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Essays on the Political Economy of Development

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Essays on the Political Economy of Development The London School of Economics and Political Science Essays on the Political Economy of Development Luis Roberto Mart´ınezArmas A thesis submitted to the Department of Economics of the London School of Economics for the degree of Doctor of Philosophy, London, March 2016. 1 Declaration I certify that the thesis I have presented for examination for the PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of approximately 47,301 words. Statement of Conjoint Work I confirm that Chapter 2 was jointly co-authored with Juan Camilo C´ardenas, Nicol´asDe Roux and Christian Jaramillo. I contributed 25 % of this work. 2 Abstract The present collection of essays studies some of the ways in which the interaction of economic and political forces affects a country's development path. The focus of the thesis is on Colombia, which is a fertile setting for the study of the political economy of development given its long-lasting internal conflict, the multiple reforms to the functioning of the state that have taken place in the last decades and the availability of high quality sub-national data. The first two chapters explore people's tendency to use resources differently depending on their source. The first chapter shows how the source of public revenue affects a government's incentives to provide public goods and services, while the second one studies people's propensity to make risky choices when playing a game with easily-gotten house money. The third chapter contributes to our understanding of the international dimension of civil conflict by analyzing the effects of access to territory in a neighboring country on the intensity of an insurgent group's activities. The idea that governments perform better when they are funded with tax revenue has a long history and surfaces often in debates regarding the origin of the natural resource curse, the effectiveness of foreign aid and the benefits from decentralization. However, the empirical evidence backing this claim is somewhat limited. In the first chapter, I try to fill this gap by comparing the effects of increases in internally-raised tax revenue and in royalties from the extraction of oil on local public good provision in a panel of Colombian municipalities. I find that tax revenue leads to an improvement in public services while oil royalties have no effect. Furthermore, I document a negative effect of royalties on the quality of government, as measured by the disciplinary prosecution of local public officials. One possible explanation for the results in chapter 1 is that taxation leads to greater accountability because voters value tax revenue more than revenue from an external source. The idea that people assign greater value to resources over which they have some sense of ownership is further explored in the second chapter. In that chapter, which is the result of joint work with Juan Camilo C´ardenas,Nicol´asDe Roux and Christian Jaramillo, we show that the risk aversion displayed by participants in a lab experiment varies depending on whether they received the endowment on the same day of the session or one month in advance. We interpret this finding as evidence of people's reduced risk aversion when allocating easily-gotten resources, also known as the `house- money' effect. 3 In the third chapter, I turn my attention to Colombia's internal armed conflict and I study the allegation that the administration of Hugo Ch´avez provided access to territory in neighboring Venezuela to Colombian insurgent groups FARC and ELN. I document a disproportionate increase in the intensity of insurgent activity (mainly by FARC) in Colombian municipalities next to the border with Venezuela after Ch´avez comes to power in 1999. This finding is consistent with the idea that the rebels had access to a safe haven across the border during the Ch´avez administration, but that the strategic advantage provided by this sanctuary decreased with distance to the border. This chapter contributes to our understanding of foreign support for insurgent groups by developing a novel data-driven method for the detection of the usually secretive activities of trans-national rebel groups. It additionally provides credible estimates of the causal effect of access to foreign territory on insurgent activities. 4 Acknowledgments For the past five years I have had the privilege to work under the supervision of Professor Gerard Padr´oi Miquel. I would like to start by thanking him for his unbeatable feedback, encouragement and availability, from which this thesis has benefited enormously. Professors Oriana Bandiera, Tim Besley, Gharad Bryan, Greg Fischer and Maitreesh Ghatak also provided numerous helpful comments on my work and taught me many valuable lessons over the course of these years. I would like to thank my parents, Luis and Graciela, and my sister, Mar´ıa Cristina, for their unwavering support throughout the PhD. Although an ocean stands between us, you are always in my heart. I would also like to thank the Perdomo Meza family, my second family, for helping me to achieve this dream. Having great friends and colleagues around, such as Munir Squires, Daniel Silva, Anders Jensen, Miguel Espinosa, and many others that I am leaving out, has made this mountain a lot easier to climb and I thank them for that. I would mostly like to thank my beautiful daughter, Ana Sof´ıa,and my best friend and wife, Mar´ıaFernanda, for their love and their patience. They have both made many sacrifices throughout this journey and this work is as much a product of their effort as it is of mine. I gratefully acknowledge the financial support from the London School of Economics and Banco de la Rep´ublicade Colombia. This thesis is dedicated to my grandparents, Gilma, Graciela, Roberto and Pedro, who seem to have understood the fundamental causes of development in ways that perhaps I never will. 5 Contents 1. Sources of Revenue and Government Performance: Evidence from Colombia 12 1.1. Introduction . 13 1.2. Local Public Finance and Public Service Provision in Colombia 18 1.3. Empirical Strategy . 21 1.3.1. Data . 21 1.3.2. Indicators of Local Public Good Provision . 24 1.3.3. Identification Strategy . 26 1.4. Results on Public Good Provision . 41 1.4.1. Main Results . 41 1.4.2. Robustness Checks and Alternative Explanations . 44 1.5. Evidence from Disciplinary Prosecutions . 53 1.6. Discussion . 55 1.7. Conclusion . 58 2. Is It my Money or Not? An Experiment on Risk Aversion and the House-Money Effect 60 2.1. Introduction . 61 2.2. The Experiment . 62 2.3. Results . 65 2.4. Conclusions . 73 3. Did Colombian Guerrillas Take Refuge in Ch´avez's Venezuela? Evidence from the Geography of Conflict 75 3.1. Introduction . 76 3.2. Background . 79 3.2.1. A Recent History of Colombia's Internal Armed Conflict 81 3.2.2. Venezuela's Role in Colombia's Armed Conflict . 85 3.3. Data . 90 3.4. Empirical Strategy . 94 3.5. Results . 98 6 3.5.1. Main Results . 98 3.5.2. Guerrilla Activity at the Border with Ecuador . 103 3.5.3. Robustness Checks . 104 3.5.4. Alternative Explanations . 107 3.6. Discussion and Concluding Remarks . 114 Bibliography 116 A. Appendix to Chapter 1 132 A.1. Theoretical Appendix . 133 A.1.1. Set-up of the Model and Equilibrium . 133 A.1.2. Taxes as a Source of Information . 136 A.1.3. Taxes as an Incentive for Information Acquisition . 138 A.2. Empirical Appendix . 141 7 List of Tables Chapter 1: Sources of Revenue and Government Performance 12 1.1. Achievement of targets by oil-royalty recipients . 21 1.2. Summary statistics of main variables . 23 1.3. Predicting a cadastral update . 30 1.4. First-stage results . 40 1.5. Sources of revenue and public good provision . 42 1.6. The effect of cadastral updates in oil-royalty recipients . 44 1.7. Additional effects of oil price shocks . 46 1.8. Sources of revenue and public expenditure . 51 1.9. Sources of revenue and educational infrastructure . 52 1.10. Sources of revenue and disciplinary processes . 54 1.11. Sources of revenue and social mobilizations . 58 Chapter 2: Is It my Money or Not? 60 2.1. Demographic characteristics of treatment and control groups . 63 2.2. Experimental results by treatment and gender . 67 2.3. Maximum likelihood estimation of γ (Game 1) . 70 2.4. Maximum likelihood estimation of γ (Game 2) . 72 Chapter 3: Did Colombian Guerrillas Take Refuge in Ch´avez's Venezuela? 75 3.1. Summary statistics . 93 3.2. Guerrilla activity at the border with Venezuela . 99 3.3. Guerrilla activity at the border with Ecuador . 104 3.4. Categories of FARC activity at the border with Venezuela . 105 3.5. Robustness tests . 106 3.6. Activity by paramilitary groups and the Armed Forces . 109 3.7. Changes in local economic and political conditions . 111 8 Appendix to Chapter 1 132 A1. Social indicators in Colombia and Latin America . 143 A2. Cadastral updates and statutory tax rates .
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