Institutions Flashcards
Definition of an institution
The rules of the game in society
- The humanly devised constraints that shape human interaction
Formal vs informal institutions
Formal:
- Written
- Official (third-party) sanctions
Informal:
- Unwritten
- Social sanctions
What are the three “ingredients” required for growth (which leads to productivity and then effects on GDP per capita)
- Human capital
- Capital
- Technology
What are inclusive economic institutions?
Those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills
- eg. institutions that promote development
Institutions that encourage investment
- The Rule of Law
- Private property
- State guarantee of education, healthcare
- Universal, non-discriminatory policies
Examples of extractive economic institutions (and what does it do?)
They punish you when you invest, stifle development
- Expropriation
- Slavery
- No opportunities for education
Why don’t all countries choose inclusive institutions?
Inclusive institutions grow the pie
- But they also change how the pie is divided
– Allowing new markets and technologies shrinks existing industries
– The current elites usually profit from old industries
They empower citizens
- Wealthier, more educated citizens tend to demand democracy
- Threatening the power of current elites
Examples of how inclusive economic institutions explain the different in development between Botswana and Nigeria
- Expropriation and corruption are more common in Nigeria
- Investment risks are much higher in Nigeria
Examples of how inclusive economic institutions cannot explain the different in development between Botswana and Nigeria
The written rules are the same
- eg. Laws against theft
– Botswana: No property of any description shall be compulsorily taken possession of
– Nigeria: No moveable property or any interest in an immovable property shall be taken possession of compulsorily
Definition of institutional strength
The degree to which written rules are complied with in practice
What do strong institutions depend on?
- Enforcement by the state
- Compliance by society
How political institutions (democracy) affect development
The strength of inclusive economic institutions depends on inclusive political institutions
- Centralized state to coordinate and enforce
- Pluralism/democracy: distributed power within society
– Minimum civic rights, institutional checks and balances
– A “precondition” for development
Why do we need democracy for development?
- Because pressure from voters encourages the implementation of inclusive economic institutions and punishes leaders who extract
- Because inclusive economic institutions are not credible under authoritarianism
How does democracy harm development?
- Elections create volatile economic rules
- Democracies tax the wealthy (median voter theorem)
– They don’t expropriate they just take high taxes - Need to “insulate” policy-making from “populist” demands
- Idea amongst many that democracies can’t make the tough long-term choices
What institutions did developed countries use to get rich in the 18th-20th centuries?
- Full democracy not until mid-twentieth century (1971 in Switzerland)
- Institutional improvements followed development (slowly)
- Developing countries today have much better institutions than developed countries had historically (but slower growth)
Does democracy promote economic development?
- Recent analysis suggests democracy is slightly better on average (2019)
- Authoritarianism shows great variation in economic growth (2017)
How does democracy impact development in health(care)?
- Increase life expectancy
- Greater calorie consumption
- Longer democracies reduce infant mortality
How does democracy impact development in education?
- More spending
- Teacher-student ratios improved
- School fees are abolished
- Enrollment increases
- Literacy rates increase
Why did China’s elite not fear inclusive economic institutions?
- The elite believed they could gain from economic reform
- Den Xiaoping was a reformer - he could profit from new industries
- and degraded the support of Mao’s allies
- “Correcting the mistakes of the Cultural Revolution”
- The elite believed they could develop without losing political power
– eg. uncontested control of the armed forces
– eg. using technology to limit citizens’ demands and collective action - An external threat forces elites to build the country’s defense capacity
How did China convince people to invest despite authoritarianism?
- The elite chose not to extract
– Developing a reputation quickly - The elite’s promises to maintain inclusive economic institutions were credible
– eg. They were backed by a long-lasting organization (CCP)
