How fast does populism destroy economic freedom in Latin America?

The turn of the twentieth century has seen an increase in populist government in Latin America. That populism is no friend of free markets is well known. And even if their movement against free markets if fairly quick, it is common for individuals to loose track of how fast they are loosing their economic freedoms.

There are five cases of populist governments in Latin America that can work as benchmarks for the region. In particular, we can look at the behavior of governments in Argentina, Bolivia, Brazil, Ecuador, and Venezuela for the time frames depicted in the following table.

Table 1

During this time period, populist governments failed to increase GDP per capita consistently faster than the region. The only exception is Argentina. But its fast increase in GDP is largely explained as recovery after the 2001 crisis and by consuming capital stock, not as an expansion of potential output. It is no accident that Argentina met stagflation in 2007. In the last three issues of the Economic Freedom of the World (Fraser Institute) Argentina ranks among the bottom 10 free economies in the world.

The following figure shows the fall in ranking of each country in the Economic Freedom of the World.

Figure 1

We can translate the information shown in the above into loss of ranking position per year of populist government. This is what is shown in the next table.

Table 2

This table offers a few readings:

  1. Argentina is the country that fall in the ranking of economic faster than its peers.
  2. Ecuador shows a very slow fall. This is due to two reasons: (1) Ecuador already starts from a low ranking position. (2) The last year of the index (2015) shows an improvement (without this improvement the fall is quite sharp as well.) Ecuador does not represent a case of “good populism.”

What this table is showing is that if an individual is born in any of these countries ranking 1st in economic freedom the same year a populist government takes office, then the same country will rank at the bottom of the world before he retires. In the case of Argentina, in 27.8 years the country will be at the bottom of the list, this means that by the time this individual starts to work, Argentina will already have a very repressed economy. By retiring time, this individual will have no experience of living and working in a free economy.

This numbers are not just descriptive of populism in Latin American countries. They also serve as a sort of warning for Europe and the United States, regions that have already seen some signs of populist behavior in their governments and political groups in the last few years. Populism can be emotionally attractive, but is very dangerous for our economic freedoms.

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On Financial Repression and ♀ Labor Supply after 1945

I just came back from the Economic History Association meeting in San Jose. There are so many papers that are worth mentioning (and many have got my brains going, see notably the work of Nuno Palma on monetary neutrality after the “discovery” of the New World). However, the thing that really had me thinking was the panel on which one could find Barry Eichengreen and Carmen Reinhart (who was an early echo of the keynote speech by Michael Bordo).

Here’s why : Barry Eichengreen seemed uncomfortable with the current state of affairs regarding financial regulation and pointed out that the after-war period was marked by rapid growth and strong financial regulation. Then, Reinhart and Bordo emphasized the role of financial repression in depressing growth – notably in the period praised by Eichengreen. I have priors that make more favorable to the Reinhart-Bordo position, but I can’t really deny the point made by Eichengreen.

This had me thinking for some time during and after the talks. Both positions are hard to contest but they are mutually exclusive. True, it is possible that growth was strong in spite of financial repression, but some can argue that by creating some stability, regulations actually improved growth in a way that surpassed the negative effects caused by repression. But, could there be another explanation?

Elsewhere on this blog, I have pointed out that I am not convinced that the Thirty Glorious were that “Glorious”.  In line with my Unified Growth Theory inclinations (don’t put me in that camp, but don’t exclude me either I am still cautious on this), I believe that we need to account for demographic factors that foil long-term comparisons. For example, in a paper on Canadian economic growth, I pointed out that growth from 1870 to today is much more modest once we divide output by household-size population rather than overall population (see blog post here that highlights my paper). Later, I pointed out the ideas behind another paper (which I am still writing and for which I need more data, notably to replicate something like this paper) regarding the role of the unmeasured household economy. There, I argued that the shift of women from the household to the market over-measures the actual increase in output. After all, to arrive at the net value of increased labor force participation, one must deduce the value of foregone outputs in the household – something we know little about in spite of the work of people like Valerie Ramey.

Both these factors suggest the need for corrections based on demographic changes to better reflect actual living standards. These demographic changes were most pronounced in the 1945-1975 era – that of the era of rapid growth highlighted by Eichengreen and of financial repression highlighted by Reinhart and Bordo. If these changes were most momentous in that period, it is fair to say that the measurement errors they induce are also largest in that era.

So, simply put, could it be that these were not years of rapid growth but of modest growth that were overestimated?  If so, that would put the clash of ideas between Bordo-Reinhart and Eichengreen in a different light – albeit one more favorable to the former than the latter.

But heh, this is me speculating about where research could be oriented to guide some deeply relevant policy questions.

On doing economic history

I admit to being a happy man. While I am in general a smiling sort of fellow, I was delightfully giggling with joy upon hearing that another economic historian (and a fellow  Canadian from the LSE to boot), Dave Donaldson, won the John Bates Clark medal. I dare say that it was about time. Nonetheless I think it is time to talk to economists about how to do economic history (and why more should do it). Basically, I argue that the necessities of the trade require a longer period of maturation and a considerable amount of hard work. Yet, once the economic historian arrives at maturity, he produces long-lasting research which (in the words of Douglass North) uses history to bring theory to life.

Economic History is the Application of all Fields of Economics

Economics is a deductive science through which axiomatic statements about human behavior are derived. For example, stating that the demand curve is downward-sloping is an axiomatic statement. No economist ever needed to measure quantities and prices to say that if the price increases, all else being equal, the quantity will drop. As such, economic theory needs to be internally consistent (i.e. not argue that higher prices mean both smaller and greater quantities of goods consumed all else being equal).

However, the application of these axiomatic statements depends largely on the question asked. For example, I am currently doing work on the 19th century Canadian institution of seigneurial tenure. In that work, I  question the role that seigneurial tenure played in hindering economic development.  In the existing literature, the general argument is that the seigneurs (i.e. the landlords) hindered development by taxing (as per their legal rights) a large share of net agricultural output. This prevented the accumulation of savings which – in times of imperfect capital markets – were needed to finance investments in capital-intensive agriculture. That literature invoked one corpus of axiomatic statements that relate to capital theory. For my part, I argue that the system – because of a series of monopoly rights – was actually a monopsony system through the landlords restrained their demand for labor on the non-farm labor market and depressed wages. My argument invokes the corpus of axioms related to industrial organization and monopsony theory. Both explanations are internally consistent (there are no self-contradictions). Yet, one must be more relevant to the question of whether or not the institution hindered growth and one must square better with the observed facts.

And there is economic history properly done. It tries to answer which theory is relevant to the question asked. The purpose of economic history is thus to find which theories matter the most.

Take the case, again, of asymetric information. The seminal work of Akerlof on the market for lemons made a consistent theory, but subsequent waves of research (notably my favorite here by Eric Bond) have showed that the stylized predictions of this theory rarely materialize. Why? Because the theory of signaling suggests that individuals will find ways to invest in a “signal” to solve the problem. These are two competing theories (signaling versus asymetric information) and one seems to win over the other.  An economic historian tries to sort out what mattered to a particular event.

Now, take these last few paragraphs and drop the words “economic historians” and replace them by “economists”.  I believe that no economist would disagree with the definition of the tasks of the economist that I offered. So why would an economic historian be different? Everything that has happened is history and everything question with regards to it must be answered through sifting for the theories that is relevant to the event studied (under the constraint that the theory be consistent). Every economist is an economic historian.

As such, the economic historian/economist must use advanced tools related to econometrics: synthetic controls, instrumental variables, proper identification strategies, vector auto-regressions, cointegration, variance analysis and everything you can think of. He needs to do so in order to answer the question he tries to answer. The only difference with the economic historian is that he looks further back in the past.

The problem with this systematic approach is the efforts needed by practitioners.  There is a need to understand – intuitively – a wide body of literature on price theory, statistical theories and tools, accounting (for understanding national accounts) and political economy. This takes many years of training and I can take my case as an example. I force myself to read one scientific article that is outside my main fields of interest every week in order to create a mental repository of theoretical insights I can exploit. Since I entered university in 2006, I have been forcing myself to read theoretical books that were on the margin of my comfort zone. For example, University Economics by Allen and Alchian was one of my favorite discoveries as it introduced me to the UCLA approach to price theory. It changed my way of understanding firms and the decisions they made. Then reading some works on Keynesian theory (I will confess that I have never been able to finish the General Theory) which made me more respectful of some core insights of that body of literature. In the process of reading those, I created lists of theoretical key points like one would accumulate kitchen equipment.

This takes a lot of time, patience and modesty towards one’s accumulated stock of knowledge. But these theories never meant anything to me without any application to deeper questions. After all, debating about the theory of price stickiness without actually asking if it mattered is akin to debating with theologians about the gender of angels (I vote that they are angels and since these are fictitious, I don’t give a flying hoot’nanny). This is because I really buy in the claim made by Douglass North that theory is brought to life by history (and that history is explained by theory).

On the Practice of Economic History

So, how do we practice economic history? The first thing is to find questions that matter.  The second is to invest time in collecting inputs for production.

While accumulating theoretical insights, I also made lists of historical questions that were still debated.  Basically, I made lists of research questions since I was an undergraduate student (not kidding here) and I keep everything on the list until I have been satisfied by my answer and/or the subject has been convincingly resolved.

One of my criteria for selecting a question is that it must relate to an issue that is relevant to understanding why certain societies are where there are now. For example, I have been delving into the issue of the agricultural crisis in Canada during the early decades of the 19th century. Why? Because most historians attribute (wrongly in my opinion)  a key role to this crisis in the creation of the Canadian confederation, the migration of the French-Canadians to the United States and the politics of Canada until today. Another debate that I have been involved in relates to the Quiet Revolution in Québec (see my book here) which is argued to be a watershed moment in the history of the province. According to many, it marked a breaking point when Quebec caught up dramatically with the rest of  Canada (I disagreed and proposed that it actually slowed down a rapid convergence in the decade and a half that preceded it). I picked the question because the moment is central to all political narratives presently existing in Quebec and every politician ushers the words “Quiet Revolution” when given the chance.

In both cases, they mattered to understanding what Canada was and what it has become. I used theory to sort out what mattered and what did not matter. As such, I used theory to explain history and in the process I brought theory to life in a way that was relevant to readers (I hope).  The key point is to use theory and history together to bring both to life! That is the craft of the economic historian.

The other difficulty (on top of selecting questions and understanding theories that may be relevant) for the economic historian is the time-consuming nature of data collection. Economic historians are basically monks (and in my case, I have both the shape and the haircut of friar Tuck) who patiently collect and assemble new data for research. This is a high fixed cost of entering in the trade. In my case, I spent two years in a religious congregation (literally with religious officials) collecting prices, wages, piece rates, farm data to create a wide empirical portrait of the Canadian economy.  This was a long and arduous process.

However, thanks to the lists of questions I had assembled by reading theory and history, I saw the many steps of research I could generate by assembling data. Armed with some knowledge of what I could do, the data I collected told me of other questions that I could assemble. Once I had finish my data collection (18 months), I had assembled a roadmap of twenty-something papers in order to answer a wide array of questions on Canadian economic history: was there an agricultural crisis; were French-Canadians the inefficient farmers they were portrayed to be; why did the British tolerate catholic and French institutions when they conquered French Canada; did seigneurial tenure explain the poverty of French Canada; did the conquest of Canada matter to future growth; what was the role of free banking in stimulating growth in Canada etc.

It is necessary for the economic historian to collect a ton of data and assemble a large base of theoretical knowledge to guide the data towards relevant questions. For those reasons, the economic historian takes a longer time to mature. It simply takes more time. Yet, once the maturation is over (I feel that mine is far from being over to be honest), you get scholars like Joel Mokyr, Deirdre McCloskey, Robert Fogel, Douglass North, Barry Weingast, Sheilagh Ogilvie and Ronald Coase (yes, I consider Coase to be an economic historian but that is for another post) who are able to produce on a wide-ranging set of topics with great depth and understanding.

Conclusion

The craft of the economic historian is one that requires a long period of apprenticeship (there is an inside joke here, sorry about that). It requires heavy investment in theoretical understanding beyond the main field of interest that must be complemented with a diligent accumulation of potential research questions to guide the efforts at data collection. Yet, in the end, it generates research that is likely to resonate with the wider public and impact our understanding of theory. History brings theory to life indeed!

On the reversal of fortune, urbanization and Canada

One of the more famous articles of economist Daron Acemoglu is his 2002 article on the reversal of fortunes where he points out that countries colonized by Europeans in 1500 that were relatively rich then are relatively poor now. In the paper, they use urban density as a proxy for economic development at that point in time.

I was not particularly convinced by this because of the issue of ruralization in colonial economies. I am still not convinced in fact. As many scholars interested in American colonial history point out, the country de-urbanized (ruralized) during the colonial era as cities grew at a slower pace than the general population. As such, the share of the US population in rural areas increased. But Jeffrey Williamson and Peter Lindert documented that in 1774, the United States were the richest place in the world (beating England on top of being more egalitarian). 

This is normal. Economies on the frontier had land to labor ratios that were the exact opposite of those in Europe. The opportunity cost of congregating in one area was high given the abundance of land that could be brought under cultivation. This is why the Americas (North America at least) was the Best Poor Man’s Country. As such, areas with low population density are not necessarily poor (even if urbanization is a pretty strong predictor of wealth).

This is where Canada comes in. Today, the country easily fits in the “relatively rich” group. According to the figures 1 and 2 in the work of Acemoglu, Johnson and Robinson, it would have been in the “relatively poor” group well behind countries in Latin America. However, I recently finished compiling the Canadian GDP figures between 1688 and 1790 which I can now compare with those of Arroyo Abad and Van Zanden for Peru and Mexico. With my Canadian data (see the figure below), we can see that Canada was as poor as Latin America around 1680 (the start date of my data).

GelosoGDP.png

So, Canada was a relatively poor country back which was equally poor (or moderately richer) than Latin American countries. Why does that matter to the reversal of fortune story? Well, with the urbanization data, one shows that the non-urbanized of 1500 are the rich of the today. With the GDP data for the 1680s, we see that the more urbanized countries were also poorer than the less urbanized countries.

Now, my argument is limited by the fact that I am using 1680s GDP rather than 1500 GDP. But, one should simply extend the urbanization series to circa 1700 and the issue is resolved.  In any case, this should fuel the skepticism towards the strength of the reversal of fortune argument.

Aggregate measures of well-being, England 1781-1850

I went in the field of economic history after I discovered how much it was to properly measure living standards. The issue that always interested me was how to “capture” the multidimensional nature of living standards. After all, what weight should we give to an extra year of life relative to the quality of that extra year (see all my stuff on Cuba)?

However, I never tried to create “a composite” measure of living standards. I thought that it was necessary, first, to get the measurements right. However, I had been aware of the work of Leandro Prados de la Escosura who has been doing considerable work on this in order to create composite measures (Leandro also influenced me on my Cuba reasoning – see this article).

A year ago, I discovered the work of Daniel Gallardo Albarrán from the University of Groningen at the meeting of the Economic History Society (EHS). Daniel’s work is particularly interesting because he is trying to generate a composite measure of well-being at one of the most important moment in history: the start of the British industrial revolution.

Because of its importance and some pieces of contradicting evidence (inequality, stature, amplitude of real wage increases, amplitude of income increases, urban pollution leading to increased mortality risks etc), the period has been begging for some form of composite measure to come along (at least a serious attempt at generating it). Drawing on some pretty straightforward microeconomic theory (the Beckerian in me likes this), Daniel generates this rich graph (see the paper here).

Daniel

The idea is very neat and I hope it will inspire some economic historians to attempt an expansion upon Daniel’s work. I have already drawn outlines for my own stuff on Canada since I study an era when (from the early 1800s to the mid-1850s) real wages and incomes seem to be going up but stature and mortality are either deteriorating or remaining stable while inequality is clearly increasing.

Household size and growth since 1870 (albeit in Canada)

Two days ago, I posted something on how much we were estimating growth since the 1950s. While organizing another research paper that I am trying to finish, I realized that I could make a follow-up to this based on previous research of mine.

A few months ago, I published (alongside Vadim Kufenko and Klaus Prettner) a short note in Economics Bulletin where we showed that the large differences in household size in Canada that existed up to 1975 led many to overestimate the level of differences between provinces. Moreover, we pointed out that because household size were converging at the same time as incomes, we argued that the rate of convergence from 1945 onwards was slightly overestimated. That paper convinced us to do the same between all the OECD countries (we are assembling the data right now).  But this was an argument about variance, what if we simply plot the “per capita” income of Canada with the “per adult equivalent” income of Canada since 1870.

By using the Maddison dataset combined with the data from my article, it took me a few seconds to get the graph below. What is important to notice in this graph is that, incomes per adult equivalent (measured in 1990 Geary-Kheamis dollars) have increased 40% less than incomes per person. Since adult equivalents are a better measure of living standards (because you capture the economies of scale associated with household size), we can easily say that we have been underestimating the level of improvement in Canada (it is still substantial however).

growthfactors

“Watch” the (industrial) revolution!

I don’t know how I missed such a valuable article, but O’Grada and Kelly have this fascinating piece on the price of watches in England from the early 18th century to the early 19th century in the Quarterly Journal of EconomicsStarting from Adam Smith’s quote that the price of watches had fallen 95% over roughly one hundred years, they collected prices of stolen watches reported in court records.  They find that Smith was wrong. The drop was only 75% (see the sarcasm here).

watch-prices

Why is this interesting? Because it shows something crucial about the industrial revolution. This was a complex good to build which required incredible technical advances – many of which could be considered general purpose technologies which could then be used by other industries for their own advances (on the assumption that other entrepreneurs noticed these technologies). But, more importantly, it provides further evidence against the pessimistic view of living standards in Britain at the beginning of the Industrial Revolution. These “new” goods became incredibly cheaper. Along with nails, glass, pottery and shipping , watches did not weigh heavily in the cost of living of the British. However, they did weigh heavily as industrial prices which meant that costs of production were falling progressively which augured well for the beginning of the industrial revolution*.

Literally, you can watch the industrial revolution in that paper! (sorry, bad pun)

* By the way, I use the term because it is conventional but a revolution is a clean break. The British industrial revolution was not saltation as much as it was a steady process of innovation from the early 18th century up to the mid 19th century. The real “revolution” in my eyes is that of the late 19th century. The technological changes from 1870 to 1890 are the most momentous in history and if there was any technological revolution in the past, this was it.