Friday, November 13, 2009

Long-lasting institutions and the value of work

From a Thanksgiving article last year by Benjamin Powell:
Many people believe that after suffering through a severe winter, the Pilgrims’ food shortages were resolved the following spring when the Native Americans taught them to plant corn and a Thanksgiving celebration resulted. In fact, the pilgrims continued to face chronic food shortages for three years until the harvest of 1623. Bad weather or lack of farming knowledge did not cause the pilgrims’ shortages.
Why, Holmes, you astound me. Then what did?
Economics, my dear Watson:
In 1620 Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on equality and need as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. ... The problem was that young men, that were most able and fit for labour, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. Because of the poor incentives, little food was produced.
Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. ... While not a complete private property system, the move away from communal ownership had dramatic results. ... they never again faced the starvation and food shortages of the first three years. It was only after allowing greater property rights that they could feast without worrying that famine was just around the corner. We are direct beneficiaries of the economics lesson the pilgrims learned in 1623.
William Bradford (above), who as governor had only reluctantly given way to allow the move away from communal property, conceded because people "have this corruption in them, God in his wisdom saw another course fitter for them" than communal property.

A new paper by Daniel Berger similarly looks at the long reach of institutions in Nigeria. For administrative reasons, the British divided colonial Nigeria into two sections in 1910. The southern government got its revenues from the seaports while the northern government had to tax its people. Berger argues that this taxation forced the governments north of the 7˚10′ N line of latitude to build capacity, to respond to complaints of the governed, and in general to develop better systems of governance than local governments just below that line. To this day - 50 years after the British left and 100 years after the arbitrary, exogenous line of demarcation was extended - "People living in areas where the colonial tax system required more bureaucratic capacity are much happier with their government, and receive more competent government services, than people living in nearby areas where colonialism did not build bureaucratic capacity."

He explains the differences in the initial conditions in the two halves that developed into long lasting social norms:
In the first, the local government does little except extract what few bribes it can….There is no incentive for hard work, as bureaucrats will neither be able to extract appreciably more rents (due to the limited amount of money available in the local economy) nor will they be able to improve government functioning on their own (since efficient functioning requires the entire bureaucracy working together). This also leads to a knock on effect on the human capital available to the local governments as the families which control the local government have no reason to steer their smartest children into local government service.
The second equilibrium is one in which significant services are actually delivered. Here, the local government is capable of delivering local basic public services with a reasonable level of efficiency and honesty. This grants sufficient legitimacy to the local government that they are able to collect local taxes, which never go to the center. They can then pay themselves regularly despite the fact that they are not regularly receiving the transfers they are due from the center. Here hard work does make a difference.
Hat tip to Aid Watchers.

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