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Inefficient policies, inefficient institutions and trade

  • Rubén Segura-Cayuela

    ()

    (Banco de España)

Despite the general belief among economists on the growth-enhancing role of international trade and significant trade opening over the past 25 years, the growth performance of many developing economies, especially of those in Latin America and Africa, has been disappointing. While this poor growth performance has many potential causes, in this paper I argue that part of the reason may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak institutions (in particular autocratic and elite-controlled political systems) may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/06/Fic/dt0633e.pdf
File Function: First version, December 2006
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0633.

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Length: 53 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:bde:wpaper:0633
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Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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  1. William Easterly & Ross Levine, 2002. "Tropics, Germs, and Crops: How Endowments Influence Economic Development," NBER Working Papers 9106, National Bureau of Economic Research, Inc.
  2. William Easterly & Ross Levine, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1203-1250.
  3. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  4. Pol Antràs, 2005. "Incomplete Contracts and the Product Cycle," American Economic Review, American Economic Association, vol. 95(4), pages 1054-1073, September.
  5. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  6. Oded Galor & Andrew Mountford, 2006. "Trade and the Great Divergence: The Family Connection," American Economic Review, American Economic Association, vol. 96(2), pages 299-303, May.
  7. Robert E. Hall & Charles I. Jones, 1998. "Why Do Some Countries Produce So Much More Output per Worker than Others?"," Working Papers 98007, Stanford University, Department of Economics.
  8. Verdier, Thierry, 2004. "Socially Responsible Trade Integration: A Political Economy Perspective," CEPR Discussion Papers 4699, C.E.P.R. Discussion Papers.
  9. Paolo Epifani & Gino Gancia, 2009. "Openness, Government Size and the Terms of Trade," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 629-668.
  10. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers 1826, Stanford University, Graduate School of Business.
  11. Andrei A Levchenko, 2004. "Institutional Quality and International Trade," IMF Working Papers 04/231, International Monetary Fund.
  12. Robert E. Hall & Charles I. Jones, 1999. "Why do Some Countries Produce So Much More Output Per Worker than Others?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 83-116.
  13. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  14. François Bourguignon & Thierry Verdier, 2005. "The Political Economy of Education and Development in an Open Economy," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 529-548, 08.
  15. Dani Rodrik, 1998. "Trade Policy and Economic Performance in Sub-Saharan Africa," NBER Working Papers 6562, National Bureau of Economic Research, Inc.
  16. Bourguignon, Francois & Verdier, Thierry, 2000. "Is financial openness bad for education? A political economy perspective on development," European Economic Review, Elsevier, vol. 44(4-6), pages 891-903, May.
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