Robert C. Allen; Tommy E. Murphy; Eric B. Schneider (2012) The Colonial Origins of the Divergence in the Americas: A Labor Market Approach. The Journal of Economic History, 72: 4.
After the last post, about Jared Diamond’s analysis of Why Nations Fail, it’s worth making some comments about Allen, Murphy and Schneider (AMS) new paper about the North and Latin America divergence. Acemoglu and Robinson book is in large part a consequence of two notorious papers that deal with America divergence: “The Colonial Origins” and “Reversal of Fortune”. The question of why some nations don’t succeed comes from the natural experiment of two regions that were almost simultaneously colonized and developed different sets of institutions.
It’s a compelling story. And AMS remember that that are other papers that offer similar compelling (and comparative) stories, such as: Legal frameworks (Common x Civil Law), human capital, geography (agricultural potential for different crops/ transport costs), culture…
The fact that all these stories have substantial data to back them up raises the always problematic issue in history about how much we can trust in counterfactuals. Don’t get me wrong, I’m a big fan (go Fogel!), but the problem I have with counterfactuals for (very) big questions is that there always a lot of noise in the analysis. All the papers quoted by AMS seem to have a human problem, not a methodological one: The Confirmation bias (Kahneman 2012), that is, when you have a point of view, all history will back you up.
The authors state this problem as follows:
“These variations raise the tantalizing possibility that the causes of economic success can be reduced to culture, institutions, or geography, and different analysts have championed one or another of these possibilities.”
And try to reframe the problem:
“The truth is that nobody knows when the Great Divergence occurred in the Americas, so explanations of that divergence drift across the centuries without any firm anchor.”
The anchor that they present is an estimate of real wages in some cities in North and South America between 1500 and 1800. Well, spoiler alert, they find that North America, for much of the period, was way more prosperous, while Latin America was much poorer. So the great divergence between north and south was a result of initial differences in wages.
For me, Bob Allen well known focus on wage data, also used for the Industrial Revolution debate, is an appealing one because is more tangible than Mokyr like explanations. However, in a 500 years span, initial differences in real wages that generated “ascending spiral of progress in North America”, leaves me with some questions, especially regarding countries that increased their income in a dramatic way in a short time (I’m looking at you South Korea). It’s important to know wage differences in the past, especially for the big/small divergence debate, but I think that the debate about Latin America really start after 1800, especially with my experience with Brazil.
Read what AMS state at the end of the paper: “The demand for labor in both continents depended on natural resources, technological efficiency, transportation costs, the ratio of export to import prices, and the quality of political institutions.”
Technological efficiency (how countries experienced the industrial revolution) / transportation costs / export to import prices – were more a post-1800 thing.
I really liked the paper. I think the GDP / real wage series is the way to go if we want to understand what was happening, but I think the period is a little bit awkward for a big part of Latin America, like Uruguay, Argentina and Brazil.
Also, a recent Foreign Policy article by Daniel Altman makes some points about the importance of high real wages and globalization.
“What makes volatile countries settle down and grow in a stable way? Is it a change of institutions, opening the door to trade, or the end of a war? Perhaps it’s none of these. As crazy as it sounds, simply reaching a set level of income may be enough.”
“The difference here may be as simple as one word: globalization. Brazil, Chile, Peru, and Uruguay have been able to bolster their growth with foreign investment to a degree that Argentina and Venezuela never could, not just in the extent of the investment but also in its diversity. Globalization has also made South American countries less isolated, both politically and culturally.”