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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





Tim Hinks


Level III, Applied


Development Economics,


University of Bath



Institutions and Economic




In the previous topic we looked at Growth, Poverty and




Remember the ?core? growth model from Levine and




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





Institutions and Economic




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




(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





Institutions and Economic




(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





Institutions and Economic




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




Trade and Integration: affects productivity changes.



Institutions and Economic




Institutions role in Deep Causes of Economic Growth and Development ?


Endogeneity (Taken from Rodrik, 2001)













Institutions and Economic




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




Types of Institutions


(i) Institutions that protect individual property rights


? e.g. defend against expropriation of resources.


(ii) Institutions related to democratic political rights




(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





Institutions and Economic




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




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




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




If the US, Canada, Australia and New Zealand



Institutions and Economic




Main Issues from Acemoglu et al (2001)


(i) Colonial Experience ? Settler Mortality is an interesting


and clever instrument for identifying the Institutional




(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 and Economic




Main Issues from Acemoglu et al (2001)




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




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




The Developmental View


That institutions form and emerge from within countries over time and


that economic, political and social development cause institutions to




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





Institutions and Economic




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.




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





Institutions and Economic




Glaeser et al estimate the following





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



Institutions and Economic Development



Institutions and Economic






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





Institutions and Economic




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





Institutions and Economic




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




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


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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