Institutions, trade shocks, and regional differences in long-run educational and development trajectories

André Carlos Martínez, Aldo Musacchio, Martina Viarengo

Institutions are known to play a powerful and enduring role in countries’ divergent levels of economic development. This column presents evidence that institutions matter for within-country inequality, too. In Brazil, changes in export prices and export tax revenues led to an increase in education spending in states that experienced commodity booms, which increased the number of schools and improved educational outcomes such as literacy rates. However, the effect was limited in states where slavery was predominant in colonial times.

Understanding the determinants of long-run socio-economic development is a major concern for academics and policymakers in many countries around the world. In particular, beyond understanding differences in development or educational and other outcomes across countries, the origins of within-country inequality are now a fundamental issue, given the impact inequality has on the long-run prosperity of nations.

Recent research has examined the relationship between current levels of development in former colonies – and also across regions in former colonies – and colonial institutions (Engerman and Sokoloff 1997, Acemoglu et al. 2001, Bruhn and Gallego 2012). Many studies have looked at the relationship between colonial institutions and current outcomes such as spending on education across and within countries (Engerman et al. 2009, Gallego 2010, Frankema 2012, Acemoglu et al. 2012).

What seems to be largely missing from the existing literature is an analysis of how institutional changes or trade shocks can affect the long-run development trajectory of countries or regions within countries. This seems to be a fundamental question given the evidence on the reversal of fortune that has affected some of the originally most prosperous regions in the world (Acemoglu et al. 2002).

Institutional changes and trade shocks in Brazil

In a recent study (Musacchio et al. 2014), we address this question using a new perspective. We examine the interaction between colonial institutions and subsequent decentralisation of fiscal responsibility among Brazilian states between 1889 and 1930, and look at their impact on the expansion of public schooling at the state level.

The historical example of Brazil provides an ideal setting to address this question because we observe that after the colonial era there is a reversal of educational outcomes across states that persists until today. Brazilian states that were lagging behind in 1872 made it to the top of the ranking by 1940, and the opposite is true for those that were leaders in educational outcomes in the early years.

To understand this puzzle it is important to notice that Brazil had a peculiar institutional setting. During the imperial period, political institutions were largely elitist, and public spending on education was concentrated in the capital of the country. Yet the rapid change brought by the Republican revolution led to, among other changes, a new Constitution that decentralised taxation and expenditures on public education. This allowed states to generate their own revenues from export and internal taxes without the introduction of any compensatory mechanisms for the more disadvantaged states. The new Constitution also introduced direct elections for governors, the upper and lower chambers, and the local assemblies, thus increasing the incentives for politicians to spend on public education.

The enduring power of institutions

Our analysis suggests that changes in export prices and export tax revenues led to an increase in education spending in states that experienced commodity booms, which increased the number of schools available and improved educational outcomes such as literacy rates. Brazil experienced during those years the largest increase in literacy rates of any Latin American country. Interestingly, alternative explanations based on other factors, such as industrialisation and immigration, do not receive significant empirical support.

An important finding of our study is that the impact was unequal and to a large extent determined by the structure of the pre-existing institutions. That is, the impact of increased revenues on educational outcomes was limited in those states where slavery was predominant during colonial times. This suggests that the existence of extractive institutions that concentrated power and limited the protection of property rights had an adverse effect on the expansion of free and public mass education when the export-related revenues relaxed the existing budget constraints. Several robustness checks confirm the accuracy of our analysis.

Our study suggests the importance of devoting more attention to the interplay between institutions and shocks, which may lead to very unequal patterns of development within countries in the long run.

References

Acemoglu, Daron, Simon Johnson, and James A Robinson (2001), “The Colonial Origins of Comparative Development: An Empirical Investigation”, The American Economic Review, 91(5): 1369–1401.

Acemoglu, Daron, Simon Johnson, and James A Robinson (2002), “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution”, Quarterly Journal of Economics, 117(4): 1231–1294.

Acemoglu, Daron, Camilo García-Jimeno, and James A Robinson (2012), “Finding El Dorado: Slavery and Long-Run Development in Colombia”, Journal of Comparative Economics, 40(4): 534–564.

Bruhn, Miriam and Francisco Gallego (2012), “Good, Bad, and Ugly Colonial Activities: Do They Matter for Economic Development?”, Review of Economics and Statistics, 94(2): 1190–1213.

Engerman, Stanley and Kenneth L Sokoloff (1997), “Factor Endowments, Institutions, and Differential Paths of Growth among New World Economies: A View from Economic Historians of the United States”, in Stephen Haber (ed.), How Latin America Fell Behind, Stanford, CA: Stanford University Press: 260–304.

Engerman, Stanley, Elisa V Mariscal, and Kenneth L Sokoloff (2009), “The Evolution of Schooling in the Americas, 1800–1925”, in Frank D Lewis, David Eltis, and Kenneth L Sokoloff (eds.), Human Capital and Institutions: The Long Run View, Cambridge and New York: Cambridge University Press: 93–142.

Frankema, Ewout (2012), “The Origins of Formal Education in Sub-Saharan Africa: Was British Rule More Benign?”, European Review of Economic History, 16(4): 335–355.

Gallego, Francisco (2010), “Historical Origins of Schooling: The Role of Democracy and Political Decentralization”, Review of Economics and Statistics, 92(2): 228–243.

Musacchio Aldo, Andre Martinez and Martina Viarengo (2014), “Colonial Institutions, Commodity Booms, and the Diffusion of Elementary Education in Brazil, 1889–1930”, NBER Working Paper 20029, forthcoming in the Journal of Economic History.