Why Nations Succeed The Institutional and Political Influence in - - PowerPoint PPT Presentation

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Introduction Model Case Study Conclusion

Why Nations Succeed The Institutional and Political Influence in Prosperity

Yiqian Lu Jincheng Zhang November 2, 2016

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Introduction Model Case Study Conclusion

What Induces Cross-country Long Term Economic Growth?

Geographical influence (Gunnar Myrdal 1968, Sachs 2001) tropical underdevelopment Leaders – (Jones and Olen, 2005): Leaders are important Intellectual difference – Lynn and Vanhanen (2006) shows IQ could explain most of income discrepancies, which is controversial. Culture Institution (Acemoglu, Robinson 2001, 2006, 2012 etc.)

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Introduction Model Case Study Conclusion

How to Explain within-country Economic Growth

Human capital accumulation - Gary Becker, Kevin Murphy 1994, Barro 1989, Romer 1989 Political capital - corruption’s negative influence (Pellegrini and Gerlagh 2004)

• government’s influence non-negligible (Stigler 1975, Posner

1974, Becker 1983) Both human capital and political capital - Ehrlich and Lui 1999

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Introduction Model Case Study Conclusion

Our Question

Acemoglu and Robinson argue intrinsic political and economic institution is the only condition for economic success. The theory could be challenging in explaining Singapore, Mideast countries’ economic prosperity Our question: how to conglomerate Becker, Murphy and Ehrlich’s approach with Acemoglu and Robinson’s?

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Introduction Model Case Study Conclusion

Some Related Literature

Przeworski and Limongi (1993) summarize literatures (about 20 papers) have different views on democracy’s influence on economic progress. Ansolabehere, Figueiredo, Snyder (2003): Political capital should not be viewed as investment but consumption. Cooper, Gulen, Ovtchinnikov (2009) Political contribution and future positive abnormal returns – one kind of anomalies. Gary Becker (1994) More efficient laws takes effect on coordination cost and reduce redundant human capital investment.

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Introduction Model Case Study Conclusion

Setup – Discounted profit maximization assumption

Agent wants to maximize max

∞

• t=0

1 (1 + rt)t Pi

t, ∀i

(1) where rt is the t-year yield rate and Pi

t represents profit level for

agent i in period t.

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Introduction Model Case Study Conclusion

Setup – Human capital and Political Capital Investment

Following Becker, Ehrlich’s approach, in each period agent needs to invest in human capital ht and political capital pt to reach the state Ht and Pt Hi

t+1 = A( ¯

Hi + Hi

t)hi t

(2) and Qi

t+1 = B(λ ¯

Hi + Qi

t)qi t

(3)

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Introduction Model Case Study Conclusion

Setup - Agent level

Production contribution ei

t = 1 − hi t − qi t

(4) and the raw profit is set by Y i

t = C( ¯

Hi + Hi

t)et t

(5) The realized profit is as follows. Pi

t = Y i t [1 + θ ln( Qi t

Q∗

t

)] (6) Agents with stronger political power Qi

t > Qt are accompanied by

positive subsidies or transferring income. On the contrary, Qi

t < Qt

denotes a net loss.

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Introduction Model Case Study Conclusion

Setup - Redistribution equation

• i

Y i

t =

• i

Pi

t =

• i

Y i

t [1 + θ ln Qi t

Q∗

t

], ∀t (7) And the median political capital level Q∗

t is also determined by the

above equation. For instance, if all agents have the same raw profit level Y i

t and the distribution of political capital follows

log-normal distribution ln N(µ, σ2), Q∗

t will be exactly eµ since

ln Qi

t

Q∗

t remains symmetric. 9/38

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Introduction Model Case Study Conclusion

Pros

Using consumption in the utility function could result in negative consumption level in the utility function, which is less convincing than including a negative profit. Linear tax-consumption relationship is not consistent with permanent income hypothesis while in our approach the linear tax-profit relationship is more appropriate.

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Introduction Model Case Study Conclusion

Equilibrium – Euler Equation

ei

t+1 =

(1 + rt+1)(1 + θ ln Qi

t

Q∗

t )

A(1 + θ ln

Qi

t+1

Q∗

t+1 )

(8) and ¯ Hi + Hi

t

¯ Hi + Hi

t+1

= θQ∗

t+1B(λ ¯

Hi + Qi

t)

A(1 + θ ln

Qi

t+1

Q∗

t+1 )

(9)

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Introduction Model Case Study Conclusion

Equilibrium I – No human capital accumulation without political capital

Condition: A < 1 + r. V ( ¯ Hi) =

∞

• t=0

C ¯ Hi (1 + r)t = C ¯ Hi(1 + r) r (10) quite similar to the traditional discount cash flow pricing model

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Introduction Model Case Study Conclusion

Equilibrium II – Decreasing human capital growth without political capital

Condition: 1 + r < A < 2r. Human capital in period t: Hi

t =

¯ Hi ((2A − 2r − 3)(A − r − 1)t − A + r + 1) A − r − 2 , ∀t (11) Value of the agent: V ( ¯ H) =

∞

• t=0

1 (1 + r)t Pt =

∞

• t=0

C(r + 1)1−t ¯

H((2A−2r−3)(A−r−1)t−A+r+1) A−r−2

+ ¯ H

• A

= C ¯ H(r + 1)2(2r + 1) Ar(2(r + 1) − A) (12)

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Introduction Model Case Study Conclusion

Equilibrium III – Increasing human capital growth with finite share value without political capital

Condition: 2 + r < A < 2(1 + r). Most of the properties in Equilibrium III is the same as Equilibrium II The human capital accumulation growth rate is positive for each period, which is still lower than the growth of interest discount rate (1 + r)t, resulting in a finite company share price.

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Introduction Model Case Study Conclusion

Equilibrium IV – Increasing human capital growth with unbounded share price without political capital

Condition: A ≥ 2(1 + r) This is equivalent to the case g > r in the discounted cash flow (with growth) model. In this case, the approximate growth rate for human capital and profit level is A − 1 − r, which even exceeds the interest rate (1 + r)t, yielding an infinite share price.

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Introduction Model Case Study Conclusion

Equilibrium I to IV

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Introduction Model Case Study Conclusion

Equilibrium I to IV

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Introduction Model Case Study Conclusion

Equilibrium with political intervention

hi

e + qi e = A − (1 + r)

A (13) and ¯ Hi + Hi

t

¯ Hi + A( ¯ Hi + Hi

t)hi e

= θQ∗

t+1B(λ ¯

Hi + Q∗

t Si e)

A(1 + θ ln Si

e)

(14) where hi

e, qi e, ei e, Si e are the steady states of hi t, qi t, ei t, Si t,

respectively

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Introduction Model Case Study Conclusion

Equilibrium with political intervention

Hi

t = (Hi τ + A ¯

Hihi

e

Ahi

e − 1)(Ahi e)t−τ − A ¯

Hihi

e

Ahi

e − 1

(15) and Qi

t = (Qi τ + Bλ ¯

Hiqi

e

Bqi

e − 1)(Bqi e)t−τ − Bλ ¯

Hiqi

e

Bqi

e − 1

(16) with the natural constraint: A ≥ 1 + r

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Introduction Model Case Study Conclusion

Equilibrium I – Stagnant human capital accumulation where Ht cannot grow

θQ∗

e B(λ ¯

H + Q∗

e )

A = 1 (17) Q∗

e = −θBλ ¯

H +

• (θBλ ¯

H)2 + 4AθB 2θB (18) where q∗

e =

Q∗

e

Bλ ¯ H + BQ∗

e

(19) under the condition 1 q∗

e

≤ A − 1 − r A (20) i.e. A > 1 + r 1 − qi

e

(21)

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Introduction Model Case Study Conclusion

Equilibrium I – Stagnant human capital accumulation where Ht cannot grow

Si

0 = Si 1 = ... = Si e = ... =

¯ Hi ¯ H (22) with Qi

0 = λ ¯

Hi and Qi

t+1 = B(λ ¯

Hi + Qi

t)qi e = B(λ ¯

Hi + Qi

t)qi e = − Bλ ¯ Hiqi

e

Bqi

e−1 for ∀t ≥ τ.

Result: dq∗

e

dθ < 0

The after-redistribution profit is Pi

t = C ¯

Hi(1 − qi

e)(1 + θ ln

¯ Hi ¯ H ) (23)

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Introduction Model Case Study Conclusion

Equilibrium I – Stagnant human capital accumulation where Ht cannot grow

the share value for the median company under stagnant equilibrium is Vθ = C ¯ Hi(1 − qi

e)(1 + θ ln ¯ Hi ¯ H )(1 + r)

r (24) The share value of the firm with relative class level Si is V Si

θ

=

∞

• t=0

C ¯ Hi(1 − qi

e)(1 + θ ln Si)

(1 + r)t = C ¯ Hi(1 − qi

e)(1 + θ ln Si)(1 + r)

r (25) Result: V Si

θ

dSi > 0 if and only if B > 1

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Introduction Model Case Study Conclusion

Equilibrium II – Increasing human capital accumulation

(A − r − 1 A −qi

e)Bλ ¯

Hiqi

e

1 − Bqi

e

B(λ ¯ Hi + Bλ ¯ Hiqi

e

1 − Bqi

e

) = Si

e

θ +Si

e ln Si e (26)

with 0 ≤ qi

e

     < 1 B , if 1 B ≤ A − r − 1 A ≤ A A − r − 1, if 1 B > A − r − 1 A (27)

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Introduction Model Case Study Conclusion

Equilibrium II – Democratic equilibrium

Equilibrium II (Democratic Equilibrium): When 1

B ≤ A−r−1 A

, i.e. B ≥

A A−r−1, for higher class agents with Si dem ≥ 1, no matter

what θ is, there exists one unique equilibrium state {qi

dem, hi dem, ei dem}. For lower class agents Si dem < 1 is true, if and

• nly if θ ≤ −

1 ln Si

dem , there exists one unique equilibrium state

{qi

dem, hi dem, ei dem}.

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Introduction Model Case Study Conclusion

Equilibrium II – Democratic equilibrium

For all 0 < Si

dem < ∞, we have

1 (w.r.t social status) ∂qi dem

∂Si

dem > 0, ∂hi dem

∂Si

dem < 0, ∂ei dem

∂Si

dem = 0 2 (w.r.t. political influence coefficient) ∂qi dem

∂θ

< 0, ∂hi

dem

∂θ

> 0,

∂ei

dem

∂θ

= 0

3 (w.r.t. to democracy level) ∂qi dem

∂B

< 0, ∂hi

dem

∂B

> 0, ∂ei

dem

∂B

= 0

4 (w.r.t how raw human capital impacts initial political

endowments) ∂qi

dem

∂λ

< 0, ∂hi

dem

∂λ

> 0, ∂ei

dem

∂λ

= 0

5 (w.r.t. human capital accumulation coefficient) ∂qi dem

∂A

< 0,

∂hi

dem

∂A

> 0, ∂ei

dem

∂A

< 0

6 (w.r.t. interest rate) ∂qi dem

∂r

> 0, ∂hi

dem

∂r

< 0, ∂ei

dem

∂r

> 0

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Introduction Model Case Study Conclusion

Equilibrium II – Democratic equilibrium

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Introduction Model Case Study Conclusion

Equilibrium III – Good authoritarian equilibrium

Equilibrium III (Authoritarian Equilibrium) When 1

B > A−r−1 A

, i.e. B <

A A−r−1, there are two equilibrium states.

(i) Equilibrium IIIG (Good Authoritarian Equilibrium) {qi

autg, hi autg, ei autg} when (a) Si aut ≥ 1, θ ≥ θ(Saut) or (b) Si aut < 1

, θ(Saut) ≤ θ ≤ −

1 ln Si

aut , where θ(Si

aut) is a threshold depending on

Si

• aut. The property of good authoritarian equilibrium is the same as

Equilibrium II (Democratic Equilibrium) {qi

dem, hi dem, ei dem}

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Introduction Model Case Study Conclusion

Equilibrium III – Bad authoritarian equilibrium

Equilibrium IIIB (Bad Authoritarian Equilibrium) {qi

autb, hi autb, ei autb} when (a) Si aut ≥ 1, θ ≥ θ(Saut) or (b) Si aut < 1

, θ(Saut) ≤ θ ≤ −

1 ln Si

aut , where the threshold function θ(Si

aut) is

the same as good equilibrium case.

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Introduction Model Case Study Conclusion

Equilibrium III – Bad authoritarian equilibrium

1 (w.r.t social status) ∂qi autb

∂Si

aut < 0, ∂hi autb

∂Si

aut > 0, ∂ei autb

∂Si

aut = 0 2 (w.r.t. political influence coefficient) ∂qi autb

∂θ

> 0, ∂hi

autb

∂θ

< 0,

∂ei

autb

∂θ

= 0

3 (w.r.t. to democracy level) ∂qi autb

∂B

> 0, ∂hi

autb

∂B

< 0, ∂ei

autb

∂B

= 0

4 (w.r.t how raw human capital impacts initial political

endowments) ∂qi

autb

∂λ

> 0, ∂hi

autb

∂λ

< 0, ∂ei

autb

∂λ

= 0

5 (w.r.t. human capital accumulation coefficient) ∂qi autb

∂A

> 0,

∂hi

autb

∂A

indetermined, ∂ei

autb

∂A

< 0

6 (w.r.t. interest rate) ∂qi autb

∂r

< 0, ∂hi

autb

∂r

indertermined,

∂ei

autb

∂r

> 0

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Introduction Model Case Study Conclusion

Equilibrium III – Authoritarian equilibrium

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Introduction Model Case Study Conclusion

Good or bad authoritarian equilibrium

Peer choice The choices among various classes are intertwined with each

• ther, making the choice within one class highly depend on
• thers.

The level of political capital threshold could have deterministic impact on the choice between good and bad authoritarian equilibrium In the country like United Arab Emirates, millions of immigrants who could never achieve permanent residency work diligently in Dubai and Abu Dhabi, lowering local political beneficial threshold Q∗

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Introduction Model Case Study Conclusion

Equilibrium I – No human capital accumulation

Least developed countries Political instability, prevalence of human rights invasion and

• ngoing warfare drive up the discount rate to a level so high

that any substantial human capital accumulation becomes not worthwhile. Such as North Korea, Syria and many Sub-Saharan countries. In North Korea, although there exists a centralized government, the inflation rate has remained at high level varying between 30% to triple digits. At the same time, North Korean citizens lack most of basic human rights such as basic education, which yields a relatively small A

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Introduction Model Case Study Conclusion

Equilibrium II

United States, United Kingdom, etc. Political capital high: military service, advocacy work and community service Enjoy a high level of both B and θ Invest intensively in human capital

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Introduction Model Case Study Conclusion

Equilibrium IIIG

Singapore and Qatar People’s Action Party has been in control since Singapore’s independence; Qatar is known as an absolute monarchy Singapore and Qatar are among the richest countries: Singapore has GDP per capita of more than 50,000 US dollars and Qatar more than 70,000 US dollars. Both Singapore and Qatar have large population of foreign

• workers. Singapore has 1.4 million foreign workers equivalent

to 25% of total population. Qatar is notorious of its exploitation of migrant workers which construct more than 90% of its population. High percentage of migrant workers lowers countries’ Q∗ level

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Introduction Model Case Study Conclusion

Equilibrium IIIG

The size of their economies is small. Their economies depend heavily on migrant workers.

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Introduction Model Case Study Conclusion

Equilibrium IIIB

In South Asia such as Cambodia and Bangladesh, in Middle Asia such as Tajikistan and Kyrgyzstan, and in Africa such as Uganda and Kenya. In this status, citizens put more efforts in acquiring political power than human capital, although their human capital still grows very slowly compared to countries in Equilibrium I stagnant economy where human capital deteriorates over time. When it is easier to gain and execute political capital (B and θ is larger), countries invest less human capital.

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Introduction Model Case Study Conclusion

Transitional Status

China China, being identified as an “authoritarian” regime, has witnessed fast economic growth during past decades of reform and opening up economic policy Size is large and almost no foreign migrant workers. China needs to switch to a regime more politically inclusive just like the democracy reform.

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Introduction Model Case Study Conclusion

Conclusion

For politically inclusive countries, there exists only one equilibrium and the share of resource allocation to human capital depends on how effective political capital can influence production redistribution and the politically beneficial threshold. For authoritarian countries,it is possible for those countries to enjoy long-lasting economic development as well if they happens to stay with the good equilibrium given proper political and policy nudges.

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