The Luck of the Development Draw: Environmental Volatility and the Takeoff to Modern Economic Growth

36 Pages Posted: 17 Jul 2012 Last revised: 8 Feb 2013

See all articles by Thomas K. J. McDermott

Thomas K. J. McDermott

SEMRU, Whitaker Institute, NUI Galway; London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment

Frank Barry

Trinity College (Dublin) - School of Business Studies

Richard S. J. Tol

The Economic and Social Research Institute, Dublin; Institute for Environmental Studies, Free University Amsterdam

Date Written: May 29, 2012

Abstract

This paper tests the implications of the model developed by Acemoglu and Zilibotti [Daron Acemoglu and Fabrizio Zilibotti, 1997. Was Prometheus unbound by chance? Risk, diversification and growth. Journal of Political Economy 41, 709-51.] which demonstrated a central role for luck - in the form of good vs bad draws - in determining which countries or regions developed first, and which have lagged behind. An obvious potential source of “good vs bad draws” is environmental volatility, particularly in the context of developing economies that - in addition to being undiversified - tend to be heavily dependent on agricultural output.

We use climate data and a finite mixture model - taking account of the bi-modality of the world income distribution - to test the effect of environmental volatility on comparative economic development. Using this approach, we find that climate variables exert a direct influence on income, even when institutions have been controlled for. Our results show that poorer countries are vulnerable to environmental volatility, which appears to delay their “takeoff” to modern economic growth. The paper also includes a revised definition of the “takeoff” concept.

Keywords: development, takeoff, economic growth, environmental volatility, rainfall

JEL Classification: O11, O15, Q54, Q56

Suggested Citation

McDermott, Thomas K. J. and Barry, Frank and Tol, Richard S. J., The Luck of the Development Draw: Environmental Volatility and the Takeoff to Modern Economic Growth (May 29, 2012). Available at SSRN: https://ssrn.com/abstract=2111434 or http://dx.doi.org/10.2139/ssrn.2111434

Thomas K. J. McDermott (Contact Author)

SEMRU, Whitaker Institute, NUI Galway ( email )

University Road
Galway, Co. Kildare
Ireland

HOME PAGE: http://https://thomaskjmcdermott.wordpress.com

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

Frank Barry

Trinity College (Dublin) - School of Business Studies ( email )

AAP College Green
Dublin 2
Ireland
353-1-896-2311 (Phone)

Richard S. J. Tol

The Economic and Social Research Institute, Dublin ( email )

Whitaker Square
Sir John Rogerson's Quay
Dublin 2
United States

HOME PAGE: http://www.esri.ie

Institute for Environmental Studies, Free University Amsterdam ( email )

De Boelelaan 1115
Amsterdam, 1081 HV
Netherlands

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