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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.

Suggested Citation

  • Josef Falkinger & Volker Grossmann, 2004. "Institutions and Development: The Interaction between Trade Regime and Political System," CESifo Working Paper Series 1279, CESifo.
  • Handle: RePEc:ces:ceswps:_1279
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    2. Matteo Cervellati & Alireza Naghavi & Farid Toubal, 2018. "Trade liberalization, democratization, and technology adoption," Journal of Economic Growth, Springer, vol. 23(2), pages 145-173, June.
    3. 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.
    4. Jonathan Temple & Ludger Wößmann, 2006. "Dualism and cross-country growth regressions," Journal of Economic Growth, Springer, vol. 11(3), pages 187-228, September.
    5. Rodriguez Acosta, Mauricio, 2016. "Essays in political economy and resource economic : A macroeconomic approach," Other publications TiSEM 1e39ef1b-43a2-4f95-892c-6, Tilburg University, School of Economics and Management.
    6. 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.
    7. Franco Mariuzzo & Patrick Paul Walsh & Ciara Whelan, 2004. "EU Merger Control in Differentiated Product Industries," CESifo Working Paper Series 1312, CESifo.
    8. Falkinger, Josef & Grossmann, Volker, 2013. "Oligarchic land ownership, entrepreneurship, and economic development," Journal of Development Economics, Elsevier, vol. 101(C), pages 206-215.
    9. Antonio Navas-Ruiz, 2008. "On Trade Openness, Institutional Change and Economic Growth," Working Papers halshs-00326394, HAL.
    10. Pao-Li Chang & Fali Huang, 2010. "Trade and Divergence in Education Systems," Working Papers 33-2010, Singapore Management University, School of Economics.
    11. Arsham Reisinezhad, 2018. "Economic Growth and Income Inequality in Resource Countries: Theory and Evidence," Working Papers halshs-01707976, HAL.
    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. 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.
    14. 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.
    15. 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.
    16. 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.

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    More about this item

    Keywords

    economic development; institutions; political system; public education; trade;
    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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