Government and Growth

The Long History

of Economic Growth
Economic Growth in Four Advanced
Countries, 1870-2017

35,000
per capita GDP in 1990 dollars

30,000

25,000

20,000

15,000

10,000

5,000

0
1870 1890 1910 1930 1950 1970 1990 2010

United States United Kingdom Germany Japan

Economic Growth in Asia, 1950-2017

35,000

30,000
per capita GDP in 1990 dollars

25,000

20,000

15,000

10,000

5,000

0
1950 1960 1970 1980 1990 2000 2010

Japan China India Four Tigers

Economic Growth in Asia, Latin America and
Africa, 1950-2017

35,000
per capita GDP in 1990 dollars

30,000

25,000

20,000

15,000

10,000

5,000

0
1950 1960 1970 1980 1990 2000 2010

Four Tigers Latin America China Africa

 Underlying Fundamentals:
Government and Institutions
 Government and Institutions

 Property rights, rule of law

-- secure property rights, enforcement of business contracts, predictable and
moderate taxation of income
After carefully controlling for causality, Acemoglu, et al. (2001) find a strong association
between variations in per capita income across countries and the security of property rights, as
measured by risk of expropriation.
Acemoglu, al. (2005) find that quality of contracting institutions is less important for economic
growth than security of property rights and suggest that individuals can use reputation, trust
and other mechanisms to mitigate the adverse effects of weak contracting institutions.

 Provision of public goods (e.g., infrastructure and public

education)
-- ethno-linguistic diversity
 Government and Institutions (cont.)

 Corruption, transparency
-- corruption reduces investment, e.g., foreign
direct investment
Mauro (1995) finds that corruption reduces economic growth,
primarily by reducing the level of domestic investment. Wei (2000)
finds that an increase in corruption levels from that of Singapore to that
of Mexico has the same negative effect on inward FDI as raising the
corporate income tax rate by fifty percentage points.
-- corruption reduces competition
In countries with corrupt governments, competition laws are less well
enforced, and public officials and bureaucrats extract rents by using
their influence to protect incumbent businesses from competition
(Soreide, 2014).
Corruption Perceptions Index, 2018
(Source: Transparency International)

100 = very clean, 0 = highly corrupt

Denmark 88 Malaysia 47
Singapore 85 India 41
Canada 81 Argentina 40
Germany 80 China 39
Japan 73 Indonesia 38
USA 71 Brazil 35
Spain 58 Mexico 28
S. Korea 57 Russia 28
Italy 52 N. Korea 14
 Government and Institutions (cont.)

-- lack of transparency reduces the volume and

stability of foreign equity capital inflows
Gelos and Wei (2005) find that international equity funds invest less
in countries with poor information disclosure -- both poor disclosure
of corporate financial information and untimely and irregular release
of macroeconomic data. Funds also have a greater tendency to exit
less transparent countries in a financial crisis.

Provision of public goods

-- countries with high ethno-linguistic diversity are
less willing to redistribute income, and they provide fewer
public goods, e.g., infrastructure and public education
(Alesina and Ferrara, 2005)
Ethnolinguistic Fractionalization Index

Index
Country 1985

Korea, South 0.003

Japan 0.014
Denmark 0.061
Italy 0.114
China 0.131

United Kingdom 0.389

Australia 0.437
USA 0.575

Nigeria 0.857
Philippines 0.859
India 0.878
Kenya 0.882
South Africa 0.886
Uganda 0.922

Note: Index shows the probability that two people selected at random
will belong to different ethnolinguistic groups.
Source: P. Roeder, "Ethnolinguistic Fractionalization Indices, 1961 and
1985," Dept. of Political Science, University of California San Diego, 2001
Worldwide Governance Indicators
(Data for 2017)

Political Stability
Voice & and Absence Government Regulatory Control of
Accountability of Violence Effectiveness Quality Rule of Law Corruption
Argentina 0.53 0.18 0.16 -0.29 -0.25 -0.26
Brazil 0.45 -0.41 -0.29 -0.11 -0.28 -0.53
China -1.50 -0.25 0.42 -0.15 -0.26 -0.27
India 0.39 -0.83 0.09 -0.25 0.00 -0.24
Indonesia 0.13 -0.51 0.04 -0.11 -0.35 -0.25
Italy 1.05 0.24 0.50 0.70 0.32 0.19
Mexico -0.08 -0.65 -0.03 0.20 -0.57 -0.93
Nigeria -0.34 -1.94 -0.96 -0.89 -0.87 -1.07
Poland 0.78 0.52 0.63 0.88 0.47 0.73
Russia -1.09 -0.67 -0.08 -0.48 -0.79 -0.89

Denmark 1.52 0.87 1.80 1.62 1.86 2.19

Singapore -0.17 1.59 2.21 2.12 1.82 2.13
United States 1.05 0.30 1.55 1.63 1.64 1.38

Source: World Bank

Note: Possible scores range from -2.5 to +2.5
World Governance Indicators: Definitions

Voice and accountability:

honesty of elections, freedom of media, rights of minorities
Political stability:
orderly transfer of power, social unrest, ethnic tensions
Government effectiveness:
quality of bureaucracy; satisfaction with education system, roads
and highways; coverage area: public schools, electricity grid, water
and sewer
Regulatory quality:
ease of starting a business, unfair competitive practices, price
controls, burden of government regulations, trade policy,
investment
freedom
 World Governance Indicators: Definitions

Rule of law:
protection of private property, threat of expropriation, speediness
and fairness of judicial system, enforceability of contracts, limits on
tax evasion, organized crime, violent crime
Control of corruption:
corruption among public officials, in judiciary, in police
Underlying Fundamentals:
Economic Policy
 Economic Policy

 Freedom of entry, open competition

-- William Lewis, Ed Prescott and others have argued that

a primary reason some countries fail to develop is that they
lack fair and open competition; that people with power –
politicians, incumbent businesses, and protected workers –
have combined to oppose competition that would force
uncomfortable changes.
 Economic Policy

 Free trade

-- Free trade creates efficiency gains through comparative

advantage and the realization of scale economies. Trade is
especially important for small countries.
-- Total factor productivity is higher in countries that are
open to international trade.
 Economic Policy

 Monetary stability

-- Hyperinflation can lead to a breakdown of markets and

is extremely destructive. However, moderate and
predictable inflation does not seem to generate significant
macroeconomic costs.
-- More and more countries achieve monetary stability not
by pegging their currency to gold or to a stable currency,
but by setting up a central bank that is independent of the
rest of government.
Inflation and Growth, 1960-99
What matters most for economic development:
institutions, policy or geography?
References

Acemoglu, et al., “The Colonial Origins of Comparative Development: An

Empirical Investigation,” The American Economic Review, Dec. 2001.
Acemoglu, et al., “Undbundling Institutions,” Journal of Political Economy,
2005.
Alesina and Ferrara, “Ethnic Diversity and Economic Performance,” Journal
of EconomicLiterature, Sept. 2005.
Gelos and Wei, “Transparency and International Portfolio Holdings,”
The Journal of Finance, Dec. 2005.
Mauro, “Corruption and Growth,” The Quarterly Journal of Economics, Aug.
1995.
Soreide, “Corruption and Competition,” OECD Forum on Competition, Paris,
Feb. 2014.
Wei, “How Taxing is Corruption on International Investors?” The Review of
Economics and Statistics, Feb. 2000.