Accounting for the Size of Nations: Empirical Determinants of Secessions and the Soviet Breakup

New EHES working paper

The year 2014 has marked the return of secessions as a challenge to existing European states. A referendum on Scottish independence was held in September, and the regional government of Catalonia may follow suit in November. Meanwhile, Ukraine faced secessionist referenda and uprisings in a number of its regions. But why do people demand the formation of new states? A new EHES Working Paper by Marvin Suesse at Humboldt University of Berlin evaluates economic theories of secession.

Participants at a pro-independence protest in Kyiv, Ukraine, in the summer of 1991, demand that “Ukraine leaves the USSR.” Picture credit: Unian.

In much of the economic literature, state size is thought of as the result of a trade-off between the benefits of size and its costs, an idea that goes back to the influential book on “The Size of Nations” by Alberto Alesina and Enrico Spolaore (2003). They propose that benefits of size stem from fixed costs in the provision of public goods, which makes living in a small state costly to each individual taxpayer. The costs of size are due to individual heterogeneity, which reduces the utility from the consumption of public goods to those individuals located far away from the government in terms of preferences or geography. If individuals are located far enough from the source of public goods, they may gain by seceding and providing public goods themselves, even if this provision is proportionally more costly. This basic trade-off can be moderated by a number of factors, such as trade prospects, the degree of democratization, as well as differential income levels between regions.

Although this theoretical framework offers some insights into state formation and dissolution, empirical evidence for it is scarce. This is partly because actual secessions are still relatively rare events. Even where we do observe them, they are difficult to compare across time and space. The new EHES paper by Marvin Suesse circumvents these constraints by looking at variation in the demand for secession expressed by millions of pro-independence protesters across 184 regions of the former Soviet Union. The paper concentrates on the late 1980s and early 1990s, because repression by Soviet authorities had become much more fragmented by that time.

The results indicate that regions that were most different from the center in Moscow in terms of language, ethnicity, religion, or historical experience, saw more secessionist protests on average. Most remarkably, larger regions saw a higher intensity of protests per capita. This supports the theory of the “Size of Nations”. The evidence is further strengthened by the fact that size seems to have acted as a “threshold” condition that determined whether there were any pro-independence protests in a region at all. Very small regions did not experience any secessionist pressure, notwithstanding their ethno-cultural differences with Moscow.

But how was this demand for secession translated into actual policy? The paper also shows that regional elites in the late Soviet Union were actively engaged in secessionist policies, such as issuing separatist declarations and laws. But their determinants seem to have been quite different. To a certain extent, regional elites may have been much more concerned about power considerations than preference heterogeneity with regard to the center. Only once we are able to understand the interplay between popular demand for secession, and the interests of local elites in shaping and transmitting those demands into actual policy, will we be able to fully understand the breakup of states.

The blog post was written by Marvin Suesse, a PhD student at Humboldt-Universität zu Berlin

The working paper can be found here.

How the Danes Discovered Britain: The International Integration of the Danish Dairy Industry Before 1880

New EHES working paper

On the 150^th anniversary of the loss of the Danish Duchies of Schleswig and Holstein to Prussia, a new EHES working paper, by Markus Lampe at Universidad Carlos III Madrid and Paul Sharp at the Historical Economics and Development Group of the University of Southern Denmark, asks whether it really was the turning point in Danish economic history it is often supposed.

The Battle of Dybbøl, 1864, by Jørgen Valentin Sonne (1801-1890) 

A commemorative medal produced for a large exhibition of industry and art in Copenhagen in 1872 bore the words of the poet H.P. Holst: ‘Hvad udad tabes, skal indad vindes’, or ‘What outside is lost, must inside be won’. With the loss of the Duchies of Schleswig and Holstein to Prussia in the Second Schleswig War of 1864, this soon became a sort of national motto for Denmark and remains a potent national symbol of strength at a time of adversity even to today. Indeed, the rapidness with which Denmark subsequently developed, based largely on the success of her agricultural exports, is well known.

Thus the then Danish Prime Minister, marking the centenary of the Federation of Danish Cooperatives in 1999, stated that the cooperative movement (a key factor in the success of Danish agriculture) was ‘part of the history of the country of Denmark, which won inwardly what we lost outwardly after the catastrophe in 1864, when we lost two-thirds of our precious country’. Then, marking the anniversary this year in front of the queen and other dignitaries, the present prime minister stated that ‘Out of the defeat in 1864 grew the modern Denmark. With democracy. With a well-educated population. With equality between the sexes. Freedom for the individual. And the whole of our welfare society based on solidarity.’

The success of Danish agricultural exports at the end of the nineteenth century is often attributed to the establishment of a direct trade with Britain. Previously, exports went mostly via Hamburg, but this changed with the loss of Schleswig and Holstein to Prussia in the war of 1864, after which the German hub was politically unacceptable. From this point quantity and price data imply narrowing price gaps and thus imply gains for Danish producers. Given this, this new working paper asks a rather neglected but perhaps obvious question: with so much to gain, why then did Denmark not discover the British market earlier?

In fact, it turns out that butter markets in the UK and Denmark were integrated in the eighteenth century, but through the Hamburg hub. It is then demonstrated that there were sound economic reasons for this well into the nineteenth century. However, movements to establish a direct trade were afoot from the 1850s, as these factors became less important even before 1864. First, the costs of establishing a direct connection with England fell with the price of steam shipping and the telegraph, and with the liberalization of British trade policy. Second, the benefits of the Hamburg hub were decreasing with the abolition of the Sound Toll (which was payable by any ships entering the Sound between Helsingør in Denmark and Helsingborg in Sweden) in 1857, which made Copenhagen a more attractive port than it had been. And finally, the commercial and credit crisis in Hamburg in late 1857 also contributed to its relative loss of centrality in trade between Britain and Southern Scandinavia over the following decade or so.

Thus, it is argued, although the war certainly gave an extra boost to the process, the shock from the loss of the Duchies was not necessary for the future Danish success.

This blog post was written by Paul Sharp, professor in Economics at University of Southern Denmark.

The working paper can be downloaded here. 

New crops, local soils and urbanization: Clover, potatoes and the growth of Danish market towns, 1672-1901

How did local soil conditions affect local development historically? Evidence on this question is provided in a new EHES working paper by Torben Dall Schmidt, Peter Sandholt Jensen and Amber Naz from the University of Southern Denmark. 

They investigate how the introduction of clover and potatoes affected market town development. Their strategy is to apply a differences-in-differences type estimation which exploits local variation in suitability for growing these new crops. The authors exploit unique data on adoption of clover whose introduction arguably worked to increase nitrogen supply which is known to govern the yields of crops that have enough water. 

Clover adoption in Denmark in 1775 

Clover adoption in Denmark in 1805 

Note: The measure of spatial distribution of clover adoption was collected on the basis of all 18th manor archives and a number of other sources as detailed by Kjærgaard (1991).

Since clover adoption is most likely endogenous, the authors employ soil suitability for growing alfalfa as an instrumental variable. The reason for this choice is that alfalfa and clover tends to grow well on the same soils, but alfalfa did not have its breakthrough in the period studied mainly due to reasons of climate. To evaluate the impact of the potato, they follow the well-known strategy of Nunn and Qian (Quarterly Journal of Economics, 2011) and use soil suitability for growing potatoes.

The authors find that both clover and potatoes contributed to market town growth with clover contributing roughly 8 percent out of the total growth from 1672 to 1901, whereas potatoes contributed a little in excess of 6 percent.  

The working paper can be downloaded here.  

This blog post was written by Peter Sandholt Jensen, professor in Economics at the University of Southern Denmark.

Lifespan from the Dark Ages to the Industrial Revolution

New EHES working paper

The family trees of European nobility provide a rich resource for the understanding of our

Neil Cummins is Assistant Professor of
Economic History,
London School of Economics

demographic past. Over the past year, I have consolidated about 1.3 million aristocratic records that have been deposited online by the church of Jesus Christ of the Latter Day Saints. The LDS church believes in a doctrine called Baptism for the dead and they have amassed billions of genealogical records which they make freely available.

My study, Longevity and the Rise of the West, uses those records which have estimates of birth and death dates, for those that die over 20, to construct a history of adult noble lifespan over the millennium between 800 and 1800. In doing this, there were many surprising patterns that emerged from the data concerning the path of violence, plague lethality and the characteristics of noble longevity across time and space.

European nobility specialized in the execution of violence. Their genealogies connected them to the Barbarian conquerors of Europe following the decline of the Roman Empire. A large proportion of noble men died in battle. To investigate precisely how many nobles died from violence, I employed a general version of the famous birthday problem. First year statistics students are often introduced to probability via the surprisingly low number of people it takes to have a high probability of a shared birthday. If we take the number of exact-date deaths per year, n, and the number of deaths on a given day, m, we can calculate the probability that a given n-m combination occurs randomly or is likely the result of a battle. I use this ‘clumping’ technique to estimate the proportion of nobles dying from violence. My estimates are presented in figure 1 below. Violence suddenly declines within this warrior caste in the 16th century.

Figure 1: The Time Trend of Male Violent Deaths

The empirical challenge I faced was to extract from the imperfect, noisy data the major time and spatial trends in noble lifespan, while controlling for the changing selectivity and composition of the sample. Every possible covariate that could confound my characterization of the time-trends that could be included was included. Figure 2 below is my estimate for the time-path of noble median lifespan, 800-1800.

Figure 2: Expected Median Lifespan 800-1800, with 95% CI

The results demonstrate that the nobility were forerunners of Europe’s mortality decline with significant and large increases in noble longevity beginning for the birth cohort of 1640-59 at least one century before that of the general population. However, a major surprise is the Europe wide rise in noble lifespan around 1400. From 600 years of mean of about 50, adult noble longevity rises sharply to a median of 55. This has never been documented previously. This pattern has remained hidden as only long and deep time series of at least a millennia in length could uncover this.
By coding each observation for longitude and latitude I was able to characterize the spatial aspects of noble mortality. Figure 3 reports median lifespan by integer values of longitude and latitude. There is a striking European Mortality Pattern. Nobles live significantly shorter lives in the South and East relative to the North and West. My analysis indicates that this Mortality pattern has existed since 1000AD.

Figure 3: Heat Map of Median Noble Lifespan

These results have implications for theories of the rise of Europe. The European Mortality Pattern revealed above correlates with those regions which later experience the Industrial Revolution first. Recent research has suggested that “The Great Divergence” of East and West is preceded by a little divergence of East and West, within Europe, around the time of the Black Death (1347). This research shows that North-West Europe was differentiated from the rest of the continent by its demographics centuries before the Black Death.

A new set of stylised facts has been uncovered that seem to raise more questions than they answer. Why were noble lifespans longer in Northwest Europe in 1000AD? What caused noble lifespan to shoot upwards in 1400? Why did violence decline so suddenly in the 16th century? Future research will tell us more.

The EHES working paper can be downloaded here

The blog post was written by Neil Cummins,

Assistant Professor of Economic History, London School of Economics

Paving the way to modernity: Prussian roads and grain market integration in Westphalia, 1821-1855

New EHES working paper

Europe in the early nineteenth century has seen enormous changes: Borders were redrawn at the Congress of Vienna in 1814 and 1815, economic liberalism took hold in Britain and the continent alike, urbanisation grew and industrialisation began to change the standard of living and the environment, to speak of just a few. Yet, economic history research on this period has been overshadowed by the late 19th century. Apparently, the events in this period – be it in politics such as the US Civil War in the 1860s, the founding of the German Reich in 1871, or be it in technology such as the railroad, the steamship, and the telegraph – have in hindsight been too monumental to not casting their shadows over the events just a few years earlier. 

Source: http://www.freedigitalphotos.net/

In this paper we follow up on recent findings about the surprising macroeconomic and demographic changes in Germany before 1850 and investigate one of the possible drivers of these changes: increasing market integration due to investment in paved roads.

For centuries, overland transport remained almost unchanged since Roman times until the late 18th century. Before the establishment of paved roads, roads were often described by contemporaries as mortal traps for men and horses, whose state barely allowed carriages to travel faster than pedestrians. An example might be illustrating. Before the Muenster-Hamm road was paved, it took 36 hours to go from one city to the other. After being paved, travelling time was reduced to only eight hours.

The importance of this mean of transport was soon recognised by the Prussian government in the early 19th century, which invested a considerable amount of resources in establishing a large paved road network. Around 1816, there were about 3.700 km of paved roads in the whole Prussian kingdom. By the middle of the century, there were 13.400km. This impressive development did not stop with the coming of the railway age, but it continued until the late 19th century.

The spread of the paved road network in the Prussian kingdom was very uneven. The Western provinces of the empire such as Westphalia and the Rhineland had a special trait (at least until 1850) from the Prussian government and they did benefit more from public investment due to their economic importance. In our study, we focus on the province of Westphalia.

To analyse the effects of paved roads on economic development, we focus on market integration. One way in which spatially separated markets become more integrated is through lower transport costs, since regions become closer in economic terms. From this integration, regions can benefit in many ways. One of the most important is the intensification of trade that leads to the regional specialization of production (i.e. Smithian growth).

From our analysis, at least two points are worth noting. One is that we take a novel approach to analyse the effects of paved roads. Instead of coding whether a city had access to the paved road network or not (i.e. dummy-variable approach), we went through all cities and for each time period we looked at the number of paved road connections to neighbouring cities. By doing this, we are able to capture some network effects that arise with the building of new paved roads that a dummy approach does not capture. The second point is that we put paved roads in a comparative perspective with other transport infrastructures such as waterways and railways by developing a digitised map of Westphalia for the period 1821-1855. We find that paved roads have always a significant and positive effect on market integration and that this effect is surprisingly bigger than the effect of railways.

These results point out that paved roads deserve a closer inspection – and there is a good reason to listen for policy makers, too: In advanced countries, the railway networks have been declining for decades, and more goods are transported on trucks. In developing countries, the state is often too poor to finance a railroad, but could maybe afford a paved road. Roads are also more flexible, as they can be used by the broad public, be it lorries, bicycles or mule-drawn carriages without time constraints.

Today, many underdeveloped regions still suffer from the same transport problems the Kingdom of Prussia suffered two hundred years ago. The lack of paved roads complicates social and economic exchange especially in the rainy season, where most unpaved roads cannot be used. Thus, we think both for economic historians and for development policy makers alike, roads and economic development are increasingly worth the trip.

Article written by Daniel Gallardo Albarrán (University of Groningen) and Martin Uebele (University of Groningen).

The paper can be downloaded here.

Daniel Gallardo Albarrán 

Martin Uebele

International conference on economic and business history of Latin America

Call for papers

As part of the 80th anniversary celebrations of the Faculty of Economics and Business of the University of Chile, the Faculty is hosting an International Conference on the Economic and Business History of Latin America to be held on December 12th, 2014 in its premises in Santiago, Chile. The conference invites contributions in English or Spanish in all areas associated to the themes of the conference. A selection of the participating papers will be invited to be published in a special issue of the journal Estudios de Economía (indexed in Thomson ISI- JCR), with Professor Bernardo Bátiz-Lazo (Bangor University) as guest editor. The conference is organized with the sponsorship of Universidad de Santiago de Chile.

The conference is also organizing a posters session open to undergraduate and postgraduate students undertaking their thesis in any field relevant to the conference. The best posters will be awarded a prize.

The deadline for submitting contributions and posters is October 19th, 2014. An extended abstract of up to 1000 words explaining the research question, the data and methods employed and the main results and conclusions should be sent to ebhla2014@fen.uchile.cl.  The deadline for sending the complete versions of the papers is December 1st, and the deadline for submitting the final, revised versions of the papers to be published in Estudios de Economía is January 18th, 2015. The special issue will be published in May 2015.

Report from the Economic History Society in Columbus, Ohio, September 12-14, 2014.

This year’s Economic History Association meeting took place in Columbus, Ohio. It followed the usual format of short presentations, and designated discussants on each paper, as well as poster displays from graduate students.

There were many excellent presentations, including some from European scholars or on European topics. Of particular interest to EHES members might be the session on Political Economy in Europe, with papers presented by Noel Johnsson at George Mason University, Rui Esteves at Oxford, and Mark Dincecco at  Michigan, and one on trade with Michael Huberman from Montréal, Alan de Bromhead from Queen’s Belfast, and Jules Hugot from CEPII. I particularly enjoyed Alan’s talk on the effect of the granting of female suffrage in the UK on the movement towards protectionism, which generated a lively debate.

In one of the sessions, Ahmed Rahman, USNA, talked about naval economic history

After an entertaining introduction, the Presidential Address was by Philip Hoffman, who argued against the traditional definition of the national state as laid down years ago by Max Weber. He demonstrated that many entities which we would certainly consider states did not enjoy a ‘monopoly of violence’.

The Gerschenkron Prize for the best PhD dissertation on topics other than American economic history was won by Tyler Beck Goodspeed on ‘Essays in British Financial History’. He received his PhD from Harvard, so no luck for the Europeans this year. He is however currently at Oxford, so we can be optimistic that European universities continue to attract many of the best economic historians – even from the United States.

The dissertation session

Otherwise, the Friday night reception at the Ohio Statehouse was a great chance to visit this impressive building. The Saturday night dinner was, on the other hand, in the view of your correspondant, something of a let down!

This blog post was written by Paul Sharp, professor in Economic History at University of Southern Denmark

Catching up or falling behind? Institutions, Geography and Economic Development of Eastern Europe in the Long Run

We look back on a summer school, hosted by the EHES, Humboldt-Universität and the London School of Economics and Political Science.  Centered on the theme “Catching up or falling behind? Institutions, Geography and Economic Development of Eastern Europe in the Long Run”, the Summer School brought together experienced and young researchers working on Eastern European economic history in an engaging and informal atmosphere. The event, which took place from September 1st to 5th, put the factors that have shaped development of the eastern half of the continent in the context of the recent debates in our discipline, such as the Little Divergence, institutional persistence and the role of geography.

Lecturers Max-Stephan Schulze (LSE, London) and Nikolaus Wolf (Humboldt,
Berlin)  focused on the role of market access and agglomeration effects in explaining the lag between western and eastern European regions.

Steven Nafziger (Williams College, MA) and Sevket Pamuk (Boğaziçi, Istanbul) provided valuable insights into the interaction between state formation, institutional reform and economic outcomes. Sibylle Lehmann-Hasemeyer (Hohenheim) took the chance to offer an encompassing account of the political economy of growth and protectionism in the late 19th century.

Additionally, the Summer School featured daily seminars aimed at bridging the gap between theoretical insights and hands-on empirical analysis. Speakers Tamas Vonyo (LSE, London), Alexander Klein (Kent) and Matthias Morys (York) allowed the  participants an in-depth view of the nuts-and-bolts aspects of empirical research. Particular emphasis was placed on the methodological issues surrounding growth accounting, the treatment of endogeneity, and exchange rate dynamics.

Finally, afternoon workshops gave doctoral students a chance to present their newest research related to Eastern Europe. This included talks by Bálint Menyhért, Hana Nielsen, Ilya Voskoboynikov, Jelena Raifalovic and Leo Kukic on the long run drivers of development, Flóra Macher, Thilo Albers, Marvin Suesse and Stefan Nikolic on financial crises and geography, Elena Korchmina, Alexander Opitz, Ekaterina Khautsova and Valentyna Shevchenko on institutions and economic development in Imperial Russia, Mikolaj Malinowski, Pinar Ceylan, Piotr Łozowski, and David Dolejší on early modern markets and cities, as well as Rita Pető, Máté Rigó, Ruth Schueler and Paweł Bukowski on the economic role of culture, education and social status.

We are very proud of having hosted such an event that provided stimulating intellectual inspiration for so many promising young talents. Many students took the chance to build networks and present their ideas to academic peers stemming from different disciplinary and cultural backgrounds. The impressive variety of innovative ideas presented during the week gives us a very positive outlook on the future of the field.

This blog post was written by:

Thilo R. Huning, PhD student at Humboldt-Universität in Berlin.

The British Economy in Global Perspective, 1000-2000

The Department of Business and Economics at the University of Southern Denmark marked the start of the new academic year with a PhD course given by their Guest Professor Stephen Broadberry. The course, titled The British Economy in Global Perspective, 1000-2000, efficiently covered a millennium of British economic history in just three days.

Professor Broadberry opens the lecture 

Drawing upon his work with various co-authors, Professor Broadberry began day 1 with a discussion of the course of British economic growth between 1270 and 1870, before placing the numbers in an international context in the afternoon’s session. Days 2 and 3 were less about Britain’s golden years and more about her relative decline from around 1870.

The course was well attended by staff and students from across Scandinavia. It was the latest in a series of exciting courses offered by the university, with Nick Crafts having offered a three-day course in October 2013.

This blog post was written by Jason Lennard, PhD student at Lund University

Mismeasuring Long Run Growth. The Bias from Spliced National Accounts

Leandro Prados de la Escosura
is Professor in Economic History at
Universidad Carlos III de Madrid

Last April it was made public that Nigeria’s GDP figures for 2013 had been revised upwards by 89 per cent, as the base year for its calculation was brought forward from 1990 to 2010 (Financial Times April 7, 2014). As a result, Nigeria became the largest economy in Sub Saharan Africa. Though spectacular, this is not an exceptional case. Ghana (2010), Argentina’s (1993) or Italy’s (1987) also experienced dramatic upward revisions of their GDP. 

How should this revision affect GDP time series and, consequently, the country’s relative position? Should the existing historical series be re-scaled in the same proportion? 

Official national accounts are usually available from mid-twentieth century onwards, but often only for the latest decades. Furthermore, official national accounts are only constructed in a homogeneous way for short periods. Hence, the output of national accounts needs to be spliced with historical national accounts. Thus, when a homogeneous long-run GDP series is required, various sets of national accounts using different benchmark years and often constructed with dissimilar methodologies need to be spliced. The alternative choice of splicing procedures to derive a single GDP series may result in substantial differences in levels and growth rates and, hence, in significant biases in the assessment of economic performance over time.

National accounts rely on complete information on quantities and prices in order to compute GDP for a single benchmark year, which is, then, extrapolated forward on the basis of limited information for a sample of goods and services. To allow for changes in relative prices and, thus, to avoid that forward projections of the current benchmark become non representative, national accountants periodically replace the current benchmark with a new and closer GDP benchmark. The new benchmark is constructed, in part, with different sources and computation methods. Often far from negligible differences in the new benchmark year between ‘new’ and ‘old’ national accounts stem from statistical (sources and estimation procedures) and conceptual (definitions and classifications) bases. Once a new benchmark has been introduced, newly available statistical evidence would not be taken on board to avoid a discontinuity in the existing series. Thus, the coverage of new economic activities partly explains the discrepancy between the new and old series. As a result, a problem of consistency between the new and old national account series emerges.

Is there a solution to this inconsistency problem? The obvious option would be computing GDP for the years covered by the old benchmark with the same sources and procedures employed in the construction of the new benchmark. However, this option is beyond the resources of an independent researcher. The challenge is, then, establishing the extent to which conceptual and technical innovations in the new benchmark series hint at a measurement error in the old benchmark series. In particular, whether the discrepancy in the overlapping year between the new benchmark (in which GDP is estimated with ‘complete’ information) and the old benchmark series (in which reduced information on quantities and prices is used to project forward the ‘complete’ information estimate from its initial year) results from a measurement error in the old benchmark’s initial year estimate.

A simple solution, widely used by national accountants (and implicitly accepted in international comparisons), is the backward projection, or retropolation, approach, that accepts the reference level provided by the most recent benchmark estimate (YT) and re-scales the earlier benchmark series (Xt) with the ratio between the new and the old series for the year (T) at which the two series overlap (YT/XT).
Underlying this procedure is the implicit assumption of an error level in the old benchmark’s series whose relative size is constant over time. In other words, no error is assumed to exist in the old series’ rates of variation that are, hence, retained in the spliced series YRt . Official national accountants have favoured this procedure of linking national accounts series on the grounds that it preserves the earlier benchmark’s rates of variation.

Usually the most recent benchmark provides a higher GDP level for the overlapping year, as its coverage of economic activities is wider. Thus, the backwards projection of the new benchmark GDP level with the available growth rates -computed at the previous benchmark’s relative prices- implies a systematic upwards revision of GDP levels for earlier years. This one-sided upward revision effect on the levels of spliced GDP series is hardly noticeable when discrepancies between the new and old benchmarks are small for the overlapping year and the considered time span is short. However, as the time horizon expands and earlier series are re-scaled once and again to match newer ones, the gap tends to deepen significantly.

An alternative to the backward projection linkage is provided by the interpolation procedure that accepts the levels computed directly for each benchmark-year as the best possible estimates, on the grounds that they have been obtained with ‘complete’ information on quantities and prices, and distributes the gap or difference between the ‘new ‘and ‘old’ benchmark series in the overlapping year T at a growing rate.
Contrary to the retropolation approach, the interpolation procedure assumes that the error is generated between the years 0 and T. Consequently, it modifies the annual rate of variation between benchmarks (usually upwards) while keeps unaltered the initial level –that of the old benchmark-. As a result, the initial level will be probably lower than the one derived from the retropolation approach.

The choice of linkage procedure makes a significant difference for GDP levels and growth rates. When the levels for earlier years are re-scaled upwards with the retropolation procedure, the country in question becomes retrospectively richer. Alternatively, interpolating each original benchmark tends to raise the economy’s rate of growth and, hence, casts a lower initial GDP level. Which method is preferable? A practical answer may be derived from the analysis of Spain’s experience, a country that went through a process of deep structural change during the second half of the twentieth century.

The figure below presents the GDP levels resulting from splicing national accounts through non-linear interpolation relative to the levels derived through extrapolation. It can be noticed how the over-exaggeration of GDP levels cumulates over time when the extrapolation method is used.

Ratio of spliced interpolated series to retropolated series, 1954-2013 (GDP at current prices). 

Differences between the results of the interpolation and retropolation procedures appear much more dramatic when placed in a long run perspective, that is, when the spliced national accounts are projected backwards into the nineteenth century with volume indices taken from historical accounts series. This is due to the fact that most countries grew at a slower pace before 1950, so its per capita GDP level by mid-twentieth century determines its earlier relative position in country rankings.

Thus, the choice of splicing procedure can result in far from negligible differences in the relative position of a country in terms of per capita income over the long run. As an illustration I present Spain’s relative position to France derived with retropolation and interpolation splicing methods below.

Spain’s Real Per Capita GDP (France = 1). Alternative Splicing Results (2011 EKS $)

According to the retropolation splicing procedure, by mid-nineteenth century, real per capita GDP in Spain would have been similar, if not superior, to that of France. If, alternatively, the relative position that results for Spain from the interpolation splicing procedure represents about 80 percent of the French. When the period 1850-1913 is considered, Spain would match France’s real income per head, according to the retropolated series, and reach only four-fifths if the interpolated series are employed. These proportions hardly alter if the period under comparison is extended to 1935. It can be conclude that whatever the measurement error embodied in the interpolation procedure may be, its results appear far more plausible than those resulting from the conventional retropolation approach.

The bottom line is that splicing national accounts must be handled with extreme care, especially when countries have experienced intense growth and deep structural change, as there is a risk to bias their income levels upwards and, consequently, their growth rates downwards. A systematic revision of national accounts splicing in fast growing countries over the last half a century using the interpolation approach would most probably reduce their initial per capita GDP levels while rise their growth with the result of a more intense and widespread catching up to the Core countries.

This blog post was written by Leandro Prados de la Escosura (Universidad Carlos III and CEPR)

References

de la Fuente Moreno, A. (2014), “A Mixed Splicing Procedure for Economic Time Series”, Estadística Española 56 (183): 107-121.

Maddison, A. (1991b), “A Revised Estimate of Italian Economic Growth 1861-1989”, Banca Nazionale del Lavoro Quarterly Review 177: 225-241.

Prados de la Escosura, L. (2014), Mismeasuring Long Run Growth. The Bias from Spliced National Accounts, EHES Working Paper 60.