Focusing on Regions: Motivation and Research Potential

characterized by cross-country studies i.e., the comparison of nationally aggregated or nationally tracked variables across two or more countries. Prominent representatives focused on the exploration of differences in national endowments regarding institutions (Acemoglu et al., 2001, Acemoglu and Robinson, 2012 or Knack and Keefer, 1995), geography (Bloom and Sachs, 1998, Easterly and Levine, 2003 or Gallup et al., 1999), foreign direct investments and trade (Alesina et al., 2000 or Balasubramanyam et al., 1996), political stability and good governance (Alesina et al., 1996 or Kaufmann and Kraay, 2011), public expenditure and infrastructure (Aschauer, 1989, Devarajan et al., 1996 or Easterly and Rebelo, 1993) and human capital (Barro, 1991 or Castelló and Doménech, 2002).

Surely, this listing covers only a very small percentage of well-published cross-country efforts, but it

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illustrates that research in the field of development economics (and others) has long been relying on the comparison of countries when analyzing determinants of growth or persistent income differences.

While it is reasonable to cross-nationally compare variables that are collated by national statistical offices (because they are of particular interest for national governments), it is less plausible for variables that are characterized by a strong subnational variation. Results from Easterly et al. (2016) suggest that many of the determinants of long-run growth are influenced by the variation of institutions, history, geography or culture on the subnational (or supra-national) level. They also state that researchers and policy makers overstated the importance of the national state for long-run economic growth, as at least half of the variation in growth happens at the supra- or subnational level. In addition, Levine and Zervos (1993) state that national indicators are often measured inconsistently and inaccurately and therefore it seems erroneous to include a random number of (very different) countries into the same regression analysis. This is particularly fatal as national external shocks may have substantially influenced economic activity, but are not accounted for when averaging the effects over a large number of countries and over several decades. Other methodological, conceptual and statistical problems include causality issues, aggregation of data and the derivation of reliable inferences from regression coefficients (see Levine and Renelt, 1991).

This critique is in accordance with a growing strand of literature addressing the relationship between subnational factors and economic outcomes: Acemoglu and Dell (2010) propose differences in productive efficiency attributed to local institutions and policies; Tabellini (2010) finds a causal effect between regional traits of culture on European economic income; Putterman and Weil (2010) stress the importance of subnational migration flows, as early settlements influenced agricultural cultivation and emergency of organized states; Dell et al. (2009) explores the negative relationship between temperature and subnational incomes in the Americas; Gennaioli et al. (2013) points to the crucial importance of human capital in accounting for worldwide regional income differences; Mitton (2016) finds high explanatory power of geographical (e.g., ocean access or natural resources) and institutional factors for subnational per capita income; and Henderson et al. (2017) analyzes the role of trade (among others) for the subnational distribution of worldwide income. Again, this selection constitutes only a small extract of studies that deal with influence factors for regional economic development. Nevertheless, only few attempts consider worldwide regions, but instead focus on within-country (e.g., China or the United States) or within-region (e.g., European Union) comparisons.

Exploring and comparing subnational differences when explaining diverging economic performances bears several advantages and avoids conceptual and methodological problems of cross-country studies: first, technological or institutional history, which clearly determines today’s development outcomes, does not necessarily correspond with current national borders. The sovereign territory of many countries has changed significantly throughout the centuries due to wars, colonial rules or migration and a cross-country comparison seems susceptible to interpretation errors. In addition,

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Alesina et al. (2011) find that the presence of artificial borders (e.g., drawn by colonial masters or war profiteers) are correlated with several measures of political and economic success. Second, looking at the subnational level, we can re‐run standard cross‐country regressions but include country fixed‐effects which are holding constant anything that is unique for a specific country such as institutions, policies, history, etc. Thereby, we not only exploit subnational heterogeneity but also account for any country-specific unobservables that might be relevant for the research objective and mitigate the risk of omitted variable bias. There is a third side effect that comes from analyzing the development of subnational regions. Through restraining from artificially aggregating variables that are characterized by a strong subnational variation to the country-level, we are much closer to capturing the actual state of welfare of the individual and therefore to approaching an important epistemological target of development economics.

In this thesis, we focus on three relevant impact factors of economic development as we believe they would strongly benefit from a re-evaluation from a regional perspective due to their pronounced national variation: culture, development aid and temperature.

The Influence of the Cultural Values Independence and Obedience on Regional Incomes

Culture matters for economic development. A large strand of research finds strong empirical evidence for this statement by comparing culture and economic development across countries (see e.g., Bjørnskov, 2007, Dearmon and Grier, 2009, Gorodnichenko and Roland, 2011, 2017, Hofstede, 2001 or Licht et al., 2007). Considerations to take up this well-discussed cultuincome relationship and re-analyze it on the regional level, are based on the concern that culture can hardly be unified across an entire nation. Countries are often subject to migration, arbitrary drawing of boundaries (colonial history), different cultural influences from adjacent states, shifting national boundaries after wars (East and West Germany), etc., and therefore we must assume that we are dealing with a subnational mélange of different cultures or simply with heterogeneity among individuals rather than with one unified national culture. This in turn, can explain why regional differences in economic growth continue to exist, despite the presence of nationally unified institutions, legal and education systems, administrations, etc.

A very prominently discussed example is the divergent economic development in Northern and Southern Italy. Authors such as Banfield (1958) and Putnam (1994) trace differences in civic, social and economic behavior back to distant historical and traditional backgrounds. This is in line with Ichino and Maggi (1999) who find a significantly higher prevalence of shirking (i.e., absenteeism and misconduct) at the Southern branches of a large Italian bank. The authors attribute this behavioral difference to individual backgrounds that are typical for Italians born and raised in the Mezzogiorno. Comparing these observations with actual data from the World Value Survey, the largest survey-based research project on values and beliefs, we discover that there is indeed a huge gap between cultural values and beliefs of individuals living in Northern and Southern Italy between 1980 and 2010: people from the North place a 12% higher importance on the value Independence and a 30% lower importance on the value

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Obedience; they are also 55% more trusting than the people from Southern Italy. Even though this is just a small extract of a whole range of values and culture can certainly not fully explain a per capita income gap of 63%, it seems inappropriate to ignore or neglect these regional differences when explaining diverging economic development in Italy.

In Chapter 2 we present our attempt to account for regional differences in the cultural values Independence and Obedience, but go well beyond the 20 regions of Italy. We compare a set of 1,204 (subnational) regions across the world and estimate to what extent cultural differences can explain diverging regional economic development when other regional (population, religious shares, education, geographic characteristics, etc.) and national (institutions and country-specific unobservables) influence factors are accounted for. Herewith, we not only conduct a comprehensive and much more granular analysis of the culture-income relationship, but also provide a solid starting point for future research that aims at analyzing other cultural aspects on the regional level.

Evaluating Water- and Health-Related Development Projects

Our motivation to re-analyze the effectiveness of development aid on a subnational level follows two main considerations: first, funds allocated to development aid have reached remarkable levels. The World Bank alone has dedicated around 269 billion USD to 2,681 projects in 17,555 locations in 132 countries (World Bank Maps, 2020). It is no wonder that assessing the effectiveness of foreign aid has been in focus of numerous research efforts in the past. Nevertheless, they have failed to come to an agreement on whether foreign aid is ultimately helpful to tackle the world’s most pressing issues, such as poverty, malnutrition, infant mortality, etc. A serious shortcoming to past evaluation attempts has been that they are based on nationally aggregated aid flows, which cannot be adequate to evaluate the effect of development projects on the living situation of individuals spread over an entire country. For instance, browsing the map of World Bank projects in Nigeria (World Bank Maps, 2020), it appears that Nigeria has a relatively high density of projects (between 200 and 249 active and closed projects) compared with other African countries. However, having a closer look at the subnational allocation of projects, it emerges that there is only one region (Kaduna state) that is characterized by a large number of projects (approximately 53 to 66 projects), whereas in almost all other states on average only 13-26 projects were conducted. Making generalized points on the effectiveness of World Bank projects in Nigeria does certainly not capture the fact that only few people had frequent and extensive access to the Bank’s services whereas others had no or much fewer exposure.

Second, it is crucially important to account for regional specifics as they can capture the rationale behind the subnational allocation (or accumulation) of projects. As pointed out by Alesina and Dollar (2000) foreign aid “is dictated as much by political and strategic considerations, as by the economic needs and policy performance of the recipients” (Alesina and Dollar, 2000, p.33). We know from subnational allocation procedures of e.g., the World Bank that regional projects are planned by the respective national line ministries, locally staffed World Bank employees and other stakeholders, that

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make need-based decisions but also might be distracted by public and private interests, by ease of implementation and accessibility (good infrastructure or good experiences with past projects in a certain area) etc. Therefore, evaluating development aid on a national level and across countries and not account for subnational specifics (including allocation considerations), cannot paint a proper picture of its effectiveness.

Not only do we extend past cross-country research on aid effectiveness with our analysis from Chapter 3 with a new subnational perspective and the employment of subnational fixed effects. But also we present a new micro(/individual)-based approach to evaluate projects on a very large scale, that can easily be extended to any development agency, aid sector or target group, and that captures many advantages of experimental studies but in addition is inexpensive and externally valid.

The Link between Regional Temperature and Regional Incomes

There is a large strand of cross-country literature, aiming at explaining differences in income with differences in temperature, that finds a convincing evidence for a negative relationship. This is in line with very recent discussions on the harmful consequences of rises in temperature for the global economy.

Researchers across the globe are searching for the right temperature thresholds in order to specify policy targets and to contain negative effects for worldwide economic activities.

Our main motivation for re-analyzing the temperature-growth relationship lies in extending the national evidence for the role of temperature on income from a new perspective. We follow Acemoglu and Robinson (2012)’s reasoning and hypothesize that average national temperature is indeed not sufficient for explaining differences in national income. However, observing a large spread of temperatures within countries, we would like to re-assess whether regional temperature differences might bridge the gap between findings of past research on the temperature-income relationship.

Whereas the national level seems to be a reasonable aggregation unit for tracking economic variables, it is certainly not adequate to capture large variations in temperature or other climatic indicators. Nordhaus clearly states that “for many countries, averages of most geographic variables (such as temperature or distance from seacoast) cover such a huge area that they are virtually meaningless” (Nordhaus, 2006, p.3511). For instance, within-country temperature differences in the year 2010 lay at 27 degrees in the United States, 26 degrees in India, 24 degrees in Russia or China and 20 degrees in Canada, whereas their average national temperature (11, 23, 2, 11 and -1 degree, respectively) completely neglects this strong variation. A preliminary deep-dive and comparison of the United States and Canada, two neighboring countries on the same continent with comparable national per capita income, reveals that the richest region in Canada and the second richest region in the U.S., both with per capita income of 56.000 USD, had average temperatures of -14 degrees and +13 degrees.

Despite the same regional income level, this span of 27 degrees is more than twice the span between their national averages and a strong example for Acemoglu and Robinson (2012)’s hypothesis that

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temperature is indeed neglectable for explaining income differences. Obviously, a much larger comparison is needed in order to make valuable conclusions but the example clarifies that analyzing temperature on the subnational level paints a much more precise picture of the relationship between temperature and income.

We are convinced that our analysis presented in Chapter 4 constitutes as valuable extension to past research as it systematically accounts for this regional heterogeneity for a large set of regions. In addition, it addresses various nuances of the temperature-income relationship, such as non-linearity or the particular consequences for poor countries, that have been highlighted by past literature.