Economic Determinants and Consequences of Political Institutions
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ECONOMIC STUDIES DEPARTMENT OF ECONOMICS SCHOOL OF BUSINESS, ECONOMICS AND LAW UNIVERSITY OF GOTHENBURG 225 ________________________ Economic Determinants and Consequences of Political Institutions Oana Borcan ISBN 978-91-88199-05-8 (printed) ISBN 978-91-88199-06-5 (pdf) ISSN 1651-4289 print ISSN 1651-4297 online Printed in Sweden, Gothenburg University 2015 To Amrish, my family and my mentors i ii Acknowledgements First I want to thank my thesis advisors Andreea Mitrut and Ola Olsson. Words cannot do justice to how much help I have received from Andreea, who has been my guide, mentor and friend in this process and beyond. How can I ever repay you? Ola opened my eyes to new ways of thinking, sparked many new interests and showed great trust and optimism in my work. Whether through our joint work or their kind advice, the amount they taught me makes me feel like one exceptionally lucky PhD student. I am deeply indebted to my co-authors Mikael Lindahl and Louis Putterman who have shared their passion and their knowledge and have taken our work to new heights. Mikael has taught me a lot about the value of being a great teacher. Louis has been very generous with his time and with facilitating my visit at Brown University. A big “Thank you!” goes to all the teachers I had through the years here at the University of Gothenburg. Måns Söderbom deserves a special acknowledgement for his meticulous and inspiring teaching method, which I hope to take with me further, and also for his support at critical points. I was also fortunate to receive insightful feedback from Randi Hjalmarsson, who, in addition, was very kind to facilitate my visit at Queen Mary University. This thesis had a great deal of valuable input of my licentiate and higher seminar discussants - Maria Perrotta Berlin and Andrea Tesei. I am thankful to them and also to the many discussants at international conferences, workshops and department seminars at Gothenburg, Brown and Queen Mary. Importantly, the process of building further upon this thesis will be enhanced owing to the fruitful defense discussions. For this I want extend my most sincere thanks to my discussant Sasha Becker and the committee members Katarina Nordblom, Carl-Johan Dalgaard and Nicholas Charron. The wonderful people that work hard to have the department run smoothly and who never spared efforts to assist me also have my utmost admiration and gratitude. To Econ-alla: I have a hard time believing any other economics crowd will ever match your friendliness and kind smiles. I had a wonderful experience in Gothenburg being surrounded by lovely colleagues and friends. I will miss all the friends in my PhD generation, from my “PhD Sisters”: Simona, Marcela, Anja and Diem, to Reda, Joakim, Emil, Remidius, Sied, Xiao-Bing and Hang. A special place in my heart is of course reserved for Simona, who has been my “partner in crime”. We shared the good and the less glamorous PhD and life experiences and the friendship we forged is one of the best things in my life. Speaking of life outside PhD, I am happy to have made some fantastic friends here in Gothenburg, people that inspire me every time: Vali, Lavinia, Costel, Andrea, Efi, Mitesh, Verena, Simon, Vlad, Andrei. I thank you all and I will also forever be thankful to my lovely lifelong friends Flavia, Veronica and Corina, who have been by my side through thick and thin. Going back in time, I nostalgically remember two teachers who have laid the foundation of my work: Valeria Suster and Marian Ursarescu have given me the words and the maths to get where I am today. I will never forget you! It should be the easiest to talk about my family's input in this achievement. Yet words cannot express how much of this is their work. Besides their love, they instilled in me values essential to an academic career: My mother has been a wonderful, kind and dedicated teacher in just about everything. My father has, from a very young age, inspired me to read, ask, travel, search and discover. I've also learnt a thing or two about “constructive criticism” from them... And the award for most patience, understanding, tireless support and unyielding belief that all will be well goes to my life companion - Amrish. I cannot imagine what the past five years would have been without your love and wisdom. This virtually became your second PhD, so enjoy the fruits of your work! Iti multumesc pentru tot si te iubesc mult! To all of you I promise to do my best to give back and pass along to others all the good you gave me! iii iv Contents Acknowledgements iii 1 Introduction 1 The historical role of institutions 2 Economic determinants and consequences of corruption 3 References 6 2 State History and Economic Development: Evidence from Six Millenia 11 Introduction 12 Literature review 14 Theoretical framework 19 Data 26 State history and economic development 30 Conclusions 39 References 40 Figures and tables 44 Appendices 53 3 The Impact of an Unexpected Wage Cut on Corruption: Evidence from the “Xeroxed Exam” 85 Introduction 86 Background 90 Data and descriptive statistics 95 Estimation strategy and baseline results 97 Sensitivity analysis and alternative explanations 101 Conclusion 111 References 112 Figures and tables 115 Appendices 127 4 Fighting Corruption in Education: What Works and Who Benefits? 135 Introduction 136 Background 140 Data 144 Graphical evidence 146 Estimation strategy 147 Results 149 v The short-term impact of the anti-corruption campaign: Preliminary evidence from admission into an elite university 158 Conclusions and discussion 161 References 162 Figures and tables 166 Appendices 177 5 The Benefits of Local Party Alignment in National Elections 191 Introduction 192 Literature review 194 Institutional setting 196 Data 200 Identification strategy 204 Results 209 Persistence of alignment: government transfers following elections 216 Concluding remarks 218 References 220 Figures and tables 225 Appendix 240 vi Introduction Political institutions are inextricably linked with economic performance, a relation- ship that goes both ways. Institutions drive growth by, for instance, securing prop- erty rights and enforcing contracts. Institutions themselves are determined by the dynamics of economic growth since, for instance, contract enforcement depends on wealth. The prominence of institutions in understanding economic performance dates to the seminal work of North (1990). His work spurred a new empirical tradition that broadly links country-level aggregates of growth, like income per capita, with measures of institutional quality, like the rule of law (e.g. Knack and Keefer 1995; Rodrik et al. 2004). While the data revealed that institutions may play an even bigger role in a nation's prosperity than initial conditions, like biogeography, it re- mained silent on how to achieve good institutions. In response another research tradition developed concurrently, focusing on specific cases of institutional failure and corrective policy interventions. The realization that bad governance and corrup- tion were severely undermining poverty alleviation efforts was a major motivation for this approach. Our enhanced understanding of institutions has no doubt contributed to the large reductions in poverty (from 50% to 21% of citizens in developing countries since 1981). However, challenges remain. Inequality is rising fast (OECD 2011); in 2000 the income levels of the richest and poorest countries differed by a factor of 200, in 2014 that factor was nearly 250.1 In light of these dynamics, it is of critical importance to examine and reexamine where and why institutions fail. Are today's development challenges inherited from history or artefacts of the modern world? What are the implications of dysfunctional institutions for key aspects of socio-economic development, like education and democracy? This thesis answers these questions with four empirical essays on the economic determinants and consequences of political institutions. It opens with a broad per- spective on the link between the state throughout history and the past and current economic performance of nations. Remaining chapters focus on a particular form of institutional failure \endemic corruption" with illustrations of its harmful impact on key development areas: human capital formation and democracy. More specifically, chapters two and three identify causal links between public sector wages, monitoring 1In 2000, the GDP per capita of the richest country in the world, Qatar, was 112,283 USD and that of the poorest, The Democratic Republic of Congo, was 518 USD. In 2014 Qatar's per capita GDP was 139,456 USD and the Central African Republic's was 566 USD. [World Bank data: GDP in constant 2011 international dollars using PPP rates]. 1 and incentives and corruption in education. The final chapter examines the clien- telistic structure of electoral politics showing that local politicians influence national elections by vote buying and electoral fraud. The historical role of institutions The experience with state institutions has been put forth as one of the important correlates of the current wealth distribution in the world. In order to capture the modern day nations' accumulated experience of large-scale political organization, Bockstette, Chanda and Putterman (2002) have created the State antiquity index. This index reflected all forms and changes of government above tribal level, between 1-1950 CE, for each of 159 countries defined by modern-day borders. The authors showed that this indicator of state experience was positively associated with 1995 income and with the 1960-1995 GDP growth rate. Other studies confirmed this empirical pattern, besides demonstrating that this \persistence of fortune" is not a localized phenomenon, but is reinforced by migration between countries (Putterman and Weil, 2010). The examples of former colonies that have gained independence late in the 20th century and are therefore much younger and inexperienced states than European states like the United Kingdom and France are in line with these findings.