran forthcoming in the Journal of  Economic Literature goes sunder the above title.

The abstract reads,

This essay critically evaluates the analytic literature concerned with causal connections between Islam and economic performance. It focuses on works since 1997, when this literature was last surveyed. Among the findings are the following: Ramadan fasting by pregnant women harms prenatal development; Islamic charities mainly benefit the middle class; Islam affects educational outcomes less through Islamic schooling than through structural factors that handicap learning as a whole; Islamic finance hardly affects Muslim financial behavior; and low generalized trust depresses Muslim trade. The last feature reflects the Muslim world’s delay in transitioning from personal to impersonal exchange. The delay resulted from the persistent simplicity of the private enterprises formed under Islamic law. Weak property rights reinforced the private sector’s stagnation by driving capital out of commerce and into rigid waqfs. Waqfs limited economic development through their inflexibility and democratization by restraining the development of civil society. Parts of the Muslim world conquered by Arab armies are especially undemocratic, which suggests that early Islamic institutions, including slave-based armies, were particularly critical to the persistence of authoritarian patterns of governance. States have contributed themselves to the persistence of authoritarianism by treating Islam as an instrument of governance. As the world started to industrialize, non-Muslim subjects of Muslim-governed states pulled ahead of their Muslim neighbors by exercising the choice of law they enjoyed under Islamic law in favor of a Western legal system.

In short, institutions matter. They help explain why around 1000 years ago the Islamic world was the most advanced area of the world but slowly they lost that advantage as Western countries developed more growth friendly institutions.

Joel Mokyr interview

An interview of Joel Mokyr by Ana Swanson from the Washington Post.

Why did the industrial revolution start in Europe, rather than in China? In part because,

It isn’t just that China doesn’t have an Industrial Revolution, it doesn’t have a Galileo or a Newton or a Descartes, people who announced that everything people did before them was wrong. That’s hard to do in any society, but it was easier to do in Europe than China. The reason precisely is because Europe was fragmented, and so when somebody says something very novel and radical, if the government decides they are a heretic and threatens to prosecute them, they pack their suitcase and go across the border.

So exit options can matter. One government doesn't like your ideas, move onto the next.

North v's South

GDP or GDP per person may not be a perfect measure of welfare but sometimes it does tell a story.

The graph below is of GDP per person for North and South Korea, and it does tell a story about peoples' welfare. And economic systems.

Do minimum wages stimulate productivity and growth?

This question is asked in a new paper (pdf) under that title by Joseph J. Sabia (San Diego State University, USA, and IZA, Germany).

The basic finding from the paper is that minimum wage increases fail to stimulate growth and can have a negative impact on vulnerable workers during recessions.

The Pros and Cons of minimum wages are outlined as,

The author's main message is

Empirical evidence provides little support for claims that higher minimum wages will: (i) serve as an engine of economic growth by redistributing income to workers with a relatively high marginal propensity to consume; or (ii) alleviate poverty during economic downturns. Therefore, policymakers wishing to aid low-skilled workers during recessions, or to spur economic growth, should not look to the minimum wage as a policy solution. Rather, means-tested, pro-work cash assistance programs and negative income tax schemes can deliver income to the working poor far more efficiently.

Do politicians affect economic outcomes?

For the US at least the answer, in one sense, is yes: the US economy has performed better under Democratic presidents than Republican ones.

But why?

A new paper in the American Economic Review (Vol. 106, Issue 4 -- April 2016 ) looks at this question.

Presidents and the US Economy: An Econometric Exploration
Alan S. Blinder and Mark W. Watson

The US economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance. For many measures, including real GDP growth (our focus), the performance gap is large and significant. This paper asks why. The answer is not found in technical time series matters nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior total factor productivity (TFP) performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. (JEL D72, E23, E32, E65, N12, N42)

When you look at the things that drive the Democratic advantage - benign oil shocks, superior total factor productivity (TFP) performance, a more favorable international environment and more optimistic consumer expectations - apart from may be the more optimistic consumer expectations, it is not obvious how the current term president could affect the other drives of economic performance.

So in this sense the answer to the question is no. It looks more like luck than good management on the part of politicians that drives economic success.

TEC Lectureship on Europe and the World 2015

Here are two lectures given by Joel Mokyr, the Robert H. Strotz Professor of Arts and Sciences and Professor of Economics and History at Northwestern University.

The first is "Culture of Gowth: Origins of the Modern Economy"


The second is "Long-Term Economic Change in China and Europe: The Needham Paradox Revisited"

So it's all endogenous

There has been much comment around the traps about a study that claims that ageing populations  hinder economic growth.The study predicts the effect of demographic change on growth rates in the current decade and shows that an ageing population will knock over a percentage point off growth rates for some countries, including New Zealand - see the graphic below.


But now James Zuccollo at the TVHE blog points out that the effect may be endogenous. Zuccollo writes,

In a ray of light, this morning’s FT (£) reported a study of over 15,000 German employees that examined the relationship between ageing and productivity. One of the authors is quoted saying:

As workforces age, employers are concerned that productivity will decrease. That is not so. What matters is not chronological age but subjective age.

The research suggests that older people are systematically excluded from training activities, and are relegated to less creative and meaningful work, which renders them less productive. As the workforce ages, that may begin to change. As it changes, the relationship between growth and age structures is likely to weaken.

Getting cause and effect right is important. This highlights why when thinking about topics like productivity you need to think at the firm level. How firms react to changes in the demographics of their workforce will help determine the rate of productivity growth. Just looking at aggregate data can obscure such effects.

GDP and social welfare in the long run

A few weeks ago over at the Offsetting Behaviour blog Eric Crampton was talking about The Case for Economic Growth, a new report put out by the New Zealand Initiative. An obvious question to ask about growth is, What's so great about it? Why should we care if the economy grows or not? After all GDP, and thus growth in GDP, is not identical to social well-being or growth in social well-being. The answer many economists would give, and the New Zealand Initiative report gives, is that growth of GDP over time has a positive correlation with human well-being broadly understood.

It turns out that Offsetting Behaviour isn't the only blog where the advantages of growth are being thought about. At the Conversable Economist blog Timothy Taylor takes a look at an OECD report from last year which asks, How Was Life? Global Well-Being Since 1820, edited by Jan Luiten van Zanden, Joerg Baten, Marco Mira d’Ercole, Auke Rijpma, Conal Smith and Marcel Timmer.

Taylor writes,

So how have other dimensions of human well-being been correlated with this rise in per capita GDP, both over time and across countries? The short answer is that there is a strong positive correlation between per capita GDP and and indicators of education and health status. There is a weaker but still positive correlation between higher per capita GDP and participatory political institutions. There is no clear-cut correlation between per capita GDP and personal security. The relationship between per capita GDP and the environment (viewed as a whole) seems to be an inverted U-shape: that is, growth of per capita GDP is first associated with higher environmental damage, but at some point it seems to be associated with lower damage. The relationship between per capita and income inequality seems to follow a regular U-shape: that is, growth of per capita GDP is first associated with greater within-country income equality up to about the 1970s, but since then is associated with greater inequality. Here are some details.

1) Education

Gains in education have a strong positive correlation with per capita GDP over time and across countries, probably a part of a virtuous circle: that is, a more educated workforce helps economic growth, and an economy with higher per capita income can afford to spend more on education.

[...]

2) Health status over the long-term can be proxied by measures like life expectancy and height. It seems clear that higher per capita GDP is associated with gains in both, although there is some evidence that at the highest levels of GDP, higher incomes are not associated with larger health gains. The report says:

"Life expectancy at birth was about 33 years in Western Europe around 1830, 40 years in 1880, and almost doubled in the period after, with the largest improvements occurring in first half of the 20th century. In the rest of the world, life expectancies started to increase from much lower levels, rising in particular after 1945. Worldwide life expectancy increased from less than 30 years in 1880 to almost 70 in 2000. There is strong evidence of a shift in the relationship between health status and GDP per capita over the past two centuries. Life expectancy improved around the world even when GDP per capita stagnated, due to advances in knowledge and the diffusion of health care technologies."

[...]

3) Personal security over the long-run can be approximated by using data on homicide rates and on war. The report summarizes the evidence on per capita GDP and homicide rates like this: "Western Europe was already quite peaceful from the 19th century onwards, but homicide rates in the United States have been high by comparison. Large parts of Latin America and Africa are also violent crime “hotspots”, and so is the former Soviet Union (especially since the fall of communism), while large parts of Asia show low homicide rates. Homicide rates are in general negatively correlated with GDP per capita – the richer a country, the lower the level, but there are important exceptions."

[...]

4) The overall pattern of political institutions over time is toward greater participation, but the path has often been a bumpy one. [...] an Index of Democracy, where the measure of competition is based on what share of the vote is received by the winning party (when a winning party receives nearly all the votes, competition is low) and a measure of participation based on the share of the adult population that votes. On a worldwide basis, both are rising since 1820. But the rise is bumpy and spiky at times.

[...]

5) Environmental quality is proxied by three measures in this report: biodiversity, and emissions of sulfur dioxide and carbon dioxide. The summary reads: "A negative correlation with GDP per capita is clearly in place when looking at quality of the environment. Biodiversity declined in all regions and worldwide as land use changed dramatically. Per capita emissions of CO2 increased after the industrial revolution in Western Europe and its Offshoots, accelerating in the mid-20th century as other regions increased their GDP, and is still increasing globally. Per capita emission of SO2 (a local pollutant) also increased alongside higher industrial production, but were curbed since the 1970s thanks to the advent of cleaner technologies."

[...]

A key question is whether countries will tend to find ways to reduce environmental damage as their per capita GDP rises--as appears to be happening with SO2. Another way of making the point is that the ways in which economic growth affects the environment are strongly affected by public policy choices. As the report notes:

To some extent SO2 emissions follow an environmental Kuznets curve, with declining emissions beyond a certain level of GDP per capita, and in recent periods biodiversity is also less directly (negatively) related to real income levels. Overall, there is still a rather strong negative link between environmental quality (as measured by these indicators) and GDP per capita, but this link has been weakening in recent years (since the 1970s), probably as a result of successful policies to lower emissions (SO2 probably being the best example).

[...]

6) Inequality of incomes is hard to summarize, in part because we live in a time when there is growing inequality of incomes within countries at the same time that global inequality of incomes is falling (with the rise of incomes in countries like China and India).

[...]

For the global distribution of income, the curves [...] are gradually moving out to the right as economic growth raises the average world income. The area under the curves is also getting larger, which captures the fact that world population has dramatically expanded. It's interesting to notice that in 1970 and 1980, the global distribution of income had two humps, one at a lower income level and one at a higher income level. By 2000, the world is back to a one-hump income distribution.

From a national and regional level, the patterns show look different: "Long-term trends in income inequality, as measured by the distribution of pre-tax household income across individuals, followed a U-shape in most Western European countries and Western Offshoots. It declined between the end of the 19th century until about 1970, followed by a rise. In Eastern Europe, communism resulted in strong declines in income inequality, followed by a sharp increase after its disintegration in the 1980s. In other parts of the world (China in particular) income inequality has been on the rise recently. The global income distribution, across all citizens of the world, was uni-modal in the 19th century, but became increasingly bi-modal between 1910 and 1970 and suddenly reverted to a uni-modal distribution between 1980 and 2000."

What then is the take home measure from this? For a start it is clear that GDP is not the same thing as real social welfare. However, it tends to be true that countries with a higher level of per capita GDP are better off on other dimensions of well-being, not just the consumption of goods and services, but also other factors like education, health, and even personal freedom.

Both the New Zealand Initiative report and the OECD report make the same basic point, growth is good.

Government size and economic growth

The theoretical literature on economic growth offers support for both positive and negative effects of government size on economic growth. There are core areas of government which are said to help growth - e.g. provision of public goods such as infrastructure, rule of law, and protection of property rights - while there are also arguments outlining detrimental effects for growth arsing from the size of government. These occur via mechanisms such as the distortionary effects of high taxes and public borrowing, diminishing returns to public capital, rent-seeking activities and bureaucratic inefficiencies. Such negative effects are said to become more prevalent as the size of government increases.

Such ideas have been formalised in the endogenous growth literature as a non-monotonic relationship between growth and the increasingly distortionary effect of the rising tax rates which are required to fund ever larger government expenditure. In one such model, due to Robert Barro, when government is relatively small growth rises with increases in productive government services, as the positive effects of more public goods dominates, but beyond some critical point the disincentive effects of higher taxes on savings and investment reduce the growth rate. If the non-linear hypothesis is valid and the effect of government spending on long-run economic growth does vary with its size this would offer clearer guidelines on the appropriate fiscal policy prescription for a country of a particular government size. Furthermore, implicit in the non-linear hypothesis is the existence of some optimal size of government which would maximise economic growth.

There is a new paper - The Effect of Government Spending on Economic Growth: Testing the Non-Linear Hypothesis by Tamoya Christie - in the Bulletin of Economic Research which examines the relationship between government size and long-run economic growth. The paper explicitly accounts for the likelihood of a non-linear effect. It contributes to the literature in a number of ways.

First, in terms of methodology, the paper makes improvements to previous empirical studies by applying threshold analysis (Hansen, 2000) to a panel of countries. This technique has been widely used as the preferred method to identify threshold effects (Khan and Senhadji, 2001; Adam and Bevan, 2005; Chen and Lee, 2005; Falvey et al., 2006; Haque and Kneller, 2009), particularly when the variable of interest is observable, but the position of the threshold is not known. The methodology uses a sample-splitting framework and follows an objective strategy for identifying and testing changes in the slope. One important advantage of threshold analysis is that it avoids the ad hoc, subjective pre-selection of threshold values – a major critique of previous studies. In addition, the generalized method of moments (GMM) dynamic panel technique is applied to address potential endogeneity of government expenditure, which is measured as a share of GDP. Second, with respect to data, the study employs an updated dataset with a broad cross-section of countries over a long time span. Pulling data from the IMF's Government Finance Statistics (GFS), the sample contains 136 countries over the period 1971–2005. Most important, this data source offers a more comprehensive measure of government size by using total government expenditure (excluding interest payments) as opposed to government consumption expenditure as the proxy. The consumption measure, though widely used in empirical studies, does not include public capital formation and so cannot fully capture the productivity-enhancing effects of government services. Moreover, the GFS data contain sectoral decompositions of government spending, which facilitates isolating productive elements of government spending from the total.

Likely the most interesting result of the paper is that it finds evidence in support of Barro's non-linear hypothesis. For total government spending above 33 percent of GDP, there is a strong negative effect on growth. However for governments of a size less than this level the negative effects are much smaller and even becomes positive when productive government spending is singled out. The paper's findings also suggest that the level of economic development and the quality of government present additional sources of potential non-linearities.