Final exam 17/1 Flashcards
What does the proximate causes look at?
They look at the closest possible explanations to economic growth and uses the production function for it. So it tries to explain it through K, L and A, where A is the most important one as it increases when tech and innovation increases and hence higher the returns of the K and L.
The convergence hypothesis, 3 parts:
- Decreasing returns of all production factors.
- Exogenous tech-change, no resource accumulation (as there are no returns).
- Tech as a free access good.
Leading economies can only grow through exogenous tech-change and the decreasing returns lead to steady-state situations.
Followers in contrast, can grow through imitation and the increasing K-endowments until reaching the same K/L as the leaders.
Main takeaway from the proximate causes:
That the factors such as innovation, economies of scale, education and capital accumulation etc are not causes of growth, they ARE growth. So we must look deeper to find the real causes of growth. What does affect the human capital level and R+D??
The three proximate causes:
Physical capital (K), Human capital (H), Technological innovation (A).
The three deep causes:
Geography, Institutions and Culture.
Are there big differences in geographical characteristics between for ex Africa and Europe?
Yes, there are large disparities. For ex the % land in tropics are huge in A and super low in E, and the closeness to a market is much better in E etc. Also the density of population situated along the coasts vs interior are very different.
Montesquieu’s proposal of the effect of geography:
Hot climate –> sloth –> poverty.
The six mechanism of the geographic factor:
- Low productivity in tropical agriculture.
- Diseases
- Transport costs
- Timing of agriculture.
- Natural resources
- Environmental shocks.
When data shows that temperate economies have had much higher growth than tropical, what does this conclude?
That geography interacts with technology. And as we have learned by now, A is the most important factor when it comes to growth. Better technology also help to keep the transport costs low.
Why does the timing/occurance of NR matters for development? And what affected the timing of the NR?
Because the technology adapted back then will often persist over time and a high stock of technology will also attract more tech (as they are often complementary, and as it means higher returns).
Its timing was dependent on:
- Biodiversity: amounts and type of arts and species.
- Orientation of continents - vertical vs horizontal affected the diffusion of tech.
Mechanism behind the diseases: why does it affect development?
In many ways, the mortality increases, the malnutrition is reinforced, the education lower due to lost school time, FDI and tourism lower etc… All of these will affect economic growth in obvious ways.
Describe how environmental schocks will affect growth:
Environmental schock can for example be the massive variations in rainfall that Africa is victim of. These will directly affect the economy and a recession will start. Even if it is temporary, the people have less to lose and will demand more from the government and hence the leaders must democratize the country. This is statistically approved by data showing that in times of drought, the polity score increases.
Transport costs:
fattade ej slidesen…
What about natural resources?
Data shows a negative relation with GDP. This is true for the countries having bad institutions. But for ex Norway, the oil is good. For the bad institutionalized countries, the natural resources make the government corrupt and less interested in investing in growth-sectors such as manufacturing and export.
Is geography destiny?
Not according to the theory of reversal of fortune, which emphasize the data showing that highly populated and relatively rich regions back in 1500 will be poor today, while the low density regions that were relatively poor in 1500 are rich today. There has been a reversal due to the colonization. The Europeans built good institutions in the regions where they settled (sparsely populated regions) and bad extractive institutions in the rich/populated areas.
What are institutions?
The rules of the game. Humanly devised constraints that structure human interactions. It can for example b eproperty rights, the form of government, labor institutions, taxation, market regulations, legal system etc.
They shape incentives!
Two problems with institutions:
- Conceptual problem - the definition is very ambiguous.
- Methodological problem - they are endogenous to economic growth. -This problem means that when you plot institutions and GDP in a diagram, you will find a correlation, but what about the causation? It goes both ways and we cannot know which one is the first one affecting the other.
Four views of institutions:
- the efficient insitutions view
- the ideology view
- the incidental institutions view
- the social coflict view
The social conflict view
The economic and political institutions are not always chosen by the entire society (neither for the best of them), but by and for the groups controlling the political power. Looking to maximize their rents.
De facto vs de jure political power:
De jure is the people having the governmental power according to the documents. In contrast, the facto is the ones having political power thanks to their control over economic resources and their capacity to solve the collective action problem.
The commitment problem
This is the problem that make dictatorship persistent = why it is hard to change into a democracy. Even if the profits of the dictator will increase in absolute terms if they change into a democracy, they loose the power and this is threatening them.
Which of the ‘Economic performance’ and ‘Distribution of resources’ is the most crucial to change for achieving a democratic ruling?
Distribution of resources. If you change the economic institutions, only the economic performance will change, but the distribution of resources wills till go to the facto political power/elite. So we have to change the distribution to break the cycle and persistency.
Can we just tell bad institutions’ states to implement better ones?
No, because as we have learned now, we have two problems: the first one is the commitment problem where it is hard to make a reliable commitment to the leaders and therefore they will not change into a democratic ruling. And the second is that we have to change the distribution of resources to break the cycle - this can be made if the de jure politicians become rich and the poor can solve the collective action problem.
Example of how the insitutions matter for the rise of Europe?
Clear when looking at England vs France/Spain. Eng and its glorious revolution made a big institutional change. Now better government who raised the public spending, secured the property rights, crown less to say, predictability of the government and falling interest rates –> incentives to invest etc.
How can the colonization . play a role when explaining underdevelopment by institutions?
Because it is a clear actual experiment where ENG and FR implemented different institutions in different countries and the outcomes are obviously also different.
Two fundamental parts of the colonization theory:
- Identity of colonizers - Eng vs Fr implemented different institutions.
- Condition in the colonies - the settler mortality plays a huge role and also the resources.
How is the identity of colonizers affecting the development?
The origins of the settlers will affect the type of institutions implemented. For example the legal system that the GBR vs FR settler brought with them was critical for the growth. The British common law was much more efficient and more secure system than the French civil law. So investors were more likely to invest in the british colonies –> better economic performance.
Conditions in the colonies affect the development, how? (settler mortality)
Settler mortality –> settlements –> early institutions –> current institutions –> current performance. If high mortality, less will be settled and then the institutions implemented will probably only protect the few settlers, not the majority, expropriative institutions….not good. But if a lot settlers come, the institutions will more likely benefit the majority - better!
The conditions concerning the resources, how can it affect economic development?
The resources when it comes to the types of factor endowments you have will affect the economic performance. Two different types:
1. Plantation crops (sugar)
2. No plantation crops (wheat)
The plantation crop farms were much more efficient so to use the economies of scale the incentives to expand was big –> slavery –> inequality –> poor.
This created a reversal of fortune between the north and south america.
What is culture?
Beliefs, preferences, values and rules of thumb which helps us behave and make decisions without thinking much.
How can culture be measured? (3)
- Survey data - ask people what they think is important when raising a child.
- Second-generation immigrants: you survey only these people. bc their behaviour cannot have changed due to institutions, only culture. Diff from the domestic population.
- Experimental evidence: ultimatum game for ex. Create lab or real life situations and see how people put different values to different things such as fairness. (critics: external validity).
Most studied trait:
Trust. Correlates with economic development, individual performance, financial development, participation in stock market, trade, producitivut, innovation etc….. So it is a very good trait to study.
Individualism vs collectivism:
Individualism correlates positively with economic performance and it puts emphasis on personal achievements and the right to choose own affiliations rather than focusing on lifelong groups.
How can the family ties affect the economic performance?
Having very strong family ties will often mean that you promote good conduct within your small circle but consider selfish behaviour acceptable outside this network. This in turn, will lead to lower trust on external people and hence a lower growth.
Generalized morality:
Related to family ties - you should behave in a good way no matter who you are interacting with, same code of conduct to everyone. Better performance if behaving good to all people.
Attitudes toward success: how can this affect economic outcome?
If you think that hard work pays off vs if you think that luck/destiny is the determinant of success –> big differences. Ex in Us the beliefs are that hard work is the key, that everyone can reach success if putting enough effort into it.
What is the problem with trying to determine the factors affecting economic growth?
That culture and institutions have a two way causal relationship. They are in many aspects the same thing, for ex “humanly devised constraint” is both institutions and culture. We need better definitions!
How can we solve the problem with institutions and culture being the same thing?
We can limit the institutions to only contain formal institutions and culture being the values and beliefs forming the informal institutions.
Ex of how institutions can affect culture:
For example the earlier slavery-institutions have affected the people to be very suspicious, not trusting other people. WHich in turn lead to lower economic growth.
Ex of how culture shapes institutions: famous example Greif
Study that showed how the agency problem culd be dealt with in diff ways:
- In the individualist society, the trader hired any agent and developed formal codes and business organization.
- In the collectivist society, the trader only hired those who had never cheated before, and therefore didn’t established any formal institutions.
How is culture and formal institutions interacting?
For example through the perception of being a cooperative player or not: If there are many cooperative players, the returns to cooperation will rise, hence the parents will teach their children coop. Additionally, well-functioning legal inst. can facilitate this + less strain on the judicial system so also that inst. will work better.
Weber’s theory of culture affecting economic growth:
He thought that the protestant reformation made people more protestantic and therefore also better work ethics (that he argued they had). This would in turn accumulate more wealth. BUT data can’t find relation to higher income/growth, only to the ethics.
If not ethics can be linked to income, what other factor has been proved to have this relation?
Literacy! As the protestants believe in literacy and that every human should be able to read the Gospel for himself, more people learned how to read. And this investment in human capital is then increasing income.
Can we explain the low growth in Africa by just one factor?
NO. It is the interaction between all three factors that are needed to explain it. The slavery itself was an institutions that came to Africa due to its geography and the fact that the low trust etc is persistent even after the abolish of the slavery is due to the culture. So all are interacting.
Golden Age, three difficulties to deal with:
- The Great depression still had impact on the society.
- The WW2 just ended and big reconstructions were needed. Many people have died.
- The Cold War was happening. Tensions between capitalists and communists.
Why Golden age specific for Europe?
All growth rates in the world were positive but the growth in Europe was very specific for this point in time, didn’t persist after and was the highest ever experienced in Europe.
What about the catching up opportunities during the golden age?
The US had much better tech and larger capital stock. So when the destroyed Europe started to adopt their tech, the growth was rapid and we gained a lot by adopting - we didänt need to invest in R&D and we didn’t needed to do the mistakes that US already had made.
But why could Europe gain from catch-up and not Africa for example?
Because we had the prerequisities needed: appropriate institutions, conditions encouraging investments, abundance of L etc.
The labour supply hypothesis:
Another explanatory factor to why golden age took place: the labour supply were abundant and inefficient in the agrarian sector, so when labor could move to the industry the total output increased. This movement will smooth out the wage differences between the sectors.
Which two main factors do we mean when we say that the role of institutions were critical for the golden age?
We mean the wage moderation which was possible thanks to the social pact, and also the export growth which was enabled though BW and GAtt for example.
