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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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1279.

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

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

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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. Graham A. Davis, 2012. "Replicating "Sources of Slow Growth in African Economies"," Working Papers, Colorado School of Mines, Division of Economics and Business 2012-09, Colorado School of Mines, Division of Economics and Business.
  3. Antonio Navas-Ruiz, 2008. "On Trade Openness, Institutional Change and Economic Growth," Working Papers, HAL halshs-00326394, HAL.
  4. Pao-Li Chang & Fali Huang, 2012. "Trade and Divergence in Education Systems," Working Papers, Singapore Management University, School of Economics 32-2012, Singapore Management University, School of Economics.
  5. Anders Akerman & Anna Larsson & Alireza Naghavi, 2011. "Autocracies and Development in a Global Economy: A Tale of Two Elites," DEGIT Conference Papers, DEGIT, Dynamics, Economic Growth, and International Trade c016_041, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Falkinger, Josef & Grossmann, Volker, 2013. "Oligarchic land ownership, entrepreneurship, and economic development," Journal of Development Economics, Elsevier, Elsevier, vol. 101(C), pages 206-215.
  7. Antonio Navas, 2013. "Trade Openness, Institutional Change and Economic Growth," Working Papers, The University of Sheffield, Department of Economics 2013018, The University of Sheffield, Department of Economics.
  8. Cervellati, Matteo & Naghavi, Alireza & Toubal, Farid, 2013. "Trade Liberalization, Democratization and Technology Adoption," IZA Discussion Papers 7132, Institute for the Study of Labor (IZA).
  9. Josef Falkinger & Volker Grossmann, 2005. "Distribution of Natural Resources, Entrepreneurship, and Economic Development: Growth Dynamics with two Elites," CESifo Working Paper Series 1562, CESifo Group Munich.
  10. 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.

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