Lecture 3: institutions

Question 1

Institutions

Answer 1

“The rules of the game in a Society”

rules –> “The humanly devised constraints that shape human interaction”

Examples of Institutions
“No person shall be elected to the office of the President more than twice.”
“The final exam will be 100% of your grade.”
“If you use the microwave, you must clean up your own mess!

Question 2

Institutions limit our individual freedoms

Answer 2

Institutions shape behavior by creating incentives, reducing uncertainty, and guiding social norms. While they may limit certain freedoms, they also provide structure that makes society function effectively.

Question 3

How Economic Institutions affect Development

Answer 3

Where does Economic Growth come from?
To get more economic growth you need: productivity

Institutions alter opportunities and incentives to invest in capital, human capital and technology

Question 4

Why don’t all countries choose inclusive institutions

Answer 4

• Inclusive institutions grow the pie
• But they also change how the pie is divided
  o Allowing new markets and technologies shrinks existing industries
  o The current elite usually profits from old industries
  (2) And they also empower citizens
  o Wealthier, more educated citizens tend to demand democracy
  o Threatening the power of current elites

Question 4

Inclusive Economic Institutions

Answer 4

• “Those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills”
  Acemoglu and Robinson (2012)
  Institutions that encourage investment
• The Rule of Law
• Private property
• State guarantee of education, healthcare
• Universal, non-discriminatory policies
  Limiting some (negative) freedoms creates other(positive) freedoms
• If you cannot steal, I feel safe to purchase a car
• If schools and exams are inspected, my qualifications convince employers to give me a job

Question 4

Extractive Economic Institutions

Answer 4

Institutions designed to extract wealth and resources from the majority of people for the benefit of a small elite. They limit economic participation and discourage innovation or investment.
Key Features of Extractive Institutions:
1️Expropriation — The state or elites unjustly seize property or wealth, reducing incentives to invest or produce.
2️Slavery/Forced Labor — Exploiting people as a source of wealth with no regard for their rights or well-being.
3️Lack of Educational Opportunities — Denying access to education prevents social mobility and keeps power concentrated.
Impact:
⚠️ Limits growth by discouraging individual effort and innovation.
⚠️ Concentrates power and wealth in the hands of a few, widening inequality.
Key Idea: Extractive institutions suppress economic potential by exploiting people rather than empowering them to contribute to growth and development.

Question 4

What varies is the policy implementation -

Answer 4

Definition: Institutional Strength
“The degree to which [written] rules are complied with in practice”

Strong Institutions depend on:
1. Enforcement by the State
2. Compliance by Society

Question 5

The strength of Inclusive Economic institutions depends on

Answer 5

Inclusive Political Institutions:
1. Centralized State to coordinate and enforce
2. Pluralism/Democracy: Distributed power within society
o Minimum civic rights, institutional checks and balances
o A ‘precondition’ for development

Question 6

How does Democracy affect Development

Answer 6

1. Because pressure from voters encourages
   the implementation of inclusive economic institutions and holds accountable leaders
   who extract
2. Because inclusive economic institutions are not credible under authoritarianism
   -Would you trust Kim Jong-un if he passed a law protecting your property

Question 7

counter argument: democracy harms development

Answer 7

1. Elections create volatile economic rules: short term decisions
2. Democracies tax the wealthy (Median votertheorem) (democracies tax more) ; Higher taxation in democracies can harm development by discouraging investment, innovation, and entrepreneurship, as it reduces incentives for wealth creation and economic growth.
3. Need to ‘insulate’ policy-making from ‘populist’ demands (autocracies just smash the protests)
   -Democracies can’t make the tough long-term choices

Question 8

How Political Institutions (Democracy) affect Development

Answer 8

o Democracy sometimes makes institutions stronger and more credible, protecting investments
o But so can authoritarian regimes who are secure in power, or face external threats
o And Western countries had very imperfect democracy when they developed
o Democracy matters more for health and education