S IEF Einaudi Institute for Economics and Finance ERIE EIEF Working Paper 10/08 November 2008 Long Term Persistence by Luigi Guiso (European University Institute, EIEF and CEPR) Paola Sapienza (Northwestern University, NBER and CEPR) Luigi Zingales (University of Chicago, NBER and CEPR) EIEF WORKING PAPER S Long Term Persistence1 Luigi Guiso European University Institute, EIEF & CEPR Paola Sapienza Northwestern University, NBER & CEPR Luigi Zingales University of Chicago, NBER, & CEPR Abstract Is social capital long lasting? Does it affect long term economic performance? To answer these questions we test Putnam’s conjecture that today marked differences in social capital between the North and South of Italy are due to the culture of independence fostered by the free city states experience in the North of Italy at the turn of the first millennium. We show that the medieval experience of independence has an impact on social capital within the North, even when we instrument for the probability of becoming a city state with historical factors (such as the Etruscan origin of the city and the presence of a bishop in year 1,000). More importantly, we show that the difference in social capital between towns that in the Middle Ages had the characteristics to become independent and towns that did not exists only in the North (where most of these towns did become independent) and not in the South (where the power of the Norman kingdom prevented them from doing so). Our difference in difference estimates suggest that at least 50% of the North-South gap in social capital is due to the lack of a free city state experience in the South. JEL: Keywords: social capital, culture, persistence, institutions, economic development. 1 We are extremely grateful to Giuliano Milani for his advice and help in obtaining data and references on Medieval history. Antonello Montesanti has very kindly given us access to his data on the Etruscan origin of Italian cities and his meticulous and scrupulous classification of Roman colonies and municipalities with a detailed and complete reconstruction of Roman cities region by region. : Luigi Guiso thanks the European University Institute, Paola Sapienza the Zell Center, and Luigi Zingales the Center for Research in Security Prices (CRSP), the Stigler Center, and the Initiative on Global Markets at the University of Chicago for financial support. 1 In spite of remarkable success stories like the Asian Tigers and, more recently, China, there is very large persistence in economic development. Among European countries, there is a correlation of 0.56 between per capita income at the beginning and the end of the century. Even between 1700 and 2000 (over a 300 years span and with an industrial revolution in the middle) the correlation is 0.23.2 Why are these differences so persistent? In an influential paper Acemoglu et al (2001) attribute this persistence to the long lasting effect of formal institutions. Protection of property rights and limits to the power of the executive, which -- they claim – are essential to the development process, are built in the formal institution of a county and tend to persist over the centuries. In countries where settlers’ mortality was very high, for instance, colonizers designed institutions aimed at extracting value, rather than creating it. In their view, these extractive institutions did not foster (and still do not foster) rule of law, with negative effect on development. An alternative view is provided by Tabellini (2007), who attributes this persistence to culture, measured by indicators of individual values and beliefs, such as trust and respect for others. He shows that regions of Europe that had more decentralized decision making in the XVII and XVIII centuries, today have both more “progressive values” and higher income per capita. Both these important papers, however, cannot completely reject the alternative that the source of persistence is geography. Colonies with a lower settler mortality might still bear a disadvantage in developing today. Acemoglu et al (2001) are aware of this problem and argue that the diseases that were a problem then (yellow fever and malaria) no longer represent a major source of comparative disadvantage. Still other geographical factors impeding economic development could be at the origin of this persistence. Similarly, different geographical conditions may foster different institutions and a different set of values, as argued by Aristotle. The possibility that geography rather than culture explains the persistence found by Tabellini (2007), thus, remain alive, especially in light of the fact that the reasons why different institutions emerged remain unclear. To try and distinguish between history and geography as a source of persistence in this paper we revisit Putnam (1993). In “Making Democracy Work”, Putnam conjectures that regional differences in trust and social capital within Italy can be traced back to the history of independence that certain cities experienced in the first centuries of the second millennium. Besides the clear logical link, Putnam’s conjecture has two other advantages. First, it traces back the origin of these differences to institutions that are long gone. Hence, it is impossible to 2 These results are obtained using Maddison (2001). 2 attribute any residual difference in social capital (and difference in economic outcomes associated with it) to the survival of any formal institution. Second, while concentrated in the Center- North of the country, the free-city state experience did not involve all the major cities in the Center North. It is possible, then, to look within the Center-North whether cities that experienced a period of independence as free city states have today (more than 800 years later) a different level of social capital. To test Putnam’s conjecture we start by comparing the level of social capital within the Center-North of Italy. To this purpose, we select the largest 400 Italian towns in the Center-North as of 1871. For these cities we reconstruct the independence history and collect several measures of social capital today. We, then, relate today’s social capital levels to whether a town had been a free city state in the 1000-1300 period. Consistent with Putnam’s conjecture, we find that Center- Northern cities that experienced a period of independence as a free city have significantly higher levels of social capital today. For example, the number of voluntary associations is 25% higher in cities that were free city states. While general geographical conditions within the Center-North are similar, this test alone cannot reject the hypothesis that some more subtle geographical characteristics, such as closeness to the sea, affect both social capital and the probability that a city would become a free-city state. In our regressions we do control for several morphological characteristics, nevertheless we address this problem directly by digging into history to find some exogenous determinants of the rise of independent municipalities. Our reading of Medieval history books (among others, Reynolds, 1997; Milani, 2005; Jones, 1997; Tabacco, 1987; Pirenne, 1956) suggests two potential instruments. First, at the collapse of the Holy Roman Empire, in Italy religious authorities were often the nucleus around which the emerging local autonomy was formed. Hence, the fact that during the V century AD a town had been selected to have a local bishop should positively affect the formation of a city state between the XII and XII century. Second, Italy experienced another episode of free city states during the IX century B.C. During that period the Etrurian civilization, which was organized as a confederation of free city states, populated an area from Mantova in the North to Salerno in the South. When they founded their towns, the Etrurians had a very clear objective to make them easily defendable from the enemies. The example of Orvieto (the capital of the confederation) located on top of a cliff is very illustrative. This military advantage should favor the likelihood of independence in the Middle Age. We find that both these instruments have a strong predictive power on the likelihood of being a free city state. The F-test of the exclusion restriction is 66, so we do not suffer from a 3 weak instrument problem. Even when we instrument the existence of a free city state with its historical determinants, we find that free city state towns have more social capital today. These results are supportive of the Putnam’s conjecture, but are not a definite rejection of the geography alternative. It is possible that something in the morphology of the territory (not captured by our controls) drives all our results. If there is a location advantage that has lead the Etrurians to settle there, has lead the Catholic Church to elect it as a headquarters for its bishop, has made it easier for that city to conquer independence from the Emperor, and also foster social capital today, then our instruments do not solve the problem. To address this issue, we use a difference in difference approach exploiting a historical counterfactual. Regardless of their location advantage, cities in the South of Italy could not become free city states because of the strong central power exerted by the Normans (Putnam, 1993). Under the maintained hypothesis that the determinants of location advantages are the same in the Center North and South, we can predict which towns would have become free city states in the South had the Normans not been there. We then compare the level of social capital of free city states in the Center North and potential free city states in the South, using the difference in social capital between not free city states in the Center- North and unlikely free city states in the South as a control for generic differences between North and South.