Lecture 3: Institutions

Question 1

Why has Botswana done better than Nigeria in development despite being tropical, landlocked, and having natural resources?

Answer 1

Poor government effectiveness -> has had 6 coups, 1 civil war, 30 years of authoritarianism, high corruption

Question 2

Being tropical and landlocked is correlated with

Answer 2

Poor government effectiveness

Question 3

Definition: Institutions

Answer 3

“The rules of the game in society”, e.g. not organizations, must contain must/shall/will

Question 4

Informal vs. formal institutions

Answer 4

Laws are formal institutions, enforced by official third-parties

Informal institutions have social sanctions, not official

Question 5

Relationship between institutions and uncertainty and behavior

Answer 5

Institutions reduce uncertainty and alter people’s behavior

Question 6

Where does economic growth come from?

Answer 6

Human capital, capital, and technology

Question 7

What does economic growth require?

Answer 7

Strong institutions to enable safe investments in capital, human capital, and technology

Question 8

3 kinds of extractive economic institutions

Answer 8

1. Expropriation (->massive dip in investments)
2. Slavery
3. No opportunities for education

Question 9

Definition: inclusive economic institutions

Answer 9

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

Question 10

4 examples of inclusive economic institutions

Answer 10

1. Private property
2. The rule of law
3. State guarantee of education and healthcare
4. Universal, non-discriminatory policies

Question 11

2 reasons why all countries don’t just choose inclusive institutions if they are great for development

Answer 11

1. 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
2. Inclusive institutions empower citizens because wealthy and educated people tend to demand democracy which threatens the power of the current elite

Question 12

Why can’t the mere fact of inclusive economic institutions explain the different development levels/pace in Botswana and Nigeria?

Answer 12

Because it is about the implementation/strength of the written rules, not just the mere presence of inclusive economic institutions

Question 13

Definition: Institutional strength

Answer 13

The degree to which (written) rules are complied with in practice

Question 14

Strong institutions depend on 2 things:

Answer 14

1. Enforcement by the state
2. Compliance by society

Question 15

The strength of inclusive economic institutions depends on

Answer 15

Inclusive political institutions

Question 16

2 examples of inclusive political institutions

Answer 16

1. Centralized state to coordinate and enforce
2. Pluralism/democracy (minimum civic rights, institutional checks and balances = precondition for development)

Question 17

2 reasons why democracy can help development

Answer 17

1. Pressure from voters encourages the implementation of inclusive economic institutions and punishes leaders who extract
2. Inclusive economic institutions are not credible under authoritarianism (would you trust Kim Jong-un to protect your property?)

Question 18

3 reasons why democracy can harm development + what kinds of decisions democracies can’t make

Answer 18

1. Elections create volatile economic rules, changing with each election
2. Democracies tax the wealthy (median voter theorem)
3. Need to insulate policy-making from populist demands

= democracies can’t make tough, long-term choices

Question 19

What institutions did developed countries use to get rich, and what does this say about development?

Answer 19

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

Question 20

Study: does democracy promote economic growth, health, and education?

Answer 20

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

Question 21

Under these 3 conditions, authoritarianism can help development (example of China)

Answer 21

1. 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)
2. The elite believe they can develop without losing political power
3. The elite’s promises to maintain inclusive economic institutions are credible