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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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Citations

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Cited by:
  1. 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.
  2. 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).
  3. Antonio Navas-Ruiz, 2008. "On Trade Openness, Institutional Change and Economic Growth," Working Papers halshs-00326394, HAL.
  4. Fali HUANG & Pao-Li CHANG, 2012. "Trade and Divergence in Education Systems," DEGIT Conference Papers c017_016, DEGIT, Dynamics, Economic Growth, and International Trade.
  5. Jonathan Temple & Ludger Wößmann, 2006. "Dualism and cross-country growth regressions," Journal of Economic Growth, Springer, vol. 11(3), pages 187-228, September.
  6. A. Akerman & A. Larsson & A. Naghavi, 2011. "Autocracies and Development in a Global Economy: A Tale of Two Elites," Working Papers wp775, Dipartimento Scienze Economiche, Universita' di Bologna.
  7. 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.
  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. 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).
  10. Falkinger, Josef & Grossmann, Volker, 2013. "Oligarchic land ownership, entrepreneurship, and economic development," Journal of Development Economics, Elsevier, vol. 101(C), pages 206-215.

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