And if growth in the North by itself makes Africa poorer?

In a just published paper (in the Proceedings of the National Academy of Sciences [of the United States of America]) on the effects of climate change on growth, Noah Diffenbaugh and Marshall Burke, argue, using a complex model, that the temperature change driven by CO₂ emissions has affected poor counties the most, and reduced their growth by a cumulative 17 to 31 percent (between 1961 and 2010). Population-weighted between-country inequality has therefore increased because of climate change. The key result of their study is in a graph (panel B) reproduced below…

which shows that, compared to the situation without climate change, the poorest 10% of the population in the world (more exactly, the poorest decile of world population if people are ranked by their countries’ GDPs per capita) have lost a quarter of their output while the rich countries have gained approximately 25%.

Now, the full model is impossible to figure out from a short text of five pages, but, so far as I can tell, it is based on three key links. First, that increased carbon emissions caused an increase in worldwide temperature. Second, that the increase in temperature is uneven across the world. Third, that the increase in temperature is particularly bad for the countries in the tropics which already suffer from hot climate, and from extreme climate events like droughts, storms etc. As the authors write “historical warming has reduced economic growth and lowered per capita GDP” of poor countries because “the mean temperature of…many poor countries lies in the extreme warm tail” which is too high for economic activity.

Of the three links the most difficult to prove is, I think, the third: that the climate change (more exactly, higher temperature) is responsible for the slowdown in poor countries’ growth (mostly in Africa). Notice that if true, the claim would imply a theory of growth largely driven by geography and climate. For if the recent increase in temperature in Africa pushed the continent further away from the optimal temperature for economic activity (which, according to the authors’ model, is around 13 degrees Celsius), then the fact that Africa was, even before anyone heard of climate change, warmer that this optimal temperature, must have historically had negative effect on Africa’s growth.

We are thus facing here a variant of economic growth theories that put the emphasis not only on exogenous factors, not only on geography (like navigable rivers, impassable mountains) but on specific exogenous geographic factors like climate. The growth regression (the step No. 3) reported in the paper is breathtaking in its simplicity. It is a country fixed effect panel regression where country’s growth rate depends on contemporaneous temperature and precipitatons (both linearly and squared), country and time fixed effects…and nothing else! No employment, no capital, no saving rates, no institutions, no civil wars…

I will leave it at that: the climatological explanations have been used for many things: from Montesquieu who thought that climate explained differences in political systems to Paul Bairoch’s argument regarding the non-transmission of the agricultural revolution.

But let’s suppose that this explanation is true and that indeed, as the authors claim, climate change was responsible for slowing the growth of poor countries. That would have enormous consequences (which, by the way, they, at least in this paper, fail to mention).

Since the change in climate is brought about by historical emissions of the currently rich counties (the stock effect), and by their current emissions plus those of China (the flow effect), this means that the very growth in the North is directly responsible for the lack of growth in the South. The implication is quite extraordinary. In the past, dependencia theorists proposed that the “center”, the Global North, deepened the underdevelopment of the Global South through a division of labor that let the South produce only agricultural goods; or that the Global North helped develop only some parts of Southern economies while leaving the rest underdeveloped. Such theories saw delinking from the North as a solution. 

But the important point is to notice that in those theories the integration of  the Global North and the Global South was bad for the South; in the new “climate theories” it is simply the fact that the North grows that is bad. It need not interact with the South of all. Northern growth alone makes the South poorer. This is quite extraordinary. It is not that my exploiting or cheating somebody is a condition for my wealth; it is that my wealth as such (acquiring it with no interaction with the injured party) is a bad news for somebody else (Africa in this particular case).

Moreover, it means that the very growth of the Global North makes the reduction or the eventual elimination of African poverty difficult, if not impossible. If we are to believe the authors, then every percentage point of additional GDP in the North makes conditions in Africa worse and the reduction of poverty there more difficult.

Thus for the elimination of global poverty, we need drastic reduction in emissions which means absolute reduction of Northern incomes, namely, a steady negative rate of growth of rich countries.

I will leave it to the reader to reflect on how politically feasible such a solution is  (I wrote about that before, here and here)—but I think that the enormity of the implications of these results should be realized. Now, whether the results really make sense or not, whether the level of temperature by itself is a significant explanatory factor of economic development is a thing that needs to be proved. More panel regressions of economic growth?  I thought we left them behind in the 1990s but perhaps I was wrong.

Francis Fukuyama against mainstream economics

I mentioned in my last post in which I reviewed Francis Fukuyama’s excellent “The origins of political order” that in my next post I will present some further comments on the book. (The first post was mostly a summary of the book’s key points.)

But as I was taking notes of the book—a thing I have been doing for many years after finishing good books—I noticed among my notes a number of Fukuyama’s views on economics, many directy critical of some mainstream nostrums. Because I think that few economists have read Fukuyama, and perhaps  even fewer have read him attentively, and perhaps even fewer have read the entire book, I decided to bring up Fukuyama’s several economic statements, with only minimal commentary from me.  

Against “property rights fetishism” (Fukuyama’s term)

“The theory that links the different components of the rule of law to economic growth is empirically questionable and becomes doubly so when projected back onto societies that existed under Malthusian economic conditions” (p. 247).

“In a Malthusian economy where intensive growth is not possible, strong property rights simply reinforce the existing distribution of resources. The actual distribution of wealth is more likely to represent chance starting conditions or the property holders access to political power than productivity or hard work….rigid defenders of property rights often forget that the existing distribution of wealth does not always reflect the superior virtue of the wealthy and that markets are not always efficient” (p 142).

At the end of the book, Fukuyama, when discussing the contemporary China, writes that “good enough” rule of law is often sufficient for fast economic growth. Moreover, technology is much more important than property rights. Fukuyama points out that in a Malthusian world, no property rights will provide you with an economic surplus; but technological development will (p. 249).

These comments are quite clearly a critique of the views propounded by Daron Acemoglu and James Robinson in, among other works, “Why Nations Fail” (the book was published after Fukuyama’s “The origins...”); but also of a number of economists who in a Whiggish type of history-writing consider the protection of property rights as almost a sole, or a sufficient, factor needed to ensure economic growth. Economic historians  have generally been much less convinced of that.

Against Hayek

In several sections of the book, Fukuyama criticizes Hayek’s ahistoricism, that is, the assumption, frequently stated in Hayek’s work (including in “Law, Legislation and Liberty”), that the English Common Law emerged entirely through “spontaneous” decentralized coordination. This is rejected by Fukuyama, who argues that without a strong state Common Law would have never come into existence.

Here is the key point:

“Hayek was simply wrong about certain of his historical facts” (p. 254). “The later evolution of the Common Law might have been a spontaneous process, but its existence as a framework for legal decision-making required centralized political power to bring it into being” (p. 258).

And also,

“This is the point that Hayek and his libertarian followers fail to see: the Common Law may be the work of dispersed judges, but it would not have come into being in the first place…without a strong centralized state” (p. 260).

The same thing is repeated, almost verbatim, on p. 253.

In the last section of the book, there is yet another critique of Hayek. Pace Hayek, large scale designs sometimes do work, writes Fukuyama (p. 446). In other words, “constructivism” is not bound to fail every time.

Against Mancur Olson

Fukuyama also disagrees with Mancur Olson. The critique is made in the context of the discussion that tries to explain why Chinese absolutism that was neither constrained by the rule of law nor accountability, imposed only very limited taxes on citizenry. (This was also discussed recently by Debin Ma in his “Rock, Scissors, Paper”.) Fukuyama gives several reasons, including difficulties of delegation and control over an extensive domain, “satisficing” rather than maximizing behavior etc.

I am not sure however if his critique of Olson is justified because in Olson’s model, Chinese emperors are “stationary bandits”; hence they have an “all-encompassing interest” and are not indifferent to the wealth of the realm. It is then possible that the tax rates they applied did not attempt to maximize own revenue.

Here is Fukuyama:  

“The only problem with Olson´s theory is that isn’t correct. The rulers of traditional agrarian societies often failed to tax their subjects at anything close to Olson´s posited maximizing rate” (p. 304).

“Olson´s assumption that any ruler would want to maximize revenues reflects the common assumption of modern economics that maximization is a universal characteristic of human behavior. But this is an anachronistic projection of modern values backward onto a society that did not necessarily share them” (p. 306).

Against the rational choice model

The last sentence could also be read as a link with the next critique: that of a rational homo economicus. Fukuyama’s argument is that humans are social beings; they never existed in a presocial state, and cooperation is not merely the product of them figuring out whether they are in some cases better off cooperating than not. Coperation, Fukuyama seems to say, is “hard-wired” since humans were always “social animals”. (This argument is consistent with Fukuyama’s emphasis on “patrimonialization”, or tribalism, as a defining feature of most historical political orders.)

“..a rational choice model of collective action in which individuals calculate that they will be better off by cooperating with one another, vastly understates the degree of social cooperation that exists in human societies and misunderstands the motives that underlie it” (p. 439).

And again, a few pages later: 

“rational self-interest is wholly inadequate in explaining the degree of social cooperation” (p. 442).

Against Amartya Sen

Just one sentence here, to say that current Indian democracy is not based on a history of democracy in Indian states but on the fact that the fragmented Indian polity, with the “checks and balances” exercised by the Brahmins over the rulers never allowed for the rise of absolutism. There was no history of democracy in India; but, importantly, there never was a social basis for tyranny.

“This is a very superficial view of contemporary Indian politics. It is not that democracy in its modern institutional manifestations is deeply rooted in ancient Indian practices, as observers like Amartya Sen have suggested. Rather the course of Indian political development demonstrates that there never was the social basis for development  of a tyrannical state that could concentrate power, to reach deeply into society and change its fundamental social institutions” (p. 187).

I am not sure that on this point Fukuyama and Amartya Sen are so far apart as the statement implies—but I may be wrong.

At the end, another concept that I really liked, handsomly-termed,  “the iron law of latifundia” or large real estates: “the rich tend to get richer in the absence of state intervention” (p. 368)

Fukuyama by these statements surely calls on the economists to rethink some of their cherished ideas. And to ask: do such ideas work only now, but not in history; do they work only on paper, but not in real life?