Institutions and growth

1. Institutions and growth Alberto Alesina

2. Institutionalist View • Due to Smith (1776), Montesquieu (1748) • Popularized by North (1981) Basic Theory: protection of property rights (institutions) → investment in physical capital → economic growth • In early – mid 1990s, evidence accumulates

3. DeLong and Shleifer (1993) Look at city population growth, available from historical records, as a function of type of government. Divide time into 150-year intervals, over the period 1050 – 1800. Code “regimes” as free or prince . Distinction between autocracy and limited government. Focus on regions, not countries.

9. More recent evidence Knack and Keefer (1995) Hall and Jones (1999) They add institutions in cross country growth regressions Big problem: Institutions endogenous Acemoglu, Johnson, and Robinson (2001) Propose to solve the endogeneity problem

10. Settlers’ mortality • Settler mortality is shaped by disease environment. It determines whether settlers settled and brought with them European institutions or plundered • If settled and brought institutions, have long run success (since institutions are persistent). If plundered, have poor institutions and long run failure.

11. AJR mechanism • Settlers'’ mortality settlementsearly institutionscurrent institutionscurrent growth. • Key steps three: settlers might have brought many other things beside institutions! • Key step four: how permanent are institutions?

16. Highly influential paper • Started a whole literature • Data problems. • But do the results mean what they seem?

17. Glaeser at al and Acemoglu et al. Points of Agreement • Wealthy countries have good governments and are well educated. • 88 percent correlation between income and education • 73 percent correlation between income and expropriation risk • 75 percent correlation between education and expropriation risk • Good policies are extremely important in abetting economic development • Protection of property rights • Openness to foreign trade and investment • Investing in People

20. Disagreement • View # 1: Institutionalism: • Political Institutions  Education  Wealth • Political Institutions  Investment  Wealth • View # 2: Embodied Human Capital • Education  Institutions  Investment  Wealth • Education  Wealth

21. Other views • Culture InstitutionsPolicies • Holding HC constant different cultures may lead to different sped of development • Or, different culture may lead to different accumulation and diffusion of HC (think of women education!) • Will look at this later.

22. What is riding on this distinction? • For many policy debates, not all that much. Both views support the idea of improving policies. • To the extent there is a distinction, it lies in exporting institutions vs. educating. • The Institutionalist view may be more hopeful: “..it is the practice of democracy that makes a nation ready for democracy, and every nation can start on this path.” President Bush 11/03 • The Human Capital View tends to think that exporting democracy to low human capital countries is doomed to fail (institutionalists might too …)

23. Separating These Hypotheses is Awfully Hard • Highly correlated variables that are both endogenous and differ primarily at the country level don’t lend themselves to highly convincing empirical results. • The path of human history can be read to support both views, and anyone with a strong prior is unlikely to be moved much in one direction or another with historical examples.

24. Weaknesses of Evidence for Institutionalism (GLSS, 2004) • Measures of institutions • By construction, most of the usual measures are about policy outcomes, not institutions per se. • These measures are quite volatile and can be seen as responding to success as much as causing it. • Exogeneity of institutions • It is very hard to think that the AJR instruments are actually orthogonal to omitted factors (like human capital) causing country success.

26. Key issues • Some dictators have been good at protecting property rights other have not • AJR variable codes good dictators with democracies but is this a good distinction of institutions?

27. Education persists; “institutions” much less so.

34. Democracy and Growth • In many ways a specific example of the institutionalist view: • Does democracy cause growth and development, or it is the latter (caused by HC) which brings about democracy?

35. Development to Democracy • Lipset (1958) Barro (1999) • Cross country evidence: no effects of becoming a democracy on growth but strong effect of level of GDP per capita on democracy • Against instirtutionalist view?

36. But…. • Acemoglu et al. Aer 2008 • Within country evidence, no effect of level of GDP on democracy • Huntington: democratic waves.. • How much of this is driven by Africa countries becoming democracies right after decolonization?

37. But…. • Persson and Tabellini (2006) “Democratic Capital” • Analysis that take into account not only whether a country is a democracy at time t now but how long it has between a democracy for. Accumulated capital • Problems.

38. Evidence without theory? • Many correlations, perhaps not enough theory? • Glaser Ponzetto Shleifer (2008) on why democracy needs education.

39. Education and participation • Democracy needs political participation but has few incentives to “force” it • Dictators prefer participation of only a small minority • Education increase the appreciation/benefit/ pleasure to participate.

40. Why? • Socialization through schools. • Pleasure in debating, understanding, criticizing, awareness of rights • Education switch the cost benefit analysis of political participation in favor of it. • Make dictatorships less attractive and therefore more costly for dictators to survive

41. So why should dictators educate? • Sometimes they do not • But: as development progresses the cost of low education for the economy become large and dictators may have to choose between remaining poor or take the risk of allowing education to grow.

42. Aghion, Alesina and Trebbi (2008) • “Democracy Technology and Growth” in Helpman “Institutions and Economic Performance” HUP • Democracy enhances competition and freedom of entry • It may be more beneficial in sectors close to the frontier of technological progress where introduction of new technologies is especially important