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Inefficient Policies, Inefficient Institutions and Trade

  • Ruben Segura-Cayuela

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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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 502.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:502
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  1. 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, MIT Press, vol. 114(1), pages 83-116, February.
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  4. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Trade, inequality, and the political economy of institutions," Policy Research Working Paper Series 3836, The World Bank.
  5. François Bourguignon & Thierry Verdier, 2001. "The Political Economy of Education and Development in an Open Economy," DELTA Working Papers 2001-11, DELTA (Ecole normale supérieure).
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  7. 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.
  8. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
  9. Paolo Epifani & Gino Gancia, 2008. "Openness, Government Size and the Terms of Trade," IEW - Working Papers 359, Institute for Empirical Research in Economics - University of Zurich.
  10. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
  11. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  12. Verdier, Thierry, 2004. "Socially Responsible Trade Integration: A Political Economy Perspective," CEPR Discussion Papers 4699, C.E.P.R. Discussion Papers.
  13. Galor, Oded & Mountford, Andrew, 2006. "Trade and the Great Divergence: The Family Connection," CEPR Discussion Papers 5490, C.E.P.R. Discussion Papers.
  14. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers 1826, Stanford University, Graduate School of Business.
  15. Rubén Segura-Cayuela, 2006. "Inefficient policies, inefficient institutions and trade," Banco de Espa�a Working Papers 0633, Banco de Espa�a.
  16. Dani Rodrik, 1998. "Trade Policy and Economic Performance in Sub-Saharan Africa," NBER Working Papers 6562, National Bureau of Economic Research, Inc.
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