Empirical Evidence

Question 1

What’s expropriation? (contextual question)

Answer 1

The action by the state or an authority of taking property from its owner for public use or benefit.

Question 2

Explain security of Property Rights (institutions Data) + examples.

Answer 2

-Protection against expropriation

0= high-risk expropriation = extractive state

10 = low risk expropriation = inclusive state (with rule of law, well-enforced property rights, etc.)

Ex: -Zaire = 3.5 (65% chance of expropriation)
-USA = 10
-if you have index of 0 there is no incentive to invest because your earnings are 100% likely to get expropriated

Question 3

Index of 10 (security of property rights)

Answer 3

protection for a broad cross section of society= inclusive institutions

Question 4

Index of 0 (security of property rights)

Answer 4

• extractive instituions
  -very good for the elites within a society

Question 5

Explain the Acemoglu, Johnson and Robinson (2005)

Answer 5

-cross-country regressions of security of property rights
-found that the positive relationship between higher index and higher gdp would lead us to believe that inclusive institutions lead to higher GDP

• Possible Problems: Potential reverse causality–> as you become wealthier and your country becomes wealthier they can afford better institutions
  -Third variable prime potential

Question 6

Montesquieu on Geography

Answer 6

• Warm climate makes people unfit to be governed by democracy

Question 7

Explain the Korean Natural Experiment

Answer 7

-Korea under Japanese occupation until end of WWII
-soviet forces entered from the north
-US worried of complete take-over and supported separatist leader in the south
-in 1948: South korea and north korea created
-very different institutions
-North: soviet socialism, abolition of private property and capital, no market, decisions by the communist state
-South: private property, government used markets and private incentives
-they both has the same geography and natural resources and the same culture
-by 1980 the south was way more developed than the north

Question 8

The Korean Experiment, explain why the North is worse off?

Answer 8

because ruling elite look after their own interests at the expense of the population at large (extractive institutes persist)

-this is the main reason by ‘bad’ institutions persist

Question 9

Korea Natural Experiment–> problems with analysis

Answer 9

• 1 sample size
  -compares market-oriented economy to communism
  -doesnt say which institution matter within market-oriented economy (would need a change in institutions, variation in types of institutes and no change in geography or culture)

Question 10

Explain the Colonial Experiment

Answer 10

(picks up after “guns, germs and steel”)
15th century 1492 and onward, europeans colonized much of the world
-colonization transformed institutions
-very diff institutions in diff places: northeast america vs caribbean plantation societies

Question 11

Reversal of fortunes

Answer 11

*Positive correlation between urbanization rates and GDP.

Rich civilizations in 1500 (mughals in india, aztecs in mexico, incas mostly in peru, ecuador, bolivia and southeast asia) are the poorer societies today
-less developed places in 1500 (north america, new zealand, australia, the southern cone of latin america) are much richer today
-countries that are rich now were the least urbanized in 1500

Question 12

Reversal of fortunes question 1

Answer 12

-is this merely a result driven by the neo-europes?
-answer: no, correlation still holds when excluding neo-european countries

Question 13

Reversal of fortunes question 2

Answer 13

were fortunes simply reversed because of the identity of the colonizer?
-British: liberal, protestant (US, Canada)
-Spanish: mercantilist (iliberal economy) catholic (peru, bolivia)
-Answer: No, think about the rest of the examples–> not dependent on identity of colonizer

Question 14

Reversal of fortunes question 3

Answer 14

is the reversal of fortunes a ‘normal’ pattern? one that would have occurred even without colonization?

Question 15

Reversal of Fortunes: Climate

Answer 15

No, in 1500 it was the countries in the tropics that were prosperous

Question 16

Reversal of Fortunes: Disease

Answer 16

“countries in the tropics have more disease”–> so no

Question 17

Reversal of Fortunes: Guns Germs and steel

Answer 17

-Food package + agricultural tools only work at the same latitude–> thus worked in US, Argentina, Australia, but not Peru, Mexico, West Africa
-Plus, timing of reversal was 1800 (industrial revolution) no in 1500!
-must be industrial package not food package

Question 18

What do inclusive institutions entail?

Answer 18

Two functions (facilitating exchange + restrain powerful actors)
FOR ALL
- Unbiased system of law
- Secure property rights
- Provision of public services that level playing field
- Permit entry of new businesses (creative destruction)
- Allow people to choose their careers

Question 19

What do extractive institutions entail?

Answer 19

same functions as inclusive but only for A FEW elite (goal: extract incomes and wealth
from one subset of society to benefit a different subset)
Ex: Slavery in Caribbean plantations from Africa, in Indonesia (by
Dutch)

Question 20

What does reversal of Functions entail for Institutions and Population

Answer 20

-The higher the initial population density, the worse are institutions
-in densely populated areas, it is much easier to enslave people (or keep using extractive institutions i.e aztecs)
-in sparsely settled ares, with small mobile groups, it is much more difficult to enslave people, see the Virginia company example

Question 21

Explain the Virginia Company.

Answer 21

-In North America the first settlers tried to enslaves the local population (they were inspired by cores and pizarro)
-Idea–> capture local chief and us him to coerce the population into producing food and for the, but they never saw the local chief
-when this failed–> they attempted to enslave their own: Indentured servants (forced labor)
-ppl still ran away cuz it was so sparsely settled to it was easy to escape
-enslaving at the time was not possible
-So, to attract settlers the virginia company promised 50 acres for each family (inclusive economic institution)
-land was abundant due to low population density, so this promise was not a problem
-beginning of private property rights

Question 22

Explanation of Reversal of Fortunes

Answer 22

-sparsely settled areas were difficult to have extractive institutions
-densely populated areas (rich)–> extractive institutions–> poor now
-Sparsely populated (poor)–> inclusive institutions–> rich now

Question 23

Timing of economic institutions (reversal of fortunes)

Answer 23

Good economic institutions become more important when there are major new investment opportunities
-the opportunity to industrialize was the major investment opportunity of the nineteenth century
-good economic institutions allowed industrialization

Question 24

Reversal of Fortunes Summary

Answer 24

-it was consistent with economic institutions
-not consistent with culture, geography, climate or guns germs and steel

Question 25

Explain the natural experiment (mortality)

Answer 25

-settlers had high mortality rates in Africa/Asia
-Malaria and yellow fever caused 80% of european deaths in colonies
-this feasibility of settlement influences quality of institutions
-high mortality of settlers: set up extractive states for the short run, your likelihood of dying is much higher so its a “grab and go” mentality
-low mortality settlers: set up good institutions for the long run, you plan on staying
-these extractive institutions persisted even after independence

Question 26

What is creative Destruction

Answer 26

-Newer, more efficient firms exist and displace older, less efficient firms
-happens naturally with inclusive institutions