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Econ 186 Exam 2

Exam over Lecture Notes 3, 4, & 5

Different aspects of institutions The type of government, Existence of (well-defined) private property rights with low risk of expropriation, Political rights and civil liberties.
Authoritarianism A small group of political elite monopolizes political power. This includes autocracy.
Autocracy One individual having unlimited legislative and executive powers. Autocratic monarchy and autocratic dictatorships are both possible. (Example: Libya under Gaddafi, Egypt under Mubarak)
Totalitarianism The state, comprising of an elite few, strives to regulate every aspect of private and public life whenever possible. (Nazi Germany)
Democracy all citizens have equal say in the political system. (India)
Different aspects of institutions The type of government, Existence of (well-defined) private property rights with low risk of expropriation, Political rights and civil liberties
Expropriation means politically motivated and forceful confiscation and redistribution of private property.
Political rights ensure one's ability to participate in the political life of the state without discrimination or repression.
Civil liberties marked by freedom of religion, freedom of speech, right to a fair trial and right to privacy, among other things.
Why did Botswana grow and other nations did not? Botswana adopted good economic policies. Botswana had very good institutions of private property. Botswana had very good pre-colonial institutions. Freedom of speech, culture of inter-tribal cooperation, power was spread out. British rule was limited
The policies adopted meant that in Botswana commoners had a voice, power was not in the hands of an elite few, the economic interests of the elite class were met and they had no incentive to expropriate the revenue from diamonds.
What is special about Botswana? Pre-colonial political institutions, British colonial rule was limited, Botswana became independent. Cattle owners (BDP) were important (international completion, good economic policies) mineral rights vested in the national government.
Pre-colonial Somalia was a nomadic society characterized by factional fighting over ownership of scarce resources.
Lesotho was involved in a series of wars against the Boers (Dutch colonists)
But not everything in Botswana is rosy Botswana has one of the highest adult incidences of AIDS in the world. Inequality in Botswana, in terms of both income and cattle ownership, is very high. Unemployment rate, especially of migrant workers from rural areas, is very high.
Ghana and Ivory Coast are an example of post British rule- they could not sustain their good pre-colonial institutions.
Institutions of private property property rights are secure and Elite do not have a lot of power.
Extractive institutions Extractive institutions are institutions where the majority of the population faces a high risk of expropriation by the government, the ruling elite or other agents. There is not much protection for private property.
The Europeans migrated and settled in a number of colonies, which are called “Neo-Europes”, examples include Australia, New Zealand, Canada and the United States. Wherever they settled, the settlers tried to replicate European institutions, with strong emphasis on private property and checks against the power of the elite.
On the other hand, in many places, European colonists set up “extractive” states, where the institutions did not offer much protection for private property rights nor did they check against expropriation by the elite few. Examples include the Belgian colonization of the Congo, British colonization of India.
According to AJR, the colonization strategy was influenced by the feasibility of settlements. In places where the disease environment was not favorable to the Europeans they set up extractive institutions. In places where the Europeans could settle themselves long-term, they set up institutions of private propert
AJR’s argument is therefore that (potential) settler mortality => whether Europeans could settle or not => types of early institutions => current institutions => current economic performance
Among countries colonized by European powers during the past 500 years those that were relatively rich in 1500 are now relatively poor.
The Mughals in India and the Aztecs and the Incas in the Americas were among the richest civilizations in 1500, while the civilizations in North America, New Zealand and Australia were less developed.
Urbanization in the 1500s occurred in places of high agricultural productivity and better developed transportation networks. Since agriculture was the main sector in pre-industrial times, large urban populations in pre-industrial times were associated with economic prosperity in the 1500s.
During pre-industrial times, only relatively prosperous areas could support dense populations. So there was a strong positive correlation between population density and economic prosperity in the 1500s.
But, there is a strong negative correlation between economic prosperity in the 1500s and economic development today. Countries that were relatively prosperous economically in the 1500s are comparatively less developed today.
Temperate Drift Hypothesis: This is an extension of the geography hypothesis. Areas in the tropics had an early agricultural advantage, but later agricultural technologies, such as the heavy plow, domesticated animals etc. have favored countries in the temperate areas.
What caused the reversal of fortunes? The answer, according to AJR, lie in institutions.
European colonialism led to the development of institutions of private property in previously poor areas, while establishing extractive institutions in previously prosperous places. The relatively poorer regions in 1500 were sparsely populated, and this enabled or induced Europeans to settle in large numbers and develop institutions of private property.
In contrast, in places with large populations and relative prosperity, establishing extractive institutions were more profitable for the colonizers. The large native population could be forced to work in mines and plantations, and taxed heavily. Their resources could be expropriated easily and sent back to Europe.
AJR provide evidence that societies with good institutions took advantage of the opportunity to industrialize, while societies with extractive institutions failed to do so.
Three problems with industrialization part 1 Those with entrepreneurial skills and innovative ideas may not be members of the elite. They may not undertake necessary investments, because they have fears of expropriation by the elite.
Three problems with industrialization part 2 The elites may want to block investment in new industrial activities, because it may be the outside groups, and not the elite themselves, who will benefit from these new activities.
Three problems with industrialization part 3 The elites may want to block investment in new industrial activities in fear of losing their political power to others who may be better at adopting these new technologies.
When industrialization became more important than agriculture in the late eighteenth-early nineteenth century, societies with good institutions of private property took advantage of the opportunity to industrialize, while societies with extractive institutions failed to do so.
Reverse causality looking at the causality at the wrong direction
omitted variables something else is affecting this causality
Exogenons means something that cannot be altered in current conditions
Settler mortality-In cases where the colonists could settle down they set up institutions of private property. -percentage of the settler population (European colonists who died of diseases)
In 1500, which of the former European colonies were the richest? India, Peru(Incas) Mexico(Aztecs)
United States, Canada, Australia, New Zealand were not as rich in 1500
Why did the reversal of fortune take place in 18th –early 19th Century? In 1500, urbanization and population density were measures of economic prosperity. In 1500, society has agriculture based. Urban centers could grow up only in places of high agricultural prosperity and good transportation networks
The Europeans settled themselves in US and Canada developed institutions of private property ownership whereas in India, Mexico, and Peru, they set up extractive institutions.
Partial Effects effect of one independent variable on the dependent variable (partial effect) after we have controlled for the effects of the other independent variables
When Europeans established colonies in the New world during the sixteenth, seventeenth and eighteenth centuries, they regarded North America to be of relatively low economic interests compared to the extraordinary economic opportunities in the Caribbean and Latin America.
But with the advent of industrialization in the late eighteenth and early nineteenth centuries, there opened up a big gap in per capita income with United States and Canada achieving much higher per capita income than the rest of the New World
The climate and soils of the Portuguese, French, Dutch and British colonies in the Caribbean and South American mainland were well suited to cultivation of crops like sugar and coffee, which were very lucrative in the world market It was beneficial to produce these crops large scale in big plantations, which were characterized by slave labor brought over from Africa.
Spain had strict European migration rules to its colonies, which kept the ratio of white men to the native population low. These factors meant power was in the hands of the elite few. This promoted extractive institutions and high inequality.
Factor endowments(climate and natural resources) determined the nature of institutions during colonial times.
Endowments that encouraged cultivation of slave-based plantation crops like sugar or coffee (in the Caribbean, Brazil etc) or large-scale agriculture (like in Peru) witnessed the emergence of extractive institutions based on inequality and with power in the hands of the elite few.
Endowments that encouraged small-scale family-based farms like wheat and maize (in the United States, Canada) led to institutions of private property and more equal wealth distributions.
The institutions hypothesis states that settler mortality determined early colonial institutions which in turn have shaped modern institutions and economic development (AJR’s argument).
Crops/Minerals Dummies: Dummy which takes a value 1 if a country produced a given crop or mineral in 1998-99. For example, the dummy WHEAT for India will take the value of 1 if India produces wheat in 1998-99, 0 otherwise.
Natural Openness: Geography plays a key role in openness to trade based on geographic factors.
Policy hypothesis: Geography matters indirectly through economic policy only, particularly trade policy.
Tropics, germs and crops explain cross-country differences in economic development only through their impact on institutions.
Institutions Hypothesis Institutions are what matters for economic development, geography and policies matters only indirectly through institutions (civil liberties, protection of private property)
Policy Hypothesis Economic policy (particularly trade policy) are all that matter. Geography or institutions matter only indirectly through their effect on policies(example: land locked on economic development through polices in countries)
Daron Acemoglu: Good institutions vs. Bad institutions Bad-Banning of private property or freedom of speech. Entry Barriers are almost always bad. Depending on public intervention a less developed country might benefit from a centrally planned economy. However the U.S. is more dynamic and micro -related
Daron Acemoglu: The major driver of economic growth over the past 500 years was Commerce and industrialization.