Introduction Introduction Institutions and development – st tut o s a d de e op e t • Vast differences in prosperity across countries today. p p y y – Income per capita in sub-Saharan Africa on average 1/20 th of Week 15 and 16 U.S. income per capita – In Mali, Democratic Republic of the Congo (Zaire), and Ethiopia, – In Mali Democratic Republic of the Congo (Zaire) and Ethiopia 1/35 th of U.S. income per capita • Why? Wh ? Readings: • Standard economic answers: Standard economic answers: Benabou & Mookherjee: Chapter 2 and 3 – Physical capital differences Acemoglu, Johnson and Robinson: ”Institutions as a – Human capital differences p f fundamental cause of long-run growth” d t l f l th” – “Technology” differences 1 2 Sources of prosperity Sources of prosperity Outline of the lecture Outline of the lecture • These are proximate causes of differences in prosperity. p p p y • What are good institutions? – Why do some countries invest less in physical and human capital? – Why do some countries fail to adopt new technologies and to – Why do some countries fail to adopt new technologies and to organize production efficiency? • Institutions, geography, or culture? • The answer to these questions is related to the Th t th ti i l t d t th fundamental causes of differences in prosperity • Why differences in Institutions? y • Potential fundamental causes: – Institutions (humanly-devised rules shaping incentives) ( y p g ) • Inequality and the development of institutions • Inequality and the development of institutions – Geography (exogenous differences of environment) – Culture (differences in beliefs, attitudes and preferences) 3 4
What are institutions? What are institutions? What are institutions? What are institutions? • Institutions: the rules of the game in economic, political • A broad cluster including many sub levels: g y and social interactions. d i l i i – Institutions determine “social organization” • Economic institutions: e.g., property rights, contract enforcement, etc. • North (1990, p. 3): • shape economic incentives, contracting possibilities, "Institutions are the rules of the game in a society or, g y , distribution. distribution. more formally, are the humanly devised constraints that shape human interaction.“ • Political institutions: e.g., form of gov., constraints on g g politicians and elites, separation of powers, etc. • Key point: institutions • shape political incentives and distribution of political power. – are humanly devised – are humanly devised – set constraints – shape incentives 5 6 What do we mean with good institutions? What do we mean with good institutions? What do we mean with good institutions? What do we mean with good institutions? • Three crucial elements of good institutions are: • Some societies are organized in a way that 1. Enforcement of property rights for a broad cross-section of society, so that a variety of individuals have incentives to invest and take part in economic y p – upholds the rule of law pholds the r le of la life. – encourages investment in machinery – encourages investment in human capital – encourages investment in better technologies 2. Constraints on the actions of elites, politicians and other powerful groups – facilitates broad-based participation in economic and political life so that these people cannot expropriate the incomes and investments of – supports market transactions supports market transactions. others in the society others in the society. • Loosely speaking, we can refer to these societies as possessing (or as having developed) " good institutions ". 3. Some degree of equal opportunity for broad segments of the society, so that they can make investments, especially in human capital, and participate in productive economic activities. 7 8
Institutions? Institutional variation Institutional variation Economic institutions and economic performance (1) E i i i i d i f (1) . • Big differences in economic and political Big differences in economic and political LUX LUX USA USA SGP CHE HKG JPN NOR DNK institutions across countries. 10 BEL AUT CAN FRA ISL AUS ITA GBR NLD SWE FIN KWT ARE ISR NZL IRL QAT BHR ESP PRT 995 MLT – Enforcement of property rights. Enforcement of property rights GRC KOR CHL BHS BHS a, PPP, in 19 SAU SAU OMN CZE ARG VEN URY MEX GAB ZAF MYS – Legal systems. BWA PAN CRI COL HUN TTO THA BRA TUR POL IRN TUN ECU BGR PER DOM DZA ROM RUS – Corruption. C ti GTM GTM DP per capita PRY JOR JAM PHL IDN SYR MAR SUR 8 SLV EGY BOL GUY CHN – Entry barriers. AGO LKA HND ZWE NIC CMR GIN CIV COG SEN PAK GHA IND IND SDN SDN MNG MNG Log GD VNM VNM GMB GMB – Democracy vs. dictatorship. TGO HTI KEN UGA ZAR BGD MDG BFA NGA ZMB NER – Constraints on politicians and political elites. YEM MLI MOZ MWI SLE S TZA – Electoral rules in democracy. ETH 6 4 6 8 10 Avg. Protection Against Risk of Expropriation, 1985-95 9 10 Institutions? Institutions? Political institutions and economic performance Political institutions and economic performance Economic institutions and economic performance (2) E i i tit ti d i f (2) . . LUX USA SGP SGP CHE CHE USA USA SGP CHE NOR JPN DNK CAN BEL 10 FRA AUT JPN HKG DEU ISL NOR DNK NLD AUS ITA BEL AUT CAN GBR SWE 10 FRA DEU FIN ITA AUS NLD ISR GBR SWE IRL NZL FIN ISR IRL NZL ESP ESP PRT 995 995 KOR PRT GRC CHL KOR GRC CHL CHL a, PPP, in 19 , PPP, in 19 SVN SVN ARG CZE VEN ARG MUS URY VEN URY MEX GAB MYS ZAF MEX BWA PAN ZAF MYS COL HUN CRI SVK THA TTO PAN COL HUN BRA THA BRA POL TUR LBN TUR POL TUN ECU ECU TUN DZA PER BGR DOM RUS HRV ROM ROM PER PER DOM DOM GTM GTM FJI FJI P per capita P per capita PRY LTU JOR JAM JAM JOR SWZ LVA PHL KAZ IDN PHL SYR MAR IDN MAR 8 EGY SLV 8 BOL EGY CHN GUY BOL CHN AGO UKR LKA LKA ZWE HND ARM ZWE NIC GIN CIV CMR Log GDP SEN SEN MRT COG Log GDP COM COM SEN SEN GHA GHA PAK PAK GEO GEO GHA GHA IND IND PAK IND SDN LSO GMB VNM TGO CAF HTI BEN KEN KEN UGA UGA NPL ZAR BGD TCD BFA MDG MDG BFA NGA ZMB NGA ZMB NER YEM BDI MLI MLI RWA RWA MWI MWI MOZ MOZ MOZ MOZ MWI MWI TZA SLE TZA ETH 6 6 0 2 4 6 8 0 .5 1 Control of Corruption Constraint on Executive in 1990s 11 12
Geography? Geography? Geography? Geography? • The geography hypothesis maintains that the geography, climate, and • If we want to believe that geography matters, it is enough to look at a world ecology of a society's location shape both its technology and the incentives l f i t ' l ti h b th it t h l d th i ti map. of its inhabitants. 1. If we locate the poorest places in the world, we will find almost all of them p p • There are at least three main versions of the geography hypothesis: close to the equator. 1. Climate may be an important determinant of work effort, incentives, or even y p 2 2. If we look at some recent writings on agricultural productivity. Ecologists and If we look at some recent writings on agricultural productivity Ecologists and productivity. The heat of the climate can be so excessive that the body there will economists claim that the tropical areas do not have enough frost to clean be absolutely without strength. the soil and are suffering from soil depletion because of heavy rains. 2. Geography may determine the technology available to a society, especially in 3. Given the word tropical disease, areas infested with these diseases are at agriculture. the tropics and much poorer than the United States and Europe, where such diseases are entirely absent. such diseases are entirely absent 3. The third variant links poverty in many areas of the world to their "disease burden“. 13 14 The Geography Factor g p y Geography? Geography and economic performance . LUX USA CHE SGP NOR HKG QAT BEL DNK CAN JPN FRA AUT NLD ISL AUS DEU GBR SWE FIN ITA IRL 10 Geography g p y ARE ESP ISR NZL GRC KOR PRT 5 PPP, in 1995 BRB BRB BHS BHS KWT KWT BHR BHR MLT MLT ARG CZE SVN SAU HUN EST MUS SVK CHL MYS MEX URY TTO ZAF LBY POL OMN BLR RUS LTU FJI LVA THA KNA TUR BRA CRI BWA TUN IRN GAB COL VEN ROM PAN DOM BGR KAZ per capita, P DZA HRV PER PRY GUY LCA GEO NAM SWZ GRDGTM PHL DMA SLV EGY UKR JAM TKM MAR CHN JOR LKA BLZ SYR IDN ECU 8 AZE VCT BTN HND ARM MDA NIC BOL LSO IRQ PNG UZB ZWE YUG IND MRT PAK VNM VNM GHA GHA Log GDP CMR SEN Physical: Economic: CAF CIV BIH TGO HTI CPV BGD KEN NPL GIN MMR STP UGA TJK GMB SDN MOZ LBR BEN BFA TCD COG Climate Distance to market access, NGA GNB NER DJI MWI ZMB MLI YEM MDG AFG AGO RWA TZA COM distance to equator distance to equator natural resources natural resources, BDI BDI ZAR ETH SLE land area factor endowment SOM 6 latitude 0 .2 .4 .6 .8 Latitude 16
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