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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Institutions and development: The interaction between trade regime and political system
Organization Unit
  • Josef Falkinger
  • Volker Grossmann
  • English
Institution CESifo Group Munich
Series Name CESifo Working Paper
Number 1279
Number of Pages 59
Date 2004
Abstract Text This paper argues that openness to goods trade in combination with an unequal distribution of political power has been a major determinant of the comparatively slow development of resource- or land-abundant regions like South America and the Caribbean in the nineteenth century. We develop a two-sector general equilibrium model with a tax-financed public sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing public investments like the provision of schooling are typically lower in an open than in a closed economy. Moreover, we find that, under openness to trade, development is faster in a democratic system. We also endogenize the trade regime and demonstrate that, in political equilibrium, a land-abundant and landowner-dominated economy supports openness to trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.
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