Acemoglu, Robinson and Johnson
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Transcript of Acemoglu, Robinson and Johnson
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Wade C. Roberts, Ph.D.
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They ask a question:Why are somecountries poorer than
others? Fundamental explanationfor growth isinstitutions. North and Thomass quote:
the factors we have listed(innovation, economies ofscale, education, capitalaccumulation etc.) are notcauses of growth; they aregrowth.
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They place primary importance on economicinstitutions, such as structure of property
rights and perfection of markets.
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1) institutions matter for economicgrowth because they shape theincentives of key economic actors in
society, in particular, they influenceinvestments in physical and humancapital and technology, and theorganization of production.
Although geography and culturemay also matter, differences ineconomic institutions are the majorsource of cross-country differencesin growth and prosperity.
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Economic
institutions
economicperformance,distribution ofresources.
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2) Economic institutions are endogenous,determined by social choices. Those with
most political power determine economicinstitutions.
Political power economic institutions.
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3) Distribution of politicalpower is also endogenous.Useful to distinguishbetween two components of
political power: de jure(institutional) political powerand de facto political power. Political institutions de jure
political power Distribution of resources defacto political power
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Broad framework:
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Example: property rightsdeveloped in Europe in the MiddleAges. The king had all power, and
power to arbitrarily take yourproperty little incentive to investdue to such economic institutions.Accordingly, growth rates were lowand the distribution of resourceswas vastly unequal.
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17th century merchantsand landed gentrystarted getting wealthy
due to overseas andinternal trade. They wanted rights to
their private property.
King wanted to tax the*!&% out of them.
Wealth increased theirpower.
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Their de facto politicalpower overcamemonarch in English
Civil War and theGlorious Revolution.
Changed politicalinstitutions, which
changed economicinstitutions which ledto growth and theindustrial revolution.
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Good economicinstitutions growth.What are goodeconomic institutions? Those that provide
security of property
rights and relativelyequal access toeconomic resources to abroad cross-section ofsociety.
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Good economicinstitutions comeabout by having:
Political institutionsthat place checks onthose who hold power.
Political power in thehands of a relatively
broad group withsignificant investmentopportunities.
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Bad institutions arisebecause the groups with
political power benefitfrom the existence ofbad institutions.
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THREEHYPOTHESES OFTHE
FUNDAMENTALCAUSES OFGROWTH
1- EconomicInstitutions
Incentives to innovate,take risks, invest.
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2- Geography
Climate and laziness
Geography and
technology disease burden
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3- Culture
Religion
National heritage
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Acemoglu, et al argue thatthere is convincingempirical support for the
hypothesis thatdifferences in economicinstitutions, rather thangeography or culture
cause differences inincomes per-capita.
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Is there acorrelationbetween
propertyrights (risk ofexpropriation)and growth
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The Korean
Experiment
A natural experiment
in institutional change. North Korea
abolished privateproperty of land andcapital, state notmarket
South Korea private
property and markets
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Before the naturalexperiment of institutionalchange, note that bothshared the same history andcultural roots. Fewgeographic distinctionsbetween them, sharedclimate and diseaseenvironment. Similar
geographies and mineralendowments. Both haveaccess to markets and similarcosts of transportation. Very homogeneous.
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The only thing that issignificantly different isinstitutions. We have anatural experiment that
controls for everything else. South Korea is member of
OECD and North Korea issimilar to sub-Saharan Africa.
Does this illustrate thatinstitutions influence growthand development?
Does it make it the mostimportant factor?
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The changeoccurred in 1970.What path dideach country
take?
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If poor countries are poorbecause they have badeconomic institutions
why do they not changethem to betterinstitutions?
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Is there really a connection between propertyrights (economic freedom) and wellbeing?
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Lets check out the data: http://www.heritage.org/Index/Ranking.aspx
Excel raw data
2010 Index of Economic Freedom
http://www.heritage.org/Index/Ranking.aspxhttp://www.heritage.org/Index/Ranking.aspx -
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2010 Index of Economic Freedom For over a decade, The Wall Street Journal and The Heritage
Foundation, Washington's preeminent think tank, have tracked themarch of economic freedom around the world with the influentialIndex of Economic Freedom.
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2010 Index of EconomicFreedom
Since 1995, the Index has broughtAdam Smith's theories about
liberty, prosperity and economicfreedom to life by creating 10benchmarks that gauge theeconomic success of 183 countriesaround the world. With its user-friendly format, readers can see
how 18th century theories onprosperity and economic freedomare realities in the 21st century.
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What is economic freedom? Economic freedom is the
fundamental right of every human tocontrol his or her own labor andproperty. In an economically freesociety, individuals are free to work,produce, consume, and invest in anyway they please, with that freedomboth protected by the state andunconstrained by the state.
In economically free societies,governments allow labor, capital andgoods to move freely, and refrainfrom coercion or constraint of libertybeyond the extent necessary to
protect and maintain liberty itself.
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What are the benefits ofeconomic freedom?
Studies demonstrate importantrelationships between economic
freedom and positive social andeconomic values such as per capitaincome, economic growth rates,human development, democracy,the elimination of poverty, and
environmental protection.
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How is economic freedommeasured? We measure ten components of economic freedom,
assigning a grade in each using a scale from 0 to
100, where 100 represents the maximum freedom.
The ten component scores are then averaged togive an overall economic freedom score for each
country. The ten components of economic freedomare:
Business Freedom
Trade Freedom
Fiscal Freedom
Government Spending
Monetary Freedom
Investment Freedom
Financial Freedom
Property Rights
Freedom from Corruption
Labor Freedom
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1- Business Freedom
Business freedom is a quantitative measure of the ability to
start, operate, and close a business that represents the overall
burden of regulation as well as the efficiency of government in
the regulatory process. The score is based on 10 factors, all
weighted equally, using data from the World Banks Doing
Business study: Starting a businessprocedures (number)
Starting a businesstime (days)
Starting a businesscost (% of income per capita)
Starting a businessminimum capital (% of income per
capita)
Obtaining a licenseprocedures (number)
Obtaining a licensetime (days)
Obtaining a licensecost (% of income per capita)
Closing a businesstime (years)
Closing a businesscost (% of estate)
Closing a business
recovery rate (cents on the dollar)
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2- Trade FreedomTrade freedom is a composite measure ofthe absence of tariff and non-tariff barriersthat affect imports and exports of goods andservices. Different imports entering a
country can, and often do, face differenttariffs. The weighted average tariff usesweights for each tariff based on the share ofimports for each good . The trade freedomscore is based on two inputs:
The trade-weighted average tariffrate
Non-tariff barriers (NTBs)
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3- Fiscal FreedomFiscal freedom is a measure of the tax burdenimposed by government. It includes both thedirect tax burden in terms of the top tax rateson individual and corporate incomes and the
overall amount of tax revenue as a percentageof GDP. Thus, the fiscal freedom component iscomposed of three quantitative factors:
The top tax rate on individual income
The top tax rate on corporate income
Total tax revenue as a percentage of GDP
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4- Government Spending
This component considers the level of
government expenditures as a percentage of GDP.
Government expenditures, including consumption
and transfers, account for the entire score.
No attempt has been made to identify an ideallevel of government expenditures. The ideal level
will vary from country to country, depending onfactors ranging from culture to geography to level
of development.
The scale for scoring government spending is
non-linear, which means that government
spending that is close to zero is lightly penalized,while levels of government spending that exceed
30 percent of GDP receive much worse scores in a
quadratic fashion (e.g., doubling spending yields
four times less freedom), so that only really large
governments receive very low scores.
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5- Monetary FreedomMonetary freedom combines a measure ofprice stability with an assessment of pricecontrols. Both inflation and price controlsdistort market activity. Price stability
without microeconomic intervention is theideal state for the free market. The score forthe monetary freedom factor is based ontwo factors:
The weighted average inflation rate
for the most recent three years Price controls
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6- Investment FreedomIn an economically free country, there would beno constraints on the flow of investment capital.
Individuals and firms would be allowed to move
their resources into and out of specific activities
both internally and across the countrys borders
without restriction. Such an ideal country would
receive a score of 100 on the investment freedomcomponent of the Index.
In practice, most countries have a variety of
restrictions on investment. Some have different
rules for foreign and domestic investment; some
restrict access to foreign exchange; some imposerestrictions on payments, transfers, and capitaltransactions; certain industries are closed to
foreign investment. Moreover, labor
regulations, corruption, red tape, weak
infrastructure, and political and security
conditions can also affect the freedom that
investors have in a market.
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7- Financial FreedomFinancial freedom is a measure of bankingsecurity as well as a measure ofindependence from government control.State ownership of banks and other financial
institutions such as insurers and capitalmarkets reduces competition and generallylowers the level of available services.
The Indexscores this component bydetermining the extent ofgovernmentregulation of financial services; the extent
ofstate intervention in banks and otherfinancial services; the difficulty of openingand operating financial services firms (forboth domestic and foreign individuals); andgovernment influence on the allocation ofcredit.
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8- Property RightsThe property rights component is an assessmentof the ability of individuals to accumulate private
property, secured by clear laws that are fully
enforced by the state. It measures the degree to
which a countrys laws protect private propertyrights and the degree to which its government
enforces those laws. It also assesses thelikelihood that private property will be
expropriated and analyzes the independence of
the judiciary, the existence of corruption within
the judiciary, and the ability of individuals and
businesses to enforce contracts. The morecertain the legal protection of property, thehigher a countrys score; similarly, the greater
the chances of government expropriation of
property, the lower a countrys score.
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9- Freedom from Corruption
Corruption erodes economic freedom byintroducing insecurity and uncertaintyinto economic relationships. The score forthis component is derived primarily from
Transparency International's CorruptionPerceptions Index (CPI), which measuresthe level of corruption in 180 of the 183countries.
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10- Labor Freedom The labor freedom component is a quantitative
measure that looks into various aspects of the
legal and regulatory framework of a country's
labor market. It provides cross-country data on
regulations concerning minimum wages; laws
inhibiting layoffs; severance requirements; and
measurable regulatory burdens on hiring, hours,and so on. Factors include:
Ratio of minimum wage to the averagevalue added per worker
Hindrance to hiring additional workers Rigidity of hours
Difficulty of firing redundantemployees
Legally mandated notice period
Mandatory severance pay
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The top 10: http://www.heritage.org/Index/TopTen.aspx
http://www.heritage.org/Index/TopTen.aspxhttp://www.heritage.org/Index/TopTen.aspx