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Tuesday, 23 October 2012

The Landlocked Challenge

Paul Collier's Bottom Billion helped popularise the idea that countries like Zambia are trapped in poverty and failing to reap the benefits of globalisation because of our "landlockedness". Empirical evidence certainly does appear to support the notion that there's some sort of "curse" associated with being landlocked. To overcome the curse of course we need to know why "landlockedness" presents a development challenge - or the channels through which it "locks in" countries. The standard answer is largely based on evidence from "gravity models", which point to the negative impact of landlockedness on bilateral trade flows. The idea being that being landlocked reduces "trade openness". A recent paper explores this issue and tests for other factors, especially institutional quality. It finds a rather different conclusion :
The paper revisits and extends the evidence on the relationship between development and landlocked status. Development is here measured by the level of per-capita GDP. The landlocked status is allowed to affect per-capita income not just through trade, but also through its effect on institutional quality. A residual effect is also accounted for, which might pick the impact of landlockedness on proximate determinants of income (like human and physical capital or technology) and/or on cultural values. Estimates of a structural model of three equations indicate that: (i) institutional quality rather than trade openness seems to be the main channel of transmission of the effect of landlockedness and (ii) there is a negative residual effect of landlockedness on income after controlling for the transmission through institutional quality (and trade). These findings are generally robust to the use of different estimators and to the exclusion of the most advanced economies from the sample.
Simply stated the evidence points to the fact that being landlocked negatively affects the quality of institutions (governance), which is in turn affects our prosperity. The trade channel is surprisingly mild. Now the econometrics may be questioned, particularly the institutional variable seems suspect. But if the work is to be believed, and the best way to do that is to keep an eye for new research in this area, it does seem to offer hope. If the main channel through which landlockedness affects us is actually something we can control through internal policies then we should be working to overcome that. Let us work to sort out our institutions! On the flip side  it is clearly easier to implement trade openness than get people to appreciate the value of good institutions because it is not in the interest of the ruling class. So therein lies the mountain and the valley! Over to you!

3 comments:

  1. I wish they had gone on to examine how being landlocked CAUSES weaker institutions. It's a puzzling link for me...

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  2. Exactly. No explanation whatsoever is given as to why and how institutional quality is lower through landlockedness, which is the most interesting question to answer.

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  3. Hey, read this paper called "The curse of being landlocked: institutions rather than trade
    Fabrizio Carmignani".

    ReplyDelete

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