Development Economics. Lecture 13: How institutions develop and why they matter Professor Anant Nyshadham EC 2273

Transcription

1 Developmet Ecoomics Lecture 13: How istitutios develop ad why they matter Professor Aat Nyshadham EC 2273

2 Today 1. Midterm (March 19, i class) 2. PS 3 Due Wed Mar 14 (TA office hours: Moday Mar pm) 3. How do istitutios develop? 1. Ope uestio durig all of this discussio: Ca we thik about the evets i Ukraie, or the Arab Sprig (Tuisia, Libya, Egypt, ad Syria) ad its aftermath through the les of istitutios? 4. Reversal of fortue: those who were rich i the past are poor ow 2

3 Exam Secod Moday after break Coverage: All assiged readigs, icludig Easterly book Models we have doe i class Lectures get the most weight, but there may be some uestios from readigs we did ot cover i lecture Format Several True/False/Explai uestios Possibly a couple short aswer uestios Oe or two model uestios like short problem set uestios, possibly a coceptual essay uestio Wedesday before exam: fiish up lectures, review practice exam as a study guide (o aswer key though). 3

4 Framework for evolutio of istitutios Acemoglu, Johso ad Robiso (ad others) Discussio ad framework from 2004 NBER paper Istitutios as the Fudametal Cause of Log-Ru Growth o readig list Basic idea: 1. istitutios evolve edogeously ad deped o the distributio of resources i society 2. istitutios affect ecoomic growth, ad affect the distributio of resources i society So istitutios, ecoomic growth, ad the distributio of resources evolve together 4

5 1. Istitutios lead to ecoomic outcomes Ecoomic istitutios matter for ecoomic growth Shape the icetives for ivestmet, ad orgaizatio of productio Istitutios are the major source of cross-coutry differeces i ecoomic growth Istitutios affect the distributio of resources i the future Ecoomic Performace t+1 Ecoomic Istitutios t Distributio of Resources t+1 5

6 2. Istitutios are edogeous Ecoomic istitutios are determied by choices made by society But ot all members of society prefer same outcomes, leadig to coflicts of iterest The group with most political power will ted to prevail, ad so choose the istitutios it most prefers. Political Power t Ecoomic Istitutios t 6

7 3. Commitmet is impossible Groups who obtai power caot (credibly) commit to the policies i the future Those who have political power caot commit ot to use it i their ow best iterests Result: sice groups will use their political power to ehace their ow iterests, it is impossible before had to agree to implemet the most efficiet policies i retur for a compesatig trasfer 7

8 4. Political power is edogeous Form of political istitutios chages who has political power de jure (from the law) political power arises from the particular political istitutios i place, ad who gets to exercise power Moarchy (govermet by oe), Autocracy (govermet by elites), democracy (govermet by the people) determie who gets to vote Political Istitutios t De Jure Political power t 8

9 5. Political power also comes from distributio of ecoomic resources Ecoomic power havig much commad over resources results i political power Ecoomic power allows oe group to pay off, or use force agaist, other groups, ad so results i de facto political power Ofte ecoomic power, de facto ad de jure political power are oe ad the same: feudal systems Corruptio i govermet is oe place where de jure ad de facto political power may be i coflict Distributio of Resources t De Facto Political Power t 9

10 6. Political power determies political istitutios Those who have political power (whether de jure or de facto) get to determie the ext roud of political istitutios Form of govermet i log term De jure political power geerally slowly chagig Costitutioal covetio, redistrictig, power of govermet De facto political power occasioally produces big chages, may also affect whether rules are obeyed Revolutios, corruptio Political Power t Political Istitutios t+1 10

11 Persistece Framework makes it seem like everythig chages every period Lots of persistece usually thigs evolve very slowly Political istitutios are durable, so fairly large chages i distributio of political power ecessary for chages i political istitutios A group that is rich relative to others has de facto power, ad so will ted to push for favorable political ad ecoomic istitutios, which will ted to reproduce or ehace its relative ecoomic power 11

12 The framework: Idustrial Revolutio Moarchy à Kig is rich Kig chooses istitutios that favor Kig Kig still Kig à Kig still rich Political Istitutios t De Jure Political power t Political Istitutios t+1 Distributio of Resources t Political Power t De Facto Political Power t Ecoomic Istitutios t Distributio of Resources t+1 NEW: Atlatic trade: New fortues à de facto political power New Parliamet & Costitutioal Moarchy Ecoomic Performace t+1 12

13 Evolutio of property rights i Eglad Moarchy the kig holds both de jure ad de facto political power Kigs protected their ow property rights, but ot the rights of others reeged o debts, taxed arbitrarily, reallocated lad, expropriated Political istitutios i which the kig had power led to ecoomic istitutios beefitig the kig Ladowers, merchats, producers had bad icetives to ivest, so low growth Sice kig maitaied ecoomic/political power, system stable 13

14 Evolutio of property rights i Eglad Chage: 17th cetury expasio of Atlatic trade Icreased fortues of ladowers ad merchats More wealthy ladowers ad merchats acuired de facto political power Icreasig de facto political power evetually lead to the Civil War ( ) ad Glorious Revolutio (1688), Restricted power of moarchy leadig to de jure political power ad ew political istitutio: costitutioal moarchy Newly powerful parliamet, major chages i ecoomic istitutios Stregtheed property rights Better ecoomic istitutios led to ecoomic growth, idustrial revolutio 14

15 Ukraie, Syria, Egypt? Political Istitutios t De Jure Political power t Political Istitutios t+1 Distributio of Resources t Political Power t De Facto Political Power t Ecoomic Istitutios t Distributio of Resources t+1 Ecoomic Performace t+1 15

16 Some observatios 1. Political istitutios that place checks o those who hold political power more likely to lead to good ecoomic istitutios Without checks those with political power choose ecoomic istitutios that are good for them, but bad for rest of society 2. Good ecoomic istitutios are more likely to arise whe political power is widely distributed The those with political power beefit from ecoomic istitutios that promote growth 3. Good ecoomic istitutios more likely to arise ad persist whe the ability of power holders to extract from the rest of society is limited The easier ad more rewardig it is to take from the rest of society, the bigger the icetive to obtai ad protect political power ad use it to create ecoomic istitutios that facility extractio 16

17 How importat are istitutios? Natural experimets ad history suggest importat North ad South Korea Haiti ad Domiica Republic Chia ad West But are they fudametal? We have already established that factor accumulatio does ot fully explai differeces across coutries, so factor accumulatio ot fudametal cause (istead proximate cause ) 17

18 The possible coteders Istitutios Geography Climate ad agriculture Availability of resources (coal) Ports, rivers, trasportatio Disease burde (malaria) Culture Shaped by ad shapes istitutios (hard to disetagle) But maybe some fudametal differeces exist Maybe some societies (Eglish) value leisure less tha others (Frech). Or maybe the political ad ecoomic power of Frech uios creates ecoomic istitutios which force lots of leisure 18

19 Is it istitutios or geography? 19

20 The Reversal of Fortue The most famous, ad covicig result from Acemoglu, Johso ad Robiso s work Basic idea: Europeas couered may other atios after 1492 Imposed differet istitutios i differet parts of the world Example: British cotrolled both may Caribbea islads (sugar platatios) ad Massachusetts Bay coloy, ad set up very differet istitutios i each The richest o-europea societies i 1500, became the poorest today, because of the choice of istitutios 20

21 The Reversal of Fortue The richest (o-europea) societies i 1500 became the poorest today. Areas cotrolled by the Aztecs, Ica, Mughals (i Idia) were the amog the richest civilizatios i the world i 1500, amog the poorest today Poor areas i 1500 (sparsely settled, huter gather societies) such as what became the US, Caada, Australia, ad New Zealad became the richest today Rich & poor have switched places Machu Pichu, Peru A very advaced society i

22 22

23 What caused the reversal? I iitially heavily populated richer areas, Europeas put extractive istitutios i place to expropriate from couered people Forced the Icas to mie for silver ad gold Haciedas i Mexico, as well as silver miig I iitially less populated areas, Europeas were the settlers, so developed istitutios respectig property rights a more developed civilizatio ad a deser populatio structure made it more profitable for the Europeas to itroduce worse ecoomic istitutios (AJR p. 25) 23

24 What caused the reversal? Util aroud 1800 the iitially less populated areas remaied poorer Aroud 1800 took off, became much richer Reversal occurs after 1800, exactly whe Idustrial Revolutio made good ecoomic istitutios valuable Some areas like Caribbea, ad US South, iitially low populatio Europeas brought i people to expropriate (slaves) because of high returs to sugar ad cotto 24

25 25

26 Resources, Coflict ad Ecoomic Developmet i Africa Adhvaryu, Feske, Khaa, ad Nyshadham (2017) Figure 1: Log Light Desity vs. Resources Figure 2: Prob(Coflict) vs. Resources 26

27 Resources, Coflict ad Ecoomic Developmet i Africa Figure 6: Nash Euilibria i the (r i,r j )space Figure 8: Heat Map of the Probability of Coflict by Resource Idex Resources j Joit Coflict by i ad j Resources c 2c1 c 2 / {N,N} {MSNE} {R, N} {N,R} {R, R} {MSNE} Resources i j Probability of Joit Coflict c 2 / c 2c1 Resources i Resources i i Resources is the first pricipal compoet of aual raifall averaged over 1998 ad 2008, oil ad gas reserves, ad lootable diamods. Probability of joit coflict is the likelihood of ever beig ivolved i the same coflict over a te year period (1998 to 2008). 27 We start by showig a heat map of joit coflict betwee poits i ad j as a fuctio of the relative resource accumulatios betwee the poits i the pair. The heat map, show i Figure 8, bears remarkable resemblace to the graph depictig the model predictios

28 Resources, Coflict ad Ecoomic Developmet i Africa Resources i j i Lights by i ad j Resources Lights Resources i i Resources i ad j trimmed at 5th ad 95th percetile. Figure 9: Model Fit ad Optimal Cuto by Risk of Expropriatio Figure 10: Heat Map of Light-Desity by Resources Resources is the first pricipal compoet of aual raifall averaged over 1998 ad 2008, oil ad gas reserves, ad lootable diamods. Probability of joit coflict is the likelihood of ever beig ivolved i the same coflict over a te year period (1998 to 2008). cotrollig for cotiuous measures of ow resources, eighbors resources ad the iteractio betwee the two. We see that light desity falls at each of these cuto s, showig how a 28 icrease i coflict may lead to a fall i local ecoomic activity. We push this empirical test of the model oe fial step further by coductig the aalogous aalysis usig the RD methods for light-desity at the resource cuto s estimated i the coflict results above.