october 9, 2007 university of warsaw 1 institutions rule: the primacy of institutions over geography...

October 9, 2007 University of Warsaw

1

INSTITUTIONS RULE: THE PRIMACY OF INSTITUTIONS OVER GEOGRAPHY AND INTEGRATION

IN ECONOMIC DEVELOPMENTBy Dani Rodrik, Arvind Subramanian

and Francesco Trebbi

AND

In Search of the Holy Grail: Policy Convergence, Experimentation, and Economic Performance

By Sharun Mukand and Dani Rodrik

Presenters:

Seidu Issah & Elizabeth Rivard


2

Outline

Introduction Interaction: Institutions, Geography

and IntegrationBenchmark resultsWhat other works sayWhat does it all mean?Conclusion


3

Introduction

3 strands of thought emerge as possible candidates for the variation in levels of economic growth and development: – Geography – Institutions – Integration


4

How are they measured?

Geography– Such as distance from the equator (our preferred measure),

percentage land mass located in the tropics, or average temperature

Institutional Quality– The quality of institutions can be measured with a range of

perceptions-based indicators of property rights and the rule of law Integration

– The intensity of an economy’s integration with the rest of the world can be measured by flows of trade or the height of trade barriers


5

Effects of Geography


6

Benchmark Results

logYi = μ+αINSi+βINTi + γGEOi+εi

where yi = income per capita in country i; INSi = measures for institutions; INTi = measures for integration, and GEOi = measures for geography; and εi = random error term.

Countries with stronger institutions, more open economies, and more distant from the equator are likely to have higher levels of income


7


8

What others say

3 papers that have made significant contributions to this topic and are worth discussing are: – Easterly Levine (EL, 2002)– Alcala and Ciccone (AC, 2002)– Dollar and Kraay (DK, 2002)


9

What does it all mean?

Evaluation, interpretation and comments on the related literature:– An instrumentation strategy should not be

confused with building and testing theories – The relevance of institutions in discussions on

“policies” – The operational implications of the results.


10

An instrument does not a theory make

The results emphasize the supremacy of institutions, very close to AJR. (larger sample and included measure of integration)

Distinction between using an instrument to identify an exogenous source of variation in the independent variable of interest and laying out a full theory of cause and effect.

Missing link in AJR results –– no direct test of the impact of colonial policies on institutions; – how to account for the variation in incomes among countries that

had never been colonized by the Europeans?


11

We find it helpful to think of policy as a flow variable, in contrast to institutions, which is a - stock variable. We can view institutions as the cumulative outcome of past policy actions.

The primacy of institutional quality does not imply policy effectiveness


12

Comments

The argument for geography is not applicable in all cases, but regardless, it makes sense that if a country has good institutions it should not matter where it is located

Using settler mortality limits the number of countries that can really be assessed using this as an instrument for institutions

Settler mortality is highly correlated with geography


13

Comments

Hard to distinguish causality between good institutions and economic growth rather than the opposite

Regarding the integration variable, the size of a country often greatly impacts the value of this variable


14

Introduction

The authors present a game-theoretic model of policy choice and attempt to answer the following questions:

– Why do countries converge on certain “consensus” policies when their circumstances would indicate that the optimal policy is different from that adopted?

– Why do some countries choose to experiment with policymaking rather than imitate policies that have been successful in “leader” countries?

– What is the effect of policy convergence on economic performance?


15

The ModelPolicies are considered to vary on 2 dimensions

“Appropriateness”– Do the policies fit the prevailing

circumstances of the country?– Assuming that policies that are

more appropriate to prevailing conditions will have better results than if the opposite was the case

“Transparency”– Do the policies limit

opportunities for corruption on the part of politicians?

– It is assumed that a policy that is transparent in one country is transparent in all countries and that all appropriate policies are transparent

– But is it possible for a policy to be transparent but the institution administering it is corrupt? What is the outcome?


16

The Model

A 2-stage game where the government and electorate in the follower country have observed a successful (and assumed to be transparent) policy in the leader

Dilemma faced by the follower country: imitate the leader’s policy to signal there is no corruption, but at the cost of adopting an inappropriate (sub-optimal) policy OR

It can choose a policy that is more appropriate to its circumstances, but it will then incur the costs of experimentation and therefore, the cost of being perceived as corrupt


17

The Model

The authors believe it captures the following ideas:– That there is some context-specificity to desirable policies– Transparency is a necessary element of successful policies and

captures the universal element of policymaking– There is a certain level of uncertainty as to which policy is the best– Some governments are more committed than others to finding the

best policies– Informational externalities exist. Countries are able to observe the

outcomes of policies implemented elsewhere


18

Predictions

A U-shape pattern in economic performance is observed

The information externality created by successful leaders means that its neighbors will choose to mimic the leader’s policies

“Far periphery” countries are unaffected by the leader’s success and experiment

“Near periphery” countries are the worst off because they are too far for mimicking to be welfare improving, but close enough for honest governments to mimic.


19

Implications

Despite that governments are interested in the welfare of their country, they are also interested in remaining in power. Thus, they prefer to signal that they are not corrupt by adopting leader policies. However, there is some welfare loss when the government chooses to imitate a policy that is not optimal in order to signal that it is honest.


20

Empirical Findings

Countries close to Western Europe have performed the best during the transition process

Interestingly, the Central Asian states have often performed better than “intermediate” countries, such as Moldova.

Thus, the U-shape hypothesis of outcomes holds according to the author


21

Graphs


22


23


24


25


26

Comments

Cultural similarity seems to be more important than proximity, although the 2 are often related

Seems only applicable to Europe and some cases in Asia, but not in Africa or South America– However, it may be seen as a “warning” to these

areas not to attempt to adopt policies of leader countries since they are likely to have different environments

This model only considers the effect of policy choice on citizen perceptions of their government, not the effect that a countries policy choices have regarding the international community


27

Comments

Paradoxical because on the one hand they say institutions should be specific to the country, yet their model would indicate that it depends on the location of the country and its similarity to a leader that should determine how a country’s institutions should be formulated.

Too much emphasis on policy adoption rather than implementation. A corrupt government that implements a good policy will either correctly implement it, meaning it doesn’t matter that they are corrupt, or the policy won’t work so the corrupt government will not survive anyway.


28

Relationship Between These Texts

Policy choices are often influenced by neighboring countries (leaders) and this might also be the case for institutions as well. Meaning, that geographically close and culturally similar countries will likely have more closely related institutions than those who are geographically and culturally different.


29

Closing Remarks

Also, there is growing evidence that desirable institutional arrangements have a large element of context specificity, arising from differing historical trajectories, political economy etc.

As this all relates to economic openness, the experience of several countries (Thailand for example) demonstrates that without quality institutions, openness may not bring the gains that many economists promise.

october 9, 2007 university of warsaw 1 institutions rule: the primacy of institutions over geography...

Documents