POLITICAL ECONOMY Economic

FOR Institutions (2)

DEVELOPMENT
COMPARING CHARACTERISTICS AMONG
DEVELOPING COUNTRIES
Ten points of comparison - both among developing countries,
and between developing and developed countries:
1. Lower levels of income and productivity
2. Lower levels of human capital
3. Higher levels of inequality and absolute poverty
4. Higher population growth rates
5. Greater social fractionalization
6. Larger rural population - rapid migration to cities
7. Lower levels of industrialization and manufactured
exports
8. Adverse geography
9. Underdeveloped financial and other markets
Income & Productivity - The 12 Most- and
Least- Populated Countries and Their Per
Capita Income, 2017

Source: World Bank World Development

Indicators
Human Capital Attainments - Under-5 Mortality
Rates, 1990 and 2017

Source: World Development Indicators

Human Capital Attainments - Primary School
Enrolment and Pupil–Teacher Ratios, 2017

Source: World Development Indicators

Population Growth - Crude Birth Rates
Around the World, 2018

Source: Population Reference Bureau: Births per 1,000

population
 Share of the Population Employed in the Agricultural,
Industrial, and Service Sectors in Selected Countries, 1990–
92 and 2008– 2011 (%)

Source: World Bank, World Development Indicators, 2013 (Washington, D.c.: World Bank, 2013), tab.
2.3
 ARE LIVING STANDARDS CONVERGING
ACROSS COUNTRIES?
A Great Divergence followed the Industrial
Revolution Two reasons to think (re-)convergence
likely
1) Diminishing returns to capital (though as economies develop they often
find ways to compensate)
2) Diffusion of ideas across countries, so can skip trial and error and grow
fast while catching up
Latter elated to “advantages of backwardness” (Gerschenkron), or “the
latecomer’s advantage”
But - at least until this century - evidence of unconditional national average
income
convergence has been unconvincing
Continued evidence of divergence between middle and low income countries
There is also evidence of “per capita income convergence,” weighting changes
in per capita income by population size
Divergence – Convergence Trend
The growth of real output per person since
1750

Source: Data from Maddison Project

Database
Relative Country Convergence: World, Developing
Countries, and OECD

Data Source: Penn World

Table
Absolute Income Convergence vs Growth
Convergence

Data Source: Penn World

Table
SOURCES OF
PROSPERITY (1)
 Vast differences in prosperity across countries today.
– Income per capita in sub-Saharan Africa on average 1/20th of
U.S. income per capita
– In Mali, Democratic Republic of the Congo (Zaire), and
Ethiopia, 1/35th of U.S. income per capita.
 Why?
 Standard economic answers:
– Physical capital differences (poor countries don’t save
enough)
– Human capital differences (poor countries don’t invest enough in
education and skills)
– “Technology” differences (poor countries don’t invest enough in
R&D and technology adoption, and don’t organize their
production efficiently)
SOURCES OF
PROSPERITY (2)
 These are, however, proximate causes of differences in
prosperity.
– Why do some countries invest less in physical and human
capital?
– Why do some countries fail to adopt new technologies and to
organize production efficiency?
 The answer to these questions is related to the
fundamental causes of differences in prosperity.
 Potential fundamental causes:
– Institutions (humanly-devised rules shaping incentives)
– Geography (exogenous differences of environment)
– Culture (differences in beliefs, attitudes and preferences)
WHAT ARE
INSTITUTIONS? (1)
 Institutions: the rules of the game in economic, political
and social interactions.
– Institutions determine “social organization”
 "Institutions are the rules of the game in a society or,
more formally, are the humanly devised constraints that
shape human interaction.“ North (1990, p. 3)
 Key point: institutions
– are humanly devised
– set constraints
– shape incentives
WHAT ARE
INSTITUTIONS? (2)
– Economic institutions: e.g., property rights, contract enforcement, etc.
 shape economic incentives, contracting possibilities, distribution.
– Political institutions: e.g., form of gov., constraints on politicians and
elites, separation of powers, etc.
 shape political incentives and distribution of political power.

 Important distinction between:

– Formal institutions: codified rules, e.g. in the constitution
– Informal institutions: related to how formal institutions are used,
to distribution of power, social norms, and equilibrium.
 Constitutions in U.S. and many Latin American countries similar, but
the practice of politics, and constraints on presidents and elites very
different.
 Why? Because distribution of political power can be very different
even when formal institutions are similar.
INSTITUTIONAL
VARIATION

 Big differences in economic and political

institutions across countries.
– Enforcement of property rights.
– Legal systems.
– Corruption.
– Entry barriers.
– Democracy vs. dictatorship.
– Constraints on politicians and political elites.
– Electoral rules in democracy.
INCLUSIVE VS EXCLUSIVE
INSTITUTIONS
‒ Political institutions  shape who has power in society  how
power is used
‒ Absolutist Political Institutions: power distribution is narrow &
unconstrained
‒ Pluralist Political Institutions: power distribution is broad & constrained
‒ Effective centralized state vs failed state
‒ Effective centralized state + Pluralist political institutions = Inclusive
Political Institutions  Inclusive Economic Institutions  Successful
development performance
‒ Exclusive Political Institutions  power to narrow elites  few
restrictions 
Extractive Economic Institutions
ECONOMIC INSTITUTIONS AND ECONOMIC PERFORMANCE
(1)

.
LUX
USA
SGP
HKG JPN
CHE
10 AUSITA
KWATR ISR INBRNLD
SWE FNGIR
QAT BHR BDCFAEIS N
ZLR AULNA
E PRTK NOR ESP
MLT GRC KOR T

OMN BHSSAUCHL CZE

ARG
Log GDP per capita, PPP, in 1995

URVYEN MEX G AMBYS

PAN ZAF BW A HUN
CRI COTLTOTHA BRA
IRN
TUR POL
TUENCU RUS BGR
GTM PER DOM DZA ROM
PHL PRYJAM IDN
SUR SYR JORMAR
8 SLV
BOL GUY
EGY
CHN
AGO
HND
NIC ZLWK
COG CMGRIN CIV
SDN SA
E
PEANKGVNM
HA MNG IND
TGO GMB
HTI
KEN
UGA
ZAR BGD NGA ZMB
MB D NER
FAG YEM
MLI
M
O
SLE
ETH Z
M
6 W
I
4 6 10
TZ
A
8
Avg. Protection Against Risk of Expropriation, 1985-95
ECONOMIC INSTITUTIONS AND ECONOMIC PERFORMANCE
(2)

USA SGP CHE

BEJLPN HKG AUT NOR CANDNK
10 FRA
ITA ADUESUG
ISR NLSDFWN
I
NZL
ESP E
BR IRL
KOR PRT
GRC CHL
SVN
CZE
Log GDP per capita, PPP, in 1995

VEN ARG
URY
MEX ZAF MYS
SVK HUN
CPOAL THA BRA
LBTN POL
ECU N
TUN
DOM RUBSGRHRRO
UR
V PER
M LTUJO
KAZIDN LVPAHLJA
8 M
UKR BOL CEHGNY R
ARM LKA M
ZWE A
GHSAEN
R
PGAE VNINM
KO KEN D
UGA
NGA ZMB MDGBFA

ML MWI
I MOZ
TZA

6
0 .5 1
Control of Corruption
POLITICAL INSTITUTIONS AND ECONOMIC PERFORMANCE
(3)

.
LUX
USA
SGP CHE
10 FRA NDCAB PJ
SFGDNAWTIS
ONUIRAZ
SI NE
ULEBALLD
N
U RNIN
PRT
ESP TRK
RS
GEKOR
LCHL
SAU OMN
ARG RC
Log GDP per capita, PPP, in 1995

VEN
MURUY
MGAEB M ZW
X THA COLHB
S C PU
BRA
T T
IRN POL TUR
A YFSA
TUN RONI
DZA PER DOM
GTM ECU
JOR PRY JAM
FJI
SW Z IDN PHL
SYR MAR
8 C SLV
E
AGO BOL
ZW
G E HNDLKA
GIN H NIC
CIV CMR N S COG
SDN GHA MRT
Y LSO IND
EN PAKCOM GMB
TGO
G CAF HTI BEN
UGA
ZCARD U
KEN
NT GA BFA Y ZMB MDG BGDNPL
NER
YEM
BDI MLI
RW A MW I MOZ
SLE TZA
ETH
6
0 2 4 6 8
Constraint on Exec. 1990s
GEOGRAPHY HYPOTHESIS:
MONTESQUIEU
 Montesquieu:
– “The heat of the climate can be so excessive that the body there
will be absolutely without strength. So, prostration will pass
even to the spirit; no curiosity, no noble enterprise, no generous
sentiment; inclinations will all be passive there; laziness there
will be happiness,”
– "People are ... more vigorous in cold climates. The inhabitants of
warm countries are, like old men, timorous; the people in cold
countries are, like young men, brave".
 Moreover, Montesquieu argues that lazy people tend to be
governed by despots, while vigorous people could be
governed in democracies; thus hot climates are conducive
to authoritarianism and despotism.
GEOGRAPHY HYPOTHESIS: MODERN
VERSIONS
 Jared Diamond:
– Importance of geographic and ecological differences in
agricultural technology and availability of crops and animals.
 Jeff Sachs:
– "Economies in tropical ecozones are nearly everywhere poor, while those in
temperate ecozones are generally rich" because "Certain parts of the world
are geographically favored. Geographical advantages might include access
to key natural resources, access to the coastline and sea…, advantageous
conditions for agriculture, advantageous conditions for human health."
– "Tropical agriculture faces several problems that lead to reduced
productivity of perennial crops in general and of staple food crops in
particular" …
– "The burden of infectious disease is similarly higher in the tropics than in
the temperate zones"
MONTESQUIEU’S
STORY?
.
USA LUX

SGP HKG QAT CHE DNK NOR

AUS JPN
ITA IRL SWEFINISL
10 ARE ISR ECSNPZL
KORGR PRT
BRB MLT
BHSBHR KWT
ARG CZE
SAU
Log GDP per capita, PPP, in 1995

MUS SVHNUN
SVK EST
MYS MEX CHL URY
TTO OMN LBY ZAF POBLLR
LTULVA RUS
FJI
THA KNA BWA TUR
GAB COL BCRR IRNTUN
VEPNAN DOM DZA BGRHROVMKAZ
AI
PER PRY
GUY LCA NAM SWZ GEO
SLV
GRPDDHMLAGJAM
T EGY JOMRAR CHN TKM UKR
BLZ SYR
IDN LKA M AZE
8 ECU
VCTHND NIC
BTN
LSO ARM MDA
IRQ
UZB YUG
BOL PAK
PNG VNM Z MNR W
GHA SEN T
HTI
D E BGD BIH
KEN CPV NPL
V
CMCRAT GIN MMR
USG TJK
GMBSDN MOZ
COG GCLBR
OFI BEN BFATCD
TPA
NGDAGJNIMBWINER
YZMML
EIMDG AFG
RWA TZA CAOGMO
ZAR BDI ETH MB
SLE
SOM

6
0 .2 .4 .6 .8
Latitude
NORTH KOREA VS SOUTH
KOREA
 Korea: economically, culturally and ethnically homogeneous at the
end of WWII.
 If anything, the North more industrialized.
 “Exogenous” separation of North and South, with radically
different political and economic institutions.
– Exogenous in the sense that institutional outcomes not related to the
economic, cultural or geographic conditions in North and South.
– Approximating an experiment where similar subjects are “treated”
differently.
 Big differences in economic and political institutions.
– Communism (planned economy) in the North.
– Capitalism, albeit with government intervention and early on without
democracy, in the South.
 Huge differences.
NORTH AND SOUTH
KOREA
GDPper
1400
0
capita
1200
0

1000
0

8000
SouthKorea
NorthKorea
6000

4000

2000

0
1950 1960 1970 1980 1990 1998
THE ROLE OF
CULTURE
 Can all this be related to culture?
 What is culture?
– Culture is a relatively fixed characteristic of a group or nation,
affecting beliefs and preferences. Example: religion
 Useful distinction between culture and informal institutions.
 Informal institutions are related to how society shapes incentives, and
are related to equilibrium of a given game (typically defined by formal
institutions, distribution of income, political power etc.).
 Informal institutions are not fixed, and change with economic
conditions and distribution of power, though they are typically
highly persistent.
 Culture not useful in understanding the Korean divergence
– North and South were culturally homogeneous.
THE ROLE OF
CULTURE (2)

 The Chinese experience informative about the role of

culture versus institutions.
– China, Hong Kong, Singapore and Taiwan many cultural and
ethnic similarities.
– While China adopted state planning and communist political
institutions, Hong Kong, Singapore and Taiwan followed a
capitalist path with relatively well-enforced property rights.
– While Hong Kong, Singapore and Taiwan prospered, China
stagnated.
– After the Mao’s death and 1978 reforms, especially the introduction
of some basic property rights, changes in economic incentives in
China, and now very rapid growth rate.
ROLE OF
CULTURE (3)

GDP per capita in China, Taiwan, and Hong Kong, 1950-

2001
25,000

20,000

15,000

10,000

5,000

China Taiwan Hong Kong

Singapore
Long-run Causes of Comparative Development - Schematic
Representation of Leading Theories of Comparative
Development
 EXPLAINING LONG-RUN CAUSES OF
COMPARATIVE DEVELOPMENT: FIG. 2.10
SUMMARY
Arrow 1: Geography: Important in pre-modern era; limited effect in
modern era
Arrow 2: However, exogenous geography affected how colonists
viewed
opportunities they could exploit in colonies; and so in part…
Arrow 3: Geography was a determinant of whether colonists created
extractive or inclusive institutions; this fact facilitates analysis of role
of institutions
Arrow 4: Geography presumably affected indigenous institutions…
Arrow 5: A Note: Difficult to quantify; but colonial institutions may
have been influenced by indigenous institutions
Arrow 6: Geography affected comparative advantages: resources
and people
EXPLAINING LONG-RUN CAUSES OF
COMPARATIVE DEVELOPMENT: FIG. 2.10
SUMMARY (CONTINUED)
Arrow 7: Geography helps explain “motivation” for institutions:
extractive when comparative advantage (CA) was in activities with (a
range of) increasing returns (e.g. sugar cane, mining); inclusive when CA
was in constant returns activities (e.g. wheat)
Arrow 8-9: Reflects that state of development of the colonizer also had
an
effect
Arrow 10: Key: Institutions were persistent from colonial to post-
colonial periods
Arrow 11: Bad institutions created high inequality which also had bad
effects on growth and development outcomes
Arrow 12: Especially difficult to reform institutions with high inequality
Results (arrows 14-22): “Bad” institutions and high inequality led to
slower growth and slow improvement of human capital and other
development outcomes