Transcript Chapter 3

Backtrack: the raw facts
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•
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Income gaps are huge
And they are not narrowing:
Though some regions breaking through
Others are falling further behind
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Acemoglu, 2008
Africa gets left behind
Sala-i-Martin, 2006
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What have we learnt from the
models of economic growth?
• Capital accumulation’s impact on growth will
peter out. (Solow diagram)
• Accumulation of capital (including human
capital) is not enough to explain growth of the
advanced economies: the “Solow residual”
accounts for most of leading-edge growth.
• Capital intensity differences between rich and
poor not big enough to explain the differences
(see calculation in next slide)
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• High income countries have output per head
at least 10 times that of Low income countries
• But with common technology and diminishing
returns to capital
– Specifically with
yH  kH 

 
yL  kL 

y  Ak
 kH
10  
 kL




1/ 3
kH
 103  1000
kL
• But capital per head in high income countries
is only about 25 times poorest countries (see
graph)
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Weil (2007)
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Or look at marginal product of capital:
• High income countries have output per head
at least 10 times that of Low income countries

y  Ak
• Again with
– A similar calculation gives
MPK H
 100
MPK L
• But if return to capital in poor countries is 100
times that in rich countries, where’s the rush
of capital from rich to poor countries to take
advantage of such returns ?
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Weil, 2007
What have we learnt from the
models of economic growth? (2)
• Technology is key to sustained growth for
the world as a whole
• Low income countries can grow by
transferring technology…but they haven’t
done so
• Why? Plausible reason: Social
infrastructure—specifically the institutions
and policies that align private and social
returns to activities
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Expropriation risk (as estimated by the consulting firm Political Risk
Services) and GDP per cap. (Source: Acemoglu, 2008)
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Interlude: Social infrastructure issues: it’s
not just corruption and rent-seeking
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Social infrastructure, rent-seeking,
predation
• E.g. risk of predation discourages
producers from modern sector or
innovative activity
– i.e. There is a reluctance to invest because
much of the return to investment and
production activity risks being captured by
rent-seekers.
• What is rent-seeking?
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Definitions of rent-seeking
Cutting yourself a bigger slice of the cake rather than making the cake
bigger.
Trying to make more money without producing more for customers.
Some examples of rent-seeking:
• a protection racket, in which the gang takes a cut from the
shopkeeper’s profit;
• a cartel of firms agreeing to raise prices;
• lobbying the government for tax, spending or regulatory policies that
benefit the lobbyists at the expense of taxpayers or consumers or
some other rivals.
Cf. The Economist: “Economics A-Z”
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Rent-seeking and economic
development – a simple model
• Career choice: producer or predator;
• Technology choice: modern or subsistence
– (subsistence production less easy to grab – cf. African
agriculture: Bates)
• Predator can grab a certain amount: the more
predators, the less the producers have left over;
too many predators  producers tend to retreat
into subsistence
Murphy, Shleifer, Vishny; Am
Econ Rev 93.
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Case 1: Predation not profitable: good equilibrium
Equilibrium
Cash crop
a
Income of
producers
Subsistence level
b
Income of
predators
Proportion of
predators
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Case 2: Predation is so profitable that equilibrium is at subsistence
b
a
Income of
predators
Income of
producers
Equilibrium
Proportion of
predators
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Case 3 – Multiple equilibria, one good, one bad
Equilibrium
Income of
predators
a
b
Income of
producers
Equilibrium
(unstable)
Equilibrium
Proportion of
predators
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Rent-seeking (3)
• And it is the more innovative producers that are
likely to be the most vulnerable to predation –
especially from officials who control issue of
permits, etc.
– They are often outsiders not part of the elite (who
don’t need to innovate
– They are credit-constrained
– Their projects are long-run, plenty of time to milk them
– Innovative projects are risky: predator takes when
things work out
Murphy, Shleifer, Vishny; Am
Econ Rev 93.
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Social infrastructure is correlated
with investment AND productivity
• This time measuring social infrastructure using a
combination of subjective measures from ICRG
(collected by Knack and Keefer, 1995) and the
country’s openness to international trade since
1950 (Sachs and Warner 1995)
• Positive correlations are found with country’s
investment rate, schooling and (total factor)
productivity (see next slides)
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But are the institutions cause or
effect of poverty? Some evidence
• Colonial institutions of the past cannot be the
effect of poverty today
– Differential institutional development depending on
suitability for settlers (Mortality; Population density)
(Acemoglu, Johnson and Robinson)
– AJR emphasize expropriation protection; others
(Engerman and Sokoloff) emphasize slavery and
inequality
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Settler mortality then and protection against expropriation now (Source:
Acemoglu, 2008)
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Settler mortality then and GDP per capita now (Source: Acemoglu, 2008)
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