ECON-2220 Chapter Notes - Chapter 2: New Institutional Economics, Human Capital, Great Divergence
15 May 2018
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Study Guide 2: Historical Roots
The Origins of Comparative Development: An Empirical Investigation
by Acemoglu, Johnson and Robinson
1. What factors are the root causes for the observed differences in income per capita
across countries?
Although there is still little consensus on the answer to this question, differences in
institutions and property rights have received considerable attention in recent years.
2. Why may geography alone not be a viable candidate for explaining observed
differences in economic performance?
For example: the divergent paths of North and South Korea, or East and West Germany,
where one part of the country stagnated under central planning and collective ownership,
while the other prospered with private property and a market economy. Similar
geographies but different regimes and outcomes, serving as evidence that there must be
other factors.
3. What are the three premises that form the foundation for AJR’s results?
1. There were different types of colonization policies which created different sets of
institutions.
a. At one extreme, European powers set up extractive states, which did not
introduce much protection for private property or provide checks and
balances against government expropriation
b. At the other extreme, many Europeans migrated and settled in a number of
colonies, creating what the historian Alfred Crosby calls Non-Europes,
where the settlers tried to replicate European institutions, with strong
emphasis on private property and checks against government power
2. The colonization strategy was influenced by the feasibility of settlements.
a. In places where the disease environment was not favorable to the European
settlement, the cards were stacked against the creation of Non-Europes, and
the formation of the extractive state was more likely
3. The colonial state and institutions persisted even after independence.
4. What was the main cause of death for Europeans in the colonies?
Diseases
5. North (1999), la Porta (1998, 1999) and Landes (1998) argued that differences among
colonies’ performance was due to colonizer’s origin, where former British colonies
prospered relative to former French, Spanish, and Portuguese colonies because of the
good economic and political institutions and culture they inherited from Britain. Explain
how this proposal differs from AJR’s theory.
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They hypothesize that settler mortality affected settlements; settlements affected early
institutions; and early institutions persisted and formed the basis of current institutions.
6. Provide 3 possible explanations to justify the persistence of institutions argued by
AJR.
1. Setting up institutions that place restrictions on government power and enforce
property rights is costly. If the costs of creating these institutions have been sunk by
the colonial powers, then it may not pay the elites at independence to switch to
extractive institutions. In contrast, when the new elites inherit extractive institutions,
they may not want to incur the costs of introducing better institutions, and may
instead prefer to exploit the existing extractive institutions for their own benefits.
2. The gains to an extractive strategy may depend on the size of the ruling elite. When
this elite is small, each member would have a larger share of the revenues, so the
elite may have a greater incentive to be extractie. In many cases where European
powers set up authoritarian institutions, they delegated the day-to-day running of
the state to a small domestic elite. This narrow group often was the one to control
the state after independence and favored extractive institutions.
3. If agents make irreversible investments that are complementary to a particular set
of institutions, they will be more willing to support them, making these institutions
persist. For example, agents who have invested in human and physical capital will
be in favor of spending money to enforce property rights, while those who have less
to lose may not be.
7. Briefly explain what the AJR theory is about. What is AJR theory main contribution?
They argued that differences in colonial experience could be a source of exogenous
differences in institutions. While there is consensus that institutions are at the root of
diversity, there is little agreement about what determines institutions and government
attitudes towards economic progress, making it difficult to isolate exogenous sources of
variation in institutions to estimate their effect on performance.
Institutions and the Historical Roots of Latin American Divergence
Chp1 by Luis Bertola and Ocampo
1. Describe the relative performance of Latin America (LA) to the West and the rest of the
world during the three historical periods: 1) 1820 and 1870 2) 1870 and 1980, and 3) after
1980.
1820-1870: World average annual growth was .6%, 12 Western European countries were
growing at 1% and the U.S. at 1.3%. Latin American growth was only .4%. The gap between
Latin America and Europe 12 increased from .9 to 1.6 of Latin America’s per capita GDP.
These decades following independence were lost in terms of relative performance and
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potential growth. Disparities increased significantly during this period, as the commodity
lottery allowed some regions to grow fast while others remained stagnant.
● 1820: independence, high cost of independence in terms of relevant development
because the gap between LA and the west doubled
1870-1980: Latin American performance seems to be reasonably good at first glance. Latin
America went up from .9 of the world average to 1 in 1913 and 1.4 in 1950. However, the
absolute gap between per capita income in the West and that of Latin America increased
by 81% between 1870 and 1913 and by a further 53% between 1913 and 1950. Latin
America’s performance after the 1970s was relatively poorer, in spite of a slower growth
rate in the West.
● 1870-1914: agro commodity export growth model, high positive growth explained
by insertion to international markets, relative gap with the west improved or
remained stable
● WWI: started to fall behind
● 1940-1980: LA implemented ISI, and during this time the west experienced a large
growth
● 1980-90: lost decade,experienced debt crisis, lagged behind in spite of growth rate
in the west, collapse of ISI
● After 1990: created a table that says that between 1990 and 2002, these countries
have implemented washington consensus, neo liberal free market approach
● 2002-2008: economic boom and they walk away from washington consensus,
washington descensus, populist governments ”pink wave)
● Now walking away from populism
2. What precipitated/accelerated the great divergence between LA and the West?
3. According to Neo-Institutional theories what are the fundamental causes of LA lack of
development? What is then their policy implication?
The basic idea that the fundamental causes of Latin America’s long-run backwardness are
to be found in the institutions that were set up shortly after the Spanish conquest, which
promoted a high concentration of wealth and political power. Regardless of their
disagreement about the factors that ultimately determined the nature of these institutions,
or even the timing, these authors all seem to trace Latin American backwardness to its
colonial roots. No policy recommendation imposed from the outside can easily change
long-run trends unless considerable domestic changes also take place.
4. What are institutions? Provide examples.
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Document Summary
For example: the divergent paths of north and south korea, or east and west germany, where one part of the country stagnated under central planning and collective ownership, while the other prospered with private property and a market economy. Explain how this proposal differs from ajr"s theory. They hypothesize that settler mortality affected settlements; settlements affected early institutions; and early institutions persisted and formed the basis of current institutions: provide 3 possible explanations to justify the (cid:522)persistence of institutions(cid:523) argued by. Ajr: setting up institutions that place restrictions on government power and enforce property rights is costly. If the costs of creating these institutions have been sunk by the colonial powers, then it may not pay the elites at independence to switch to extractive institutions. When this elite is small, each member would have a larger share of the revenues, so the elite may have a greater incentive to be extractie.
