The luck of the development draw: environmental volatility and the takeoff to modern economic growth
This paper tests the implications of a model which gives a central role to luck − in the form of good versus bad draws − in the process of economic development. An obvious potential source of good versus bad draws is environmental volatility, particularly in the context of developing economies which tend to be heavily dependent on agricultural output. The study uses rainfall data and a finite mixture model to test the effect of environmental volatility on comparative economic development. It finds that climate variables exert a direct influence on income, even when institutions have been controlled for. The results show that poorer countries are vulnerable to environmental volatility, which appears to delay their takeoff to modern economic growth. The study implies that these results may have important implications for development policy and studies on the expected costs of future climate change. The paper also includes a revised definition of the takeoff concept.