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Please talk about two questions here: 1. Institutional failure-(Answered)

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Please talk about two questions here:

  • 1. Institutional failure and economic development:? ?institutions to mediate conflicts, institutions for accountability, and institutions to ensure market efficiency.
  • 2.?Interactions?between?political?institutions,?land?institutions,?market?efficiency,?and?investment?and?output?decisions?in?agriculture.
  • I need answers base on my ppt and ?around 250 words for each question. thx

Institutions and Economic

 

Development

 


 

Tim Hinks

 

Level III, Applied

 

Development Economics,

 

University of Bath

 


 

Institutions and Economic

 

Development

 

In the previous topic we looked at Growth, Poverty and

 

Trade.

 

Remember the ?core? growth model from Levine and

 

Renalt.

 

Evidence is that growth rates are not converging so are

 

the growth models incorrect? Are there variables that

 

are ?deeper? or ?fundamental? causes or pre-requisites

 

for growth?

 

One such area of recent interest is that of institutions.

 

(Q) Are institutions the cause of current economic

 

performance?

 


 

Institutions and Economic

 

Development

 

By institutions we mean rules of structural

 

social interaction (both formal and informal)

 

? they structure incentives in human

 

exchange (be it economic, political or social).

 

Formal institutions ? property rights, legal

 

system, rule of law, constitution.

 

Informal institutions ? how to behave in

 

everyday life (linked to religion, history,

 

social acceptability).

 


 

Institutions and Economic

 

Development

 

(Q) How do institutions form?

 

Efficiency or Social Conflict view of Institutions:

 

(1) Institutions affect economic outcomes but society will

 

choose those institutions that maximise social surplus

 

(North and Thomas, Demsetz).

 

(2) Institutions are not always chosen by all of society but

 

instead by the few, hence not efficient. Coase Theorum

 

does not apply, i.e. the winners do not fully compensate

 

the losers.

 

(3) North (1981) argues that institutions act to constrain

 

the individual in order to enhance the welfare of the

 

?principals?.

 


 

Institutions and Economic

 

Development

 

(Q) How do institutions form?

 


 

Institutions can and will likely result in an elite

 

forming who will attempt to retain their position of

 

power. There may be successful or may not be, but

 

they can be replaced by an alternative elite.

 

For the basis of this lecture we assume that

 

institutions can be (i) developmental or (ii) predatory

 

(i) Developmental Institutions ? encourage

 

investment, growth and productivity.

 

(ii) Predatory ? extractive institutions that favour the

 

few.

 


 

Institutions and Economic

 

Development

 

Fundamental Causes of Growth

 

Economics Institutions: encouraging investment

 

through incentives, human capital, entrepreneurship,

 

innovation, occupational choice, land ownership.

 

Cultures: values, beliefs, religions

 

Geography: climate (affect productivity and worker

 

effort), agricultural (technological) productivity

 

higher in temperate zones than in tropics, burden of

 

infectious diseases, natural endowments, transport

 

costs

 

Trade and Integration: affects productivity changes.

 


 

Institutions and Economic

 

Development

 

Institutions role in Deep Causes of Economic Growth and Development ?

 

Endogeneity (Taken from Rodrik, 2001)

 

Income

 


 

Trade

 


 

Geography

 

Institutions

 


 

Institutions and Economic

 

Development

 

Evidence of Institutions and Economic Growth

 

Korea ? natural experiment since split into North and

 

South Korea in 1948. Same geography, history and

 

culture. North Korea went Dictator and Socialism, South

 

Korea went Dictator and Capitalist that involved private

 

property rights and in 1980 to a democracy.

 

Micro level evidence of importance land property rights

 

have on investment in agriculture in LDCs.

 

Macro level evidence looking at within country and

 

between country ? problem with this is though that we

 

cannot control for whether ?better? institutions cause

 

growth or growth then leads to ?better? institutions.

 


 

Institutions and Economic

 

Development

 

Types of Institutions

 

(i) Institutions that protect individual property rights

 

? e.g. defend against expropriation of resources.

 

(ii) Institutions related to democratic political rights

 

(Sen)

 

(iii) Institutions correcting co-ordination failure ?

 

efficiency of government for example in implementing

 

policy (e.g. South Korea).

 

Countries can have good and bad institutions then ?

 

e.g. South Korea has one party political system.

 


 

Institutions and Economic Development

 

The issue of endogeneity must be solved in most

 

empirical work in economics.

 

The solution is for us to try and find a variable

 

or a factor that meaningfully can cause

 

institutions but does not directly affect

 

economic growth.

 

Acemoglu, Johnson and Robinson (American

 

Economic Review, 2001) addressed this

 

point??.

 


 

Institutions and Economic

 

Development

 

Primacy of Institutions

 

Acemoglu et al control for settler mortality as an instrument

 

to control for endogeneity in their growth model. The

 

variables in the model are

 

M = settler mortality

 

S = Colonial Settlements

 

R = Early Institutions and Modern Institutions

 

Y = Economic Performance

 

Settlements lead to the export of colonial institutions such

 

as property rights. Where settlements failed or were not

 

attempted (due to high settler mortality) only extractive

 

institutions were exported.

 


 

Institutions and Economic

 

Development

 

The Model ? 2 SLS

 


 

LogYi Ri X i ui

 

Y GDP per capita in1995 in $ ( PPP a day).

 

64 countries in the sample

 

R Institutional Pr oxy

 

X Other controls

 

Ri a b log M i cX i vi

 

M Settler mortality 17th 19th ce

 


 

Institutions and Economic Development

 


 

Institutions and Economic

 

Development

 

The ?b? coefficient (mortality variable) in the

 

first stage of the regression is negative and

 

significant ? higher mortality rate the worse

 

institutions are.

 

The beta coefficient is positive and significant

 

implying institutions have a positive impact

 

on current GDP level.

 

The introduction of latitude in line with

 

Rodrik?s work does not change the main

 

result.

 

If the US, Canada, Australia and New Zealand

 


 

Institutions and Economic

 

Development

 

Main Issues from Acemoglu et al (2001)

 

(i) Colonial Experience ? Settler Mortality is an interesting

 

and clever instrument for identifying the Institutional

 

variable.

 

(Q) However, what about differences in growth between

 

Finland, China, Luxembourg who had no colonial history?

 

(ii) Pre-colonial histories are important. Brazil and India

 

have different histories prior to colonization. Extractive

 

institutions such as the land revenue system attributed to

 

Britain in India were present during the Moghul period.

 

(iii) Acemoglu et al (2001) fail to consider political

 

institutions.

 


 

Institutions and Economic

 

Development

 

Main Issues from Acemoglu et al (2001)

 

cont?

 

Is colonial death rate really capturing the

 

under lying cause of institutions?

 

Decisions to settle maybe caused by

 

whether there is a need to settle in the first

 

place. Other factors influence the decision

 

to settle too.

 


 

Institutions and Economic

 

Development

 

There is also the view that the proxy

 

for institutions (risk of expropriation

 

by the government) is not really

 

picking up any permanent set of rules

 

of a country.

 

Rather this in itself is an outcome of

 

what has gone before. This measure

 

of institutions also rises with (i) per

 

capita GDP and is (ii) highly volatile.

 


 

Institutions and Economic

 

Development

 

The Developmental View

 

That institutions form and emerge from within countries over time and

 

that economic, political and social development cause institutions to

 

change.

 

Opposite of Acemoglu et al.

 

Development and Institutions are caused by human capital ? Lipset

 

(1960) argued that through greater education people would be likely

 

and more able to resolve differences by negotiation and reach a more

 

Coase-type end game.

 

Externality of higher initial education of a population is greater

 

political and social stability as well as economic spillovers in terms of

 

productivity and technology.

 

We base this view on Glaeser et al paper Journal of Economic Growth

 

(2004).

 


 

Institutions and Economic

 

Development

 

Glaeser et al argue that measures of institutional quality such

 

as risk of expropriation (used in Acemoglu et al 2001),

 

government effectiveness and constraints on the executive are

 

?outcomes? and do not represent ?deep? institutions.

 

E.g.

 

Constraints on the executive is measured as a score between

 

?1? (bad institutions) and ?7? (good institutions). If this was a

 

measure of a ?set of rules? as North argues institutions are

 

defined as, then why do they change so much?

 

Because they are outcomes from other factors ? Haiti gets

 

score of ?1? under dictatorship during 1960-89, then a score of

 

?6? when Aristide is elected in 1990, drops to ?1? again when

 

he?s ousted between 1991-93 and rises again to 6 when

 

Aristride returns to power and falls to 3 during 2000-01. How

 

can institutions change so quickly? Glaeser argues they

 

cannot.

 


 

Institutions and Economic

 

Development

 

Glaeser et al estimate the following

 

equation?

 


 

Results are as follows (2004, pp.35)?..

 


 

Institutions and Economic Development

 


 

Institutions and Economic

 

Development

 

Interpretation

 

Coefficient on Initial level of schooling is always +ve

 

and significant.

 

So to the coefficients on Initial GDP per capita (-ve

 

and significant) and Share of Population living in

 

Temperate Zone (+ve and significant).

 

The beta coefficients are only significant when the

 

institutional proxies stand for outcomes

 

(expropriation risk (82-90) or government

 

effectiveness (98-2000).

 

Other proxies for institutions such as judicial

 

independence or constitutional review are

 

insignificant.

 


 

Institutions and Economic

 

Development

 

What can we say about institutions and Development?

 

Measuring institutions is difficult. Popular measures are subject

 

to criticism since they are (i) ?outcomes? rather than anything

 

?deep? (ii) they are also largely subjective (iii) when non-outcome

 

proxies for institutions are used they are insignificant.

 

Looking at country specific evidence though both the

 

Institutional View and the Developmental View have strengths

 

but are not universal.

 

Development View - Some countries have very different initial

 

institutions and different histories, but have the same level of

 

economic development and have very similar current

 

institutions, e.g. Tiger Economies - Taiwan and South Korea with

 

Japanese colonialisation then US occupation compared to HongKong and Singapore with British colonial past and less

 

intervention)

 


 

Institutions and Economic

 

Development

 

Institutional Primacy View ?

 

Countries have similar backgrounds and

 

histories but start from different

 

institutions and hence diverge onto

 

different growth paths.

 

E.g. North and South Korea, East and

 

West Germany, Burma and Thailand.

 


 

Institutions and Economic

 

Development

 

Suggested Readings

 

Acemoglu, D., Johnson, S., and Robinson, J.A., (2001), ?The Colonial Origins of Comparative

 

Development: An Empirical Investigation?, American Economic Review, 91(5):1369-1401.

 

Glaeser, E.l., La Porta, R., Lopez-de-Silanes, F., and Shleifer, A., (2004), ?Do Institutions Cause Growth??,

 

Journal of Economic Growth, 9(3):271-303.

 

North, D., and Thomas, R.P, (1973), The Rise of the Western World: A New Economic History, Cambridge,

 

Cambridge University Press.

 

North, D., (1989), ?Institutions and Economic growth: An Historical Introduction?, World Development,

 

17(9): 1319-1332.

 

North, D., (2009), Institutions, Institutional Change and Economic Performance, Cambridge University

 

Press, UK.

 

Rodrik, D., (2001), ?Institutions, Integration and Geography: In search of the deep determinants of

 

Econmics Growth?, found at

 

http://economics-files.pomona.edu/Andrabi/Economic%20Development/growthintro.pdf

 

Rodrik, D., A. Subramanian and F. Trebbi., (2004) ?Institutions Rule: The Primacy of Institutions over

 

Geography and Integration in Economic Development?, Journal of Economic Growth, 9(2): 131-65.

 


 

 

Paper#9209648 | Written in 27-Jul-2016

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