The Role of Institutions in Economic Growth - Lecture Notes | ECON 184, Lab Reports of Economics

Download The Role of Institutions in Economic Growth - Lecture Notes | ECON 184 and more Lab Reports Economics in PDF only on Docsity! ECON 184 Economic Growth: the role of institutions ECON 184: Institutions and Growth January 26, 2010 1 Contents 1 Institutions and growth: initial analysis 3 2 How can institutions affect economic growth? 7 3 Reversal of fortune 11 3.1 The idea . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.2 What does the data say? . . . . . . . . . . . . . . . . . 13 4 Finding causal effects for institutions 19 4.1 Methods . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.2 The strategy . . . . . . . . . . . . . . . . . . . . . . . 21 4.3 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ECON 184: Institutions and Growth January 26, 2010 2 Expropriation and income (Acemoglu et. al) 12 . L o g G D P p e r c a p it a , P P P , in 1 9 9 5 Avg. Protection Against Risk of Expropriation, 1985-95 4 6 8 10 6 8 10 AGO ARE ARG AUS AUTBEL BFA BGD BGR BHR BHS BOL BRA BWA CAN CHE CHL CHN CIVCMRCOG COLCRI CZE DNK DOM DZA ECU EGY ESP ETH FIN FRA GAB GBR GHA GIN GMB GRC GTM GUY HKG HND HTI HUN IDN IND IRL IRN ISL ISR ITA JAMJOR JPN KEN KOR KWT LKA LUX MAR MDG MEX MLI MLT MNG MOZ MWI MYS NER NGA NIC NLD NOR NZ OMN PAK PAN PER PHL POL PRT PRY QAT ROM RUS SAU SDN SEN SGP SLE SLV SUR SWE SYR TGO THATTO TUN TUR TZA UGA URY USA VEN VNM YEM ZAF ZAR ZMB ZWE ECON 184: Institutions and Growth January 26, 2010 5 Corruption and income (Acemoglu et. al) . L o g G D P p e r c a p it a , P P P , in 1 9 9 5 Control of Corruption 0 .5 1 6 8 10 ARG ARM AUS AUTBEL BFA BGR BOL BRA CAN CHE CHL CHN COL CZE DEU DNK DOM ECU EGY ESP FIN FRA GBR GEO GHA GRC HKG HRV HUN IDN IND IRLISR ITA JAM JOR JPN KAZ KEN KOR LBN LKA LTU LVA MAR MDG MEX MLI MOZ MWI MYS NGA NLD NOR NZL PAK PAN PER PHL POL PRT ROMRUS SEN SGP SVK SVN SWE THA TUN TUR TZA UGA UKR URY USA VEN VNM ZAF ZMB ZWE ECON 184: Institutions and Growth January 26, 2010 6 2 How can institutions affect economic growth? ECON 184: Institutions and Growth January 26, 2010 7 The big pictureframework is as follows: political institutionst
⇒ de jure political power t & distribution of resourcest
⇒ de facto political power t                   
⇒ economic institutionst
⇒            economic performance t & distribution of resourcest+1
⇒ political institutionst+1 ECON 184: Institutions and Growth January 26, 2010 10 3 Reversal of fortune ECON 184: Institutions and Growth January 26, 2010 11 3.1 The idea • How can you measure economic performance in 1500? • Historians suggest that population density or urbanization are good predictors of economic performance. • If so, we can measure economic performance in 1500 by looking at the urbanization rate in those years. • Acemoglu, Johnson and Robinson (QJE, 2002) followed that idea. ECON 184: Institutions and Growth January 26, 2010 12 Yesterday’s “poor” are today’s rich FIGURE I Log GDP per Capita (PPP) in 1995 against Urbanization Rate in 1500 Note. GDP per capita is from the World Bank [1999]; urbanization in 1500 is people living in towns with more than 5000 inhabitants divided by total popu- lation, from Bairoch [1988] and Eggimann [1999]. Details are in Appendices 1 and 2. ECON 184: Institutions and Growth January 26, 2010 15 Robustness: reversal is found with population density too FIGURE II Log GDP per Capita (PPP) against Log Population Density in 1500 Note. GDP per capita from the World Bank [1999]; log population density in 1500 from McEvedy and Jones [1978]. Details are in Appendix 2. ECON 184: Institutions and Growth January 26, 2010 16 It started between 1750-1850 ECON 184: Institutions and Growth January 26, 2010 17 4.1 Methods • Question: can we find causal effect of institutions on economic performance? • We can start with this model yi = α+ θ ′insti + β ′xi + ei – Where yi be the GDP per capita for country i. – insti set of institution-related variables (e.g. protection against expropriation risk) – xi other variables (e.g., education, geography). – θ is the vector of parameters of interest. – ei is the error term. We need this to be uncorrelated with the insti variables. ECON 184: Institutions and Growth January 26, 2010 20 4.2 The strategy • The idea is to find a variable zi that can “explain” institutions but that doesn’t explain economic performance. • zi is called the “instrument” and the method is called “instrumental variables.” • Idea: Acemoglu, Johnson and Robinson (AER, 2001) use colonialism as an experiment. • The argument: Mortality of settlers (zi) ⇒ settlements ⇒ early institutions ⇒ current institutions (insti) ⇒ current performance (yi). • Sample: a cross-section sample of countries. ECON 184: Institutions and Growth January 26, 2010 21 4.3 Results ECON 184: Institutions and Growth January 26, 2010 22 Second step: how “exogenous” institutions affect income ECON 184: Institutions and Growth January 26, 2010 25 • Question: what are the policy recommendations you could derive from this approach? • How can countries choose “good” institutions? ECON 184: Institutions and Growth January 26, 2010 26