Daron Acemoglu, Simon Johnson and James Robinson were recently awarded a Nobel Prize in Economics, partly for work emphasizing the role of good institutions in economic development. They used a variety of creative statistical techniques to get around the thorny problem of how to establish causality.
One problem in establishing causality is that a group of successful countries might share a number of distinctive characteristics. If most successful countries share characteristics X, Y and Z, then it is difficult to know whether any one of those characteristics played a decisive role in development.
Normally, we tend to assume that a large number of observations provides more “statistical significance” than does a single anecdote. But is that always true?
Consider the following claim:
Differences in institutions, differences in culture, and differences in natural resource endowments all play a major role in explaining the relative wealth of nations.
I believe that these three claims are true. I also believe that the strongest evidence in favor of these three claims does not come from reams of statistical analysis, rather it comes from three very powerful anecdotes.
Good institutions: Korea provides a near perfect example of the importance of having good institutions, which is a term economists use to represent an economic and legal system conducive to wealth creation. When Korea was divided after WWII, there was relatively little difference between either the culture or the resource endowments of the two halves of the country. If anything, the North was somewhat richer.
Today, South Korea is vastly richer than the North. It’s almost impossible to think of a plausible explanation that does not in one way or another reflect differences in institutions. Yes, Korea is just a single data point. But it is overwhelmingly persuasive, in some ways more so than a regression of 200 nations that tries to establish the importance of good institutions.
If you are the sort of person who likes a simple explanation for complex phenomena, you might wish to stop here. Korea seems to clearly demonstrate the overwhelming importance of institutions. Unfortunately, further south there’s another powerful anecdote, with a very different implication.
Good culture: People who emphasize the role of culture in economic development, often point to the impact of Chinese diaspora on the economies of Southeast Asia. Singapore (76% Chinese) is much richer than Malaysia (23% Chinese), which is significantly richer than Thailand (14% Chinese), which is significantly richer than Indonesia (1% Chinese.)
But is that information actually decisive? Perhaps Singapore is rich due to the policies of Lee Kuan Yew. Malaysia has more natural resources than Thailand. Thailand was not exploited by colonial powers in the way that Indonesia was. One can always dream up all sorts of ad hoc explanations for any given correlation.
I’m actually much more persuaded by a single anecdote: Malaysia. The 23% of Malaysia’s population that are Chinese are much richer than the remaining 77% of the population (mostly ethnic Malays, but also some Indians.) Does that prove that culture matters? Perhaps the Malays are being discriminated against. In fact, it is the Chinese that are being discriminated against, as Malaysia has a strong affirmative action policy favoring the Malays. Thus it’s very hard to think of any explanation for the relative success of Chinese Malaysians that does not involve some aspect of culture (which is admittedly a broad category.)
As an aside, I’m perplexed when progressives make the argument that economic disparity is prima facie evidence of discrimination. Jewish Americans have considerably higher average incomes than Christian Americans (even white Christian Americans). Do progressives actually wish to argue that this disparity reflects the fact that America discriminates against Christians? How would that differ from offensive arguments made by anti-semites?
Natural Resources: When I was young, the north coast of South America had three little colonies called British Guiana, Dutch Guiana and French Guiana. Today, British Guiana is just Guyana, Dutch Guiana is Suriname, and French Guiana is a part of France. Even five years ago, both Guyana and Suriname were fairly poor.
Today (in 2024), Suriname has a per capita GDP of $6700, while Guyana has shot up to over $26,000 (and will be two or three times higher by the end of the decade.) There is simply no plausible explanation for Guyana’s success that does not reference Exxon’s recent discovery of large oil deposits off the country’s north coast.
To summarize: From Korea, we know that good institutions are really, really important. From Malaysia we know that culture is really, really important. And from Guyana we know that natural resource endowments can be very, very important. Lots of things are very, very important!
I worry that people often have trouble holding multiple explanations in their mind at the same time. Consider that right next to Guyana you have poverty-stricken Venezuela. But Venezuela is even more oil rich than Guyana (although that’s partly offset by its larger population.). A person obsessed with monocausal explanations might look at Venezuela and conclude that natural resources were a curse.
A better way to approach the problem is to note that more than one factor is very, very important. From Guyana, we know that natural resources can be very conducive to growth. But from North Korea we know that bad institutions can be extremely negative for growth. Venezuela has ended up with really bad institutions in a country with large oil reserves.
Here’s how I approach the tricky problem of establishing causality in economic development. Start with the single best anecdote, the single example that seems to be the cleanest test. Then look for confirmation from slightly less clean examples.
After the two Koreas, you might look to East and West Germany prior to 1989. Or to Taiwan and Mainland China during the Mao era.
After Malaysia, you can look at Chinese minorities in other Asian countries, or Indian immigrants to Africa, or Jewish immigrants to America. Thomas Sowell has documented many more such examples showing the importance of culture.
After Guyana you can look at other oil-rich low population places such as the UAE and Kuwait.
If the single most powerful anecdote is mostly confirmed by the next best examples, then you can have even more confidence that it wasn’t just some sort of fluke. You know that you are on the right track.
But now the hard part starts. We have general sense that extreme communism in North Korea hurt their growth, but which specific aspects of the system were most damaging? That’s a much harder question. You might look to other cases that share some characteristics of North Korean communism, but not all.
We have a general sense that Chinese culture is favorable for growth, but which specific aspects? We might look at other Confucian cultures in East Asia. Or we might look at other “middleman minorities” in various parts of the work.
We have a general sense that oil and gas can be very important, but what other natural resources seem to matter?
One piece at a time, we gradually fill in the jigsaw puzzle, and a coherent picture starts to emerge. There are no short cuts, no easy answers, no monocausal explanations.
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