L3 - institutions Flashcards
(16 cards)
why geography isn’t enough (review)
Nigeria vs Botswana: both have resources
- Nigeria: civil war, coups, 30y authoritarianism, high in corruption perceptions rank, low property rights
- Botswana the opposite: 0,0,0, low and high
government effectiveness (politics) and development correlate
but so do geography and development
-> which is the cause?
questions + conclusions
- what is an institution
- the RULES that shape economic and political incentives - how economic institutions affect development
- rules PROTECTING PROPERTY RIGHTS boost investment and growth
- but institutional STRENGTH matters more than written rules - how political institutions (democracy) affect development
- democracy sometimes makes institutions STRONGER AND MORE CREDIBLE, protecting investments
- but so can authoritarian regimes who are SECURE IN POWER, OR FACE EXTERNAL THREATS
- Western countries had VERY IMPERFECT DEMOCRACY when they developed
- democracy matters more for HEALTH AND EDUCATION
what is an institution?
an institution is a rule,
institutions
= the rules of the game in a society
(North)
- the humanly devised constraints that shape human interaction
- (defines rights, expectations etc.)
- oppose obligations, rights
e.g. “no person shall be elected to office of the president more than twice”, “right to free speech”, “compulsory voting in Brazil”
- !!!money is an institution: in itself has no value, we accept it because we know we can use it (no intrinsic value)
!institutions do not equal organizations
- organization =European Central Bank
- institution = “shall have the exclusive right to authorise the issue of euro banknotes within the Union”
institutions can be
- formal: written and official sanctions (e.g. laws, constitutions)
- informal: unwritten, social sanctions (by people, judgement, shouting, etc.)
institutions change INCENTIVES, reduce UNCERTAINTY and ALTER PEOPLE’S BEHAVIOUR
- I don’t A BECAUSE B
institutions limit our individual freedom
- for Sen, development IS freedom
- so how do institutions promote development?
how eco institutions affect development
- where does eco growth come from?
institutions ->
- human capital (education)
- capital (machines)
- technology
-> productivity (being good at producing something specific: being able to make more/better with less)
-> GDP per capita
institutions alter opportunities and incentives to invest in capital, human capital and technology
how eco institutions affect development
- inclusive eco institutions
“Those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills”
- Acemoglu and Robinson (2012)
institutions that ENCOURAGE INVESTMENT
- the rule of law
- private property
- state guarantee of education, healthcare
- universal, nondiscriminatory policies
limiting some (negative) freedoms creates other (positive) freedoms:
- if you can’t steal, I feel safe to purchase a car
- if schools and exams are inspected, my qualifications convince employers to give me a job
how eco institutions affect dev.
- extractive eco institutions
- expropriation: state takes property of private actors (e.g. Venezuela: government took oil assets without proper compensation)
- slavery (can’t invest + why would a slave invest in anything if they will not benefit from it?)
- no opportunity for education (why invest in education if you know jobs aren’t given based on that, if it is corrupt?)
how eco institutions affect dev.
- why don’t all countries choose inclusive institutions?
inclusive institutions grow the pie
but they also change how the pie is divided:
- allowing new markets and tech -> shrinks existing industries
- current elite usually profits from old industries
(more reliable energy grid -> people don’t profit of selling generators and fuel for it)
and they also empower citizens:
- wealthier, more educated citizens tend to demand democracy (keep the people poor and protect political power, even when giving up some potential economic gains by allowing your econ to grow)
- threatening the power of current elites
how eco institutions affect dev.
- can inclusive eco institutions explain North vs South Korea?
South has inclusive eco institutions: markets, protection private property
-> investment
+ economic development South-Korea -> protests for democracy -> democratization
North no point in investing: everything is decided by the state and they can take everything at any time
geography can’t explain the difference
how eco institutions affect dev.
- can inclusive eco institutions explain Botswana vs Nigeria?
2 resource economies
yes:
- expropriation and corruption are more common in Nigeria
- investment risks are much higher in Nigeria: high risk of expropriation
no: the written/formal rules are the same
- Botswana: no property of any description shall be compulsorily taken possession of…
- Nigeria: no moveable property or any interest in an immovable property shall be taken possessions of compulsorily
-> what explains the difference? institutional strengths
definition: institutional strength
= the degree to which (written) rules are complied with in practice
strong institutions depend on:
- enforcement by the State (e.g. police and judges)
- compliance by Society
it is not (only) the rules themselves that matter, it is the compliance and enforcement
how political institutions (democracy) affect development
- relation eco and political institutions
strength of inclusive economic institutions depends on inclusive political institutions:
- centralized state to coordinate and enforce
- pluralism (variety of interests in power)/democracy: distributed power within society
- minimum civic rights, institutional checks and balances
- ‘precondition’ for development
why do we need democracy?
- because pressure from voters encourages the IMPLEMENTATION of inclusive economic institutions and holds ACCOUNTABLE leaders who extract (punishes rule breakers)
- because inclusive economic institutions are not CREDIBLE under authoritarianism
- would you trust Kim Jong-un if he passed a law protecting your property?
counterargument: democracy harms development
(rewatch, ongeveer t laatste half uur, iets erna)
- elections create volatile economic rules (at least with a dictator you know what to expect, no fragile coalitions etc.)
- democracies tax the wealthy (Median voter theorem)
- invest in countries with low taxes, bc higher return BUT positive relation democracy and taxes (bc median voters are poor thus want redistribution) - need to ‘insulate’ policy-making from ‘populist’ demands
- have t pay-off protesters, have to address it (authoritarian regimes can just shoot and ignore them)
- organised groups can protest and get their way, distorting policies
democracies can’t make the tough long-term choices
E.g. Bolsonaro, Lula back and forth -> volatile policies - > doesn’t incentivize investment
what institutions did developed countries use to get rich in the 18th-20th centuries?
- full democracy not until mid-C20 (1971 in Switzerland)
- institutional improvements FOLLOWED DEVELOPMENT (slowly)
- developing countries today have much BETTER institutions than developed countries had historically … but slower growth
1820 UK vs India 2002
- GDP per capita kind of the same
- India 2002: universal suffrage, central bank, income tax, bankruptcy law, meritocratic civil service, labor regulations
- UK 1820 had none of this
-> why can’t India grow with all these political and economic institutions while the UK could?
the story does not fit with history
the evidence: does democracy promote development?
democracy is good for your health:
(mostly because of accountability)
- increases life expectancy
-greater calorie consumption - longer democracies reduce infant mortality
good for education:
*quality sometimes still questionable
- more spending
- teacher-student ratios improve
- school fees are abolished
- enrollment increases
- literacy rates increase
- even in education some authoritarian countries score well, e.g. Shanghai-China
for the econ?
- 50/50 of studies said authoritarian/democracy is better, depending on which country and what time period
- not at all clear bc e.g. China, Singapore, Maleysia
- recent analysis (Acemogly and Robinson) suggests democracy is slightly better on average
- variation is huge: authoritarian countries either really low growth or huge growth
- some authoritarian countries have developed faster than democracies: China e.g.
how did China develop so quickly? with explicitly authoritarian system?
China: inclusive eco institutions + centralized state BUT NOT political pluralism/democracy
they were politically stable
- elite did not fear inclusive eco institutions:
- elite believed they could GAIN FROM THE ECONOMIC REFORM
- Deng Xiaoping was a reformer - he could profit from new industries
- degrading the support of Mao’s allies
- ‘correcting the mistakes of the cultural revolution’
- ELITE BELIEVED THEY COULD DEVELOP WITHOUT LOSING POLITICAL POWER: e.g. uncontested control of the armed forces, e.g. using technology to limit citizens’ demands and collective action
- EXTERNAL THREAT FORCES ELITES TO BUILD THE COUNTRY’S DEFENCE CAPACITY (needs money), e.g. Japan, South Korea, Taiwan - how did China convince people to invest despite authoritarianism?
- the elite chose not to extract: developing a reputation quickly (the Chinese Communist party has been around for a long time: have a long reputation of not expropriating)
- the elite’s promises to maintain inclusive economic institutions were credible: e.g. they were backed by a lnog-lasting organization
(the Chinese Communist party has been around for a long time: have a long reputation of not expropriating)
