Lesson 6: The Political Economy of Development Flashcards
What are institutions?
Definition: Institutions are the rules of the dame in a society, humanly devised constraints that shape human interaction.
Typology:
* Formal institutions: officially established rules and organizations (e.g. constitutions, ..)
* Informal institutions: social norms, customs and unwritten rules that guide behavior (e.g. patronage network, ..)
* Political institutions: rules governing power distributions, governance and decision-making (e.g. electoral systems)
* Economic institutions: rules shaping economic transactions, incentives, and market functions (e.g. property rights)
* Social institutions: norms and structures that shape social interactions (e.g. family structure)
* inclusive institutions: encourage broad participation, protect rights and foster innovation and economic growth (e.g. rule of law)
* extractive institutions: concentrate power and wealth in the hands of few, stifling development (e.g. corrupt regimes)
Why and how do institutions matter?
- matter for economic decisions -> they are not exogenous
- are at least partly outcomes of the political institutions and power relations in the country
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Where do institutions come from? Why do some countries choose to democratize?
AJR (2001): Colonial origins
Reasons for democratization:
* constraints elites form allocating resources to themselves, promotes new investments, allowings new technologies and ideas
What are alternative explanations to institutions on why some countries struggle while other strive?
- Geographical determinism: temperate regions foster productive agriculture while tropical regions face challenges, resource wealth
- Cultural explanations: values, work ethics and beliefs influence economic behavior (e.g. protestant work ethic, trust and social capital)
- Human capital and technology: education, knowledge diffusion, and technological progress drive development
- political and historical contingency: historical accidents and political choices shape devleopment trajectories (e.g. colonial legacies, revolutions & reforms)
Does democracy matter for economic development?
- when lead by a group of reasonably enlightened people, it can have great advantages (e.g. China)
- but can incentivize broad public good provision and government investments
- Autocracy can hurt economic outcomes for many reasons: elites could feel threatened, incentives for investments are lower
Acemoglu et al. (2019): democracy matters for growth -> increases per capita GDO by 20% in the long-run (through DiD)
* intital drop right after democratization but then takes off
* higher investments, better economic reforms, more success in taxation
Why do elites allow democratization in the first place?
Acemoglu & Robinson (2000): threat of revolution as a way to democratization
-> gives a political economy reasoning to the Kuznets Curve (as country develops, inequality rises but will at some point start to decline)
- Main idea: democracy does not happen but it is a response from the autocratic elites to the threat of revolution from non-elites -> democracy as a commitment tool
- Connection to Kuznet’s Curve: turn is associateed with democratization and increased redistribution -> brought by the increased revolutionary threat from rising inequality
Explain modernization theory. What is the evidence around it?
Theory: does a higher income lead to better political outcomes?
* if non-democratic countries become wealthy enough and more economically linked, they will start experiencing political changes
-> no evidence in favor (Acemoglu (2008))
What is state capacity and how are institutions a building block to it?
Hobbes: civilizations need a legitimate government in order not to fall into permanent state of disarray -> in econ: state capacity (what can the state achieve)
- it seems that good things are clustered with large states, well-off countries are richer, have better institutions and have larger/more capable states
- Institutions as a building block of state capacity: political, economic institutions enhance state capacity, informal institutions can hinder formal state capacity
-> we see this in the data
Explain the Anna Karenina Matrix.
Slide 185
Explain the motivation and background behind Famine, Inequality & Conflict (Meriläinen et al. (2022)).
Research question: What are the long-term consequences of famines on the distribution of prosperity and power?
- studies the consequences of a famine on inequality, elite power, and conflict (and the interplay between these three)
- Finland: great hunger years of 1866 - 1868
- documentation that the famine contributed to both the rise and fall of local inequality in Finland
Chain of events:
Famine -> inequality/ labor coercion -> civil war -> democratization/ redistribution/ equality
* 8% of Finnish population died
* a lot of people lost their property (debt money paid wheat -> failure on loans) -> more concentrated ownership (tenant farming)
* economic inequality tied to political inequality (voting rights tied to tax payments)
* Finnish civil war 1918, very bloody, a lot of casualties -> red lost the war
* Post civil war reforms: land reforms, extended voting rights, large equalizing effects
What is the interlink between famine, inequality and political conflict?
Data in Finland:
* more famine exposure -> more inequality
* more famine exposure -> igher insurgancy participation
* post famine: huge drops in inequality
Theoretical link:
* Economic underdevelopment and proverty predict civil conflict
* economic inequality considered to be among the fundamental economic preconditions of insurgency
* Political exclusion can also trigger civil conflict
What are the finding on the famine paper by Jaakko?
Famine -> Inequality/ labor coercion
* famine exposure lead to higher levels of land & economic inequality by experiencing crop failure
Famine -> Civil War
* famine exposure related to more causalites in the war, higher vote shares for sociodemocratic party
Famine -> Democratization / Equality
* famine exposure on redistribution of land is positive
What are the conclusions of Jaakko’s paper?
- countries that apperar poor and backward may not be destined to be trapped in a low-development, high-inequality equilibrium
- nordic countries were not always equal: civil war created a credible threat of revolution, consequently there was successfull democratization and redistribution
