2. THEORETICAL PERSPECTIVES
2.1 Institutional Approaches
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2. THEORETICAL PERSPECTIVES
Regarding the ongoing search for the variables that can effectively boost or decline economic development, many studies have been done. Between them, we can find prominent and repeated factors that have been demonstrated to affect economic development like institutions, income inequality, education, and fertility.
2.1 Institutional Approaches
An important factor to talk about is Institutions. Institutions in a country are important because they are the ones that will set the norm on the effectiveness of development. Weak institutions will affect the economy. Some authors, in between them Acemoglu, Johnson, and Robinson (2002), in their study ¨exploit differences in European mortality rates to estimate the effect of institutions on economic performance¨. The previously mentioned authors propose a theory of institutional differences among countries colonized by Europeans and argue that there existed different types of colonization policies which created different sets of institutions.
On the one hand, European powers set up "extractive states,” these institutions did not introduce protection for private property, nor did they provide checks and balances against government expropriation. As explained by Acemoglu, Johnson, and Robinson (2002), the purpose of the extractive state was to transfer the resources of the colony to the colonizer. Practically steal. On the other hand, some Europeans migrated in the new territory and created some new European styled institutions, which did not happen in the Latin American and Caribbean Region. Therefore Latin-Americans were not benefitted from this. In their results, Acemoglu, Johnson, and Robinson (2002) find that “reducing expropriation risk (or improving other aspects of the "cluster of institutions") would result in significant gains in income per capita.” Acemoglu, Johnson, and
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Robinson’s argument then tell us that colonization interfered with the type of Institutions the LAC Region have in present days. Although some authors believe that it is not about if institutions are weak or strong, but about how they manage to solve the conflicts that arise. Rodrik, Subramanian, and Trebbi (2004) argue that “Quality of Institutions trump everything else” referring to other factors that are argued to affect income (which we can use to measure economic development) like geography and integration. The authors conclude that “once institutions are controlled for, integration has no direct effect on income and geography has a weak effect.”
La Porta et al. (1998) argues that it is essential to take into consideration the type of legal system adopted in a country or imported through colonization because this has a significant bearing on Institution development and income level. Similarly, Gerring, Bond, Barndt, and Moreno (2005), state that the length of time democracy has been in existence serves as a rough indicator of its degree of institutionalization.
Many studies argue that democracy has a positive impact on economic development. Acemoglu, Naidu, Restrepo, and Robinson (2014), argue that democracy does indeed have a positive effect on gross domestic product per capita. The authors demonstrate that democratization increase gross domestic product per capita by twenty percent in the following twenty-five years compared to a country that remains a non-democracy. Furthermore, Acemoglu, Naidu, Restrepo and Robinson, find that “democracy increases gross domestic product by investment encouragement, increasing schooling, inducing economic reforms, improving the provision of public goods, and reducing social unrest.” The effect of democracy does not depend on the initial level of economic development, although the authors find some evidence that democracy is more conducive to growth in countries with greater levels of secondary education. The previous argument, is just logical as a democracy should work better when the population has a higher literacy rate because
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this will give them the chance to elect their leaders more carefully and be more aware of the effects that policies can cause in a national and personal perspective. Even though this study was not done with an exclusive sample of LAC, the same results could be expected for the LAC region.
Democracy creates a stable atmosphere that attracts FDI and national investment. Robert J. Barro (1999), was also in favor of the hypothesis that democracy has a positive effect on growth, stating that “democratization came together with growth.” Barro, also proved in his study that a higher standard of living promotes democracy, and this high standard of living can only be achieved by economic development which gives rise to high quality services in the health and education sector.
This general higher standard of living should then lower inequality.
On the other hand, Gerring, Bond, Barndt, and Moreno (2005), in their study show that democracy has no significant effect on economic growth, but when measured as a stock variable, democracy appears to have a positive relationship on growth performance. They finally conclude that
“democratic experience over the course of the twentieth century is positively associated with growth in subsequent years. Long-term democracy leads to stronger economic performance”.
Acemoglu (2008), discusses the pros and cons of democracy on growth: the “PRO” is that higher levels of democracy tend to be good for growth because it reduces the extent to which existing oligarchies can prevent entry by potential competitors. The “CON” states that democracy leads to higher tax rates in equilibrium, which in turn tends to discourage innovation.
Other authors, will not even link the form of government, type of policies, and economic development like Mulligan, Gil, and Sala-I-Martin. (2004). Other authors argue that democracy constraints economic growth for countries with low levels of development, like Aghion, Alesina, and Trebbi (2007), who state that democracy affects productivity differently in different sectors.
The authors also suggest that political rights are conducive to growth in more advanced sectors of
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an economy, while they have a negative effect on growth in sectors far away from the technological frontier. Democracies tend to have much lower market entry barriers and cost of entry than autocracies. For our study this could imply that the LAC has a lower level of development, hence is not affected positively by democracy. Political accountability reduces the protection of personal interests (by the alternation of power and freedom of the press), and “entry, in turn, is known to be more growth-enhancing in sectors that are closer to the technological frontier.” Therefore, democracy is more beneficial to rich countries that do possess economic sectors that have an advanced value added per worker.
On a more in-depth view, Cooper, Krieckhaus, and Lusztig (2006) argue that democracy has only an indirect effect on growth, while corruption has a direct and negative impact on economic performance. They say that “one of democracy’s indirect benefits is its ability to mitigate the detrimental effect of corruption on economic growth.” The LAC region as every other region in the world suffers from corruption, but democracy, unlike autocracy, can provide the citizens a pacific tool to “punish” corrupt leaders by not voting for them in the next elections. Of course, only as long as there is an effective accountability system the citizens can rely on.
Branching from democracy and corruption, there is literature suggesting that leaders are important factors affecting development. These leaders through the policies they decide to implement can cause economic growth or stagnation in the country they rule. Jones and Olken (2004) support the leader theory by concluding in their work, that leadership transitions provoke persistent changes in the growth rate of a country. The authors suggest that the effects leaders produce through their policies are stronger in autocratic regimes than in the presence of democratic institutions.
Therefore, showing us another benefit derived from institutions. In Przeworski and Curvale (2008), we can observe clearly the conviction of the authors that “Institutions are the key to development.”
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The authors concluded that when political institutions managed conflicts according to law, the Researcher could expect economic development in Latin America. Because of the importance of the institutional figure, the Researcher will use institutions as our control variable.