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Why the US and not Brazil? Old Elites and the Development of a Modern Economy

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Abstract

Old elites can block changes, but not all do. Why is it that stronger elites may allow more changes than weaker elites? Why do economies with larger stocks of natural resources not grow faster than economies poorer in natural resources? We argue that old elites hold some power to extract rents from the economy. Whereas old sectors (i.e. agriculture or extraction of natural resources) are not affected by rent extraction, modern sectors require investments that do react to rent extraction. At the same time, a modern sector relies on networks of firms. These structures form the basis of political power of a new elite, which reduces the ability of the old elite to extract rents. We show that countries rich in natural resources provide their old elite with incentives to extract rents so high that the private sector has no incentives to build up a modern economy. If the old elite is either politically very strong or the natural resource sector is small compared to the potential of the modern sector, the old elite will choose to extract smaller rents from a growing sector. Some empirical evidence completes the paper.

Suggested Citation

  • Uwe Dulleck & Paul Frijters, 2004. "Why the US and not Brazil? Old Elites and the Development of a Modern Economy," Vienna Economics Papers 0408, University of Vienna, Department of Economics.
  • Handle: RePEc:vie:viennp:0408
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    1. Daron Acemoglu & James A. Robinson, 2001. "A Theory of Political Transitions," American Economic Review, American Economic Association, vol. 91(4), pages 938-963, September.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Will the resource curse stifle democracy in Libya?
      by Paul Frijters in Core Economics on 2011-08-23 10:24:43
    2. Will the resource curse stifle democracy in Libya?
      by Paul Frijters in Club Troppo on 2011-08-23 10:23:19

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    Cited by:

    1. James C. Rockey, 2007. "Which Democracies Pay Higher Wages?," Bristol Economics Discussion Papers 07/600, Department of Economics, University of Bristol, UK.

    More about this item

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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