Essays on the Political Economy of Development

Mueller, Joris Michael

doi:https://doi.org/10.21985/n2-ckks-9984

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Essays on the Political Economy of Development

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Political stability is fundamental for economic development. Understanding the determinants and consequences of political stability is thus an important topic in development economics and political economy. This dissertation studies how political or economic instability influences economic development and, in turn, how economic factors influence political stability. In Chapter 1, I document how the Chinese government's goal of securing domestic political stability influences the allocation of the foreign aid it provides to other low- and middle-income countries, and examine whether this aid can successfully foster economic development in the recipient countries. The efficacy of foreign aid, especially when given to satisfy the objectives of the donor country, is highly controversial. This is particularly true in the context of Chinese infrastructure aid, which has received much attention from policymakers. I build a novel project- and firm-level dataset to make progress on this question. I document that when there is local labor unrest in a Chinese prefecture, contracts for Chinese aid projects are allocated to large state-owned firms in the prefecture, and employment by these firms increases. Connections between these firms and other countries mean that China's response to domestic unrest affects the allocation of Chinese aid projects to recipient countries. I exploit the variation in countries' receipt of aid caused by the timing and spatial variation in local labor unrest in China, together with these connections, to develop an instrument for identifying the causal effects of Chinese aid on recipients. I find large positive effects on GDP, trade, consumption and employment. My findings provide new insights on the political determinants and economic effects of foreign aid. In Chapter 2, co-authored with Joe Long, I study how instability in China affects a different kind of financial flow out of China. We first document how fluctuations in economic growth in China lead to an outflow of Chinese capital by wealthy Chinese investors into the U.S. real estate market. We then quantify the effect of these capital flows on local U.S. house prices, local governments, and residents. Using a novel instrument, we demonstrate that an increase in the share of wealthy Chinese buyers in a locality causes an increase in house price growth. As a result of this increased growth, local governments benefit from increased property tax revenues, but do not see a drop in sales tax revenues, suggesting that the vacancy rate for Chinese-owned properties is no different from that of counterfactual buyers. A drop in rental prices suggests that wealthy Chinese buyers are more likely to rent out their houses and less likely to move into them. In Chapter 3, co-authored with Ruth Carlitz and Ameet Morjaria, I examine a potential determinant of political stability. Specifically, we study the Ujamaa policy in Tanzania from 1970 to 1981, one of the largest policy experiments in post-colonial Africa aimed at building a national identity and establishing the new post-independence state as a legitimate authority. The policy brought much of the country's population to live in planned villages, where children were exposed to public education whose content reflected the new government's core goals. We combine differences in the intensity of villagization across districts with differences in the exposure to the timing of the policy across age cohorts to identify the effect of the Ujamaa policy on citizens' attitudes. We show persistent, positive effects on national identity, as measured by survey responses and inter-ethnic marriage decisions. Treated cohorts are less likely to demand democratic accountability: they express positive views for a strong central state and question less state authority.

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