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 - PowerPoint PPT Presentation

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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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By Dani Rodrik, Arvind Subramanian. and Francesco Trebbi. AND ... By Sharun Mukand and Dani Rodrik. Presenters: Seidu Issah & Elizabeth Rivard ... – PowerPoint PPT presentation

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Title: 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


1
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

2
Outline
  • Introduction
  • Interaction Institutions, Geography and
    Integration
  • Benchmark results
  • What other works say
  • What 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 economys 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 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

7
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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

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.

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 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

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 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.

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
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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 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.

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.
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