DEVELOPMENT ECONOMICS
Sponsored by a Grant TÁMOP-4.1.2-08/2/A/KMR-2009-0041 Course Material Developed by Department of Economics,
Faculty of Social Sciences, Eötvös Loránd University Budapest (ELTE) Department of Economics, Eötvös Loránd University Budapest
Institute of Economics, Hungarian Academy of Sciences Balassi Kiadó, Budapest
2
Author: Katalin Szilágyi Supervised by Katalin Szilágyi
January 2011
Week 5
Role of institutions in growth Growth: towards deeper causes
• So far: proximate causes of growth
• Growth due to
• Capital accumulation
• Human capital accumulation
• Improvement in technology
• Exogenous
• Accumulation
• Diffusion
Role of instituitions
• Toward deep causes
• Soft factors, hard to measure
• Often lack of sound theoretical foundations
3
• Insights from other disciplines (political economy, history etc.)
Some examples
• United Kingdom
• Precipitation (early civilisation)
• Ports, trade with rest of the world
• Big country (empire)
• Long tradition of free elections
• Protection of private property and investments
• Motivation for success
• Burkina Faso
• Tropical climate
• Far from sea
• Dictatorship, regular coups
• No rule of law
• Singapore
• 50 years ago: unemployment and corruption all around
• Today: GDP per capita is 140% of UK
• Virtually no corruption
Geography and institutions
• Climate, precipitation, land quality and agricultural production
• Pivotal in early stages of development
• Ports vs. landlocked countries: access to trade (in goods, services and ideas)
• Natural resources
• Health conditions and contagion
• Size of the country
4
• Lower fixed costs of public goods
• Military and negotiation power
• Insurance for idiosyncratic shocks
• Diverse population, minorities, ethnic conflict
• Natural resource curse
• Dutch disease, paradox of plenty
• Rent-seeking
• Lower investment in education
Formal institutions
• Institutions
• Behavioral constraints (rules of the game) determined by the society
• Regulate human interactions
• Formal and informal
“Good” institutions “Bad ” institutions
Competitive tax system Over-regulation in labor markets
Efficient bureaucracy Inefficient state
Free trade Liquidity constraints
Low and predictable inflation Non-transparent regulation
Stable exchange rates Corruption
Free press Dictatorship
5
• Institutions of economic freedom
• Liberalisation of labor and capital markets
• Deregulation
• Rule of law
• Protection of private property
• Precondition for innovation (Cooter–Schäfer)
• Shakespeare vs. Rowling
• Legal traditions
• Democracy
• Not a necessary condition
• Developing vs. exploiting states/elites (Acemoglu)
Informal institutions
• Culture and informal institutions
• Opinions
• Beliefs
• Approaches
• Social norms
• Traditions
• Trust
• Trust
• Repeated transactions
• Long-term planning
• Imperfect substitute for formal institutions
• Reciprocity
• Costly in case of bad experience
• Reputation
• Restaurants, catering, hotels
6
• Private services
• Maghrib traders (Greif)
• Productive economies
• Produce more effort than indispensable (determined by formal control and economic incentives)
• Motivation to succeed
• General expectation
• Social norms
• Behavioral regularity with informal social sanctions attached (Fehr and Gächter)
• Preferences and values
• Opinions about the role of state in East vs. West Germany
• Collective support for individual initiatives
• Appreciation of work and diligence
• Social capital
• Civil communities
• Correlation between quality of education and strength of social capital
• Correlation between crime rates (aggression) and social capital
• Quantification in the spirit of measuring human capital (Putnam)
