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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

    ()

  • 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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Web page: http://www.univie.ac.at/vwl

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  1. Hahn, Sunku, 2003. "Why should reform wait until things get really bad?," Economics Letters, Elsevier, vol. 79(3), pages 345-352, June.
  2. 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.
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  4. 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.
  5. Acemoglu, Daron & Robinson, James A, 1998. "Why did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective," CEPR Discussion Papers 1797, C.E.P.R. Discussion Papers.
  6. Daron Acemoglu & James A. Robinson, 2001. "A Theory of Political Transitions," American Economic Review, American Economic Association, vol. 91(4), pages 938-963, September.
  7. 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.
  8. Stephen L. Parente & Edward C. Prescott, 1997. "Monopoly rights: a barrier to riches," Staff Report 236, Federal Reserve Bank of Minneapolis.
  9. Daron Acemoglu & James A. Robinson, 2002. "Economic Backwardness in Political Perspective," NBER Working Papers 8831, National Bureau of Economic Research, Inc.
  10. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, December.
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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 C. Rockey, 2007. "Which Democracies Pay Higher Wages?," Bristol Economics Discussion Papers 07/600, Department of Economics, University of Bristol, UK.

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