acemoglu, robinson and johnson

8/2/2019 Acemoglu, Robinson and Johnson

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Wade C. Roberts, Ph.D.


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They ask a question:Why are somecountries poorer than

others? Fundamental explanationfor growth isinstitutions. North and Thomass quote:

the factors we have listed(innovation, economies ofscale, education, capitalaccumulation etc.) are notcauses of growth; they aregrowth.


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They place primary importance on economicinstitutions, such as structure of property

rights and perfection of markets.


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1) institutions matter for economicgrowth because they shape theincentives of key economic actors in

society, in particular, they influenceinvestments in physical and humancapital and technology, and theorganization of production.

Although geography and culturemay also matter, differences ineconomic institutions are the majorsource of cross-country differencesin growth and prosperity.


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Economic

institutions

economicperformance,distribution ofresources.


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2) Economic institutions are endogenous,determined by social choices. Those with

most political power determine economicinstitutions.

Political power economic institutions.


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3) Distribution of politicalpower is also endogenous.Useful to distinguishbetween two components of

political power: de jure(institutional) political powerand de facto political power. Political institutions de jure

political power Distribution of resources defacto political power


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Broad framework:


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Example: property rightsdeveloped in Europe in the MiddleAges. The king had all power, and

power to arbitrarily take yourproperty little incentive to investdue to such economic institutions.Accordingly, growth rates were lowand the distribution of resourceswas vastly unequal.


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17th century merchantsand landed gentrystarted getting wealthy

due to overseas andinternal trade. They wanted rights to

their private property.

King wanted to tax the*!&% out of them.

Wealth increased theirpower.


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Their de facto politicalpower overcamemonarch in English

Civil War and theGlorious Revolution.

Changed politicalinstitutions, which

changed economicinstitutions which ledto growth and theindustrial revolution.


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Good economicinstitutions growth.What are goodeconomic institutions? Those that provide

security of property

rights and relativelyequal access toeconomic resources to abroad cross-section ofsociety.


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Good economicinstitutions comeabout by having:

Political institutionsthat place checks onthose who hold power.

Political power in thehands of a relatively

broad group withsignificant investmentopportunities.


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Bad institutions arisebecause the groups with

political power benefitfrom the existence ofbad institutions.


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THREEHYPOTHESES OFTHE

FUNDAMENTALCAUSES OFGROWTH

1- EconomicInstitutions

Incentives to innovate,take risks, invest.


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2- Geography

Climate and laziness

Geography and

technology disease burden


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3- Culture

Religion

National heritage


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Acemoglu, et al argue thatthere is convincingempirical support for the

hypothesis thatdifferences in economicinstitutions, rather thangeography or culture

cause differences inincomes per-capita.


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Is there acorrelationbetween

propertyrights (risk ofexpropriation)and growth


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The Korean

Experiment

A natural experiment

in institutional change. North Korea

abolished privateproperty of land andcapital, state notmarket

South Korea private

property and markets


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Before the naturalexperiment of institutionalchange, note that bothshared the same history andcultural roots. Fewgeographic distinctionsbetween them, sharedclimate and diseaseenvironment. Similar

geographies and mineralendowments. Both haveaccess to markets and similarcosts of transportation. Very homogeneous.


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The only thing that issignificantly different isinstitutions. We have anatural experiment that

controls for everything else. South Korea is member of

OECD and North Korea issimilar to sub-Saharan Africa.

Does this illustrate thatinstitutions influence growthand development?

Does it make it the mostimportant factor?


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The changeoccurred in 1970.What path dideach country

take?


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If poor countries are poorbecause they have badeconomic institutions

why do they not changethem to betterinstitutions?


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Is there really a connection between propertyrights (economic freedom) and wellbeing?


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Lets check out the data: http://www.heritage.org/Index/Ranking.aspx

Excel raw data

2010 Index of Economic Freedom
http://www.heritage.org/Index/Ranking.aspxhttp://www.heritage.org/Index/Ranking.aspx


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2010 Index of Economic Freedom For over a decade, The Wall Street Journal and The Heritage

Foundation, Washington's preeminent think tank, have tracked themarch of economic freedom around the world with the influentialIndex of Economic Freedom.


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2010 Index of EconomicFreedom

Since 1995, the Index has broughtAdam Smith's theories about

liberty, prosperity and economicfreedom to life by creating 10benchmarks that gauge theeconomic success of 183 countriesaround the world. With its user-friendly format, readers can see

how 18th century theories onprosperity and economic freedomare realities in the 21st century.


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What is economic freedom? Economic freedom is the

fundamental right of every human tocontrol his or her own labor andproperty. In an economically freesociety, individuals are free to work,produce, consume, and invest in anyway they please, with that freedomboth protected by the state andunconstrained by the state.

In economically free societies,governments allow labor, capital andgoods to move freely, and refrainfrom coercion or constraint of libertybeyond the extent necessary to

protect and maintain liberty itself.


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What are the benefits ofeconomic freedom?

Studies demonstrate importantrelationships between economic

freedom and positive social andeconomic values such as per capitaincome, economic growth rates,human development, democracy,the elimination of poverty, and

environmental protection.


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How is economic freedommeasured? We measure ten components of economic freedom,

assigning a grade in each using a scale from 0 to

100, where 100 represents the maximum freedom.

The ten component scores are then averaged togive an overall economic freedom score for each

country. The ten components of economic freedomare:

Business Freedom

Trade Freedom

Fiscal Freedom

Government Spending

Monetary Freedom

Investment Freedom

Financial Freedom

Property Rights

Freedom from Corruption

Labor Freedom


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1- Business Freedom

Business freedom is a quantitative measure of the ability to

start, operate, and close a business that represents the overall

burden of regulation as well as the efficiency of government in

the regulatory process. The score is based on 10 factors, all

weighted equally, using data from the World Banks Doing

Business study: Starting a businessprocedures (number)

Starting a businesstime (days)

Starting a businesscost (% of income per capita)

Starting a businessminimum capital (% of income per

capita)

Obtaining a licenseprocedures (number)

Obtaining a licensetime (days)

Obtaining a licensecost (% of income per capita)

Closing a businesstime (years)

Closing a businesscost (% of estate)

Closing a business

recovery rate (cents on the dollar)


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2- Trade FreedomTrade freedom is a composite measure ofthe absence of tariff and non-tariff barriersthat affect imports and exports of goods andservices. Different imports entering a

country can, and often do, face differenttariffs. The weighted average tariff usesweights for each tariff based on the share ofimports for each good . The trade freedomscore is based on two inputs:

The trade-weighted average tariffrate

Non-tariff barriers (NTBs)


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3- Fiscal FreedomFiscal freedom is a measure of the tax burdenimposed by government. It includes both thedirect tax burden in terms of the top tax rateson individual and corporate incomes and the

overall amount of tax revenue as a percentageof GDP. Thus, the fiscal freedom component iscomposed of three quantitative factors:

The top tax rate on individual income

The top tax rate on corporate income

Total tax revenue as a percentage of GDP


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4- Government Spending

This component considers the level of

government expenditures as a percentage of GDP.

Government expenditures, including consumption

and transfers, account for the entire score.

No attempt has been made to identify an ideallevel of government expenditures. The ideal level

will vary from country to country, depending onfactors ranging from culture to geography to level

of development.

The scale for scoring government spending is

non-linear, which means that government

spending that is close to zero is lightly penalized,while levels of government spending that exceed

30 percent of GDP receive much worse scores in a

quadratic fashion (e.g., doubling spending yields

four times less freedom), so that only really large

governments receive very low scores.


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5- Monetary FreedomMonetary freedom combines a measure ofprice stability with an assessment of pricecontrols. Both inflation and price controlsdistort market activity. Price stability

without microeconomic intervention is theideal state for the free market. The score forthe monetary freedom factor is based ontwo factors:

The weighted average inflation rate

for the most recent three years Price controls


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6- Investment FreedomIn an economically free country, there would beno constraints on the flow of investment capital.

Individuals and firms would be allowed to move

their resources into and out of specific activities

both internally and across the countrys borders

without restriction. Such an ideal country would

receive a score of 100 on the investment freedomcomponent of the Index.

In practice, most countries have a variety of

restrictions on investment. Some have different

rules for foreign and domestic investment; some

restrict access to foreign exchange; some imposerestrictions on payments, transfers, and capitaltransactions; certain industries are closed to

foreign investment. Moreover, labor

regulations, corruption, red tape, weak

infrastructure, and political and security

conditions can also affect the freedom that

investors have in a market.


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7- Financial FreedomFinancial freedom is a measure of bankingsecurity as well as a measure ofindependence from government control.State ownership of banks and other financial

institutions such as insurers and capitalmarkets reduces competition and generallylowers the level of available services.

The Indexscores this component bydetermining the extent ofgovernmentregulation of financial services; the extent

ofstate intervention in banks and otherfinancial services; the difficulty of openingand operating financial services firms (forboth domestic and foreign individuals); andgovernment influence on the allocation ofcredit.


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8- Property RightsThe property rights component is an assessmentof the ability of individuals to accumulate private

property, secured by clear laws that are fully

enforced by the state. It measures the degree to

which a countrys laws protect private propertyrights and the degree to which its government

enforces those laws. It also assesses thelikelihood that private property will be

expropriated and analyzes the independence of

the judiciary, the existence of corruption within

the judiciary, and the ability of individuals and

businesses to enforce contracts. The morecertain the legal protection of property, thehigher a countrys score; similarly, the greater

the chances of government expropriation of

property, the lower a countrys score.


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9- Freedom from Corruption

Corruption erodes economic freedom byintroducing insecurity and uncertaintyinto economic relationships. The score forthis component is derived primarily from

Transparency International's CorruptionPerceptions Index (CPI), which measuresthe level of corruption in 180 of the 183countries.


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10- Labor Freedom The labor freedom component is a quantitative

measure that looks into various aspects of the

legal and regulatory framework of a country's

labor market. It provides cross-country data on

regulations concerning minimum wages; laws

inhibiting layoffs; severance requirements; and

measurable regulatory burdens on hiring, hours,and so on. Factors include:

Ratio of minimum wage to the averagevalue added per worker

Hindrance to hiring additional workers Rigidity of hours

Difficulty of firing redundantemployees

Legally mandated notice period

Mandatory severance pay


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The top 10: http://www.heritage.org/Index/TopTen.aspx
http://www.heritage.org/Index/TopTen.aspxhttp://www.heritage.org/Index/TopTen.aspx

acemoglu, robinson and johnson

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