Lecture 3: Institutions Flashcards
Why has Botswana done better than Nigeria in development despite being tropical, landlocked, and having natural resources?
Poor government effectiveness -> has had 6 coups, 1 civil war, 30 years of authoritarianism, high corruption
Being tropical and landlocked is correlated with
Poor government effectiveness
Definition: Institutions
“The rules of the game in society”, e.g. not organizations, must contain must/shall/will
Informal vs. formal institutions
Laws are formal institutions, enforced by official third-parties
Informal institutions have social sanctions, not official
Relationship between institutions and uncertainty and behavior
Institutions reduce uncertainty and alter people’s behavior
Where does economic growth come from?
Human capital, capital, and technology
What does economic growth require?
Strong institutions to enable safe investments in capital, human capital, and technology
3 kinds of extractive economic institutions
- Expropriation (->massive dip in investments)
- Slavery
- No opportunities for education
Definition: inclusive economic institutions
Those that allow and encourage participation by the great mass of people in economic activities that make best use of their talent and skills -> boosts investment and growth
4 examples of inclusive economic institutions
- Private property
- The rule of law
- State guarantee of education and healthcare
- Universal, non-discriminatory policies
2 reasons why all countries don’t just choose inclusive institutions if they are great for development
- Inclusive institutions grow the pie, but also change how the pie is divided -> the current elite usually profits from old industries and has no interest in replacing these with new ones
- Inclusive institutions empower citizens because wealthy and educated people tend to demand democracy which threatens the power of the current elite
Why can’t the mere fact of inclusive economic institutions explain the different development levels/pace in Botswana and Nigeria?
Because it is about the implementation/strength of the written rules, not just the mere presence of inclusive economic institutions
Definition: Institutional strength
The degree to which (written) rules are complied with in practice
Strong institutions depend on 2 things:
- Enforcement by the state
- Compliance by society
The strength of inclusive economic institutions depends on
Inclusive political institutions
2 examples of inclusive political institutions
- Centralized state to coordinate and enforce
- Pluralism/democracy (minimum civic rights, institutional checks and balances = precondition for development)
2 reasons why democracy can help development
- Pressure from voters encourages the implementation of inclusive economic institutions and punishes leaders who extract
- Inclusive economic institutions are not credible under authoritarianism (would you trust Kim Jong-un to protect your property?)
3 reasons why democracy can harm development + what kinds of decisions democracies can’t make
- Elections create volatile economic rules, changing with each election
- Democracies tax the wealthy (median voter theorem)
- Need to insulate policy-making from populist demands
= democracies can’t make tough, long-term choices
What institutions did developed countries use to get rich, and what does this say about development?
They developed without democracy/income tax/meritocratic civil service/labor regulations -> hypocritical to claim that democracy and other inclusive political institutions goes hand in hand with development, institutional improvements followed development, not the other way around
Study: does democracy promote economic growth, health, and education?
Health and education yes (increased life expectancy, infact mortality reduction, more education spending, school fees abolished, enrolment rate increase)
But no concrete answer on economic growth
Under these 3 conditions, authoritarianism can help development (example of China)
- The elite choose not to extract (e.g. if they personally gain from growing markets + external threat forces elite to grow economy to build defense capacity of country)
- The elite believe they can develop without losing political power
- The elite’s promises to maintain inclusive economic institutions are credible