Institutions and Economic Growth

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Institutions and Economic Growth

• 1) Theoretical papers
• North 1994
• Przeworski and Limongi 1993
• 2) Empirical papers
• Rodrik, Subramanian Trebbi 2004
• Sachs 2003
• 
  
• Email victor.lapuente_at_pol.gu.se Office B532

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1st seminar summary of the readings

• Ideal Institutions are logically impossible
• Incumbents will always find ways of taking
  advantage of them
• The best (or least bad) institutions are those
  that limit as much as possible their incumbents
• E.g. constitutions, check and balances

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1st seminar some problems of readings (I)

• Miller co. toy models too abstract and few
  non-systematic empirical examples (e.g.
  anglo-saxon biased)
• Interesting insights for local governments the
  professional bureaucrat could work
• e.g. city-manager cities gt strong mayor cities,
  both in US and across countries
• but regarding national governments, not so
  clear only some Madisonian solutions work
• US gt LA 17th Britain gt 17th Poland, Hungary
• Small efficient residual sounds so nice on
  paper
• Constitutional ban on deficit, McCain..

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1st seminar some problems of readings (II)

• but in practice (some US states, some EU
  members)
• North and Weingast original, elegant,but two
  different stories on one hand, a description of
  political events on the other, interests rates
  dropping, and no narratives of what is going on
  in the middle
• We know little of the millions of decisions by
  investors
• Clark dismantles what is left of NW property
  rights were as protected before the Glorious
  Revolution as after
• ..but he does not offer alternative explanations
• what does explain the industrial revolution in
  Britain?

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.Is there hope after the 1st seminar?

• On the one hand, original theoretical mechanisms
  without convincing empirical evidence
• On the other, elegant evidence without mechanisms
• Lets see if we are luckier today

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2. Institutions and Economic Growth

• Analysis of two (relatively) different questions
• (Political Administrative) Institutions ?
  Economic Growth
• (Political Administrative) Institutions ?
  Corruption (QoG)
• Theory
• North 1994
• Przeworski and Limongi 1993
• Empirical debate Institutions rule versus. dont
  rule
• Rodrik, Subramanian Trebbi 2004
• Sachs 2003

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Theoretical starting point Transaction Cost
Economics (TCE)

• Coase (1937) Why do Firms Exist?
• Transaction costs are pervasive (45 of the US
  GNP?)
• TCE ? New Institutional Economics (Williamson
  1975)

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Douglass C. North receives the 1993 Bank of
Sweden Prize in Economic Sciences in Memory of
Alfred Nobel from King Carl XVI Gustaf of Sweden.
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North 1994 Economic Performance Through Time

• Critic to Neoclassical Economic Theory
• focus the operation of markets, but doesnt
  address Why (some) markets (in some parts of the
  world) develop
• rejects the role of Institutions and Time
• markets are efficient only if it is costless to
  transact, but there are many transaction costs..

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Norths definition of Institutions

• Institutions are the humanly devised constraints
  that structure human interaction.
• They are made up of formal constraints (e.g.,
  rules, laws, constitutions), informal constraints
  (e.g., norms of behavior, conventions,
  self-imposed codes of conduct), and their
  enforcement characteristics.

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Assumptions of his theory

• necessary to dismantle the rationality
  assumption
• ideas, ideologies, myths, dogmas, and prejudices
  matter
• Instead of the rationality assumption, he prefers
  Simons bounded rationality

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Mental Models Time ? Institutions

• models that formed the informal constraints that
  defined the institutional framework of the tribe
  and were passed down intergenerationally as
  customs, taboos, and myths that provided cultural
  continuity
• The key to the foregoing story is the kind of
  learning that the individuals in a society
  acquired through time
• Hayek (1960) "the transmission in time of our
  accumulated stock of knowledge"

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Path dependence

• Term used to describe the powerful influence of
  the past on the present and future
• Example of bad path dependence Spain
• The long decline of Spain from the glories of the
  Hapsburg Empire of the 16th century to its sorry
  state under Francisco Franco in the 20th century
  was characterized by endless self appraisals and
  frequently bizarre proposed solutions

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Conclusion

• It is the admixture of formal rules, informal
  norms, and enforcement characteristics that
  shapes economic performance
• Informal norms provide legitimacy to a set of
  rules

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Przeworski Limongi 1993

• Does democracy foster or hinder economic
  growth?
• Criticize North OK, autocrats have problems to
  offer credible commitment, but North does not
  offer no clear mechanisms of how democracy
  provides that commitment
• Encompassing lists of mechanisms both Against
  and In favor of democracy
• What do you think? Some more convincing than
  others?

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Rodrik, Subramanian Trebbi 2004

• The Big Question What accounts for the
  differences between the worlds richest and
  poorest nations?
• The 3 Big Answers
• Geography (Diamond 1997, Sachs 2001)
• International Trade (Dollar and Kraay 2004)
• Institutions (North 1990, Acemoglu et al. 2001)
• The Big Problem How to Test Them?

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F
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RST empirical test
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Results

• When we include Institutions, Geography and
  Integration dont have any additional explanatory
  power (in fact, they have the wrong sign!)
• The Quality of Institutions Trumps Everything
  Else

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Problems?

• Correlations, not Causal Relations..
• Lack of micro-foundations
• Reverse Causality? Tautology
• Omitted variables?
• No clear policy implications

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Test the robustness of the results I

• Institutions also ? accumulation of capital
  (human and physical)
• Eliminate too influential cases (Singapur,
  Ethiopia) and special ones (the neo-European
  countries)
• Introduce regional dummies (Latin America,
  Sub-Saharan Africa, Asia)

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Test the robustness of the results II

• Introduce standard variables in the literature
• Legal origin Common Law (British) vs. Civil Law
  (French)
• Former British Colony vs. French Colony
• Religion Muslim, Catholic and Protestant

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Conclusion of RST empirical analysis

• Institutions, even controlling for the
  traditional variables used in the literature,
  stay significant and if anything, their
  explanatory power increases

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Sachs 2003
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Quality of Institutions
Acemoglu, Johnson, and Robinson 2001 Easterly
and Levine 2002 Rodrik, Subramanian, and Trebbis
2002
Geographical and Ecological Variables
Economic Growth
(e.g. climate zone, disease ecology, distance
from the coast)
Sachs 2003
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The standard institutional model

• ln(Yi) B0 B1 QIi B2 Zi Ei
• QI quality of institutions
• Z geography variables (distance from equator,
  mostly)

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Sachs Malaria matters

• How can we measure the effect of Malaria in a
  country?
• MAL94 of population with risk of malaria
  transmission (WHO reports of malaria cases)
• Malaria Ecology climate and mosquito abundance

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Results

• Institutions matter
• Some geographical and ecological variables also
  matter
• Malaria
• population living within 100km of the coast

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Another non-institutional explanation Clark
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