Institutions, Political Economy and Growth Daron Acemoglu MIT (Building on long-term collaboration with James A. Robinson) MIT September 4, 2012. Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.1 / 43 Institutions, Political Economy and GrowthIntroduction Introduction: From Proximate to Fundamental Causes Huge cross-country diff erences in income per capita. Largely due to signifi cant diff erences in growth over the last 200 years. Empirical work in economic growth has successfully decomposed these diff erences in levels and growth rates into contributions from physical capital, human capital and residual (technology). But why do these factors vary so much across countries? Some possible fundamental causes: 1 Geography 2 Institutions 3 Culture 4 Luck Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.2 / 43 Institutions, Political Economy and GrowthInstitutions What Are Institutions? “Institutions are the rules of the game in a society,., the humanly devised constraints that shape human interaction” Douglass North Key points: institutions are (1) are humanly devised; (2) set constraints; (3) shape incentives. But important that institutions have to be broadly construed– economic, political and social; de facto and de jure. But crucially, institutions are all about politics, because diff erent sets of institutions lead to diff erent distributions of resources. Thus the investigation of the institutional origins of prosperity is largely about the politics of institutions: who has power to mold institutions what are the limits of that power the dynamics of political power And institutions have their origins in history. Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.3 / 43 Institutions, Political Economy and GrowthInstitutions Distinguishing Institutions from Other Fundamental Causes Natural experiments of history: e.g., the division of Korea into North and South: Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.4 / 43 Institutions, Political Economy and GrowthInstitutions Geography vs. Institutions in Colonial History Colonial history gives us another window for thinking about the role of institutions vs. geography. The economic and political institutions of most former European colonies have been shaped by their colonial history, in many cases with signifi cant diff erences across colonies and changes relative to the past: e.g., compare the United States to Barbados. How has this aff ected long-run prosperity? Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.5 / 43 Institutions, Political Economy and GrowthInstitutions Measuring Prosperity Before National Accounts Only societies that have reached a certain level of productivity can support urban populations doing preindustrial times. Even today, urbanization and GDP per capita strongly correlated. Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.6 / 43 Institutions, Political Economy and GrowthInstitutions Reversal of Fortune: Urbanization Acemoglu, Johnson and Robinson “Reversal of Fortune”QJE 2002: Former colonies that were relatively prosperous before colonization are comparatively poor today: Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.7 / 43 Institutions, Political Economy and GrowthInstitutions Reversal of Fortune: Population Density The same relationship using population density to proxy for precolonial prosperity and level of civilization. Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.8 / 43 Institutions, Political Economy and GrowthInstitutions Reversal of Fortune: Interpretation The reversal due to the fact that Europeans set up more extractive institutions in places that had developed more complex civilizations and reached greater prosperity. Historical and econometric evidence shows that this is mostly because of population density Europeans were more likely to set up extractive institutions in places with large population is to dominate The reversal then follows because of the pre-colonial correlation between population density and prosperity. Acemoglu (MIT)Institutions, Political Economy and GrowthSeptember 4, 2012.9 / 43 Institutions, Political Economy and GrowthInstitutions Historical Example Juan Díaz de Solís colonizes Río de la Plata in 1516, ‘ River of Silver’ and Pedro de Mendoza founds Buenos Aires in 1534. But Solís and de Mendoza unable to enslave and put to work the hunter gatherer Indians of the area, Charrúas and the Querandí. Starving Spaniards soon left the area. In 1537, Juan de Ayolas found the sedentary and more densely settled Guaraní up the Paraná river, in Paraguay. The Spaniards could successfully take over the Guaraní hierarchy, enslave them and put them to work to produce food for them. A very similar pattern to the colonization of the Aztecs and the Incas. Contrast this with the colonization of North America. Acemo。