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Institutions and Development: The Interaction between Trade Regime and Political System

  • Falkinger, Josef

    ()

    (University of Zurich)

  • Grossmann, Volker

    ()

    (University of Fribourg)

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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1242.

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Length: 56 pages
Date of creation: Aug 2004
Date of revision:
Publication status: published in: Journal of Economic Growth, 2005, 10 (3), 229-270
Handle: RePEc:iza:izadps:dp1242
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