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Institutions and Development: The Interaction Between Trade Regime and Political System

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  • Josef Falkinger
  • Volker Grossmann

Abstract

This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.

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File URL: http://hdl.handle.net/10.1007/s10887-005-3534-4
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Bibliographic Info

Article provided by Springer in its journal Journal of Economic Growth.

Volume (Year): 10 (2005)
Issue (Month): 3 (09)
Pages: 231-272

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Handle: RePEc:kap:jecgro:v:10:y:2005:i:3:p:231-272

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Web page: http://www.springerlink.com/link.asp?id=102931

Related research

Keywords: economic development; institutions; political system; public education; trade; O10; N10; N16; F43; H50;

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Citations

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Cited by:
  1. Jonathan Temple & Ludger Woessmann, 2004. "Dualism and Cross-Country Growth Regressions," CESifo Working Paper Series 1290, CESifo Group Munich.
  2. Akerman, Anders & Larsson, Anna & Naghavi, Alireza, 2011. "Autocracies and Development in a Global Economy: A Tale of Two Elites," Research Papers in Economics 2011:24, Stockholm University, Department of Economics.
  3. Navas, Antonio, 2009. "Trade Openness, Institutional Change and Economic Growth," Working Papers in Economic Theory 2009/05, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  4. Graham A. Davis, 2012. "Replicating "Sources of Slow Growth in African Economies"," Working Papers 2012-09, Colorado School of Mines, Division of Economics and Business.
  5. Bednarik, Radek & Filipova, Lenka, 2009. "The role of religion and political regime for human capital and economic development," MPRA Paper 14556, University Library of Munich, Germany.
  6. Pao-Li Chang & Fali Huang, 2012. "Trade and Divergence in Education Systems," Working Papers 32-2012, Singapore Management University, School of Economics.
  7. Falkinger, Josef & Grossmann, Volker, 2013. "Oligarchic land ownership, entrepreneurship, and economic development," Journal of Development Economics, Elsevier, vol. 101(C), pages 206-215.
  8. Matteo Cervellati & Alireza Naghavi & Farid Toubal, 2014. "Trade Liberalization, Democratization and Technology Adoption," Working Papers 2014-08, CEPII research center.
  9. Antonio Navas-Ruiz, 2008. "On Trade Openness, Institutional Change and Economic Growth," Working Papers halshs-00326394, HAL.
  10. Falkinger, Josef & Grossmann, Volker, 2005. "Distribution of Natural Resources, Entrepreneurship, and Economic Development: Growth Dynamics with Two Elites," IZA Discussion Papers 1756, Institute for the Study of Labor (IZA).

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