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2 Development Macro Lectures 1
2 Development Macro Lectures 1
2 Development Macro Lectures 1
Sharun W. Mukand
The Argument
Institutions are not typically chosen for the good of society, but
imposed by groups with political power for their economic
consequences.
Why?
Standard economic answers:
Institutional variation
Big
.
HKG
10
ARE
KW
T
ARG
PAN
IRN
GTM
PER
ISR
QAT BHR
MLT
GRC
CHL
BHS
SAU
OMN
VEN
URY
MEX GAB
MYS
ZAF
BWA
CRI COL
THA BRA
TTO
TURPOL
TUN
ECU
DOM DZA
ROM
PRY
JAM
JOR
PHL
IDN
MAR
SYR
EGY
BOLGUY
CHN
AGO
LKA
ZW
E
HND
NIC
CMR
GIN
CIV
COG
SEN
PAKGHA
MNG
VNM
TGO
KEN
UGA
BGD
BFA
MDG
NGA
ZMB
NER
YEM
MOZ MW I
KOR
CZE
HUN
RUS
BGR
SUR SLV
8
SDN
HTI
ZAR
MLI
SLE
ETH
6
4
LUX
USA
CHE
JPNNOR
DNK
BEL
CAN
AUT
FRA
AUS
ITA EISL
GBRNLD
SW
FIN
IRL
NZL
ESP
PRT
SGP
IND
GMB
TZA
6
8
Avg. Protection Against Risk of Expropriation, 1985-95
10
L o g G D P p er ca pita , P P P, in 1 9 9 5
10
KOR
ARG
VEN
MEX
PAN
COL
THA
TUR
LBN
ECU
BGR
HRV
PER
DOM RUS ROM
USA
HKG
NOR
FRA AUT AUS
DEU
GBR
ISR
IRL
ESP
PRT
JPN
BEL
ITA
JAM
LVA
PHL
EGY
BOL CHN
ZW E LKA
KAZ
IDN
UKR
ARM
GRC
CZE
URY
ZAF
SVK
BRA
SGPCHE
DNK
CAN
NLD
SW
FINE
NZL
CHL
SVN
MYS
HUN
POL
TUN
LTUJOR
MAR
SEN
GHA
IND
VNM
GEO
PAK
KEN
NGA
UGA
BFA
ZMB MDG
MLI
MOZ
MW I
TZA
6
0
.5
Control of Corruption
.
LUX
USA
CHE
JPN
NOR
DNK
BEL
CAN
AUT
ISL
DEU
AUS
NLD
ITA
GBR
SWE
FIN
ISR
IRL
NZL
ESP
PRT
KOR
GRC
CHL
SGP
10
FRA
DZA
SWZ
SYR
ZAR
TCD
NGA
JOR
MAR
IDN
GIN
SDN
TGO
PER
EGY
CHN GUY
AGO
ZWE
GHA
UGA
THA
TUN
KEN
LSO
CAF
BFA
POL
GTM
MW I
MOZ
SLE
DOM
PRY
SLV
LKA
HND
NIC
COG COM
PAK
GMB
HTI
ZMB
YEM
BDI
RWA
MUS
URY
MYS
ZAF
BWA
PAN
COL
HUN
CRI
TTO
BRA
TUR
ECU
FJI
JAM
PHL
BOL
IND
BEN
MDG
NPL
BGD
NER
MLI
TZA
ETH
6
0
10
ARG
VEN
MEX
GAB
4
Constraint on Executive in 1990s
Montesquieus story:
Identification problem.
11
Geography hypothesis:
Montesquieu
Montesquieu:
12
Geography hypothesis:
modern versions
Jared Diamond:
13
Jeff Sachs:
14
Diamond (contd.)
15
Jared Diamond
16
17
18
Montesquieus story?
.
LUX
USA
SGP
HKG QAT
AUS
10
ARE
ISR
BHS
BHR KWT
BRB
JPN
CHE
NOR
AUT BEL
FRA
NLD DNK CAN
ISL
DEU
FIN
GBR
SW E
ITA
IRL
ESP
NZL
GRC
KOR
PRT
MLT
ARG
CZE
SVN
SAU
HUN
EST
MUS
SVK
CHL
MYS
MEX
URY
TTO
POL
OMN LBY ZAF
BLR LTU RUS
LVA
FJI
THAKNA
TUR
BRA
CRI
TUN
BWA
IRN
GAB COL VEN
ROM
BGR
PAN
DOM
KAZ
HRV
DZA
PER LCA
PRY
GEO
GUY
NAM SW Z
PHL
GTM
GRD
DMA
EGY
SLV
UKR
TKM
JAM
MARCHN
JOR
BLZ
LKA
SYR
IDN
ECU
AZE
BTN
VCT
HND
MDA
ARM
NIC
BOL
LSO IRQ
UZB YUG
PNG
ZWE
IND
PAK
MRT
VNM
GHA
CMR
SEN
CAF
CIV
BIH
TGO
BGD NPL
CPV HTI
KEN
GIN
MMR
STP
UGA
TJK
GMB
SDN MOZ
LBR BEN BFA
TCD
COG
NGA
GNB
MW INER
DJI
MLI MDG
ZMB
YEM
AFG
AGO
RWA TZA
COM
BDI
ZAR
ETH
SLE
SOM
6
0
19
.2
.4
Latitude
.6
.8
Reverse causality:
Attenuation bias:
20
1.
2.
3.
21
22
Huge differences.
23
24
12000
10000
8000
South Korea
North Korea
6000
4000
2000
0
1950
25
1960
1970
1980
1990
1998
Acemoglu-Johnson-Robinson (2001)
26
Empirical strategy
27
This correlation may exist because of an omitted explanator, a missmeasured explanator, an endogenous explanator, or a lagged dependent
variable among the explanators.
Empirical Strategy
Instrumental Variables: basic idea
28
29
30
1. Relevance:
2. Exogeneity:
31
A. Empirical strategy
AJR 2001
32
33
A. Empirical strategy
AJR
2001
34
(2)
35
those with political power are more likely to opt for good institutions when
they will benefit from property rights and investment opportunities
Better institutions arise when there are constraints on elites
The colonial context:
Europeans more likely to benefit from good institutions when they are a
significant fraction of the population, i.e., when they settle
Lower strata of Europeans place constraints on elites when there are
significant settlements. Thus: European settlements better institutions
Endogeneity of settlements
Or
36
37
38
where
39
40
Institutional Persistence
Good
law and order and private property established during the early
phases of colonialism in Australia, Canada, New Zealand, the
U.S., Hong Kong, and Singapore formed the basis of the current
day institutions
Bad
41
institutions:
institutions:
42
A. Empirical strategy
AJR
2001
43
(2)
44
.
10
AUS
NZL
USA
SGP
HKG
CAN
CHLBHS
ARG
VEN
URY
MEX
COL
CRI
TTO
BRA
MYS
ZAF
TUN
ECU
PER
DZA
GTM
PRY
MAR
EGY
SLV
BOL
SUR
GUY
PAN
DOM
JAM
IDN
AGO
LKA
HND
PAK IND
SDN
BGD
GAB
NIC
SEN
VNM
HTI
KEN
CMR
COG
UGA
ZAR
BFA
GIN
NER
CIV
GHA
TGO
MDG
GMB
NGA
MLI
TZA
SLE
6
2
45
-0.61
(0.13)
Latitude
-0.5
(0.15)
[0.25]
0.26
63
0.29
63
-0.37
(0.14)
2.34
(1.37)
-0.43
(0.19)
0.31
63
0.11
59
0.99
(0.17)
Latitude
1.11
(0.26)
47
1.43
(0.45)
-1.61
(1.57)
1.19
(0.39)
[0.09]
63
63
63
59
1.07
(0.27)
Temperature (p-value)
[0.71]
Humidity (p-value)
0.98
(0.17)
0.87
(0.32)
0.82
(0.22)
-0.014
(0.07)
62
63
-0.28
(0.59)
Life Expectancy
48
1.18
(0.84)
[0.64]
Malaria
Number of Observations
Yellow Fever
63
63
62
49
Mortality rates of local troops - very similar in different regions despite very large
differences in European mortality rates otherwise, a direct effect on human capital
and incomes
50
Use only variation due to yellow fever, which is now mostly eradicated,
thus, less likely to have direct effect.
Note not estimating the causal effect of being colonized vs. not colonized
(!!!)
51
Robustness checks
52
53
54
55
56
What is culture?
Culture is a relatively fixed characteristic of a group or nation,
affecting beliefs and preferences. Example: religion
57
58
59
3.
4.
60
61
62
63
64
Sources of inefficiency:
commitment problems in politics
65
Political Economy:
Commitment Problems
66
Endogenous (economic)
institutions from history
1.
2.
3.
4.
67
68
69
70
71
Why?
Power of insiders and state governments in Mexico, supported by
the dictatorship of Porfirio Diaz.
In 1789, the U.S. structure also similar.
Haber: [in the U.S. in late 18 th century] it was not in the
interest of state governments to charter large number of banks
and create a competitive market for banking services
Many U.S. politicians, including Alexander Hamilton, wanted to
create monopolies.
But expanding frontier, which caused interstate competition, and
universal male suffrage made this system unsustainable.
Insiders did not have enough political power to impose their
preferred institutions, which would have been inefficient for society
at large.
72
Why?
In Ghana and Zambia, but not in Kenya and Colombia,
farmers had little political power.
73
74
Key lesson:
political power economic institutions
75
2.
3.
76
When those holding political power also will benefit from well
enforced property rights (and financial development, free entry,
functioning markets etc.)
When there are relatively few resources to be extracted or exploited
using political power
When constraints on political power preclude expropriation or the
imposition of institutions detrimental to excluded groups.
77
Comp. Stat. 3: better institutions more likely to emerge when there are
constraints on political elites.
78
Comp Static 3 again: once political institutions constrain the use of political
power, good institutions likely to persist.
Conversely, when the state structure is highly hierarchical, coercive and
without checks and balances, persistent incentives to expropriate and fight
to control the state apparatus.
Problems of Oligarchy
79
Hierarchy of institutions
80
10
SGP
SAU
ARE
TGO
SYR
MMR
NGA
OMN
MAR
T
CIVKW
MW I JOR
CMR
GHA
SLE
ETH
EGY
TZA
TUN MOZ
YEM
SDN
ZMB
PAK
GTM
GNB
COG
ARG
DOM
LKA
HND
NIC
ISR
CYP
IND
MYS
BRA
CHL
BWA
TTO
COL
PNG
JAM
CRI
URY
ZAF
ECU
PAN
BOL
PHL
BGD
NER
SLV
MDG
HTI
ZAR
VEN
PRY
KEN
ZWE
SEN GUY
PER
AGO
UGA BFA
GAB
MEX
IDN
GIN DZA
MLI
SOM
IRQ
81
GMB
BHR
AUS
4
Constraint on Executive in 1990s
82
83
84
85
A theory of institutions
86
Source of persistence.
De jure power
(Political institutions)t
De facto powert
87
Economic institutionst
political
powert
Economic policiest
Political institutionst+1
88
700
600
500
Atlantic voyages per year
400
300
200
100
0
1300
89
1400
1500
1600
1700
1750
1800
120.00
Average population in Atlantic ports, Mediterranean ports, and West European cities
not ports (balanced panel)
100.00
80.00
60.00
40.00
20.00
0.00
1300
90
1400
1500
1600
1700
1750
1800
1850
91
92
Thus:
economic institutions (economic outcomes) political power.
political power economic institutions
But note the role of de facto political power in determining political
and economic institutions.
Merchants political power in the Civil War, in the Glorious
Revolution or in the Dutch revolt was not granted by political
institutions, but obtained because
the Atlantic shock improved their economic situation and their
greater incomes enabled them to acquire military power and
they could coordinate and solve the collective action problem.
93
Thus:
94
Policies and economic institutions looking after the interests of the rich
elite.
Challenge from excluded groups, threat of revolution, making
concessions necessary.
95
E.g.; in Britain extremely limited franchise with less than 2 percent of the
population with the vote.
96
Evidence so far that institutions important for crosscountry differences in prosperity and long-run growth.
97
OLS estimation biased; omitted variables, reverse causality and errorsin-variables problem.
We need a source of exogenous variation; an instrument for institutions.
Instrument: affects institutions, but no direct effect, or effect through
other channels, on economic performance.
Theory
Europeans more likely to benefit from good institutions when they are a
significant fraction of the population, i.e., when they settle
Lower strata of Europeans place constraints on elites when there are
significant settlements.
98
those with political power more likely to opt for good institutions when they
will benefit from property rights and investment opportunities.
better institutions more likely when there are constraints on elites.
99
100
Preview of results
101
NZL
USA
CAN
AUS
SGP
HKG
DNI
GMB
MYS
BRA
CHL
GAB
MEX BHS
TTO
COL
VEN
CRI
URYMAR
PRY
EGY
ECUDZA
TUNARG
MLT
ZAF
PAK
GUY
ETH MMR
LKA
PER
BOL
IND
JAM
PNG
CIV
TGO
TZA
CMR
VNM
DOM
KENSEN
PAN
HND
GTM
BGD
SLV
GIN
GHA
SLE
NGA
AGO
NIC
NER
SUR
GNB
COG
UGA
BFA
MDG
SDN
MLI
HTI
ZAR
102
5
Log Mortality
-0.61
(0.13)
Latitude
-0.5
(0.15)
[0.25]
0.26
63
0.29
63
-0.37
(0.14)
2.34
(1.37)
-0.43
(0.19)
0.31
63
0.11
59
.
10
AUS
NZL
USA
SGP
HKG
CAN
CHLBHS
ARG
VEN
URY
MEX
COL
CRI
TTO
BRA
MYS
ZAF
TUN
ECU
PER
DZA
GTM
PRY
MAR
EGY
SLV
BOL
SUR
GUY
PAN
DOM
JAM
IDN
AGO
LKA
HND
PAK IND
SDN
BGD
GAB
NIC
SEN
VNM
HTI
KEN
CMR
COG
UGA
ZAR
BFA
GIN
NER
CIV
GHA
TGO
MDG
GMB
NGA
MLI
TZA
SLE
6
2
104
0.99
(0.17)
Latitude
1.11
(0.26)
105
1.43
(0.45)
-1.61
(1.57)
1.19
(0.39)
[0.09]
63
63
63
59
1.07
(0.27)
Temperature (p-value)
[0.71]
Humidity (p-value)
0.98
(0.17)
0.87
(0.32)
0.82
(0.22)
-0.014
(0.07)
62
63
-0.28
(0.59)
Life Expectancy
106
1.18
(0.84)
[0.64]
Malaria
Number of Observations
Yellow Fever
63
63
62
107
Empirical strategy: look at the effect of religion on longrun economic growth once we take differences in
institutions into account (that is, estimate the causal
effect of institutions simultaneously).
Answer: no evidence of any effect of religion (therefore
culture) on cross-country differences in income.
108
Institutions
(Protection Against Expropriation)
Dependent
variable is log
GDP per capita
in 1995
Second stage
0.96
(0.16)
Dependent
variable is
institutions
First Stage
Percent Catholic
0.006
(0.01)
-0.01
(0.01)
Percent Muslim
-0.002
(0.01)
-0.002
(0.01)
Percent "Other"
-0.011
(0.01)
-0.01
(0.01)
109
Dependent
variable is log
GDP per
capita in 1995
Second stage
1.13
(0.35)
-0.008
(0.01)
Dependent
variable is
institutions
First Stage
-0.58
(0.14)
0.019
(0.006)
-0.40
(0.15)
0.30
63
0.35
63
63
2.
110
111
112
.
4
N ZL
A US
US A
CA N
S GP
HK G
MY S
0
ZA F
BH
RL
A
C
ID N
ME X
C OL
V
E
MA
R
CR
RN
I IN D
UP
R
Y
Y
E GY
EC
U
TU
V N M TTO
AN
RDGZA
D OM
SA
EN
N
P
PER
B OL
HND
N IC
GTM
SPLV
AK
LK A
C IV
C MR
JA M
TZA
B FA
-2
GH A
K E NN E R
MD G
N GA
B GD
MLI
U GA
-4
-2
0
2
R es iduals from Regress ing Log Settler Mort. on Eng. Leg. Orig.
.
2
VEN
PPRAYK
B OL
GTM
PER
C R I IN D
A RG
TZA
LK
AN
PA
B GD
N GA
KEN
US A
S GP
MY S
CA N
A US
-1
N ZL
ZA F
EH
CN
UD
N IC
ME
MA
XR
DLLV
ZA
S
CH
SEN
C OL
TUUNR Y
E GY
C MR
B FA
JA M
U GA
GH A
MLI
N E R MD G
D OM
IDTTO
N
C IV
VNM
BRA
HK G
-2
-2
0
2
Res iduals from Regres sing Log. Sett. Mort. o n Eng. Leg. Or ig
R e s id u a ls fr o m C h e c k Me a s u r e Fo rm a lis m o n En g . L e g a l O
R reigs . fro m R e g r e s s Av . Pr o te c t. Ex p r o p . o n En g . L e g . O r ig .
C IV
USA
CA N
ID N
GH A
IN D
TZA
TTOJA M
A US
C MR
ME X
C OL
V
EN
MA
C RR
I
UPRRYY V N M
N GA
S GP
N ZL
B RA
CHL
MLI
H MY
K GS
E GY
SEN
D OM
P AN
ED
CZA
U
KEN
NER
AR
TU
NG
MD G
LK A
N IC
-1
PER
B OL
ZA F
B FA
HND
U GA
PAK
GTM
S LV
B GD
-2
-.5
0
.5
Res iduals from Regress ing Eng. Leg. Orig. on Log Settler Mort.
.
VEN
P RY
B OL
GTM
PER
CR
AR
GI
EHCNUD
ME
MAXR
D
CS
HZA
L
LV
CR
OL
TU
NY
U
PAN
N IC
SEN
C MR
B FA
PAK
E GY D OM
ID N
LK A
NE R
MD G
IN D
MLI
US A
S GP
MY S
B RA V NM
C IV
TZA
B GD
KEN
A US CAN
N ZL
ZA F
-2
JA M
U GA
TTO
GH A
N GA
HK G
-.5
0
.5
R esiduals from Regres sing Eng. Leg. Orig on Log. Sett. Mort.
113
.
2
ANU
ZL
S
C
U
BH
R
O
CL
Y
LR I
E IN
CU
D
UZA
C
SA
AFN
C OL
PRY
B RA
VE N
PAK
A RG
H
SN
LV
D
0
MY S
ME X
GTM
TTO
JA M
PAN
D OM
LK A
B GD
PER
SEN
-2
S GP
TU
EN
GY
MA R
VNM
ID N K E N
GH A
TZA
C IV
U GA
N GA
-4
-2
0
2
Residuals from Regressing Log Settler Mort. on Eng. Leg. Orig.
.
2
PAN
VE N
GTM
A RG
PAK
PER
ZA F
LK A
IN D
BP
OR
L
C RY
I B GD
MY S
S GP
USA
ME
XR
C
H
MA
L
HU
ND
EC
S LV
CA N
A US
-1
N ZL
URY
TUCNO L
B RA
N GA
K EN
TZA
GH A
D OM
U GA
JA M
EN
TTOSID
C IV
E GY
VNM
-2
-2
0
2
Residuals from Regres sing Log. Sett. Mort. on Eng. Leg. Or ig
TTO
P AN
IN D
C OL
P RY
BRA
D OM
V EN
C
AA
ZA
FN
U
S
AH
GD
SRN
LV
GH A
PAK
LK A
B GD
ANU
ZL
S
C IV
ME X
GTM
N GA
TZA
SEN
PER
VN
IDM
N
K E NU GA
MY S
-2
EMA
GY
TU
NR
S GP
-4
-.5
0
.5
Residuals from Regressing Eng. Leg. Orig. on Log Settler Mort.
.
V E NP A N
GTM
A RG
PER
B
O LY
P
CR
RI
ME
C
HX
LR
MA
EHCNUD
D OM
S LV
U
Y
CR
O
TU
NL
B RA
ZA F
SID
EN
N
LK A
PAK
E GY
IN D
C IV
MY S
S GP
US A
B GD
K E NTZA
V NM
N GA
CAN
A US
JA M U GA
TTO
GH A
-2
N ZL
-.5
0
.5
Residuals from Regres sing Eng. Leg. Orig on Log. Sett. Mort.
114
115
10
SGP
HKG
MYS
IDN
MUS
PAK IND
AUS FJI USA
CAN
NZL
ZAF
MMR
GUY
EGY
TUN
LKA
CHL
BRA
ECU
COL
PRY
MAR
TTO
MEX
BRB
URY
CRI
BGD
SDN
GTM
HND
ARG
DZA
PER
BOL
SLV
VEN
DOMBLZ
KEN
PAN
PNG
JAM SEN
HTI
COG
GAB
BFA
CMR
GMB
BEN
BDI
RWA
MRT
TCD
CAF
NGA
MLI
CIV
GHA
TGO
MDG
NERSLE
NIC
ZAR
-5
2
116
8
NIC
SDN
FJI
HKG
MYS
ZAF
SGP
NZL
AUS
117
MMR
SLV
MAR
BRA
BGD
URY
VEN
PRY
BRB
MEX
TUN
CRI
HND
BOL
IND EGY
NGA
NER
TGO
BDI
DZA
TTO
PER
CHL
ARG
ECU
GUY
MUS
CMR
COG
SLE
KEN
PNG
JAM
SEN
HTI PAN
DOMBLZ
IDN
ZAR
MLI
GHA
CIV
MRT
CAF
MDG
BFA
BEN
GMB
GTM
PAK
CAN
USA
COL
LKA
118
119
Interpretation
120
121
122
123
124
125
126
127
Source: DANE
128
129
130
131
132
133
Source: INDEC
134
135
136
2.
137
The seesaw effect; reform only part of institutions, and the rest of
the institutions become worse as a consequence. Back to Colombia
and Argentina.
Ignoring internal dynamics; attempts at reform backfire because of
resistance by potential losers or subversive action by other groups.
138
1.
2.
139
Recall:
political institutions economic institutions
Thus important to understand change in political
institutions
Political institutions a way of regulating the
allocation of future political power
Two axes:
Elite-driven versus conflict-driven
Internal versus external
140
141
Conclusions (1)
142
Institutions matter.
Although ideology and history influence institutions, in
many many cases institutions emerge because of their
distributional consequences.
Although everything else equal more efficient
institutions more likely to arise, there will typically be
major social conflict over institutions.
Then the choices benefiting politically powerful groups,
not the society as a whole, more likely to emerge.
Conclusions (2)
Summary:
De jure power
(Political institutions)t
De facto powert
143
political
powert
Economic institutionst
Economic policiest
Political institutionst+1
Conclusions (3)
Unbundling institutions
Institutional persistence
Institutional change
Policy to influence institutions? (further further in the future!)
This presentation should not be reported as representing the views of the IMF. The views expressed are those of the authors and
do not necessarily reflect the views of the IMF or IMF policy.
144
145