Social Capital and Economic Growth: Insights from Spying in East Germany

Transcription

1 Social Capital and Economic Growth: Insights from Spying in East Germany Andreas Lichter Max Löffler Sebastian Siegloch January 30, 2015 Abstract. This paper estimates the causal effect of government monitoring on social capital and economic performance by using regional variation in surveillance at the time of the socialist German Democratic Republic. Accounting for non-random allocation of spies into regions, we provide evidence of longlasting negative effects of mass surveillance on economic performance. We show that these negative economic effects can be attributed to persistently lower levels of social capital. Keywords: spying, social capital, trust, East Germany, natural experiment Andreas Lichter is affiliated to the Institute for the Study of Labor (IZA) and the University of Cologne; Max Löffler to the Centre for European Economic Research (ZEW) and the University of Cologne; Sebastian Siegloch to the University of Mannheim, IZA, ZEW and CESifo. We thank Jens Gieseke for sharing his data on official employees of the Ministry for State Security with us. We thank Alexandra Avdeenko, Corrrado Giulietti, Jochen Streb, Fabian Waldinger, Ludger Woessmann as well as seminar participants at IZA Bonn, ZEW Mannheim and the University of Mannheim. Felix Pöge provided excellent research assistance. 1

2 Extended Abstract Many countries monitor their populations using secret surveillance systems. According to the Democracy Index 2012, published by the Economist Intelligence Unit, 37 percent of the world population lives in authoritarian states. A key feature of these regimes is to control all aspects of public and private life at all times. In order to establish and maintain control over the population, large-scale surveillance systems are installed that constantly monitor societal interactions, identify and silence political opponents, and establish a system of obedience by instilling fear (Arendt, 1951). 1 Despite the prevalence of government surveillance, its economic costs are still unknown. Theory would predict a negative effect of (malevolent) surveillance on economic performance: if surveillance is part of the government s strategy to control the population by creating fear and obedience, it is likely to destroy trust and social capital. In a world in which all economic transactions involve an element of trust between the trading partners, a lack of trust in society is likely to exhibit adverse economic effects (Arrow, 1972, Putnam, 1995). Empirically, it is, however, extremely challenging to pin down the effect of surveillance on both social capital and economic outcomes. In general, high levels of governmental surveillance are experienced in totalitarian countries, where other policy measures eroding social capital and eventually economic prosperity are in place. From a cross-country perspective, it is more advisable to compare regimes as a whole, while a research design that is able to isolate any single mechanism implemented by authoritarian states is hard to imagine. When relying on a single-country research design, two challenges arise: first, surveillance intensity must be measurable, and second, there has to be exogenous variation in surveillance, either regionally or over time or both. Against this backdrop, we investigate the long-term effect of state surveillance on different measures of social capital and economic performance using within-country variation in surveillance intensity in combination with a particular (political) natural experiment at the time of the socialist German Democratic Republic (GDR). The official State Security Service of the GDR, the Ministry for State Security (Ministerium für Staatssicherheit), commonly referred to as the Stasi, administered a huge network of spies, called unofficial informers (Informelle Mitarbeiter, IM). These spies were ordinary people, recruited to secretly collect information on any societal interaction that could be of interest to the regime. We use the regional variation in the density of Stasi spies in former East German counties in the 1980s to estimate the causal long-term effect of government surveillance on various measures of 1 We acknowledge that democracies usually spy on their populations as well, but pretendedly for a better cause. It is obvious that there is no clear line between democracies and authoritarian states in this respect. In this paper, we are interested in the effect of surveillance on economic performance and leave definitional discussions aside. This also concerns the lively debate in political science on how to precisely define and distinguish different forms of authoritarian regimes, such as totalitarian, despotic, tyrannic systems. 2

3 social capital and economic performance after the fall of the iron curtain and Germany s reunification. We explicitly account for the obvious concern that the allocation of spies might not have been random. In such a case, we argue that endogeneity is most likely to drive our estimates towards zero, yielding a lower bound estimate. Nevertheless, we address potential endogeneity concerns by applying three different identification strategies. Our first identification strategy exploits the territorial-administrative structure of the Stasi and the fact that about 25 percent of the variation in the spy density at the county level (Kreis) can be explained with GDR state (Bezirk) fixed effects. We use the resulting discontinuities along state borders as source of exogenous variation and limit our analysis to all contiguous counties that straddle a GDR state border (see Dube et al., 2010, for an application of this identification strategy in the case of minimum wages). 2 Our second strategy makes use of instrumental variables techniques, instrumenting the county s spy density with its distance to the inner-german border, a border that has been drawn due to military considerations in Again, we rely on the territorial structure of the Stasi and exploit within-state variation only. Using the county s distance to the eastern border, i.e. to Poland and Czechoslovakia, as a Pseudo-IV test we are further able to ease concerns that our estimates are driven by spurious geographical patterns. For our third identification strategy, we follow Moser et al. (2014) and construct a county-level panel data set that covers both pre- and post-treatment years, which allows us to account for time-invariant county-fixed effects. Given that the Stasi density has no explanatory power for social capital and economic performance prior to the division of Germany, we attribute a causal interpretation to our findings. Throughout our analysis we control for a large set of historical controls in order to account for persistent regional differences in economic potential, political ideology and social capital. Our results provide evidence for long-lasting negative effects of government surveillance on economic performance. A ten percent increase in the county-level spy density reduces the regional GDP per capita by 0.5 percent, or 72 Euro, in a given year. This effect persists even two decades after Germany s reunification and the end of Stasi surveillance. We find similar and long-lasting negative effects on local employment and local business tax revenues. Our analysis further shows that lacking social capital is most likely to drive these results. Surveillance negatively affects voter turnout and favor for governmental redistribution, even twenty years after the fall of the iron curtain. And, more importantly, people s trust is significantly lower in counties with a high density of spying. Our paper contributes to the literature in three ways. There is a large literature documenting a long-term positive effect of the quality of political institutions (oftentimes social capital) on economic performance using cross-country research designs (Mauro, 1995, Knack 2 Note that many of these GDR state borders do not exist anymore, given that today s federal states are much larger than states at the time of the GDR. The 15 former GDR states were merged to only six states in

4 and Keefer, 1997, Hall and Jones, 1999, Sobel, 2002, Rodrik et al., 2004, Nunn, 2008, Nunn and Wantchekon, 2011). We add to this strand of the literature by providing within-country evidence using regional variation in surveillance to establish causality. Moreover, the persistence of our negative economic effects highlights the long-term costs of eroding social capital and the transmission of trust across generations (Guiso et al., 2006, Algan and Cahuc, 2010, Tabellini, 2010, Becker et al., 2015). Second, this study also contributes to the specific literature focusing on the consequences of the socialist GDR and the effects of the fall of the Berlin wall. 3 In particular, we replicate the findings by Alesina and Fuchs-Schündeln (2007), who provide evidence that East Germans favor state intervention more than West Germans after reunification. Our analysis adds to their analysis by showing that favor for state intervention is lower in East German areas where surveillance had been more intense. Preferences for redistribution are thus indeed shaped by the political regime, however, not only by the government s ideology but also by the type of governance. For high levels of malevolent state intervention, i.e. in areas with high surveillance, trust in the government seems to be persistently shaken. Last, our research is remotely related to the literature studying the relationship between democracy and economic performance. In two influential papers by Acemoglu et al. (2008, 2009) no evidence for a causal effect of income on democracy is found. In a recent paper, Acemoglu et al. (2014) yet provide cross-country panel data evidence for a significantly positive effect of democracy on economic growth, which can be linked to our findings. 3 Redding and Sturm (2008) use the German division and reunification as a natural experiment and demonstrate that West Germany cities close to the iron curtain, facing a disproportionate loss of market access compared to other West German cities during the division, grew more slowly during that time. Burchardi and Hassan (2013) use regional variation in the concentration of social ties to the East in combination with the sudden reunification, to show that interpersonal relationship are important determinants of growth. 4

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