PS 241 Final study guide

Endogenous variable

a factor in a causal model that is inside the system. Endogenous variables Mutually causes each other within a system.

Exogenous variable

doesn’t depend on other factors within the system

What makes a “good” institution?

→property rights

→bankruptcy law

Acemoglu, Johnson, Robinson

Acemoglu’s conclusion and that of many others: institutions are the
main cause of growth long-term.

4 potential growth factors: luck, culture, geography, institutions

Example: North and South Korea have similar cultural and geography but their institutions are different, leading to different economic levels.

Institutions are endogenous: they emerge from political power struggles, not from efficiency alone.

What is the most important source of economic growth according to the Solow Growth model?

“A” variable → Technology

Habyarimana et al. (2007)

The authors ask research subjects to play different versions of the Dictator Game in order to test hypotheses about why ethnic diversity is correlated with less public good provisions

Which of the following best describes the results in de la Cuesta et al (2022).?

It is possible to make people feel more ownership over foreign aid or natural resource revenue AND demand government accountability

Proximate vs. Fundamental Causes of Economic Growth

proximate causes → solow growth model (tech, physical capital, labor)

fundamental causes → Luck, culture, geography, Institutions (The driving factor)

Solow Growth Model

Y = f (A, K, L)

Y = f(A, K, L)

Y - output

A- tech (means of production, organization of production, etc.)

K - physical capital (e.g. machines, factories)

L - labor (number of workers, quality of workers)

Theory

set of assumptions that leads to predictions about how a system will behave

Theory of Convergence

Convergence of incomes: we should see poor countries should grow faster and become as rich as rich countries

Conditional Convergence

after accounting for certain factors (countries having similar institutions/policies) convergence was found

Current Evidence on Convergence

Latest evidence shows that we have been seeing Unconditional Convergence, as the Theory of Convergence would predict

Luck, Culture, Geography, Institutions

The 4 potential fundamental causes of economic growth.

Driving factor = Institutions

Institutions and Incentives

Institutions affect incentives
With reference to the Solow Growth Model, think about what incentives
are important for economic growth and what institutions might affect those
important incentives.

Property Rights and Bankruptcy Law as Good Institutions

Exogenous and Endogenous Variables

Exogenous variables → factors outside system that influence outcomes within the system

Endogenous variables → variables are inside the system

Settler Mortality and Institutions

• High Settler Mortality (e.g., Sub-Saharan Africa, parts of the Caribbean)

  • Europeans couldn’t settle permanently.

  • They set up extractive institutions: forced labor, monopolies, tribute systems, little protection of property rights.

  • Goal: maximize resource extraction, not long-term development.

• Low Settler Mortality (e.g., North America, Australia, New Zealand)

  • Europeans could settle in large numbers.

  • They established inclusive institutions: property rights, checks on elites, representative assemblies.

  • Goal: build societies where settlers themselves would thrive.

Long term:

Countries with inclusive institutions developed strong economies and political systems.

Countries with extractive institutions often remained stuck in poverty, inequality, and weak governance.

"Institutions Rule!"

Institutions are better causes of economic growth rather than geography or trade integration

North and South Korea as a Natural Experiment about Institutions (Acemoglu, Johnson, and Robinson)

North and South Korea have similar culture and geography, however their economic institutions are different causing South korea to be richer

Reversal of Fortune (Acemoglu, Johnson, and Robinson)

refers to a landmark economic theory showing that regions wealthy in 1500 became relatively poor today, while previously poor regions became rich, largely due to the institutions established during European colonialism

(James Ferguson & Larry Lohmann, 1994)

• Development projects in Lesotho often fail economically but succeed in expanding bureaucratic state power.

• Aid agencies construct a false image of Lesotho as “isolated subsistence farmers,” ignoring integration with South Africa’s economy.

• Projects depoliticize structural issues (land loss, labor migration) by framing them as technical problems.

• The “anti‑politics machine” effect: aid strengthens bureaucracy while sidelining politics.

Development projects in Lesotho fail they objectives, but succeed to expand state power in peoples everyday lives.

(Nicholas Eubank, 2012)

• Somaliland’s lack of foreign aid forced reliance on local taxation.

• Citizens leveraged this dependence to demand accountability → “revenue bargaining.”

• The more countries rely on taxation, the more political accountability they take

• Contrasts with aid‑dependent states, where governments bypass citizens and accountability weakens.

• “Somaliland demonstrates that when governments depend on citizens for revenue, accountability flourishes. Foreign aid, while well‑intentioned, can unintentionally weaken this bargaining power.

What 2 factors do Pengl - highlight as responsible for the cretaion and politicization of particular ethnic identities in Africa?

export oriented cash crops and Christian missionary literacy programs

According to Pengl - which of the following become stronger in particular communities as Christian missionaries helped turn oral languages into written languages?

Sense of imagined community

Which of the following is the main outcome variable that Pengl study?

The contemporary political salience of different ethnic groups

Which of the following variables do Pengl use to operationalize the idea of porous ethnic groups?

interethnic marriage within an ethnic group

Where do the research subjects for Habyinamara et al. study come from?

A convience sample from the slums of Kampala, Uganda

De la Cuesta (2022)

Citizens demand accountability when they believe public money—whether from taxes, aid, or oil revenues—belongs to them.
Ownership leads citizens to voice demands for accountability, even if they lack direct enforcement power.
Aid and oil revenues can generate accountability pressures if citizens perceive them as shared national wealth, not external windfalls.

Ross (1999)

Countries with high shares of natural-resource exports often grow more slowly than resource-poor countries — this is the "resource curse."

→oil wealth hinders democracy. Unlike other forms of income, petroleum revenues strengthen authoritarian regimes by reducing pressures for democratization. This is known as the “resource curse” in political science.

Economic Resource Curse

countries rich in natural resources often experience slower growth, weaker institutions, and more instability than resource-poor countries.

Political Resource Curse

countries rich in natural resources—especially oil and gas—are more likely to experience authoritarianism, weak institutions, corruption, and conflict, rather than democracy and good governance.

Dutch Disease

boom in natural resource exports causes a country’s domestic currency to appreciate, making other sectors like manufacturing and agriculture less competitive because exports are more expensive and therefore leading to fewer exports.

result: good-producing companies sell less, make less profit, and go
out of business because they are less competitive in global market

Currency (or Exchange Rate) Appreciation

This is caused by natural resource exports resulting in deterioration of other sectors in the economy

Enclave economy

the other sectors of the economy are not as good (Ex: resource based economies)

investors like to invest in these because they see high return on investments

Example of enclave economy: Chile

The 2000s Commodity Boom and Canadian Exports

demand for resources made Canada’s exports more resource-dependent, boosted western provinces, but hurt manufacturing competitiveness in central Canada. It was a turning point that exposed both the benefits and risks of relying on commodities.

Spillovers

indirect effects that an economic activity, policy, or innovation has on actors or sectors beyond its immediate target. In other words, they’re the “ripple effects” that spread benefits (or costs) to others who weren’t directly involved.

Deteriorating Terms of Trade

the value of a country’s exports falls relative to the value of its imports over time. In other words, the country must export more goods to afford the same amount of imports, reducing its purchasing power in international trade.

Import-Substitution Industrialization

A development strategy where countries reduce dependence on imports by promoting domestic manufacturing through tariffs, quotas, and subsidies.

Price Volatility

Frequent and unpredictable fluctuations in commodity or asset prices, often driven by global demand, supply shocks, or speculation.

Boom and Bust Cycles

Economic cycles where rapid growth (boom) fueled by high prices or demand is followed by sharp decline (bust) when conditions reverse.

Solutions to the Economic Resource Curse

enclave economy: -gov. can invest in other parts of economy
avoid boom+bust: gov can save money for when economy bust

gov can set money aside for “Sterilizing” currency appreciation

Political Myopia

Short-term political decision-making focused on immediate gains (e.g., spending resource windfalls) rather than long-term sustainability.

Nationalization

Government takeover of private or foreign-owned industries, often in resource sectors, to control revenues and strategic assets.

Fiscal Contract

The implicit agreement where citizens pay taxes and, in return, expect government accountability, representation, and public services.

Alaska Permanent Fund

A sovereign wealth fund created from oil revenues in Alaska; pays annual dividends to residents, ensuring citizens share in resource wealth.

Rentier State

A state that derives most of its revenue from resource rents (like oil), often reducing taxation and weakening citizen accountability demands.

Accountability in De La Cuesta (2022)

Citizens demand transparency and responsible governance when they feel public revenues belong to them, regardless of whether funds come from taxes, aid, or oil.

Feelings of Government Budget Ownership in De La Cuesta et al. (2022)

When citizens perceive revenues as their money, they are more likely to monitor spending, demand fairness, and push for better governance.

Chad-Cameroon Oil Pipeline Project

Example of a bad political environment with natural resources and corruption

Chad: discovered oil, World Bank made agreement with Chad to back the exports.

Chad played along for a little white but broke the agreement

Example of corruption

What is corruption?

misuse of public office for private gain

Principal-Agent Relationship between Truster and Trustee/Fiduciary

citizen voters (Trusters) ask the politcians (Trustee) to do something on their behalf
The Trustee may act in self-interest instead of faithfully representing the principal.

Grand corruption

high-level corruption that involves systematic sanctioning of public money.
involves elites, high-level officials

Petty corruption

“street-level” solicitation of bribes to perform services or avoid problems

bribes for services

Rent-Seeking

manipulating political environment to gain wealth without contributing to societal productivity or well-being

Rents

Excess profits from scarce resources or monopolies.

3 different types of measures of corruption

Expert (elites) Surveys

Firm Surveys

Household Surveys

Golden Picci 2005

argue that traditional survey-based corruption indices (like Transparency International’s) suffer from reliability and perception biases.

They propose an alternative, objective measure of corruption based on discrepancies between public spending and physical infrastructure outcomes. This method, applied to Italian regional data, offers a more grounded and potentially replicable way to assess corruption at the subnational level.

Boas et. Al 2019

argue that although Brazilian voters express strong anti-corruption norms in hypothetical scenarios (vignette experiments), they fail to act on these norms in real elections. Their field experiment during the 2016 municipal elections showed that providing voters with credible information about their own mayor’s malfeasance had no effect on voting behavior

political corruption in brazil

post-election audit - relection rates of corrupt officials pretty much stayed the same

pre-election audit - reelection rates of corrupt officials plumetted

what allows them to have good counterfactural cases? - because it was randomized

Transparency International’s Corruption Perceptions Index (CPI)

A global ranking based on expert and business surveys that measures perceived levels of public-sector corruption.

scale of 0 (very corrupt) to 100 (very clean)

Golden and Picci’s (2005) Measure of Corruption in Italian Regions

Compares reported public spending on infrastructure with actual physical outputs; reveled discrepancies that indicate corruption and inefficiency. occured in Italy

What happened in Brazil when votes were given info. about corruption pre-election?

Reelection rates for those corrupt officials plummeted

How does Corruption correlate to the Solow Growth model?

corruption hinders economic growth.
why? → bc with bribes and such, businesses are discouraged to make investments in (A, K, L)

What does Corruption as “Greasing the Wheels” / “Speed Money” mean?

There’s an idea that corruption can speed up bureaucratic processes or overcome inefficiencies, but it often at long-term institutional cost.

Information Hypothesis:

voters lack info. about political corruption and so keep reelecting corrupt politicians

Trade-off hypothesis:

voters accept corruption bc they like other things that the corrupt politician does.

Research Design for Ferraz and Finan (2008)

Uses randomized Brazilian municipal audits to test whether information on corruption affects electoral outcomes.

Evidence on Anti-Corruption Voting from Ferraz and Finan (2008)

• Voters punished mayors revealed as corrupt, showing that credible information increases accountability.

Research Design for Boas, Hidalgo, and Melo (2019)

• Field experiments in Brazil testing whether giving information to voters about corruption would influence voter behavior.

Competing Results in Boas, Hidalgo, and Melo (2019) and the Work of Weitz-Shapiro and Winters

• Boas et al.: Mixed evidence—information sometimes fails to change voting.

• Weitz-Shapiro & Winters: Voters respond strongly when information is credible and trusted, highlighting conditions for effective accountability.

Pengl et Al.

The authors argue that two historical forces—cash crop agriculture and print technologies—played a critical role in shaping ethnic politicization and boundary-making in Africa.

→Cash crops led to more exclusionary ethnic boundaries due to competition over land and resources

→print technologies fostered more inclusive boundaries by strengthening shared identities through language standardization and cultural dissemination

Behavioral Games

Experimental tools in social science where participants make decisions in structured scenarios to reveal preferences, cooperation, or fairness.

The Dictator Game

A behavioral experiment where one player unilaterally decides how to divide a sum of money between themselves and another, testing altruism and fairness.

Ethnic Fractionalization

• The probability that two randomly selected individuals in a society belong to different ethnic groups; a measure of ethnic diversity

Public Goods

commodities and services in society that are available to everyone

Primordialism versus Constructed Identities

• Primordialism: Ethnic identities are fixed, ancient, and deeply rooted.

• Constructed Identities: Ethnic identities are socially and politically shaped, fluid, and context-dependent.

Chewas and Tumbukas in Malawi and Zambia

Case study showing how the same ethnic groups are politically mobilized differently: in Malawi they are rivals (politicized), while in Zambia they are allies (depoliticized), illustrating that ethnic divisions depend on political context.

Different Preferences, Taste for Discrimination, Efficacy, Findability, and Strategy Selection (Habyarimana et al. 2007)

evidence found for strategy selection → in similar settings, co-ethnics work together to mutually benefit.

Polyani

Allow markets to function without outside interference

-must seperate the economy from politics&social

argued that when labor is treated as a mere “commodity,” workers are exposed to degradation, insecurity, and exploitation, which undermines human dignity and social stability

Friedman

globalization is a product of technological change and financial liberalization

“golden straitjacket” - gov.’s basically must adopt globalization policies

because no other system except free market can generate as much money as efficiently

“electric herd” - investors across the world who can change where their money goes. (big multinational corps)

Kristoff & WuDunn

argues that sweatshops, while harsh, are necessary for people in those countries for income

Blattman

• argues that sweatshops are NOT better for people in poor countries.

• found that most workers quit, hazardous work,

• Ethiopia study revealed that there was no advantage to it

The Golden Age era (1880-1914)

tech. innovation,(telegraph, trains, steam ships) helped move goods much faster

Last wave of imperialism/colonialism

ex: (Berlin Conference where european countries decide how they divide up powers in Africa)

The end of the Golden Age was Great Depression

Fictitious Commodities

Karl Polanyi’s term for land, labor, and money treated as market commodities despite not being produced for sale.

Bretton Woods era (1944-1971)

tech. innovation: air transport, container shipping, increasing flow of trade

-Bretton Wood conference: established international financial institutions

fixed exchange rates, capital controls, and institutions promoting stability and trade.

What was the Bretton Woods conference?

Established 3 International financial institutions:

1) fixed exchange rates

-international monetary fund (IMF, oversees fixed exchange rates)

2) The World Bank

3) General Agreement on Tariff and Trade (GATT)

Embedded Liberalism

new wave of free market is embedded in social welfare movements

Double Movement

• Polanyi’s idea: markets expand, but societies push back with protective regulations.

International Monetary Fund (IMF)

• Institution created in 1944 to stabilize exchange rates, provide short-term loans, and support balance-of-payments.

Neoliberal era (1980-Now)

→exponential growth in capital/finance, increasing flow of trade/investments

assisted by new communication tech. (satellites, new telephone lines)

Foreign Direct Investment (FDI)

foreign investor control company in other country and tells them what to do

Portfolio Investment

People invest in stocks

Currency investment

trading in money markets

What has Globalization done to economic growth?

it has fostered economic growth

Race to the Bottom:

countries eager to attract foreign investors may offer low wages, low taxes, and limited labor regulations,
making their standard of living lower

Easterly (2005)

Foreign aid fails because it is dominated by Planners who pursue unrealistic “Big Plans” without accountability. Aid should instead empower Searchers, who focus on small, feasible, locally adapted interventions that directly meet poor people’s needs.

Qian (2015)

Foreign aid research shows mixed results because aid is heterogeneous, donor-driven, and poorly measured. Aggregate studies are unreliable; progress requires focusing on specific types of aid and using rigorous empirical methods to evaluate their effects.

Bilateral Aid vs. Multilateral Aid

• Bilateral: Aid given directly from one country to another.

• Multilateral: Aid pooled through international organizations (e.g., UN, World Bank).

Humanitarian Aid / Food Aid vs. Development Aid

• Humanitarian/Food Aid: Emergency relief for crises (disasters, famine, conflict).

• Development Aid: Long-term support for economic growth and institution-building.