This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental cause of differences in economic development. We first document the empirical importance of institutions by focusing on two "quasi–natural experiments" in history, the division of Korea into two parts with very different economic institutions and the colonization of much of the world by European powers starting in the fifteenth century. We then develop the basic outline of a framework for thinking about why economic institutions differ across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are social decisions, chosen for their consequences. Because different groups and individuals typically benefit from different economic institutions, there is generally a conflict over these social choices, ultimately resolved in favor of groups with greater political power. The distribution of political power in society is in turn determined by political institutions and the distribution of resources. Political institutions allocate de jure political power, while groups with greater economic might typically possess greater de facto political power. We therefore view the appropriate theoretical framework as a dynamic one with political institutions and the distribution of resources as the state variables. These variables themselves change over time because prevailing economic institutions affect the distribution of resources, and because groups with de facto political power today strive to change political institutions in order to increase their de jure political power in the future. Economic institutions encouraging economic growth emerge when political institutions allocate power to groups with interests in broad–based property rights enforcement, when they create effective constraints on power–holders, and when there are relatively few rents to be captured by power–holders. We illustrate the assumptions, the workings and the implications of this framework using a number of historical examples.
In Takatoshi Ito and Andrew K. Rose eds. Growth and Productivity in East Asia, Chicago and London; The University of Chicago Press.
There is a growing consensus among economists that differences in institution, in particular the enforcement of property rights, rule of law, and constraints placed on politicians and elites, have a first–order effect on long–run economic development? Recent empirical findings support this notion. There is a strong correlation between institutions and economic financial development? especially when we look at the historically determined differences in institutions? In this paper and a companion paper, Acemoglu et al. (2003), we argue that institutions also have a first–order effect ion short– and medium–run economic instability. We document that societies that have weak institutions for historical reasons have suffered substantially more output volatility and experienced more severe output, exchange rate, banking, and political crises over the past thirty years. The link we document between the historically determined component of institutions and economic instability calls for a quiet different view of medium–run macroeconomic volatility, and for more work to understand the relationship between institutions and volatility. This paper is therefore meant more as a progress report to encourage others to investigate these issues.
This paper analyzes the economic impact of export subsidies by investigating stock price reactions to a critical event in 1997. On November 18, 1997, the European Union announced its intention to file a complaint before the World Trade Organization (WTO), arguing that the United States provided American exporters illegal subsidies by permitting them to use Foreign Sales Corporations to exempt a fraction of export profits from taxation. Share prices of American exporters fell sharply on this news, and its implication that the WTO might force the United States to eliminate the subsidy. The share price declines were largest for exporters whose tax situations made the threatened export subsidy particularly valuable. Share prices of exporters with high profit margins also declined markedly on November 18, 1997, suggesting that the export subsidies were most valuable to firms earning market rents. This last evidence is consistent with strategic trade models in which export subsidies improve the competitive positions of firms in imperfectly competitive markets.
We examine new survey data on attitudes toward international trade showing that women are significantly less likely than men to support increasing trade with foreign nations. This gender gap remains large even when controlling for a broad range of socio-economic characteristics among survey respondents, including occupational, skill, and industry-of-employment differences that feature in standard political-economy models of individuals’ trade policy preferences. Measures of the particular labor-market risks and costs associated with maternity do not appear to be related at all to the gender gap in trade preferences. We also do not find any strong evidence that gender differences in non-material values or along ideological dimensions have any affect on attitudes toward trade. The data do clearly reveal that the gender gap exists only among college-educated respondents and is larger among older cohorts. We argue that differences in educational experience—specifically, exposure to economic ideas at the college level—appear to be most plausible explanation for gender differences in attitudes toward trade. The findings suggest the possibilities of a renewed theoretical and empirical focus on the political roles played by ideas, not just among policymakers but also among the broader electorate. In practical terms, there are also implications for trade policy outcomes in different contexts and for how debates over globalization contribute to broader gender divisions in politics.
This paper attempts to capture the behavior of agents (states), and the effects of international systemic structure, and the relationship of each to the other in a systemic, dynamic theory of international politics. The "nested politics" model describes how three layers of political authority– individual autonomy nested within state hierarchy nested within interna–tional anarchy–constitute an engine for both changes in state behavior and changes in the distributions that constitute the structure of the inter–national system. This paper discusses the model and examines its logical implications for existing explanations of Great Power behavior.
The rise of the radical right is open to multiple interpretations. The question addressed in this paper is whether many of these parties have fostered an enduring social base among core voters and, if so, which social sectors are most likely to support them. Part I discusses the alternative theoretical frameworks provided by the classic accounts of the 1950s and 1960s, the ?new social cleavage? thesis common during the last decade, and the theory of partisan dealignment. The chapter then compares evidence to analyze rival hypotheses about the social basis of the radical right vote across fifteen nations, using data drawn from the European Social Survey, 2002 and the Comparative Study of Electoral Systems, 1996–2001. Part II focuses upon the role of socioeconomic indicators, while Part III considers the enduring gender gap and patterns of generational support. The conclusion considers the implications of these results for understanding the basis of radical right popularity, and for the stability and longevity of these parties.
This paper is drawn from Chapter 6 of Radical Right: Parties and Electoral Competition, a new book by the author forthcoming with Cambridge University Press (2005).
This paper reassesses the burden of the current U.S. international tax regime and reconsiders well–known welfare benchmarks used to guide international tax reform. Reinventing corporate tax policy requires that international considerations be placed front and center in the debate on how to tax corporate income. A simple framework for assessing current rules suggests a U.S. tax burden on foreign income in the neighborhood of $50 billion a year. This sizeable U.S. taxation of foreign investment income is inconsistent with promoting efficient ownership of capital assets, either from a national or a global perspective. Consequently, there are large potential welfare gains available from reducing the U.S. taxation of foreign income, a direction of reform that requires abandoning the comfortable, if misleading, logic of using similar systems to tax foreign and domestic income.
Many Europeans support common European Union (EU) representation in international institutions. But such a pooling international political influence raises complex and controversial issues. A common European foreign policy position implies compromise among EU members. The pooling international representation thus requires, as with many internal EU policies, that member states weigh the potential benefits of a common policy against the potential costs a policy not to their liking. There can be a trade–off between the advantages of scale and the disadvantages overriding heterogeneous preferences. Simple spatial models help to make this point, to clarify the circumstances in which a common European international representation is most likely, and to explain who is most likely to support or oppose a pooling of European foreign policies.
Over the last two decades, the International Monetary Fund has provided developing countries with over $400 billion in conditional loans, ranging in size from less than $10 million to over $30 billion. What explains the significant variation in the amount and terms (conditionality) of these loans? Why do some countries get a better deal from the IMF, while others receive less Fund credit on more stringent terms? I argue that IMF lending behavior is driven by the interests of and interaction between three key actors: the IMF?s professional staff, the Fund?s five largest member-states (the "G-5"), and private international creditors. Each of these actors influences the IMF policymaking process, but none exercises complete control. Furthermore, these actors? preferences are not constant; rather, they vary over time and across cases based on the composition of a prospective Fund borrower?s private international debt. Changes in debt composition – specifically, differences in the instruments (commercial bank loans vs. bonds) and maturity (short– vs. long–term) of a borrower country?s external debt – shape the preferences of all three key actors over the size and terms of IMF lending packages. Using a new time–series cross–sectional dataset developed for this project, I find that differences in the amount and concentration of G–5 bank exposure, along with changes in the instruments and maturity of a borrower country?s private external debt, have had significant and substantive effects on the size and terms of short–term IMF loans from 1984–2003. Moreover, these effects are at least as large as those of other economic and political factors identified in the literature as important determinants of IMF lending. Ultimately, these results suggest the need to move beyond one–dimensional explanations of Fund policymaking that privilege a single economic or political variable in favor of a more complex and dynamic understanding of the political economy of IMF lending.
This chapter focuses on reconciliation in the context of and in relation to an emerging or recently completed process of conflict resolution. The cases that particularly inform my analysis are the Israeli–Palestinian conflict and other protracted conflicts between identity groups – such as those in Bosnia or Northern Ireland – that re characterized by the existence of incomplete, fragile peace agreements (cf. Rothstein, 1999a). I hope, however, that the analysis also has some relevance to reconciliation in postconflict situations – both those of recent origin, such as South Africa or Guatemala, and those of long standing, such as the German–Jewish or the Franco–German relationship in the wake of World War II. Clearly, there are differences in the nature of reconciliation processes as a function of the stage of the conflict and the time that has elapsed since the end of active hostilities, but such differences need to be accounted for in a comprehensive theory of reconciliation.
In the rubble following the collapse of the World Trade Center towers in the violent assault of September 11 lies the tawdry remnants of religion?s innocence. In those brief horrifying moments our images of religion came of age. Religion was found in bed with terrorism. Whatever bucolic and tranquil notions we may have had were rudely replaced by those that were tough, political, and sometimes violent. Is this the fault of religion? Has its mask been ripped off and its murky side exposed–or has its innocence been abused? Is religion the problem or the victim?
The term "rent–seeking" refers to special interest group efforts to seek special benefits at little or no cost to themselves. Because government spending has the potential to create both costs and benefits for taxpayers, fiscal policy is commonly viewed as a primary arena of rent–seeking activity. At least five different theories of nineteenth–century American urban development fit this general rubric. Each theory predicts different winners and losers as well as different underlying strategies and distributions of interests incumbent upon municipal decision making. This study uses two–wave panel data on special interest group representation and municipal social spending to examine the validity of these different theories of rent–seeking. Though all such theories share in commonan emphasis on self–seeking, this study points to the role of competition between different sectors of the local economy as a motivating force for the formation and mobilization of spe–cial interest group organizations. This finding contrasts with those rent–seeking theories that predict widespread cooperation among communities and/or classes in pursuit of common goals. Suggestions for future research on this topic are offered as well.
Iraq's new interim government has no time to lose. Though it was welcome news when the new Prime Minister, Iyad Allawi, announced that the militias of nine major political parties would disband and join the government's security forces by January 2005, this is only one of the monumental tasks and formidable obstacles that the new government faces. As I discovered in a recent visit to Baghdad, Iraq is in dire need of reconstruction–not only from the miseries of Saddam Hussein?s long dictatorship, but also from the failed policies of the one–year occupation by America's Coalition administration, which has left demoralization, humiliation, and a weak security and economic infrastructure in its wake.
Sadly, in the perception of many Iraqis, the US has taken on the ugly aura of a Saddam–like dictatorship. This means that the former CIA backing of Prime Minister Iyad Allawi will be a problem, as will any other ties that he and members of the new government have to America. Although he cannot delete the CIA support from his resume Allawi will need to demonstrate his independence.
We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross–national dataset into two sub–samples: (i) colonies versus non–colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub–samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.
This essay reviews the state of the scholarly study of Mexican politics. It focuses on research on political change since 1990. It discusses the political origins of economic problems and policies, including the enactment of NAFTA and the 1994–95 financial panic. It assesses the decline of the PRI, the presidency, and official organized labor; the role of urban protest and the Zapatista insurgency; and the revitalization of Congress, the Supreme Court, and state governments. It synthesizes the principal analytical findings on parties, public opinion, and elections.
The Australian story is best understood as a series of experiments. The first was highly problematic: the creation of a society from a collection of convicts and military officers. The second was uplifting: the formation of a new world democracy upon the oldest continent. And the third is audacious: a national reinvention of how Australia interprets itself and relates to the world. Of course, there are many other Australian experiments, so this list is not exhaustive. These experiments, however, have their origin in a fundamental question: What is Australia?s purpose? Is Australia to be defined forever as a museum to a bizarre historical accident–a bunch of Europeans, shipwrecked on the wrong side of the earth–or as a nation that renews itself to offer its own people and the world a more successful and enduring creation? This is the question I want to address in these lectures.
The economic integration of Western Europe after the Second World War proceeded by a circuitous route. It began with the creation of a "Community" to regulate the production and pricing of coal and steel in six European states: West Germany, France, Italy, Belgium, the Netherlands and Luxembourg. The Treaty of Rome then created a"Common Market", formally prohibiting barriers on trade between these countries. Trade between them had been growing rapidly before the formation of this European Economic Community; it continued to grow thereafter—as did world trade generally. However, in other respects economic integration proceeded slowly. In agriculture the development of an integrated market was positively hindered by the persistence of national subsidies until a Common Agricultural Policy superseded these. In manufacturing, too, national governments continued to resist pan-European competition by subsidizing politically sensitive sectors or by imposing non-tariff barriers. Such practices were less frequently adopted in the case of services, but only because services were less easily traded across national boundaries even under conditions of perfect free trade. In short, national markets were not being integrated because they were not really being liberalized. The exception to this rule was financial services, one of which—the sale of long-term corporate and public sector bonds to relatively wealthy investors—became integrated in a quite novel way in the course of the 1960s.
Our analysis begins with the puzzle: how did Botswana develop a legal–rational state? We suggest that three key interlinked factors were important. First, during the pre–colonial period the Tswana developed local states with relatively limited kingship or chiefship and with a political structure that was able to integrate people of other ethnic groups such as Kalanga. Second, facing the onslaught first of the Boers, next of the British South African Company, and finally of the Union of South Africa, Tswana political elites attempted to maintain a good measure of independence by defensively modernizing. (The Tswana were not unique in this British Africa, either in the types of political institutions they evolved, or in their desire to modernize. What is unique about Botswana is they way that local state elites were coordinated in the whole of colonial national territory, pursuing similar policies to fend off the most pernicious effects of colonialism.) Finally, the political elites in both local states before independence and the national state at independence heavily invested in the country?s most important economic activity, ranching. This gave them a strong incentive to promote rational state institutions and private property. Moreover, the integrative nature of traditional Tswana political institutions reduced the likelihood that alternative groups would aggressively contest the power of the new unitary state.
That a group of young people in Iraq recently beheaded Nick Berg, a young American who was in that country working as an independent contractor rebuilding infrastructure, in front of a video camera while proclaiming ?God is Great? should give pause to all of us interested in global peace and civility. Not too long ago, the world was shocked by pictures of American guards treating Iraqi prisoners in the most degrading imaginable forms, in ways clearly counter to basic American and human norms of civility and counter to international conventions about the treatment of prisoners of war.
So that we do not dismiss the horror of these acts as ?casualties of war? we should remember that a few years ago Daniel Pearl, another young American, a journalist working in Pakistan, was beheaded in front of a video camera, as his captors also claimed ?God is Great?. It was the same claim about God?s Greatness that those who hijacked several airplanes made on September 11, 2001, as they slashed the throats of pilots and passengers, and crashed those airplanes against civilian and military targets taking the lives of the largest number of civilians not engaged in combat to die in a single act in recent American history.
These crimes against humanity are not limited to recent acts against Americans or Iraqis, they are the routine form of coercion used by those who choose to pursue their political goals at the margin of national and international legal frameworks, and they are also the forms of coercion used by States against their own citizens, and often against the citizens of other nations. The Rwandan genocide of 1994, the ethnic cleansing in Sudan, the religious wars in Yelwa Nigeria, and fifty years ago the Holocaust are too recent examples, in the scale of human history, of the capacity of humans to lose their humanity in consciously acting to physically take the lives of those whom they perceived as different.
Should we resign ourselves to accept that members of a species that has survived innumerable evolutionary challenges should come from time to time to seek to destroy each other because they came to share norms and values that made this acceptable? Human history offers abundant evidence of the capacity of our species to engage in massive efforts of destruction of human life. Our times are not the first in history in which groups sharing a set of cultural values killed other humans ?in the name of God?.