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Abstract
We revisit the debate about the root causes of income divergence, and ask
whether geographical variables or institutions are the main determinants
of income. Complementing earlier cross-country work, we focus on the
local level and seek to explain within-country income differences. Analysing
Kenyan household data, we find that certain geographical variables appear
to be more important drivers of per capita income levels than local insti-
tutions. Once we control for geography, our measures of community-level
institutions do not seem to explain within-Kenya differences in income.
JEL classification: 012, B52, 040, D72
1. Introduction
A rapidly growing literature explores the factors explaining differences in
per capita income across countries. Two main hypotheses have emerged
from this literature. One identifies geographical variables as the main
determinant of long-term income, and the other points to institutions as
the key driver.1 In the light of ongoing efforts to enhance the effectiveness
and efficiency of development assistance, the question which hypothesis is
correct is clearly an issue of first-order relevance. If geographical factors are
1
Alternative explanations for income differences include policies and, for the African con-
tinent, the history of slave raids (Nunn, 2008).
# The author 2011. Published by Oxford University Press on behalf of the Centre for the
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2 | Maren Radeny and Erwin Bulte
other factor inputs (Gallup et al., 1999; Gallup and Sachs, 2001; Sachs and
Malaney, 2002; Sachs, 2003). Lastly, resource endowments may affect
income, albeit not necessarily in a positive sense (see Brunnschweiler
and Bulte, 2009 on the resource curse).
How may institutions matter? Institutions refer to the social, economic,
legal and political organisation of a society. They shape the incentive struc-
ture of economies, and determine economic performance via their impact
on accumulation and investment decisions of economic agents.
Institutions affect information flows, transaction costs, investment risk
2
Restrained by internal and external factors—including the 2008 post-election conflict, the
global financial crisis and high fuel and food prices—economic growth slowed from 7.1%
in 2007 to 1.7% in 2008.
Determinants of Rural Income | 7
Income variables
Household-level annual Income from crops, livestock and off- 120,794 123,327
income farm (salary income, remittances,
business income and income from
casual Labour and dividends) in KShs.
Household-level annual Household annual income per adult 32,564 42,550
per capita income equivalent unit (in KShs.)
Geographical variables
Table 1: Continued
Table 1: Continued
an ad hoc list—it is certainly not an exhaustive list of proxies for local insti-
tutions. But these variables have the advantage that the required data were
relatively easy to collect. We hope vector Ij captures enough of the relevant
institutional spectrum to be informative.4
Cross-country studies indicate that good governance is important for
economic growth and provision of public goods. The local governance
quality (i) influences the enforcement of the rule of law, including
by-laws that protect private property, and (ii) increases the efficiency of
the use of public resources and provision of public goods and services.
only across villages. The rainfall data were collected by the National
Weather Service Climate Prediction Centre as part of a Famine Early
Warning System.7 We calculated the average main season rainfall for
each household as well as the variance of rainfall. However, when con-
trolling for rainfall levels, the variance never enters significantly (so this
variable is dropped in what follows). Soil data are based on the
Exploratory Soil Map and Agro-climatic Map of Kenya.8 We used the
new malaria risk data based on the work by Noor et al. (2009),
which is exogenous to per capita incomes as it is based on climatic
7
These data have been compiled by the Tegemeo Institute of Agricultural Policy and
Development.
8
For details on the actual soil types and the associated information, see the documentation
‘Exploratory Soil Map and Agro-climatic Zone Map of Kenya, 1980’.
Determinants of Rural Income | 15
collective action (see also Welch et al., 2004).9 Religion can also poten-
tially influence civic and political participation via certain social norms.
In addition, churches are avenues for providing political information. In
Kenya, some churches are more vocal in political matters than others. In
particular, the non-Catholics (Protestants and Pentecosts) under the
National Council of Churches of Kenya (NCCK) have been actively
involved in political issues. Religious institutions, therefore, hold the
potential to reconnect people to politics, and provide political infor-
mation and participatory opportunities to their followers (Greenberg,
9
In Italy, the prevailing lack of trust towards others in the South has been attributed to the
strong Catholic tradition, which emphasises the vertical bond with the Church and tends
to undermine the horizontal bond with fellow citizens.
10
The incumbent leader may implement policies aimed at expropriating resources from
ethnic losers, restricting the rights of other groups and discouraging the growth of indus-
tries or sectors that might threaten the position of the ruling group (e.g., Alesina et al.,
1999).
16 | Maren Radeny and Erwin Bulte
model). We explore the empirical basis for these assumptions below. The
second stage of the IV model is akin to model (1), but replaces our
vector of institutional variables Ij by their predicted values, Ij* (as predicted
in accordance with the model in (2)).
As mentioned above, when testing for multicollinearity we found high
correlations between some community control variables, notably popu-
lation density, ethnicity, water source, distance to health facilities, avail-
ability of transport and geography variables (e.g., malaria endemicity).
We included only community controls that are not highly correlated
5. Regression results
We first explore simple correlations between income, geography and insti-
tutions, and start by examining the correlation between income and
geography or institutions separately. Later, we proceed by combining
geography and institutions together in one model. Table 2 explores the
link between geography and per capita income. Column 1 is a parsimo-
nious model with only geographical variables (and a constant). In
Column 2, we add household controls, and in Column 3 we add commu-
nity controls. Column 4, finally, is the complete geographical model.
In Column 2, several geographical variables are significantly correlated
with per capita income. Specifically, maximum temperature, distance to
12
As an extra robustness analysis, we have also estimated a series of models at the village
level, explaining average income by our vectors of institutions and geographical variables,
and controls. Qualitative results are similar to the ones presented below, explaining
household income, and are made available in Supplementary data, Table SA9.
Additional results of village-level models (OLS specifications, etc.) are available on
request.
18 | Maren Radeny and Erwin Bulte
Dependent variable: log OLS (1) OLS (2) OLS (3) OLS (4)
of per capita income
Geography variables
Mean maximum temp- 20.133*** 20.126*** 20.039 20.041
eratures (8C) (0.044) (0.028) (0.047) (0.038)
Distance to the nearest 20.114** 20.045 20.070 20.010
market (km) (0.052) (0.044) (0.055) (0.042)
Distance to the nearest 20.040*** 20.040*** 20.053*** 20.047***
major town (km) (0.008) (0.007) (0.006) (0.008)
Table 2: Continued
Dependent variable: log OLS (1) OLS (2) OLS (3) OLS (4)
of per capita income
Robust standard errors are given in parentheses, clustered at the community level.
***p , 0.01, **p , 0.05 and *p , 0.10.
Dependent variable: OLS (1) OLS (2) OLS (3) OLS (4)
log of per capita
income
Robust standard errors are given in parentheses, clustered at the community level.
***p , 0.01, **p , 0.05, *p , 0.10.
22 | Maren Radeny and Erwin Bulte
Dependent vari- OLS (1) OLS (2) OLS (3) OLS (4) OLS (5)
able: log of per
capita income
Geography variables
Mean maximum 20.011 20.036 20.085* 20.068* 20.201**
temperature (8C) (0.040) (0.038) (0.047) (0.039) (0.096)
Distance to the 0.005 20.028 20.020 20.012 20.003
nearest market (0.039) (0.050) (0.044) (0.040) (0.051)
(km)
Table 4: Continued
Dependent vari- OLS (1) OLS (2) OLS (3) OLS (4) OLS (5)
able: log of per
capita income
Robust standard errors are given in parentheses, clustered at the community level.
***p , 0.01, **p , 0.05, *p , 0.10.
Dependent variable: log IV (1) 2SLS IV (2) 2SLS IV (3) 2SLS IV (4) 2SLS
of per capita income
Geography variables
Mean maximum temp- 20.048 20.044 20.060 20.052
erature (8C) (0.070) (0.036) (0.073) (0.040)
Distance to the nearest 20.047*** 20.047*** 20.049*** 20.047***
major town (km) (0.007) (0.007) (0.013) (0.007)
Mountains, scarps and 20.051 20.103 20.079 20.139
hiUs (landscape) (0.352) (0.309) (0.309) (0.413)
Table 5: Continued
Dependent variable: log IV (1) 2SLS IV (2) 2SLS IV (3) 2SLS IV (4) 2SLS
of per capita income
Robust standard errors are given in parentheses, clustered at the community level.
Excluded instruments are distance to a good road, distance to the nearest market and the
proportion of adults Catholics in the community.
***p , 0.01, **p , 0.05, *p , 0.10.
et al., 2004)13 and in studies on the ‘natural resource curse’ (see Rodrik,
2003; Sala-i-Martin and Subramanian, 2003; Brunnschweiler and Bulte,
2009). We speculate that there may be two reasons why geography might
also shape institutions at the community level. First, geographical endow-
ments and factors (such as vegetation and altitude) may affect the stochas-
ticity of production, which in the context of imperfect markets affects the
incentives and scope for mutual insurance via informal sharing networks
(e.g., Binswanger and McIntire, 1987). Secondly, factor endowments may
affect the potential for accumulation and the degree of inequality in
wealth, human capital and political power, resulting in persistent effects
on local institutions. Hence we assume that, at the local level as well as
at the macro level, geography may shape the evolution of local commu-
nities and their livelihoods, and impact on the dynamics of local govern-
ance and institutions. Of course, it is an open question whether this
assumption is borne out by the data.
13
The most common instrument for institutional quality used in macro studies is settler
mortality in colonial time. Acemoglu et al. (2001) argued that mortality among colonial
settlers was a major factor determining settling patterns, which in turn affected the insti-
tutions that were introduced. Examples of other instruments used in macro studies are
state antiguity (Bockstette et al., 2002), or the fraction of people speaking a European
language (Hall and Jones, 1999).
26 | Maren Radeny and Erwin Bulte
14
2SLS relative bias critical values.
Determinants of Rural Income | 27
|
Dependent variable: log OLS (1) OLS (2) OLS (3) OLS (4) IV (1) 2SLS IV (2) 2SLS IV (3) 2SLS IV (4) 2SLS
of per capita income
Robust standard errors are given in parentheses, clustered at the community level. Excluded instruments for the IV regression are distance to a good
road, distance to the nearest market and the proportion of adults Catholics in the community.
***p , 0.01, **p , 0.05, *p , 0.10.
|
29
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30 | Maren Radeny and Erwin Bulte
15
We have also estimated a series of models in which we seek to explain agricultural income
by geographical and institutional variables (agricultural income is some 50% of total
income for our sample respondents). Our qualitative results go through: none of the
institutional variables enters significantly and several geographical variables do (albeit
somewhat less robust than before—landscape variables, the vegetation index and
malaria risk are significant in multiple specifications). Distance to the nearest town
does not matter when explaining agricultural income, suggesting that this must be a
key variable to explain non-farm income.
32 | Maren Radeny and Erwin Bulte
Supplementary data
Supplementary data are available at JAFECO online.
Funding
We thank the Netherlands Organization for Scientific Research (NWO),
the Netherlands Fellowship Programme (NFP), the African Economic
Research Consortium (AERC) and the International Livestock Research
Institute (ILRI) for financial support.
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