GDP Density

[phk]

A paper by John Gallup, Jeffrey Sachs and Andrew Mellinger in the International Regional Science Review in 1999 introduced the concept of "GDP density", calculated by multiplying GDP per capita by the number of people per square kilometer. Basically GDP density is a measure of the total amount of economic activity that takes place at different spots on our globe. I found the map they produced quite fascinating:

($/time)/(people)*(people)/(kilometers^2) = ($/time)/(kilometers^2)



Not surprisingly, it looks a whole lot like those satellite pictures of the earth at night



That correlation suggested to the authors that something about the institutions that accompanied colonization, such as laws protecting property rights and promoting capital markets, gave these islands an edge in economic development. On the other hand, another natural hypothesis is that those islands that were colonized first had the richest resources, and it is that inherently more favorable endowment that continues to help them today.

To try to resolve this fundamental ambiguity, the authors claimed to be able to explain the date of initial colonization in part by the magnitude of the prevailing winds. Their argument is that, before the 20th century, the most important determinant of whether a ship was likely to pass by or discover a given island was the strength of the east-west winds at that location. The empirical observation is that the stronger the wind, the longer the island was likely to spend as a colony:



They therefore formed a prediction of how long a given island might have spent as a colony solely on the basis of the prevailing wind velocity, and then looked at the correlation between that prediction and the current GDP per capita. The argument is that, by using this first-stage prediction, one has isolated a statistical component of the time spent as a colony that is uncorrelated with factors that could otherwise be contributing to current GDP. They found a positive correlation, suggesting that institutions may indeed make a measurable contribution to current GDP.

Unfortunately, a critic could always object that, just as a strong wind may have helped determine when the first ship hit land, it would also have an influence on when the second ship arrived, and the third, so that it likely played a formative role in all sorts of important details such as the development of trade networks and accumulation of capital. This capital base may have provided a permanent benefit, which could perhaps be more important than anything about the current legal framework or institutions in determining GDP.

For that matter, a similar issue might account for the correlations between GDP density, ports, and climate. Perhaps the latter factors were important historically, causing physical and network capital to accumulate in certain locales, which remain prosperous today because of that capital rather than because of the ports or climate.