Institutions Flashcards
Definition of institutions>
The humanly devised constraints that shape social interaction.
The rules of the game.
2 functions of institutions?
- Facilitating cooperation between private actors, gains from trade
- Restraining powerful actors, especially predatory governments
Solution 1) Legal (Impose a fine)
Solution 2: Repetition.
tit-for-tat strategy
Promise of doing business with another eternally until the other one deviates, then never again. BUT: only works if an infinite game.
If end-game? What about a finite game?
Backward reasoning tells us this doesn’t work: no matter what you play, the other should play D at the last round. Knowing this, you always play D.
Solution 3?
Reputation?
- Problems, you need:
- group membership stable and well defined.
- Speed and accuracy of information transmission (not usually great)
Sophisticated geography hypothesis
- geography determines the technology available to a society.
- Differences in geography, climate and natural resources lead to different rates of societal development. These are the “ultimate” causes of inequality.
- Differences in ultimate causes lead to differences in proximate causes: guns, germs, stel, writing, societal complexity, technology etc. These are the “proximate” causes of inequality
Fertile crescent
West Asia, Europe (mediterranean zone), North Africa
- wheat, barley, pea, lentil, chickpea, flax
Germs
- close contact with animal+high densities (thanks to productive agriculture): crowd diseases
- immune system developed to fight these crowd diseases
Spread of food packages
- eurasia (straight line; easier)
- the americas (diagonal and upwards?)
Superiority of farming over hunting-gathering
productive agriculture fed armies bureaucrats, inventors, writing?
Guns, germs and steel first in …
Eurasia.
Fertile crescent underwent major ecological overexploitation (desert today)
-
China
- China (very homogenous, no natural barriers)
- Favoured a unified, centralised empire
- subject to arbitrary decisions by leaders
- in 15th century, largest fleet on earth
- but a power struggle stoppe oceangoing shipping
Europe
- very heterogenenous (mountains, languages, societies…)
- christpher columbus
explains why Europe colonised the rest of the world, and not the opposite
Implications of sophisticated geography hypothesis
- the world is explained by geography and history in a deterministic way
- impossible to change now the course of history
Problems with regression in analysing impact of institutions on GDP?
- reverse causality: richer countries are able to build better institutions in the first place, therefore not sure institutions leads to more growth
- OVB: may be geography?
Solutions to that?
- randomized experiments (difficult) : but see an example at the end!
- natural experiments: exogenous source of variation in institutional quality, with no simultaneous change n geography or culture
The Colonial Experiment
15th century (1492), Europeans colonised much of the world. colonisation transformed institutions. Very different in different places.
Reversal of Fortunes
Rich civilizations in 1500 (Mughals in India, Aztecs in Mexico, Incas mostly in Peru, Ecuador, Bolivia and Southeast Asia) are the the POORER societies today
Less developed places (North America, New Zealand, Australia, south Latin America) are now much RICHER
Proxies for the systematic investigation of reversal of fortunes?
Urbanisation rates! Because it demonstrates economic activity.
- Countries with high urbanisation rates in 1500 are poorer today. Low urbanisation rates are richer today.
Question 1, 2 and 3:
1) fact more general than just Neo-Europes (excluding America, New Zealand…)
2) not dependent on identity of coloniser
3) characteristic of the colonial experiment (no reversal of fortunes among non-colonies, and no reversal of fortunes BEFORE colonisation)
Historical fact: reversal of fortunes around 1800. Is it consistent with… geography? climate? Sophisticated geography hypothesis?
Climate: no, in 1500, it was the countries in the TROPICS that were prosperous!
Disease? NO, countries in the tropics have more disease
Geography? NO; hard to reconcile:
- yes, food package spread more easily in the US, Argentina, Australia (same latitude) and not Peru, Mexico and West Africa
- BUT timing of reversal: 1800! Should have been industrial packages, not food packages. Why wouldn’t technologies work in the tropics? Singapore, Hong Kong…
Economic institutions: inclusive institutions
Two functions: facilitating exchange + restraining powerful actors (FOR ALL!)
Includes:
- unbiased system of law
- secure property rights
- provision of public services that level playing field
- permit entry of new businesses (creative destruction)
- allow people to choose their careers
Extractive institutions
same functions, but only for a FEW = elite
Examples: Mita (Inca), forced labor on plantations or Potosi silver mines (Bolivia) for aristocracy in exchange for famine relief and security
- maya: short-run growth, but extreme inequality created by extractive institutions that generated infighting to become the elite
Fact about economic institution: the higher initial population density, the worse …
are institutions!
Why? (Think about settlers)
- in densely populated areas, it was in the interest of Europeans to have (or keep using) institutions facilitating the EXTRACTION of resources (not respecting the property rights of the majority)
- in sparsely settled areas, it was in the interest of Europeans to develop institutions protecting property rights (or at least less interesting to extract from the few people)
Mortality rate of settlers…?
- mortality rate of settlers –> good/bad past institutions –> good/bad current institutions –> current GDP
But NO direct link from mortality rate to GDP (not correlated with the mortality rate of indigenous population)
Climate and GDP…?
- Apparent correlation between latitude and GDP (see next slide)
- but this is explained by the institutional story:
- settlers did not have immunity to tropical diseases, therefore
- they created better institutions in TEMPERATE climates
- these institutions persisted to the present
(not because “warm climates make people lazy”!)
Culture?
Europeans brought new institutions AND their culture
3 tests:
- Identity of colonial power should matter: NO
- Proportion of population of various religion should matter: NO
- If “European culture” matters, countries with a higher proportion of Europeans in population today should perform better: NO
Social conflict view
- conflict among various groups determines economic institutions more at time t than does the choice of economic institutions
- winner is the group holding political power (elites i.e. the politically powerful, may opt for economic institutions which increases their incomes, often at the expense of society: Marxist theory)
What determines the distribution of economic resources?
Economic institutions at time t-1
Vicious circle/virtuous circle
England; Magna Carta (1215..) parliament…
France; King Louis XVI; a broad coalition of merchants, businessmen…
Napoleon ; Napoleon code = Rule of law
But virtuous circle can be broken: example: Venice
- Inclusive economic institutions: started with two partners, one in capital in Venice, other travelling,
- shared profits 75/25
- young entrepreneurs without capital: upward social mobility But new families demanded more politcal power! THEN existing elites treated by creative destruction… So they decided to CLOSE political institutions. Ban commenda contracts. Decline for 110,000 people in 1330 to 100,00 in 1500
- other examples: Nazi Germany, Authoritarian Japan in WWII
Four theories of design of institutions:
1) ideology view (e.g. marxism)
2) incidental institutions view: example (common-law/civil-law)
3) the social conflict view
4) modernisation theory : more GDP leads naturally to better institutions (authoritarian regime is a passing stage…)
Olken paper: conclusions
Main effect on women:
- poorest women get more projects
- but projects are of “elite” types!
Why?
Because:
- the elections did not affect the agenda setting within these hamlets
- in poorer hamlets, poor women were less involved in the agenda setting stage
- example: the poorest hamlet was 19.2 % points more likely to propose a road for the women’s project than the richest hamlet was (which they did not want at all)
- in elections, poorer women preferred to vote for a suboptimal project type located in their area
- conclusion: election empowers porrer women in the final decision-making process, but they should also be involved in the agenda-setting stage
Experimental design:
- in some villages, they employed a village meeting (a group of 9-15 individuals, village elites. Mixed and women-only).
- other (random) villages: voting
- still first step, but voting in the second step
- voting booth in each hamlet (max 15 min to walk)
- men choose among figure 1
- women choose among figure 1 + choose among women’s project
- winner (2 projects) is the one with the most votes
- turnout (60% of eligible voters)
Expected effect:
- with elections, people choose projects more in line with their interests
- most people would prefer a suboptimal project as long as it was close to their own village. Therefore people choose projects in their hamlets.
- Thus: we should see more projects in:
1) poorest hamlets (true)
2) more populated hamlets (not true!)
Conclusion
- democracy works for poor women, if included in the decision-making
- increase in satisfaction
- example of how microeconomic randomised experiment may tackle big issues!
