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Institutions and Development: The Interaction between Trade Regime and Political System

Josef Falkinger and Volker Grossmann ()

No 1242, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: public education; economic development; institutions; political system; trade (search for similar items in EconPapers)
JEL-codes: O10 N10 N16 F43 H50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: 2004-08
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Published in: Journal of Economic Growth, 2005, 10 (3), 229-270

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Related works:
Journal Article: Institutions and Development: The Interaction Between Trade Regime and Political System (2005) Downloads
Working Paper: Institutions and Development: The Interaction between Trade Regime and Political System (2004) Downloads
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