Alberto Ades

Trade and Circuses: Explaining Urban Giants

Using theory, case studies, and cross-country evidence, we investigate the factors behind the concentration of a nations urban population in a single city. High tariffs, high costs of internal trade, and low levels of international trade increase the degree of concentration. Even more clearly, politics (such as the degree of instability) determines urban primacy. Dictatorships have central cities that are, on average, 50 percent larger than their democratic counterparts. Using information about the timing of city growth, and a series of instruments, we conclude that the predominant causality is from political factors to urban concentration, not from concentration to political change.

National Champions and Corruption: Some Unpleasant Interventionist Arithmetic

The authors present a hold-up model of investment where active industrial policy promotes both corruption and investment. Since corruption deters investment, the effect of industrial policy on investment is lower than when corruption is absent. They find evidence suggesting that corruption is indeed higher in countries pursuing active industrial policies. Policy implications are illustrated by decomposing the total effect of industrial policy into a positive, direct effect, and a negative, corruption-induced effect. In the presence of corruption, the total effect of industrial policy on investment ranges between 84 and 56% of the direct impact. The magnitude of these corrections suggests that corruption considerations should not be absent from cost-benefit analyses of industrial policies. Copyright 1997 by Royal Economic Society.

Evidence on Growth, Increasing Returns, and the Extent of the Market

We examine two sets of economies, (19th century U.S. states and 20th century less developed countries) where growth rates are positively correlated with initial levels of development to document how these dynamic increasing returns operate. We find that open economies do not display a positive connection between initial levels and later growth; instead, closed economies do display this positive correlation (i.e. divergence). This evidence suggests that increasing returns operate by expanding the extent of the market (as in the big push theories of Murphy, Shleifer and Vishny (1989)). For U.S. states, we also find that larger markets enhance growth by increasing the division of labor. Among LDCs, while more diversified production increases growth, diversification is negatively associated with openness for the poorest economies (as in the quality ladder theories of Boldrin and Scheinkman (1988), Young (1991) and Stokey (1991)). However, and despite the negative effect that openness has on the diversity of production and, thus, on growth, we find that openness still substantially increases growth for these poorer economies.

Thy Neighbor's Curse: Regional Instability and Economic Growth

We show that regional instability, defined as politicalinstability in neighboring countries, has a strong negative effecton a countrys economic performance. The magnitude of this negativeexternality is similar in size to that of an equivalent increasein domestic political instability. We also identify two mainchannels through which regional instability lowers economic performance.First, regional instability disrupts trade flows. The sharesof merchandise and manufactured trade are lower in countrieswith high regional instability. Second, regional instabilityleads to increased military outlays. Defense expenditures arehigher in countries with high regional instability. In contrast,the share of government expenditures allocated to education islower in countries with politically unstable neighbors. Our resultssuggest the existence of negative spillovers among politicallyunstable neighboring countries. These adverse regional influencesshould be taken into account when projecting the future economicperformance of countries. The evidence presented also suggeststhat the gains from reducing regional instability extend farbeyond the welfare of the country experiencing political unrest.Policies directed at settling current territorial disputes ina peaceful and orderly manner can have large beneficial effectsfor parties not directly involved in the conflict.