3. Governments and institutions Flashcards
How does Douglas North famously describe institutions?
Economic institutions, which play an important role in comparative development, are defined by Nobel laureate Douglass North as the “rules of the game” of economic life
Why are institutions important to an economy?
Institutions provide the underpinning of a market economy (and social cooperation more generally) by establishing the rules of property rights and contract enforcement; restricting coercive, fraudulent, and anticompetitive behaviour; addressing potential coordination failures; providing access to opportunities for a broad population; constraining the power of elites; and managing conflict more generally
How did Physical geography influence the development of institutions globally?
- Local features affecting types of colonies established (potential settler mortality)
- Precolonial institutions
- Precolonial labour abundances, production structure and potential comparative advantage
- Evolution and timing of European development
Why is it so hard to change institutions?
Because institions are not just made up of formal rules such as a constitution but also informal institutions. As Douglass North stresses, even if the formal rules “may be changed overnight, the informal rules usually change only ever so gradually”
What are informal institutions
Informal institutions consist of things such as broadly shared norms of behaviour
Why can it be challenging to identify the impact of institutions on income?
Countries with higher incomes can afford better institutions, so it is challenging to identify the impact of institutions on income
Where did better institutions develop?
Where mortality was low, populations were not dense, and exploitation of resources required substantial efforts by colonists, institutions broadly encouraging investments, notably constraints on executives and protection from expropriation, were established (sometimes as a result of agitation from settlers who had the bargaining power to demand better treatment)
What are the key findings of Acemoglu, Johnson and Robinson?
After accounting for institutional differences, geographic variables (e.g. closeness to the equator) have little influence on incomes today
What have been some of the geographical influences on precolonial institutions?
When climate was suitable for a production structure featuring plantation agriculture (particularly sugarcane in the early history), slavery and other types of mass exploitation of indigenous labour were introduced.
Why did the US and Canada overtake tropical regions despite lacking a competitive advantage in labour (Engerman and Sokoloff)?
Its comparative (emerging) advantage in grain lacked at the time the scale economies of tropical agriculture and of mineral extraction seen elsewhere in the Americas. The combination of scarce labour with abundant land inhibited the concentration of power (despite efforts of colonisers to do so). The need to attract more settlers and encourage them to engage the colonial economy led to the evolution of more egalitarian institutions in the North American colonies (albeit not before significant struggles). North Americans enjoyed greater egalitarianism in access to all of the factors so restricted elsewhere. This environment facilitated broad-based innovation, entrepreneurship, and investment and gave the United States and Canada a decisive advantage despite their starting out as much poorer societies, which they used to economically surpass societies whose populations were mostly illiterate, disenfranchised, and lacking collateral
What is the “reversal of fortune” hypothesis?
When local populations were larger and denser and social organisation was more advanced, it was easier for colonists to take over existing social structures to gain tribute. In such cases, resulting institutional arrangements would tend to favour mechanisms of extraction of existing wealth over the creation of new wealth, often leading to declines in the relative fortunes of these regions. There is evidence that colonisers set up more extractive institutions (ones designed to extract more surplus from colonised populations) in prosperous areas and that these institutions have often persisted into the contemporary period. For example, the Mughals in India and the Aztecs and Incas in the Americas were among the richest civilizations in 1500
Why was the level of European development at the time of colonisation important to the establishment of institutions?
It has been argued that for various reasons, earlier colonisation generally involved more plunder and less active production than later colonisation although both occurred at the expense of the indigenous populations
What are the agricultural reasons that earlier European settlement was important for institutional development?
More advanced agricultural techniques were brought to later settled areas such as North America. They were able to gain higher incomes using these skills in temperate colonies and former colonies (the so-called neo-Europes). Thus, precolonial comparative advantage again mattered
What about colonial institutions caused high inequality?
High inequality often emerged as a result of slavery in regions where crops could be “efficiently” produced on slave plantations. It also emerged where a large, settled indigenous population could be coerced into labour.
What were the consequences of high inequality caused by colonialism on development?
Such histories had long-term consequences, particularly in Latin America. As Engerman and Sokoloff argued, the degree of inequality itself can shape the evolution of institutions as well as specific policies. Where inequality was extreme, there was less investment in human capital (Arrow 13) and other public goods (Arrow 16) and, as reflected by the bidirectional Arrow 12, a tendency of less movement toward democratic institutions (which could also have facilitated movement to other constructive institutions)
Why is human capital important to the development of institutions?
Institutional quality affects the amount and quality of investments in education and health, via the mediating impact of inequality. In countries with higher levels of education, institutions tend to be more democratic, with more constraints on elites. The causality between education and institutions could run in either direction, or both could be caused jointly by still other factor
What did Easterly’s research into the Engerman and Sokoloff hypothesis conclude on impacts of inequality?
His research confirmed that “agricultural endowments predict inequality and inequality predicts development.” Specifically, Easterly found that inequality negatively affects per capita income; it also negatively affects institutional quality and schooling, which are “mechanisms by which higher inequality lowers per capita income.
What is an instrumental variable?
The basic idea is that to identify the effect of a potential causal variable c (such as inequality) on a development outcome variable d (such as income or educational attainment), the hunt is for an instrumental variable e that affects d only through e’s effect on c. So, an instrument has no independent effect on the outcome variable of interest.
Why is the level of education important to the government’s ability to produce development?
This is due not only to a better-qualified civil service but likely also to the understanding of citizens of poor government performance, and perhaps knowledge of how to work for a better outcome and capacity to organise
What are some advantages of backwardness in development?
There may be some “advantages of backwardness” in development, such as the ability to use existing, proven technologies rather than having to reinvent the wheel, and even leapfrogging over older technology standards that developed countries have become locked into
