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Why the US and not Brazil? Old Elites and the Development of a Modern Economy

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  • Uwe Dulleck

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  • Paul Frijters

    ()

Abstract

Old elites can block changes, but not all do. Why is it that stronger elites may allow more changes than weaker elites? Why do economies with larger stocks of natural resources not grow faster than economies poorer in natural resources? We argue that old elites hold some power to extract rents from the economy. Whereas old sectors (i.e. agriculture or extraction of natural resources) are not affected by rent extraction, modern sectors require investments that do react to rent extraction. At the same time, a modern sector relies on networks of firms. These structures form the basis of political power of a new elite, which reduces the ability of the old elite to extract rents. We show that countries rich in natural resources provide their old elite with incentives to extract rents so high that the private sector has no incentives to build up a modern economy. If the old elite is either politically very strong or the natural resource sector is small compared to the potential of the modern sector, the old elite will choose to extract smaller rents from a growing sector. Some empirical evidence completes the paper.

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Paper provided by University of Vienna, Department of Economics in its series Vienna Economics Papers with number 0408.

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Date of creation: May 2004
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Handle: RePEc:vie:viennp:0408

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  1. Stephen L. Parente & Edward C. Prescott, 1997. "Monopoly rights: a barrier to riches," Staff Report 236, Federal Reserve Bank of Minneapolis.
  2. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, December.
  3. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
  4. Daron Acemoglu & James A. Robinson, 2000. "Why Did The West Extend The Franchise? Democracy, Inequality, And Growth In Historical Perspective," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1167-1199, November.
  5. Daron Acemoglu & James Robinson, 1999. "A Theory of Political Transitions," Working papers 99-26, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. James A. Robinson & Daron Acemoglu, 2000. "Political Losers as a Barrier to Economic Development," American Economic Review, American Economic Association, vol. 90(2), pages 126-130, May.
  7. Acemoglu, Daron & Robinson, James A, 2002. "Economic Backwardness in Political Perspective," CEPR Discussion Papers 3261, C.E.P.R. Discussion Papers.
  8. Acemoglu, Daron, 2003. "Why not a political Coase theorem? Social conflict, commitment, and politics," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 620-652, December.
  9. Hahn, Sunku, 2003. "Why should reform wait until things get really bad?," Economics Letters, Elsevier, vol. 79(3), pages 345-352, June.
  10. Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
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  1. Will the resource curse stifle democracy in Libya?
    by Paul Frijters in Core Economics on 2011-08-23 05:24:43
  2. Will the resource curse stifle democracy in Libya?
    by Paul Frijters in Club Troppo on 2011-08-23 05:23:19
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Cited by:
  1. James Rockey & Miltiadis Makris, 2010. "Which Democracies Pay Higher Wages?," Discussion Papers in Economics 11/09, Department of Economics, University of Leicester.

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