Entrepreneurs, Local Amenities and Growth:

A research proposal

Rodrigo Wagner

December 1st , 2008

(De)motivating evidence about negative “growth”

One out of five countries had their peak GDP per capita before 1985

0.2

.4.6

.81

Cu

mul

ativ

e d

istr

ibut

ion

of c

oun

trie

s

1960 1970 1980 1990 2000Year of peak GDP per capita

Source: Calculated from WDI, using

Total countries = 191Year of peak output per capita for countries

SENKWT

ZMBNER

MDG GHAJAM

ZWEZAR

GABIRNBOL VENNICNGA CAF SAU

SLVCIVHND

GTMHTIAGO NAMTGOPRY ZAFPER

SLERWA

COM VUTGMBCOGGEO DZA

JORCMRDJI ROM

TJKRUSUZBMNG BHSUKRMDA

KEN KGZ MKDAZENCLBDI

PNG

SLBERI COLGNB IDN

ARGURYSYR KNAMWI LCA

GRDDMA ISRMLTBRB PYFSYCCHEPRT NLDOMNNPL PRI

GIN DOM MACBHRMLIYEM

BEN MAR BLZ NORNZLVCTWSM POLSVKIND CYPEGY DNKESP IRLTONBFA CRICPVKHM GNQMYSTUN FINTURFJILSO HUNMUSCHN BIHTCD HKGBGD USALVALAO BWABLRTZA ATGPAN JPNISLBELAUTESTTHASWZKAZPAKMRT CZE SWEDEUALB GBRAUSFRALKA SGPECUTKM ITAVNMETH KOR LUXUGA PHL TTO SVNBRA CANHRV GRCBGR MEXLBNARM LTUMOZ GUYSDN CHL

1960

1970

1980

1990

2000

Yea

r o

f pe

ak G

DP

per

cap

ita

6 7 8 9 10 11Ln of GDP per capita PPP (2000)

Source: Calculated from WDI, using LCU

Year of peak GDP per capita by country's income

Below the historical peak…

SEN-61

KWT-62

NER-65

ZMB-65

MDG-71

GHA-71 JAM-72

ZAR-74

ZWE-74

GAB-76

IRN-76

NGA-77

CAF-77VEN-77

BOL-77

NIC-77

SAU-77

SLV-78

CIV-78

HND-79NAM-80

GTM-80

AGO-80TGO-80

HTI-80

ZAF-81

PRY-81PER-81

SLE-82

RWA-83

COG-84

VUT-84

COM-84

GMB-84

0.2

.4.6

.8G

ap

in G

DP

pe

r ca

pita

[1-G

DP

(t)/

GD

Pm

ax]

6 7 8 9 10Ln of GDP per capita PPP in 2000

(*) Year of peak GDP pc in parenthesis.Source: Calculated from WDI, using LCU

Only countries with peak before 1985 Gap between income in 2000 and peak GDP

10% of the world live in countries that “forgot” their TFP

• 600 million people live in countries – where GDP today (2000) is below its 1984 peak.– This isn’t small potatoes

• Questions– Why some countries are poorer today than 20 years ago ?– How can this happen in a world where technology is growing ?– Why some countries take so much time to recover from collapses ?

• Unlike Germany after WWII

• Approach:– Look at the role of entrepreneurial talent leaving the country

Some usual suspects ?

Y = A f(k,h)• A in the world in higher

• Barriers to k

• Overall investment in h is higher.

• Infrastructure can be rebuilt…– And then pay the cost

• If shadow price of capital (physical or human) is high One may import it…

• In general, true for any (tradable) input

• Conflict ends… but GDP crisis does notThere seems to be a permanent loss in TFP

- hysteresis

ARE

BOL

JAM

NER

PRY

SAU

020

4060

80S

eco

ndar

y en

rollm

ent

200

0

0 20 40 60Secondary Enrollment 1990

This channel…

1) Crisis induces reduction in amenities

– Public security, for example

2) Entrepreneurs exit the country (or the area):V(stay local, w) < V(live in “Miami”, w - Cost of moving)

3) Conflict stops, but “coordinators” are not there…– It takes a while to build a new pool of entrepreneurs

Some micro evidence• Kidnapping of businessmen reduced investment in

Colombian provinces.• Pshisva and Suarez (2006)

• Russian cities disproportionally hit by the Holocaust grew less.

• Acemoglu, Hassan and Robinson (2008)

• Entrepreneurship is (very) imperfectly tradable– Many local entrepreneurs in Italy

• Olmo & Michelacci (2004, REStat)

• African migration … (and return ?) – Anecdotal evidence of recent return(article in EL PAIS)

Macro perspective

• Talent and allocation of talent• Lucas (1978) ; Murphy Shleifer & Vishny (1991).• But talent is implicitly tradable

• Entrepreneurs demand educated people.• Dias & McDermontt (2006).

• Talent and tolerance for delayed gratification emerge from the middle class

• Acemoglu & Zilibotti (1997)

• Endogenous migration and growth– But here human capital does not depreciate when you leave

• Braun (1993)

• Familiarity with foreign economy• Goodfriend and McDermontt (1998)

Central claims

• Location decisions of entrepreneurs impact the set of available projects.

• Outward migration of the “entrepreneurial class” reduce long term growth.– Why ? Less projects less spillovers…

• Restoring amenities for entrepreneurs may attract people able to run businesses.

Towards a Model

Conclusions

• Some countries are poorer than before

• In a world of technological improvement.

• Did they loose their ability to do business ?

• Evidence supporting imperfect substitution between local and foreign entrepreneur…

• How to model ?

• How relevant ?