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Trade Openness, Institutional Change and Economic Growth

  • Navas, Antonio

    ()

    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

This paper explores the relationship between trade openness and economic growth through a change in institutions. To do so, the paper creates a theory of endogenous institutional change where there are three social groups, each one owns a specific production factor. An ellite (landowners) controlling the political power fix higher taxes to extract rents from the other groups of the society (capitalists). This reduces investment in capital, the source for endogenous growth. Endogenous institutional change is done by allowing the rival group (capitalists) to invest in a military action which expels out the group in power. The model studies optimal taxation, growth and institutional change under two scenarios, autarky and free trade. The model is calibrated according to the Western European experience in the Modern Age. Generally, economies opened to trade will experiment higher growth and earlier institutional change although economies specializing in manufacturing products tend to grow more and rise the institutional change earlier. These results are qualitatively very robust to change in parameter values.

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Paper provided by Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) in its series Working Papers in Economic Theory with number 2009/05.

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Length: 31 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:uam:wpaper:200905
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  1. O Rourke, Kevin H. & Williamson, Jeffrey G., 2002. "When did globalisation begin?," European Review of Economic History, Cambridge University Press, vol. 6(01), pages 23-50, April.
  2. 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, 09.
  3. Eicher, Theo & García-Peñalosa, Cecilia, 2008. "Endogenous strength of intellectual property rights: Implications for economic development and growth," European Economic Review, Elsevier, vol. 52(2), pages 237-258, February.
  4. Rubén Segura-Cayuela, 2006. "Inefficient policies, inefficient institutions and trade," Banco de Espa�a Working Papers 0633, Banco de Espa�a.
  5. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," NBER Working Papers 10568, National Bureau of Economic Research, Inc.
  6. Oded Galor & Omer Moav & Dietrich Vollrath, 2005. "Land Inequality and the Emergence of Human Capital Promoting Institutions," Development and Comp Systems 0502018, EconWPA.
  7. Gonzalez, Francisco M., 2007. "Effective property rights, conflict and growth," Journal of Economic Theory, Elsevier, vol. 137(1), pages 127-139, November.
  8. 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.
  9. Lvarez-Nogal, Carlos & Prados De La Escosura, Leandro, 2007. "The decline of Spain (1500 1850): conjectural estimates," European Review of Economic History, Cambridge University Press, vol. 11(03), pages 319-366, December.
  10. Luis A. Rivera-Batiz & Paul M. Romer, 1990. "Economic Integration and Endogenous Growth," NBER Working Papers 3528, National Bureau of Economic Research, Inc.
  11. Keefer, Philip & Knack, Stephen, 1997. "Why Don't Poor Countries Catch Up? A Cross-National Test of Institutional Explanation," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 590-602, July.
  12. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  13. Stephen L. Parente & Edward C. Prescott, 2002. "Barriers to Riches," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661306, June.
  14. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
  15. Matthias Doepke & Fabrizio Zilibotti, 2005. "Social Class and the Spirit of Capitalism," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 516-524, 04/05.
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