Institutions Economic Development Corruption and Institutions What do

Institutions & Economic Development

Corruption and Institutions What do we learn about institutions from the NYC parking ticket example? 10 Ways to Fight Corruption (World Bank)

Corruption as a Regressive Tax

Costs of Corruption in Zimbabwe: Meet Mugabe

Mugabe Replaced with the “Crocodile” in Nov 2017 • • “We have removed a tyrant, ” former minister of education David Coltart said, “but not yet a tyranny. ” Yet when corruption and despotism take root as political norms, the removal of ruinous old regimes hardly guarantees a movement toward democracy. Far from it. A country’s new leaders arise from the same political environment that the old regime created. In countries around the world, from Egypt to Myanmar to Russia, the bad old ways have given way not to democracy and forwardlooking governance, but to a renewal of repression. Indeed, corruption — the abuse of public position for private gain — is the factor most responsible for the replacement of old tyrants by new tyrants. In Zimbabwe, as in other cases, control of the levers of state has funneled immense spoils to a ruling elite. Enrichment is the fuel that drives the perpetuation of tyranny. There is hope for Zimbabwe as well. While Mnangagwa is very much a Mugabe clone, his bloodless coup has unleashed popular expectations that will be difficult to contain. And if nothing else, his and his generals’ continued enrichment depends on revving up Zimbabwe’s economy. That may be motive enough to bring some economic change to the former breadbasket of Africa.

Institutions Rules of a society or organization that facilitate coordination among people by helping them form expectations that each person can reasonably hold when dealing with others How then does corruption pertain to institutions?

Institutions & Path Dependency Sometimes institutions change abruptly or are imposed by external forces or authorities, but often they emerge in more subtle ways! “Men make their own history, but not of their free will…The tradition of the dead generations weighs like a nightmare on the minds of the living. ” - Karl Marx

(Path Dependent!) Table Manners as Institutions You just sat down to eat Thanksgiving dinner. You have a generous slice of succulent turkey (tofurkey) on your plate. Which of the following best characterizes the way you eat your meat (tofu)? A. Hold fork in left hand knife in right to cut. Eat with fork still in left hand. B. Hold fork in left hand knife in right to cut. Switch fork to right hand. Eat with fork in right hand. C. Other

Travis J. Lybbert (2010) “The Economics Roots of the American “Zigzag”: Knives, Forks, and British Mercantilism” Economic Inquiry Current differences in knife and fork usage between Americans and Europeans show institutions can emerge from economic forces and then persist across generations. Great Britain Table fork arrives. Table knife is civilized (softened). 1600 1776 1700 w/ soft knife but no fork the zigzag emerges. † Fork replaces spoon in zigzag. Pressure to confirm locks in zigzag. Colonies can’t manufacture goods. Must import from Britain. Colonists must adopt ‘soft’ knife, but not expensive table fork. †Eat meat with these utensils to see why.

Mercantilist Roots of the American Zigzag Great Britain 1600 Colonies 1700 1776

Institutions Matter Big Time • Inclusive Institutions Political systems that are pluralistic, protect individual rights, and create the conditions that reward innovation and entrepreneurship, including secure private property and competitive markets • Extractive Institutions Concentrated political power and economic institutions that reinforce and often enrich the powerful few. Like mining: Gold mining extracts but does not create gold Daron Acemoglu (MIT) and James Robinson (Harvard), Why Nations Fail (2012)

Why Nations Fail Acemoglu & Robinson (2012) • Differences in economic and political institutions are the dominant explanation for why some countries are rich and others poor • Institutions can be a potent economic force because of the positive or negative dynamics they trigger • Elites may not want things to improve, since genuine improvements may deteriorate their power • Remember Mugabe!?

Counterpoint: Institutions Aren’t Everything • Authoritarian elites aren’t necessarily hostile to economic progress • The diffusion of technology from other countries sometimes matters more than innovation • Even if we could magically transform institutions, unfavorable geography and other factors may continue to constrain growth and development Jeff Sachs Daron Acemoglu

An Instrument for Institutions: Malaria? (Sidebar 8. 2) • Why exactly do we need an “instrument” to infer that institutions cause development outcomes? • If Europeans could live in a place without a constant threat of tropical diseases or other hazards, they tended to import more inclusive institutions • If mortality risks kept Europeans from settling en masse in a location, they opted for more extractive institutions • “Settler mortality risk” as instrument for extractive institutions? • [Ch 2] A good instrument in this case should be highly correlated with extractive institutions (it is) and not have a direct effect on current income (? ) • Mortality risk in 1850 may also be correlated with mortality risk today, which may directly affect income today and may undermine its usefulness as an instrument

So Where Do Institutions Come From? • William Easterly: Top-down vs. bottom-up • The top down view: institutions are created by leaders and legislators who govern and establish laws. • The bottom up view: institutions emerge organically in response to local conditions and constantly evolve based on the social norms, traditions, values & beliefs of individuals as they interact and exchange with each other in a society laws are codified and accepted after (because) they seem reasonable & useful to people

Emergent Institutions Shape Our World But Are Often Invisible

Why Does It Matter How Institutions Emerge? • Top down: Leaders and legislators can determine a society’s institutional path o Including revolutionary do-overs o Experts and planners are needed! • Bottom up: Institutions only change gradually, as individuals change their values or beliefs o Astute leaders and legislators formalize these institutions into laws and regulations o Institutions are “evolutionary rather than revolutionary. ” o “Evolution is smarter than you are. ” o Big plans are destined to fail: Searchers beat Planners! • In practice, societies thrive by balancing both forces!

A Sampling of Other Institutions that Shape Economic Growth & Development 1. Institutions that govern time 1. Institutions that govern land 1. Institutions that direct entrepreneurs

Institutions that Govern Time • In the US: o Standardized times and time zones emerged in 1880 s as railroads facilitated transportation and communication over long distances o The US Congress officially legislated standard times 35 years later • In India: o British created standard times and 23 time zones as railroads expanded o After independence, India legislated a single national time zone (IST, UTC+5: 30) o Sunset times differ widely across India, but school start times are (roughly) the same o Later sunsets=later bedtimes, but not later wake-up times�� tired kids o Later sunsets�� worse educational outcomes in India (Maulik Jagnani) o Splitting back into 2 -3 time zones would improve educational outcomes!

Institutions that Govern Land (& Agricultural Investment) • Dismal productivity in communal rice production in China in the 50 s, 60 s, 70 s… • The emergence of the “Household Responsibility System” in China o 18 households in Xiaogang village secretly establish a quasi -private property system o Deng Xiaoping and others see and praise this success and this institution spreads rapidly to farmers…and the broader economy • IFPRI’s ‘Millions Fed’ describes the impact of this institutional innovation

Institutions that Govern Land (& Environmental Outcomes) Worldwide average soil erosion rate is 2. 4 t/ha/year. The average ‘country discontinuity’ is 1. 4 t/ha/year! Source: Wuepper et al. 2019 https: //www. nature. com/articles/s 41893 -019 -0438 -4

Institutions that Direct Entrepreneurs Why aren’t Zimbabweans more entrepreneurial?

What exactly is entrepreneurship? Anyone speak French? Entre prendre = Entrepreneur : a 17 th Century French term for a government subcontractor who supplied specified goods or services. The price at which the contract was valued was fixed, so the entrepreneur bore the risk of any profits or losses. • • Entrepreneurs drive economic progress “Entrepreneurship is an omnipresent aspect of human action” or an innate “impulse”

The Omnipresent Entrepreneur If entrepreneurship is really omnipresent, why are there such extreme differences in ‘entrepreneurial outcomes’ across the world? 1. Opportunity awareness: shaped by training, experience, technical skill, etc. Why did Bill Gates see opportunities that few others saw? 2. Entrepreneurial focus …

Entrepreneurial Focus • Entrepreneurs carry out “new combinations” �� “creative destruction” (Schumpeter 1912) 1) New good or new quality of a good 2) New method of production 3) New market 4) New input source 5) New organization • Baumol (1990) adds: 6) New rent seeking procedures Where should entrepreneurs focus?

Institutions & Entrepreneurs • • • Institutions can directly and indirectly shape opportunity awareness Institutions also focus entrepreneurs to productive or redistributive pursuits Historical evidence: – – – Ancient Rome Medieval China Later Middle Ages: The remarkably entrepreneurial Cistercian monks

Institutions & Entrepreneurial Focus INTERVIEWER: Why do you rob banks, Mr. Sutton? Mr. SUTTON: Because that’s where the money is. Institutions drive entrepreneurs to where the money is!

Institutions & Entrepreneurial Focus • Romania since 1990 s – Legal uncertainty – Black market – Rent seeking • • Bad institutions spawn contagious and unproductive entrepreneurship Meet Nicolae Guta

Institutions & Entrepreneurial Focus Inclusive institutions (remember “Why Nations Fail”) are also conducive to productive entrepreneurial focus • • • Defined, enforceable property rights Markets for capital and trade Political transparency and accountability Predictable, stable rule of law Functional courts “The problem with high-tax societies is not that it is impossible to become rich there, but that it is difficult to do so by way of productive effort in the ordinary production system” Lindbeck (1987) “Indispensible is enterprise that is prepared to learn from the successes of others, and to adapt appropriate foreign practices and rules of the game to the needs of domestic circumstances and cultures. ” Landes (2010)

(By extension) Institutions Shape Business Focus & Performance World Bank’s “Doing Business Report” 2018

World Bank’s “Doing Business Report” 2018

World Bank’s “Doing Business Report” 2018

World Bank’s “Doing Business Report” 2018 Econ. Talk, 27 Nov 2017 “Simeon Djankov and Matt Warner on the Doing Business Report and Development Aid”