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“Ins%tu%ons as a Fundamental Cause of Long Run Growth”
Acemoglu, Johnson and Robinson, Handbook of Economic Growth
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Tradi%onal Theories of Growth
• Neo-‐classical (factor accumula%on), F(K) produc%on
• Newer growth A-‐K produc%on (Human capital, physical capital externali%es)
• Modern growth theory (Technology based)
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• As North and Thomas (1973, p. 2) put it:
• “the factors we have listed (innova%on, economies of scale, educa%on, capital accumula%on, etc.) are not causes of growth; they ARE growth”
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The argument here
• Economic ins%tu%ons maVer for economic growth as they influence investments in physical and human capital and technology, and the organiza%on of produc%on.
• They influence not only the size of the aggregate pie, but how this pie is divided among different groups and individuals in society
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• Economic ins%tu%ons are endogenous. They are determined as collec%ve choices of the society, in large part for their economic consequences
• There will typically be a conflict of interest among various groups and individuals over the choice of economic ins%tu%ons
• Which group’s preferences will prevail? The answer depends on the poli%cal power of the groups
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Why Not Always Maximize Growth
• Coase Theorem • Why do the groups with conflic%ng interests not agree on the set of economic ins%tu%ons that maximize aggregate growth
• They can use their poli%cal power simply to determine the distribu%on of the gains?
• Why does the exercise of poli%cal power lead to economic inefficiencies and even poverty?
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• Distribu%on of poli%cal power: endogenous (de jure and de facto)
• De jure poli%cal power refers to power that originates from the poli%cal ins%tu%ons: democracy vs. monarchy
• A monarchy: poli%cal ins%tu%ons allocate all de jure poli%cal power to the monarch, and place few constraints on its exercise
• Cons%tu%onal Monarchy: poli%cal ins%tu%ons reallocate some of power of the monarch to a parliament, constraining the monarch
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• De facto poli%cal power • Determined by distribu%on of resources • Group without de jure rights can s%ll have poli%cal power: can revolt, use arms, hire mercenaries, co-‐opt the military, or use economically costly but peaceful protests
• Aim is to impose their wishes
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Sources of de facto power
• 1. depends on ability of the group to solve its collec%ve ac%on problem,
• 2. depends on its economic resources, which determine both ability to use (or misuse) exis%ng poli%cal ins%tu%ons and also their op%on to hire and use force against different groups
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• Poli%cal ins%tu%ons and the distribu%on of resources typically change rela%vely slowly,
• they determine economic ins%tu%ons and economic performance both directly and indirectly.
• Poli%cal ins%tu%ons determine the distribu%on of de jure poli%cal power, which in turn affects the choice of economic ins%tu%ons.
• Thus a hierarchy of ins%tu%ons, with poli%cal ins%tu%ons influencing equilibrium economic ins%tu%ons, which then determine economic outcomes.
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• Poli%cal ins%tu%ons, though slow changing, are also endogenous.
• They are also collec%ve choices, the distribu%on of poli%cal power in society is the key determinant of their evolu%on
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Persistence
• Poli%cal ins%tu%ons are durable, and typically, a sufficiently large change in the distribu%on of poli%cal power is necessary to cause a change in poli%cal ins%tu%ons, such as a transi%on from dictatorship to democracy.
• Being rich rela%ve to others increases de facto poli%cal power and enables a push for economic and poli%cal ins%tu%ons favorable to interests.
• Tends to reproduce the ini%al rela%ve wealth disparity in the future.
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E.g. Property in Europe in Middle Ages
• Lack of property rights for landowners, merchants and proto-‐industrialists detrimental to economic growth
• Poli%cal ins%tu%ons placed poli%cal power in the hands of kings and lords rights were decided by these monarchs.
• Used their powers to expropriate producers, impose arbitrary taxa%on, renege on their debts, and allocate the produc%ve resources of society to their allies
• Economic ins%tu%ons during Middle Ages provided liVle incen%ve to invest in land, physical or human capital, or technology – hence low growth
• Economic ins%tu%ons ensured monarchs controlled economic resources, solidifying their poli%cal power and ensuring regime con%nua%on.
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C17th
• Expansion of Atlan%c trade in sixteenth and seventeenth centuries increased the fortunes, and consequently de facto power of landowners and merchants.
• These groups had interests in conflict with those of the king: English kings were interested in preda%ng against society to increase their tax incomes, the gentry and merchants were interested in strengthening their property rights
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• Growing prosperity of merchants and the gentry, enabled them to field military forces capable of defea%ng the king.
• De facto power overcame the Stuart monarchs in the Civil War and Glorious Revolu%on,
• Led to a change in poli%cal ins%tu%ons that stripped king of his previous power over policy.
• Led to major changes in economic ins%tu%ons, • Strengthening property rights of both land and capital
owners and spurred a process of financial and commercial expansion.
• Rapid economic growth, culmina%ng in the Industrial Revolu%on
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• Good economic ins%tu%ons are those providing secure property rights and hence incen%ves for investment and growth
• Good poli%cal ins%tu%ons are those that generate incen%ves to create/enforce good economic ins%tu%ons – generally those that give poli%cal power to as broad a group as possible
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• Review evidence that differences in economic ins%tu%ons are a fundamental cause of cross-‐country differences in prosperity.
• Outline a framework for thinking about why economic ins%tu%ons vary across countries.
• Illustrate the key mechanisms through a series of historical examples and case studies
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Evidence
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Correla%on or Causa%on?
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Clearer causa%on? Historical “experiments”
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• Hard to argue against “ins%tu%onal” explana%on for Koreas
• Same geography, culture, industrial development prior to separa%on
• Poli%cal ins%tu%ons probably favor elite everywhere – Strongly so in Nth. – Democra%za%on (long, somewhat painful) in Sth.
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One example or more general?
• European colonial expansion from C15 on
• Almost whole world conquered – varying pre-‐condi%ons
• How to es%mate GDP in the very long run?
• Urbaniza%on and Popula%on density as measures
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Urbaniza%on Correlates to Wealth
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Colonies: Reversal
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Colonies: Reversal
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Reversals aren’t inevitable
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Nor amongst Colony set
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And not b/w 1500 and today
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An explana%on
• Densely-‐seVled and rela%vely-‐developed places Europeans put in ins%tu%ons facilita%ng extrac%on of resources
• In the sparsely-‐seVled areas it was in their interests to develop ins%tu%ons protec%ng property
• Led to an ins%tu%onal reversal. • Ins%tu%ons hypothesis, predicts the Reversal of Fortune: rela%vely rich places got rela%vely worse economic ins%tu%ons and became rela%vely poor over %me.
• These persisted 30
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Coloniza%on Ins%tu%on Selec%on Argument
• Europeans introduced or maintained economic ins%tu%ons of extrac%on where they would benefit from extrac%on
• Typically areas controlled by a small group of Europeans, • Areas with resources: gold, silver, sugar, people. • A large indigenous popula%on to exploit: taxes, tributes,
forced labor in mines or planta%ons. • Incompa%ble with ins%tu%ons providing economic or civil
rights • In places with liVle to extract/in sparsely-‐seVled places
where the Europeans themselves became the majority they introduced ins%tu%ons protec%ng their own property rights
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SeVler Mortality
• Already seen this with popn density • What about other determinants of colonizer strategy
• When Europeans died in great numbers (local diseases such as malaria) they tended to not seVle in a place
• Where they seVled in greater numbers they imported beVer (more inclusive) ins%tu%ons
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Instrumental Variables Strategy
• If the disease environment 200 or more years ago affects outcomes today only through its effect on ins%tu%ons today, then we have a valid instrument which will enable us to pin down the casual effect of economic ins%tu%ons on prosperity
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• Can be done in a regression framework • Regress Ins%tu%ons measure on seVler mortality and other variables
• Take predicted measure of ins%tu%ons and regress this on GDP per capita today
• Under the “exclusion” restric%on • Doing this show strong sta%s%cal effect of ins%tu%ons on outcomes (no longer an effect of la%tude) or disease environment today
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Why do ins%tu%ons differ?
• If we buy the importance of ins%tu%ons, the ques%on is pushed back to where do they come from?
• Many different theore%cal tradi%ons • 1. Poli%cal Coase Theorem • Socie%es choose ins%tu%ons that are socially efficient • Coasian bargains should see people nego%a%ng to avoid costly outcomes
• Standard “theore%cal” view – observe an ins%tu%on try to think of the reason why it came about
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• E.g. North and Thomas (1973) Feudal economic ins%tu%ons and efficient exchange between serfs and lords
• If more efficient one exists, it will emerge and create surplus
• Beckerian compe%%ve view. Poli%cal entrepreneurs will be able to arbitrage rents by proposing beVer ins%tu%ons.
• Observed varia%on in ins%tu%onal quality cannot be explained – North Korea
• Commitment problems?
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• 2. Ins%tu%ons due to ideology • Certainly examples of ideology playing a big role: India aoer independence, West Germany, African freedom fighters/leaders – Nyerere in Tanzania
• Again, North Korea seems hard to swallow – at least eventually
• Britain: Caribbean planta%on socie%es based on slavery
• But where few indigenous people to be captured slavery, not profitable northeastern United States, Canada, Australia and New Zealand, very different
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3. Ins%tu%ons as “accidents” • Barrington Moore (1966) why Britain went way of
democracy, and Germany – Fascism, Russia – Socialism. • Class coali%ons and the way agriculture is organized are key • Democracy emerged when there was a strong, poli%cally
asser%ve, commercial middle class, • Fascism arose when the middle classes were weak and
entered into a poli%cal coali%on with landowners. • A communist revolu%on resulted when the middle classes
were non-‐existent, agriculture was not commercialized, and rural labor was repressed through feudal regula%ons.
• Unintended consequence of the organiza%on of agriculture
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Legal origins similarly “accidents” • Djankov et al. (2003) cross-‐na%onal dataset on how legal systems dealt with evic%ng a tenant for nonpayment of rent and collec%ng on a bounced check.
• Constructed an index of procedural formalism of dispute resolu%on for each country
• Such formalism systema%cally greater in civil than common law countries
• Associated with higher expected dura%on of judicial proceedings, less consistency, less honesty, less fairness in judicial decisions, and more corrup%on
• Legal Origins not chosen
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4. Social Conflict View • North (1981) “A neoclassical theory of the state” • Ins%tu%ons not always chosen by the whole society (not for its benefit), but by poli%cally powerful at the %me.
• Chosen to maximize their rents, not total surplus or welfare
• Why not maximize welfare and keep more? • According to North “Transac%on Costs” • Economic ins%tu%ons thus depend on poli%cal power (and poli%cal ins%tu%ons)
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Transac%ons costs = commitment problems
• Acemoglu and Robinson: Inability to commit to how poli%cal power will be used in the future implies impact of economic ins%tu%ons on efficiency cannot be separated from effects on distribu%on
• E.g. suppose society can be a dictatorship or a democracy. • Dictator wants individuals to undertake the same
investments as they would in democracy • Solu%on: Promises that he will obey the rules of democracy • Promise would not be credible. Under dictatorship no
higher authority to make the dictator s%ck to his promise. • Dictator has monopoly of military/poli%cal power, no
higher authority
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• Reverse solu%on: dictator agrees to a voluntary transi%on to democracy in return for some transfers in future to compensate for lost income and privileges.
• Ci%zens would be willing to make such promises, but once dictator gives up poli%cal power, no guarantee that ci%zens would agree to tax themselves in order to make payments to a former dictator.
• Promises of compensa%on are not credible. • Essence of the problem is commitment. Neither party can commit to take ac%ons that would NOT be in their interests ex post.
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• Djankov et al. (2003) showed that procedural formalism systema%cally greater in civil than in common law countries, and is associated with higher expected dura%on of judicial proceedings, less consistency, less honesty, less fairness in judicial decisions, and more corrup%on.
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