INSTITUTIONS RULE: THE PRIMACY OF INSTITUTIONS OVER GEOGRAPHY AND INTEGRATION IN ECONOMIC DEVELOPMENT By Dani Rodrik, Arvind Subramanian and Francesco Trebbi AND In Search of the Holy Grail: Policy Convergence, Experimentation, and Economic

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INSTITUTIONS RULE THE PRIMACY OF INSTITUTIONS
OVER GEOGRAPHY AND INTEGRATION IN ECONOMIC
DEVELOPMENTBy Dani Rodrik, Arvind
Subramanianand Francesco TrebbiANDIn Search
of the Holy Grail Policy Convergence,
Experimentation, and Economic PerformanceBy
Sharun Mukand and Dani Rodrik

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• Presenters
• Seidu Issah Elizabeth Rivard

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Outline

• Introduction
• Interaction Institutions, Geography and
  Integration
• Benchmark results
• What other works say
• What does it all mean?
• Conclusion

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Introduction

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

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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 economys integration with
  the rest of the world can be measured by flows of
  trade or the height of trade barriers

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Effects of Geography
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Benchmark Results

• logYi µaINSißINTi ?GEOiei
• where yi income per capita in country i INSi
  measures for institutions INTi measures for
  integration, and GEOi measures for geography
  and ei random error term.
• Countries with stronger institutions, more open
  economies, and more distant from the equator are
  likely to have higher levels of income

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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)

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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.

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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?

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The primacy of institutional quality does not
imply policy effectiveness

• 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.

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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

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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

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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?

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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?

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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 leaders 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

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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

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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 leaders policies
• Far periphery countries are unaffected by the
  leaders 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.

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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.

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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

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Graphs
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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

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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 countrys
  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 doesnt matter that they
  are corrupt, or the policy wont work so the
  corrupt government will not survive anyway.

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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.

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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.