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

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.