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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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  • Josef Falkinger & Volker Grossmann, 2005. "Institutions and Development: The Interaction Between Trade Regime and Political System," Journal of Economic Growth, Springer, vol. 10(3), pages 231-272, September.
  • Handle: RePEc:kap:jecgro:v:10:y:2005:i:3:p:231-272
    DOI: 10.1007/s10887-005-3534-4
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    2. Akerman, Anders & Larsson, Anna & Naghavi, Alireza, 2011. "Autocracies and Development in a Global Economy: A Tale of Two Elites," Research Papers in Economics 2011:24, Stockholm University, Department of Economics.
    3. Falkinger, Josef & Grossmann, Volker, 2013. "Oligarchic land ownership, entrepreneurship, and economic development," Journal of Development Economics, Elsevier, vol. 101(C), pages 206-215.
    4. Arsham Reisinezhad, 2018. "Economic Growth and Income Inequality in Resource Countries: Theory and Evidence," Working Papers halshs-01707976, HAL.
    5. Sajjad F. Dizaji & Mohammad Reza Farzanegan & Alireza Naghavi, 2016. "Political institutions and government spending behavior: theory and evidence from Iran," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(3), pages 522-549, June.
    6. Ciara Whelan & Patrick P. Walsh & Franco Mariuzzo, 2004. "EU merger control in differentiated product industries," Open Access publications 10197/138, School of Economics, University College Dublin.
    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. Pao‐Li Chang & Fali Huang, 2014. "Trade And Divergence In Education Systems," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(4), pages 1251-1280, November.
    9. Dong-Hyeon Kim & Shu-Chin Lin, 2017. "Natural Resources and Economic Development: New Panel Evidence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 66(2), pages 363-391, February.
    10. Pao-Li Chang & Fali Huang, 2010. "Trade and Divergence in Education Systems," Working Papers 33-2010, Singapore Management University, School of Economics.
    11. Jonathan Temple & Ludger Wößmann, 2006. "Dualism and cross-country growth regressions," Journal of Economic Growth, Springer, vol. 11(3), pages 187-228, September.
    12. Falkinger, Josef & Grossmann, Volker, 2005. "Distribution of Natural Resources, Entrepreneurship, and Economic Development: Growth Dynamics with Two Elites," IZA Discussion Papers 1756, Institute of Labor Economics (IZA).
    13. Isaac Lyatuu & Georg Loss & Andrea Farnham & Mirko S Winkler & Günther Fink, 2021. "Short-term effects of national-level natural resource rents on life expectancy: A cross-country panel data analysis," PLOS ONE, Public Library of Science, vol. 16(5), pages 1-13, May.
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    15. Antonio Navas-Ruiz, 2008. "On Trade Openness, Institutional Change and Economic Growth," Working Papers halshs-00326394, HAL.
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    More about this item

    Keywords

    economic development; institutions; political system; public education; trade; O10; N10; N16; F43; H50;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative
    • N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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