Effects of Type of Exports on Institutions

and Current Income

Jad Zoghaib
Ralph Hanna
Jean Boujaki
Adib Saadeh
Abstract

This paper will cover the significance in regards to types of exports, primary and

manufactured, and its effect on colonial institutions which in turn effects current institution leading

to a change towards GDP. Furthermore, investigating exports more to better understand that higher

share in manufactured goods exported leads to a positive effect on colonial institutions, while the

higher share of primary goods exported has a negative effect on colonial institutions. To address

this issue, we used a data set on colonial trade. In this data set, we used the data on the ratios of

primary and manufactured goods on total exports. We also used the Ordinary Least Square

Modeling in our empirical investigation, to be able to construct latent variables for variables that

cannot be directly observed, such as the quality of institutions. We concluded that countries with

a high share of primary goods exported are correlated with worse institutions, while countries with

a high share of manufactured goods exported are correlated with better institutions.

Introduction

An analysis of extensive research and literature regarding the topics of resource curse and

colonization will help better understand the effect of exports on current institutions and initial

institutions that affects a country’s growth domestic production (GDP). By better understanding,

these variables will help to determine whether there is a direct or indirect effect on GDP and the

extent as to which those variables do affect it. Lastly, we will also be able to conclude whether

those three variables have a positive or negative effect, either leading to prosperity and economic

development or lead to corruption and rent-seeking. The type of exports, being either primary or

manufactured (secondary) exports, affect colonial institution which in turn affects current
institution leading to a change towards GDP and income. This paper will also conclude that higher

share in manufactured goods exported leads to a positive effect on colonial institutions, while the

higher share of primary goods exported has a negative effect on colonial institutions.

When tackling exports, there are variables that affect a country’s degree as to their level of

exports. Acemoglu states in “The Rise of Europe” that countries located in Western Europe located

near the coast affect the volume of trade done, the number of exports leaving the country and its

involvement in trade (Acemoglu, Johnson, Robinson, 2002). As well as countries that are part of

the Atlantic trade can export and trade more, relative to other countries who aren’t part of the

Atlantic trade. Such factors affect a country’s export level, leading to a higher level of exports and

trade resulting in an increase in GDP and economic development compared to other countries that

don’t have access to the Atlantic trade or a coast. Acemoglu also discusses the effect of

colonization and its impact on economic development and growth. Focusing on European

colonization, which is mostly extractive, and variables such as settle mortal, which determine the

type of institutions which colonizes would use (Acemoglu, Johnson, Robinson, 2000). Political

institutions if the country is suitable for the colonizers to settle in or extractive institutions in order

to obtain resources, natural and human. Concluding that based on the type of institution set, there

is an impact being either positive or negative on economic development is done by European

settlement.

Another stance would include, a country’s abundance of natural resources and its effect on

economic development. Frederick van der Ploeg explains in “Natural Resources: A Curse or

Blessing” that there are many variables that affect a country’s GDP which revolves around its

natural resources. Some countries that do have an abundance of natural resources can manage to

achieve long-term economic development, but many of those countries have experienced short-
term economic development followed by corruption and rent-seeking. A country could achieve an

increase in GDP due to having an abundance of resources but as seen in Nigeria, Benin “Slave

Coast”, and Congo; although they had a resource blessing, abundance of resources, they achieved

lower levels of GDP growth and economic development compared to countries without an

abundance of resources (Ploeg, 2011). Factors such as colonization and initial institutions lead to

many countries falling into corruption due to having an abundance of natural resources. The acts

of rent-seeking and extractive institutions with the presence of natural resources divert growth

from the country. Ploeg highlights the importance of institutions on cultivating growth, especially

in the case of having an abundance of resource which heavily impacts GDP.

Another interesting literature conducted by Acemoglu, Johnson, and Robinson on colonial origins

and its effect on economic developed helped better understand how institutions can directly affect

GDP and growth. Throughout their work, the effect of whether a country was colonized did have

an effect on GDP; the type of colonization did play a role as either extractive or political

institutions would be formed based on factors such as mortality rates and geographic location, and

climate (Acemoglu, Johnson, Robinson, 2000). Many colonizers such include Spanish, Dutch and

French, who are known to primarily set extractive institutions, focused on colonial exports of

primary goods and placed importance on maintaining their colonials for the resources to ensure

their control. Negatively impacting the growth of the countries they have colonized, even after the

colonizers left, the extractive institutions set still remained extractive but towards a different party.

Acemoglu and Robinson focused on this point furthermore in their book “Why Nations Fail”, it is

evident that extractive institutions do remain extractive even after the colonizers were over-thrown,

this is shown in Venezuela, Soviet Union, Venice, and many other countries (Acemoglu,

Robinson, 2012). Acemoglu and Robinson concluded that extractive institutions do remain
extractive and don’t lead to long-term economic development but only short-term followed by

corruption and rent-seeking towards a different group of individuals. It is important to take into

account the current and initial institutions set, as they directly impact GDP. The factors mentioned

earlier, such as colonization, have a direct effect as to which type of institution were initial set and

current institutions in place, which directly has an impact on GDP and economic development.

Other studies related to factor endowment have soon to have an effect on economic development.

A study conducted by Kallab and Terra “The colonial exports pattern, institution and current

economic performance” shows that factors such as climate and soil play an important role in

whether countries were turned into slave plantations by French Colonies (Kallab, Teer, 2019).

Based on those factors would result in extractive institutions with worse institutions for trade.

Which is related to the natural resources curse, as colonies have an abundance of natural resources

which include minerals will lead to concentrated power in the hands of the elites. Hindering

economic development and growth of the country due to unequal distribution of political power

towards the few which leads to decline to GDP. We notice that countries with little to no natural

resources, don’t have extractive institutions, leads to no effect on the type of institution, but

countries with a high level of exports have colonial institutions which negatively effects GDP.

Throughout our paper, we will be further analyzing the effects on exports, and current and

initial institutions on GDP to better understand if those channels do directly or indirectly affect the

variable. As well as, to what extent do these channels manage to affect the variable and whether

the effect is positive or negative.

Literature and Research Hypothesis:

Institutions play a major role in the impact of a country’s future. During colonization either

extractive institutions were set up or inclusive ones. Extractive institutions were set due to the

abundance of the country with resources and weak institutions not acting upon them. After

establishing that, Ploeg finds the country will fall under the Dutch disease where the country

focuses on one sector to trade for and neglects others. This will lead to rent-seeking behavior as

elites take charge of trading the resources and a real appreciation in the currency leading to the

impairment of other sectors prospering. Hence, corruption is encouraged which restrain the

country from economic growth. Kallab & Terra mention that countries who rely heavily on natural

resources have a greater level of corruption which is correlated with weak political institutions.

Also, institutions were structured extractive due to the type of land as being profitable with high

cultivation potentials and on the type of the environment, whether the natives were hostile or weak

and did not fight the colonizers.

Another argument to point out where Acemoglu and Robinson (2011) find that extractive

institutions are formed when “absolutism” is the shape of political institutions. Whilst the power

is in the hands of the elites, none is distributed to the people of the country hence no constraints

on the executive will occur. That will identify the “rule of law” in the nation which induces forced

labor denying them from the public good. As such exports will be determined by the elites which

will affect institutions on being extractive.

According to Acemoglu, Gallego and Robinson (2014), initial institutions will determine the

human capital flow of the country. Therefore, when initial institutions (colonial institutions) are

extractive no incentive for economic growth will be established, meaning that human capital will
remain low and in the long run, current institutions will have low productivity labor. In that case,

the country will remain poor due to persistent institutions which will affect the country’s GDP.

Such as the case of Soviet Unions who was prospering until extractive institutions led the country

to a breakdown. A further example is Uzbekistan where cotton was very valuable for the

government which was under the control of Soviet communism. Cotton was exported heavily and

a very small part of the profits was paid for the farmers. Those extractive institutions even obliged

kids to work depriving them of proper education and did not encourage technological progress.

Thus, the country is very poor today and do not contribute to connection with the world since the

media and the Internet is suppressed. In fact, extractive institutions cannot last; its growth is not

sustainable since there is no incentive for technological progress and the country is politically

centralized as the power is in the hand of the elites whose only goal is to gain money. For the case

of Uzbekistan, the trading went through cotton exports only, while no innovations were

encouraged and focusing on one type of exports (resources) led the country into the hand of a

single family (absolutism) and basing the economy on forced-labor.

On the other hand, Acemoglu, Johnson, and Robinson (2001) argue that inclusive

institutions were brought up by the intention of settlements. If disease rate was low meaning

mortality rate of colonizers was low, potential settlers would settle. Then early institution would

establish a good purpose of imitating their institution at home(neo-Europes). In fact, the trading

sector flourished due to settlers who initially empowered inclusive institutions and considered the

resource abundance as a blessing rather than a curse. Those early institutions would lead to

economic growth where economic institutions would secure property rights and order. Moreover,

trading made citizens richer which led to more enforced property rights and higher constraints on

the executive. Hence, the state would regulate the market, allow free entry of new businesses,
encourage trading and enhance the education system. As for the political institutions, numerous

participation would lay constraints on the executive. Therefore, investments would increase due

to applied property rights and the country would prosper under economic growth. Engerman and

Sokoloff (1997) mentioned that economic growth is in need of the increase of inclusive

institutions. Sunk cost and investments would prevent the return of inclusive institutions to

extractive ones. Thus, early institutions would persist to current ones which would affect GDP.

That was proven growth enriching and healthier accomplishing. To emphasize, the example of

North and South Korea prove that inclusive institutions are the key to economic growth. In fact,

income per capita was the same for both countries at the end of WW2. However, today South

Korea surpasses North Korea’s economic growth by a long way as South Korea stimulated

investments, encouraged innovations and increased its exports. While for North Korea, the

dictatorship (extractive institutions) has prohibited economic growth and forbade people to chase

their own economic activities and their dreams (Kramer, 2017).

Finally, the theory pressures the need for exports that affects inclusive institutions for

growth. Therefore, inclusive institutions would place constraints on the executive and persist till

today. That would lead to a higher GDP, where extractive institutions persisting until today would

have a relatively low GDP due to corruption and no or low growth (Acemoglu & Robinson). More

recent work of Ploeg also heavily focuses on the Hartwich Rule and its importance towards leading

a country to high levels of GDP and economic development. The idea of consuming less today and

saving more can help lead to slow but consistent growth resulting in long-run economic prosperity.

With saving, a nation becomes richer and social welfare increases making them less depended on

their abundance of resources, having different alternatives of generating wealth. Resource-rich

economies thus sustain consumption by consuming a fraction of their marginal resource rents

without having to heavily rely on it.

Variables -

Colonial Exports

One of the variables used in our Ordinary Least Square (OLS) regression is colonial

exports; it is a component of global exchange whereby merchandise/resources in one nation are

dispatched to another nation for future deal or exchange. To effectively use this variable, we divide

it into two segments which consist of the share of Primary products and manufacturing products

exports of each country. This would help analyze and help test our hypothesis on whether countries

that are heavily dependent on exporting primary products fall into the resource curse trap whereas

those that focus on exporting manufacturing goods prevail in the long run. (The data directly

observes exports as we will see later). For example, oil-rich states such as Congo and Nigeria have

poor institutions, as a result, have poor performance economically due to factors such as corruption

and inhibition of democracy which lead to the curse prolonging into a cycle.

Colonial Institutions

In order to use Former institutions as a variable in our regression, we use one of its two

markers usually utilized by democracy and constraint on the executive (in 1900) according to

Kallab and Teer in 2019. We have decided Democracy is measured as an index ranging from 0 to

10. “A higher score indicates more democracy points from three dimensions: competitiveness of

political participation (from 1 to 3 points); competitiveness of executive recruitment (from 1 to 2

points, with a bonus of 1 point if there is an election); and constraints on chief executive (from 1
to 4 points).” “Whereas Constraint on the executive is a seven-point scale ranging from 1 to 7,

with a higher score indicating more constraints on executive power, that is, a better quality of

institutions. A score of 1 indicates unlimited authority to the governor, 3 indicates slightly to

moderate limitations by other institutional corps, 5 indicates substantial limitations, and 7

indicates executive parity or subordination. Scores of 2, 4, and 6 indicate intermediate values.

Data are from Acemoglu et al. (2001), completed with data from the polity III data set for the

missing values.” (Kallab et al. 2019)

Empirical Model:

Figure1: Hypothesis Model

Figure 1 illustrates the relationships between the variables in our model. These relations are captured by
the following equations:
 Inst1900i = β0 + β1ExportofPrimarygoods +ε (1)

Inst1900i = β0 + β1ExportofManufacturedgoods +ε (2)

These equations suggest that the quality of colonial institutions were affected by the type of

goods that these countries exported. Equation (1) suggests that colonial institutions are

negatively affected if the country used to export mainly primary goods. Equation (2) suggests

that colonial institutions are positively affected if the country used to export mainly

manufactured goods.

Previous literature (AJR, 2001) proved that colonial institutions have persisted over time.

These institutions persist because it is very costly to achieve institutional change. Therefore

rulers tend to maintain these previous institutions.

The same paper (AJR, 2001) also drew a positive relationship between current

institutions and current income. This is mainly due to the fact that good inclusive institutions that

encourage investment and innovation and these institutions will eventually lead to sustained

growth.

Table 1: Colonial Institutions: OLS Regression

Dependent Variable: Institutions 1900
(1) (2)
Share of Exports of Primary -.62026**
Goods (.71059)
Share of Exports of .6203**
Manufactured Goods (.7106)
Observations 98 98
R square 0.0943 0.1024

8
6
Fitted values

4
2
0

.5 .6 .7 .8 .9 1
share of primary production

Fitted values Fitted values

Figure 2: Relationship between the share of primary products in exports and constraint on the executive
in 1900
8
6
Fitted values

4
2
0

0 .1 .2 .3 .4 .5
share man prod

Fitted values Fitted values

Figure 3: Relationship between share of manufactured products in exports and constraint on executive
in 1900
Results:
Table 1 shows the OLS regressions for Equations (1) and (2), using the latent variable for

colonial exports of primary products and manufactured products as the trade variable in (1) and

(2) respectively.

Referring to the results in Table (1), the impact of colonial exports of primary goods on

colonial institutions is negative and statistically significant at the 5-percent significance level.

Therefore, colonial exports of primary negatively affect colonial institutions. A higher share of

primary products on colonial exports are associated with worse quality of colonial. The graph in

figure 2 shows the negative relationship between the share of primary products in exports and the

quality of colonial institutions. This relations ship is represented by the line of slope -0.62026.

On the other hand, colonial exports of manufactured goods positively affect colonial

institutions. The impact of colonial exports of manufactured goods on colonial institutions is

positive and statistically significant at the 5-percent significance level. The graph in figure 3

shows the positive relationship between the share of manufactured products in exports and the

quality of colonial institutions. This relations ship is represented by the line of slope 0.6203.

These results are compatible with our main hypothesis about the resource-curse:

Colonizers tend to use extractive institutions to extract their colony’s natural resources.

Therefore, the amount of resources extracted by the colonizing country is reflected by the

number of primary goods these colonies export. These high amounts of primary exports are

associated with the maintaining of bad colonial institutions. Therefore these results confirm the

existence of the resource curse.

 On the other hand, a higher share of manufactured good is positively associated with

institutions of better quality. A higher share of manufactured goods gives manufacturers and

merchants a higher bargaining power. This leads to more inclusive institutions that foster growth

and innovation.

Conclusion:
In this paper, we investigated the relationship between colonial trade patterns and

institutional quality, and their effect on current income. We used Ordinary Least Square

regression, which is a simple linear regression. This method allowed us to create measures for

abstract variables, like the quality of institutions. It also allows us to isolate the impact of the

type of colonial exports on long-run development through the channel of colonial institutions and

current institutions. Our main findings can be divided into two parts. Regarding the colonial

trade patterns, we find that (1) a high share of primary goods of colonial exports are negatively

related to the quality of colonial institutions. (2) A high share of manufactured goods of colonial

exports is positively related to the quality of colonial institutions.

References