Publications by Type: Miscellaneous

We revisit one of the central empirical findings of the political economy literature that higher income per capita causes democracy. Existing studies establish a strong cross–country correlation between income and democracy, but do not typically control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We also present instrumental–variables estimates using two different strategies. These estimates also show no causal effect of income on democracy. Furthermore, we reconcile the positive cross–country correlation between income and democracy with the absence of a causal effect of income on democracy by showing that the long–run evolution of income and democracy is related to historical factors. Consistent with this, the positive correlation between income and democracy disappears, even without fixed effects, when we control for the historical determinants of economic and political development in a sample of former European colonies.

Peacekeeping – the deployment of international troops and monitors to war–torn areas – is an institution intended to help recent belligerents maintain peace. The literature on peacekeeping has exploded in the last fifteen years, but analyses of it as an institution promoting cooperation have been hampered by several methodological handicaps. One is a matter of case selection – the majority of studies examine only cases where peacekeepers are involved, with no comparison to cases of non–peacekeeping. The second is an endogeneity issue – peacekeepers are not deployed to conflicts at random, so analysis of their effects must begin with an analysis of where peacekeepers go. Recent studies of peacekeeping have begun to address the first problem, but much less has been done to remedy the second. We know very little about why peacekeepers are sent to maintain peace after some conflicts but not others. Peacekeeping missions operate with the consent of the belligerents; in a civil war, the consent of the government is particularly important. But there has been no systematic analysis of the conditions under which warring parties request or consent to peacekeeping by the international community. This paper begins to answer the question of why belligerents sometimes agree to be "peacekept" and sometimes do not by focusing on peacekeeping as a mechanism that enables warring sides to signal their intentions to one another.

Bob Keohane revolutionized the study of institutions in international relations by insisting that we think about the demand for international institutions. We follow in his footsteps here by concentrating on the institution of peacekeeping, and modeling the demand for it. We also build on Keohane?s work in general terms by thinking about how the willingness to bear the costs of acting within an institutionalized setting can serve as a signal. We conceive of peacekeeping as a costly signal of intent to abide by a peace agreement, and ask about what patterns of behavior we would expect to follow if this is an accurate conceptualization.

Before 1914 it was widely believed that a major European war would have drastic consequences for financial markets. To the editors of The Economist magazine, this seemed ?obvious?:

... To begin with, [war] must necessitate Government borrowings on a large scale, and these heavy demands upon the supplies of floating capital must tend to raise the rate of discount. Nor is it only our own requirements that will have to be provided for. ... From other quarters demands are likely to be pressed upon us. There is a very general conviction that if war is entered upon ? Other Powers ? will almost inevitably be, in some way or other, drawn into the contest. The desire, therefore, in all European financial centres, will be to gather strength, so as to be prepared for contingencies. Thus the continental national banks will all be anxious to fortify their position, and as they can always draw gold from hence by unloading here the English bills they habitually hold, the probability is that gold will be taken. And the desire on the part of the continental banks to be strong will, of course, be greatly intensified by the precarious condition of the Berlin and Paris bourses. At both of these centres it would take little to produce a stock exchange crisis of the severest type; and ... it is to the Bank of England, as the one place whence gold can promptly be drawn, that recourse must be had. The outbreak of war, therefore, would in all probability send a sharp spasm of stringency through our money market ... [that] would pretty certainly leave rates at a higher level than that at which it found them. ... There is, of course, one [other] way, apart from the depressing influence of dearer money in which war, should it break out will prejudicially affect all classes of securities. It will ... necessitate Government borrowing on a great scale, and the issue of masses of new stock will lessen the pressure of money upon existing channels of investment. ... And as it is to the volume of British ? securities that the additions would be made, these would naturally be specially affected. ... With European Government stocks ... a more or less heavy depreciation, according as war circumscribed or extended its sphere, would have to be looked for. ? For Russia ... war can mean little else than bankruptcy, possibly accompanied by revolution, and those who ... have become her creditors, have a sufficiently black outlook.

The most striking thing about this prescient analysis is that it was published in 1885, nearly thirty years before just such a war – and just such a crisis – broke out. In the intervening years, only a minority of commentators dissented from the view that a war between the European powers would lead to steep falls in bond prices. In 1899 the Warsaw financier Ivan Bloch estimated that ?the immediate consequence of war would be to send securities all round down from 25 to 50 per cent?. If a battleship belonging to a foreign power were to sail up the Thames, the journalist Norman Angell asserted in his best–seller The Great Illusion, it would be the foreign economy that would suffer, not the British, as investors dumped the aggressor?s bonds. Diplomats used similar arguments during the July Crisis itself. On 22 July 1914, to give just one example, the Russian charg? d?affaires in Berlin warned a German diplomat that German investors would ?pay the price with their own securities with the methods of the Austrian politicians?.

Government exchange rate regime choice is constrained by both political and economic factors. One political factor is the role of special interests: the larger the tradable sectors exposed to international competition, the less likely is the maintenance of a fixed exchange rate regime. Another political factor is electoral: as an election approaches, the probability of the maintenance of a fixed exchange rate increases. We test these arguments with hazard models to analyze the duration dependence of Latin American exchange rate arrangements from 1960 to 1999. We find substantial empirical evidence for these propositions. Results are robust to the inclusion of a variety of other economic and political variables, to different time and country samples, and to different definitions of regime arrangement. Controlling for economic factors, a one percentage point increase in the size of the manufacturing sector is associated with a reduction of six months in the longevity of a country?s currency peg. An impending election increases the conditional likelihood of staying on a peg by about 8 percent, while the aftershock of an election conversely increases the conditional probability of going off a peg by 4 percent.

In this paper we review the hypothesis that adherence to the gold standard facilitated the access of peripheral countries to European capital markets in the first era of financial globalization. To test whether the gold standard worked as a credible commitment mechanism – a "good housekeeping seal of approval" – we have assembled the largest possible dataset covering almost the entire foreign borrowing in the London market. Our results suggest that the gold effect identified in previous studies was a statistical illusion generated principally by limited country samples. The market looked behind "the thin film of gold" not only at economic fundamentals but at political determinants of creditworthiness.

When the United States reaches international agreements on military matters, the president has a choice of the form that the agreement will take. This paper explores the strategic choice of agreement form, concentrating on the circumstances that lead the president to use formal treaties rather than executive agreements. The evidence supports the view that the form of the agreement serves as a signal of U.S. preferences and reliability to other states. It does not support the view that the president uses executive agreements to evade congressional opposition, nor a purely legal normative perspective. The paper also contrasts multilateral and bilateral agreements, finding that Democratic presidents reached more multilateral agreements than Republican presidents in the 1980s and 1990s.

Affiliate–level evidence indicates that American multinational firms circumvent capital controls by adjusting their reported intrafirm trade, affiliate profitability, and dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 24 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.4 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Together, the costliness of avoidance and higher interest rates raise the cost of capital, significantly reducing the level of foreign direct investment. American affiliates are 13–16 percent smaller in countries with capital controls than they are in comparable countries without capital controls. These effects are reversed when countries liberalize their capital account restrictions.

Working Paper 10337, National Bureau of Economic Research, March 2004.

We analyze the interplay of policy reform and entrepreneurship in a model where investment decisions and policy outcomes are both subject to uncertainty. The production costs of non–traditional activities are unknown and can only be discovered by entrepreneurs who make sunk investments. The policy maker has access to two strategies: "policy tinkering," which corresponds to a new draw from a pre–existing policy regime, and "institutional reform," which corresponds to a draw from a different regime and imposes an adjustment cost on incumbent firms. Tinkering and institutional reform both have their respective advantages. Institutional reforms work best in settings where entrepreneurial activity is weak, while it is likely to produce disappointing outcomes where the cost discovery process is vibrant. We present cross–country evidence that strongly supports such a conditional relationship.

Multiple factors have been found to determine the structure of opportunities for women?s representation in elected office, including the institutional context like the electoral system and the use of affirmative action strategies within party lists, and the resources that women and men bring to the pursuit of fulltime legislative careers, such as their social and occupational networks (Rule 1987; Norris 1997; Karam 1998; Kenworthy and Malami 1999; Caul 1999; Reynolds 1999). What this study seeks to demonstrate is that in addition to these factors, the trend toward gender equality is intimately linked with the broader process of cultural change and democratization.

A user's guide to the recent literature on institutions and growth.

To help get our bearings in a complex and ever-changing world, it is useful to ask what the world will look like in a decade or two. Forecasting the future accurately is of course impossible. And of course we cannot forecast surprises, by definition. But by projecting known trends and tendencies, it is possible to say a remarkable amount about the broad outlines of the world one to two decades from now. In particular, we can identify with high confidence four factors, which we hardly notice from year to year, but which accumulate relentlessly over time, such that by 2020 they will have profoundly transformed the world as we now know it. The four factors are population growth, growth in per capita income, increasing international mobility among national firms and individuals, made possible and driven by both technological changes in transportation and communication, and the aging of existing political leaders (as well as everyone else).

For concreteness, I will focus below on the year 2020. The year should not be taken literally, but as the rough mid–point of one to two decades from now. That looks beyond the immediate issues of today, and allows the cumulation of small annual changes in the trends mentioned above. But it is also a comprehensible distance into the future, the same distance as the year 1988, which many adults can remember, is into the past.

Unlike most cross–country growth analyses, we focus on turning points in growth performance. We look for instances of rapid acceleration in economic growth that are sustained for at least eight years and identify more than 80 such episodes since the 1950s. Growth accelerations tend to be correlated with increases in investment and trade, and with real exchange rate depreciations. Political–regime changes are statistically significant predictors of growth accelerations. External shocks tend to produce growth accelerations that eventually fizzle out, while economic reform is a statistically significant predictor of growth accelerations that are sustained. However, growth accelerations tend to be highly upredictable: the vast majority of growth accelerations are unrelated to standard determinants and most instances of economic reform do not produce growth accelerations.

Mediation is one of the most widespread techniques for preventing con ict and pro–moting cooperation. Unfortunately, the literature on mediation has not yet reached consensus on what makes mediation work. For instance, some have argued that mediators should be unbiased, while others argue that biased mediators are effective. This paper examines the conditions under which mediators can facilitate cooperation by building trust between the two parties. Mediators can be credible trust builders in one round interactions only if they prefer mutual non–cooperation to either side exploiting the other. A biased mediator or one who is solely interested in promoting cooperation will be ineffective. If the mediator is involved in an ongoing relationship with the par–ties, biased mediators can function as trustbuilders, provided that the degree of bias is not too great.

This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two "quasi–natural experiments" in history, the division of Korea into two parts with very different economic institutions and the colonization of much of the world by European powers starting in the fifteenth century. We then develop the basic outline of a framework for thinking about why economic institutions differ across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favor of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions allocate de jure political power, while groups with greater economic might typically possess greater de facto political power. We therefore view the appropriate theoretical framework as a dynamic one with political institutions and the distribution of resources as the state variables. These variables themselves change over time because prevailing economic institutions affect the distribution of resources, and because groups with de facto political power today strive to change political institutions in order to increase their de jure political power in the future. Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad–based property rights enforcement, when they create effective constraints on power–holders, and when there are relatively few rents to be captured by power–holders. We illustrate the assumptions, the workings and the implications of this framework using a number of historical examples.

This paper attempts to capture the behavior of agents (states), and the effects of international systemic structure, and the relationship of each to the other in a systemic, dynamic theory of international politics. The "nested politics" model describes how three layers of political authority– individual autonomy nested within state hierarchy nested within interna–tional anarchy–constitute an engine for both changes in state behavior and changes in the distributions that constitute the structure of the inter–national system. This paper discusses the model and examines its logical implications for existing explanations of Great Power behavior.

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross–national dataset into two sub–samples: (i) colonies versus non–colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub–samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.

The Australian story is best understood as a series of experiments. The first was highly problematic: the creation of a society from a collection of convicts and military officers. The second was uplifting: the formation of a new world democracy upon the oldest continent. And the third is audacious: a national reinvention of how Australia interprets itself and relates to the world. Of course, there are many other Australian experiments, so this list is not exhaustive. These experiments, however, have their origin in a fundamental question: What is Australia?s purpose? Is Australia to be defined forever as a museum to a bizarre historical accident–a bunch of Europeans, shipwrecked on the wrong side of the earth–or as a nation that renews itself to offer its own people and the world a more successful and enduring creation? This is the question I want to address in these lectures.

Our analysis begins with the puzzle: how did Botswana develop a legal–rational state? We suggest that three key interlinked factors were important. First, during the pre–colonial period the Tswana developed local states with relatively limited kingship or chiefship and with a political structure that was able to integrate people of other ethnic groups such as Kalanga. Second, facing the onslaught first of the Boers, next of the British South African Company, and finally of the Union of South Africa, Tswana political elites attempted to maintain a good measure of independence by defensively modernizing. (The Tswana were not unique in this British Africa, either in the types of political institutions they evolved, or in their desire to modernize. What is unique about Botswana is they way that local state elites were coordinated in the whole of colonial national territory, pursuing similar policies to fend off the most pernicious effects of colonialism.) Finally, the political elites in both local states before independence and the national state at independence heavily invested in the country?s most important economic activity, ranching. This gave them a strong incentive to promote rational state institutions and private property. Moreover, the integrative nature of traditional Tswana political institutions reduced the likelihood that alternative groups would aggressively contest the power of the new unitary state.

That a group of young people in Iraq recently beheaded Nick Berg, a young American who was in that country working as an independent contractor rebuilding infrastructure, in front of a video camera while proclaiming ?God is Great? should give pause to all of us interested in global peace and civility. Not too long ago, the world was shocked by pictures of American guards treating Iraqi prisoners in the most degrading imaginable forms, in ways clearly counter to basic American and human norms of civility and counter to international conventions about the treatment of prisoners of war.

So that we do not dismiss the horror of these acts as ?casualties of war? we should remember that a few years ago Daniel Pearl, another young American, a journalist working in Pakistan, was beheaded in front of a video camera, as his captors also claimed ?God is Great?. It was the same claim about God?s Greatness that those who hijacked several airplanes made on September 11, 2001, as they slashed the throats of pilots and passengers, and crashed those airplanes against civilian and military targets taking the lives of the largest number of civilians not engaged in combat to die in a single act in recent American history.

These crimes against humanity are not limited to recent acts against Americans or Iraqis, they are the routine form of coercion used by those who choose to pursue their political goals at the margin of national and international legal frameworks, and they are also the forms of coercion used by States against their own citizens, and often against the citizens of other nations. The Rwandan genocide of 1994, the ethnic cleansing in Sudan, the religious wars in Yelwa Nigeria, and fifty years ago the Holocaust are too recent examples, in the scale of human history, of the capacity of humans to lose their humanity in consciously acting to physically take the lives of those whom they perceived as different.

Should we resign ourselves to accept that members of a species that has survived innumerable evolutionary challenges should come from time to time to seek to destroy each other because they came to share norms and values that made this acceptable? Human history offers abundant evidence of the capacity of our species to engage in massive efforts of destruction of human life. Our times are not the first in history in which groups sharing a set of cultural values killed other humans ?in the name of God?.