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

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  • Falkinger, Josef

    ()
    (University of Zurich)

  • Grossmann, Volker

    ()
    (University of Fribourg)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1242.

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Length: 56 pages
Date of creation: Aug 2004
Date of revision:
Publication status: published in: Journal of Economic Growth, 2005, 10 (3), 229-270
Handle: RePEc:iza:izadps:dp1242

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

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References

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Citations

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Cited by:
  1. Antonio Navas, 2013. "Trade Openness, Institutional Change and Economic Growth," Working Papers 2013018, The University of Sheffield, Department of Economics.
  2. 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.
  3. Anders Akerman & Anna Larsson & Alireza Naghavi, 2011. "Autocracies and Development in a Global Economy: A Tale of Two Elites," Working Papers 2011.65, Fondazione Eni Enrico Mattei.
  4. 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).
  5. Cervellati, Matteo & Naghavi, Alireza & Toubal, Farid, 2013. "Trade Liberalization, Democratization and Technology Adoption," IZA Discussion Papers 7132, Institute for the Study of Labor (IZA).
  6. Temple, Jonathan & Woessmann, Ludger, 2006. "Dualism and Cross-Country Growth Regressions," CEPR Discussion Papers 5655, C.E.P.R. Discussion Papers.
  7. 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.
  8. Fali HUANG & Pao-Li CHANG, 2012. "Trade and Divergence in Education Systems," DEGIT Conference Papers c017_016, DEGIT, Dynamics, Economic Growth, and International Trade.
  9. Falkinger, Josef & Grossmann, Volker, 2013. "Oligarchic land ownership, entrepreneurship, and economic development," Journal of Development Economics, Elsevier, vol. 101(C), pages 206-215.
  10. Antonio Navas-Ruiz, 2008. "On Trade Openness, Institutional Change and Economic Growth," Working Papers halshs-00326394, HAL.

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