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Acemoglu, Bautista, Querubin and Robinson on Political and Economic Inequality and Growth

Abstract: Is inequality harmful for economic growth? Is the underdevelopment of Latin America related to its unequal distribution of wealth? A recently emerging consensus claims not only that economic inequality has detrimental effects on economic growth in general, but also that differences in economic inequality across the American continent during the 19th century are responsible for the radically different economic performances of the north and south of the continent. In this paper we investigate this hypothesis using unique 19th century micro data on land ownership and political office holding in the state of Cundinamarca, Colombia. Our results shed considerable doubt on this consensus. Even though Cundinamarca is indeed more unequal than the Northern United States at the time, within Cundinamarca municipalities that were more unequal in the 19th century (as measured by the land gini) are more developed today. Instead, we argue that political rather than economic inequality might be more important in understanding long-run development paths and document that municipalities with greater political inequality, as measured by political concentration, are less developed today. We also show that during this critical period the politically powerful were able to amass greater wealth, which is consistent with one of the channels through which political inequality might affect economic allocations. Overall our findings shed doubt on the conventional wisdom and suggest that research on long-run comparative development should investigate the implications of political inequality as well as those of economic inequality.

Discussion [Crossposted at Crooked Timber]

Tyler Cowen points to a very interesting new paper by Daron Acemoglu and his colleagues (PDF - it was here this morning, but this link isn’t working for me any more; see here for a slightly earlier version) on the relationship between political and economic inequality. Tyler’s gloss is that this provides general insights into the “meme” of whether economic inequality is bad for growth, and concludes that “at least from that data set, the real problem seems to be rent-seeking behavior through the political process.” Thus, unless I misunderstand him (which is possible; he may just be blogging in shorthand), he is saying that this paper provides significant evidence suggesting that economic inequality isn’t the cause of slower economic growth; instead, political inequality and rent-seeking are at fault.

This, however, isn’t how I read the paper. Acemoglu and his colleagues seem to me to be quite careful not to extrapolate broad conclusions about the general relationship between inequality and economic growth from their findings (they do believe that there are some important implications for the development literature, but that’s not quite the same thing). Instead, what they argue is that under conditions of weak institutionalization, some degree of economic inequality may be a good thing. Roughly speaking, their causal argument is that under these conditions powerful land-owners may serve as a counterweight to politicians who have access to the powers of a repressive state, preventing the latter from grabbing as much property to themselves as they would be able to otherwise. When economic inequality is lower, power is diffused among many actors, who can’t organize against the state as successfully because of collective action problems (here they borrow from Robert Bates’ research on Kenya).

This is a very interesting, and potentially very important result for the study of development, if it’s borne out elsewhere. However, its implications for the general meme that Tyler is talking about seems to be more limited. It’s likely to tell us interesting things about what is happening in countries where there is a more or less naked power struggle going on between different interests to define property rights etc. However, on the authors’ own interpretation, its relevance to countries where these struggles are more sublimated is at best uncertain. Acemoglu and his co-authors specifically distinguish their findings from previous work on the nineteenth century US South, where there is evidence of a strong link between economic inequality and growth. They suggest that the key difference between the two cases is their respective levels of political development (institutions in the South did place some constraints on what politicians could do that weren’t present in Columbia, thus vitiating the need for a countervailing force against the state).

In contrast, the relationship between inequality and economic outcomes appears to be different in strongly institutionalized environments such as the United States. Here, political institutions place certain constrains on politicians so that having an independent landed elite is not necessary as a check against politicians and does not necessarily create a tendency for better outcomes. Rather, and possibly consistent with the US evidence, in such environments greater inequality may have negative economic or political consequences (for example, in the extreme via “political capture,” capture,” as in Acemoglu and Robinson, 2006b, or Acemoglu, Ticchi and Vindigni, 2006) [quote from earlier draft - will update tomorrow if nec.]

Thus, the paper is really an argument about what we are likely to find in countries with more-or-less openly predatory states, not about economic inequality’s more general effects for growth. Regardless, this is an interesting and potentially very important paper that’s well worth reading.

Daron Acemoglu, María Angélica Bautista, Pablo Querubín, James A. Robinson, “Economic and Political Inequality in Development: The Case of Cundinamarca, Colombia.” Unpublished paper. Available here.

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