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

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Author Info
Josef Falkinger ()
Volker Grossmann ()

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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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1279.

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Date of creation: 2004
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Handle: RePEc:ces:ceswps:_1279

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Related research
Keywords: economic development; institutions; political system; public education; trade;

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Find related papers by JEL classification:
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
N10 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - General, International, or Comparative
N16 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations - - - Latin America; Caribbean
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Josef Falkinger & Volker Grossmann, 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). [Downloadable!]
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