Institutions

Question 1

What are institutions, and what is the difference between formal and informal institutions?

Answer 1

Institutions are the rules, norms, and structures that shape human behaviour and interactions.

• Formal institutions are official, codified rules like laws, constitutions, and property rights.
• Informal institutions are unwritten social norms, traditions, and cultural practices.

Question 2

Inclusive Institution

Answer 2

• distribute power broadly
• secure property right –> encourage investment and long-term planning
• access to education –> higher productivity and innovation
• open markets and low entry barriers –> promotes competition, innovation, and efficient allocation

Question 3

Extractive institution

Answer 3

• Concentrated political power –> limits innovation and suppresses reform
• Weak or selective property rights –> discourages investment
• Corruption and lack of rule of law –> increases uncertainty

Question 4

Why are extractive institutions so prevalent throughout
history and even today?

Answer 4

Elites choose extractive institutions to maintain control. These institutions block innovation and competition. Growth is suppressed, and the system remains stagnant

Economic losers: those who hold monopolies or special privileges fear losing income due to competition or new technology.
Political losers: those with unconstrained power fear losing control if institutions become more inclusive and democratic.

Question 5

Can Growth Happen Under Extractive Institutions?

Answer 5

YES

1. Elite-controlled high-productivity sectors: when resources are allocated efficiently, but only in sectors controlled by the elite (Soviet Union with state-planned industry)
2. Controlled economic liberalisation: allow limited inclusive economic institutions to boost growth—but still maintain political control (China’s economic reforms under Communist Party control)

BUT lack of innovation –> limit long-term growth

Question 6

Peru’s mining mita

Dell (2010)

Answer 6

• example of extractive institutions
• forced labour system requiring indigenous communities to send a portion of their male population to work in mines under harsh conditions
• extracted labour and wealth from the local population without offering economic benefits
• long term negative impacts
• data show lower household consumption and higher rates of stunted growth in children –> persistent effect

Question 7

To what extent can historical factors explain cross-country differences in economic development today? Discuss with reference to the role of institutions discussed by Acemoglue, Johnson and Robinson (2001).

Required Reading

Answer 7

Data: Historical mortality data from 17th–19th century military and clergy records.

Method: “Average expropriation risk” as a measure of institutional quality. Use settler mortality rates (i.e., death rates of European colonists from disease) as an instrument for the quality of current institutions

• High settler mortality: Europeans created extractive institutions (exploit labour, control land and resources) (e.g., Congo, India).
• Low settler mortality: Europeans created inclusive institutions (e.g., U.S., Canada, Australia).

Findings: Strong positive relationship between historical institutional quality and present-day income levels

• Explains over 75% of the variation in income per capita across countries
• Causal relationship established through IV
• Geography does not explain income differences once institutions are controlled for

Question 8

Why have formerly rich societies become poor and formerly poor societies become rich? Discuss with reference to the concept of ‘reversal of fortune’ and the role of institutions in long-run development.

Required Reading

Acemoglue, Johnson and Robinson (2002)

Answer 8

• Reversal of fortune only occurred in colonised regions (not in non-colonizsd countries like Japan or Thailand).
• Places where extractive institutions were set up are poor today (e.g., Bolivia, Congo).
• Places where inclusive institutions were established are rich today (e.g., U.S., Canada).
• Shows institutions are the key driver of long-term development—not geography or culture.

Societies that were rich in 1500 (e.g., India, Peru) are relatively poor today, while those that were poor in 1500 (e.g., USA, Canada) are now rich.

Question 9

What are the key argument, method, and findings of Nunn (2008) on the impact of Africa’s slave trades on economic development?

Required Reading

Answer 9

Data: number of slaves exported from different African regions
IV: distance from the coast (confirms causal relationship)

Findings: Strong negative relationship

• more slave exports → lower GDP per capita today
• 1 s.d. increase in the number of slaves exported per capita is associated with a decrease in GDP per capita today of around 50%.
• Countries and ethnic regions that exported more slaves are significantly poorer today.

Political instability, distrust, weakened institutions, and social fragmentation, which persistently undermined development.

Question 10

What are the key empirical findings of Nunn and Wantchekon (2011) on the slave trade and mistrust in Africa?

Required Reading

Answer 10

Data: Slave export data by ethnic group

Method: Regress individual-level trust on the historical number of slaves exported by their ethnic group. Control for individual characteristics, country fixed effects, and regional characteristics.

IV: historical distance from the coast

Findings: Slave exports strongly predict lower trust

• 1 SD increase in slave exports is associated with a 13 %pt decrease in the probability of trusting others
• Effects are broad and persistent

Implications:

• Weaken social cohesion, reduce cooperation, and undermine the effectiveness of institutions