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Institutions and development: The interaction between trade regime and political system


Falkinger, Josef; Grossmann, Volker (2004). Institutions and development: The interaction between trade regime and political system. CESifo Working Paper 1279, CESifo Group Munich.

Abstract

This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.

Abstract

This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:September 2004
Deposited On:09 Oct 2013 09:30
Last Modified:14 Aug 2017 15:07
Series Name:CESifo Working Paper
Number of Pages:59
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.cesifo-group.de/de/ifoHome/publications/working-papers/CESifoWP/CESifoWPdetails?wp_id=14559293
Related URLs:http://dx.doi.org/10.5167/uzh-1188

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