. WEEK 4 STATES AND MARKETS

Extractive insutions

Extractive institutions- Rules that concentrate power and channel resources to a narrow group

Definition: Extractive institutions are political and economic institutions that concentrate power and resources in the hands of a small elite, allowing them to benefit at the expense of the wider population.

In The Colonial Origins of Comparative Development (2001), Acemoglu, Johnson and Robinson argue that colonial powers often established institutions to extract resources rather than create broad economic opportunities. These institutions could persist after independence and influence long-term development.

Example: Example — Belgian Congo under colonial rule

The colonial Congo illustrates how institutions could be organised around extracting resources for the benefit of colonial authorities rather than expanding opportunities for the local population.

Concentrated power: political and economic decisions were controlled by colonial authorities.

Resource extraction: the colonial economy prioritised transferring resources out of the territory.

Long-term consequences: extractive institutional arrangements could persist and constrain broader economic development. 

Significance: For the state: Political power can be used to protect elite interests rather than serve the wider population. State capacity may be strong, but that does not mean institutions are inclusive.

For markets: Extractive institutions can restrict competition, weaken property rights for ordinary people and limit access to economic opportunities.

For economic development: When people lack security and opportunities to invest, institutions can discourage productive activity and contribute to persistent differences in income between countries. 

Settler mortality AJR

Settler mortality- AJRs instrument for colonial settlement startergy 

Definition: Settler mortality refers to the death rates faced by European settlers in colonies, particularly from diseases and other dangerous conditions.

In Acemoglu, Johnson and Robinson’s (AJR) The Colonial Origins of Comparative Development (2001), settler mortality is used to explain why different colonial institutions developed and how these institutions influenced long-term economic development.

Key idea: The risk of European settlers dying influenced whether they settled permanently or established extractive colonial systems, shaping the institutions that developed.

Example:  European colonisation

AJR argue that differences in settler mortality influenced colonial strategies:

Lower settler mortality: Europeans were more likely to settle permanently and establish institutions that offered stronger protection for property rights.

Higher settler mortality: Europeans were less likely to settle permanently, and colonial powers were more likely to establish extractive institutions designed to transfer resources out of the colony.

Long-term consequences: These institutional differences often persisted after independence, influencing investment and economic performance

Significance: For the state: Settler mortality helps explain how historical conditions influenced the institutions and political systems established during colonial rule.

For markets: The institutions that emerged affected property rights and the security of investment, influencing incentives for businesses and individuals.

For economic development: AJR use historical settler mortality as an instrumental variable to estimate the effect of institutions on income per capita. Their argument is that colonial conditions shaped institutions, which in turn affected long-term prosperity.

Insutions NORTH

Institutions DOUGLAS NORTH Humanly designed rules of the game, formal and informal 

Definition: Institutions are created by humans through formals and informal rules, Such as formal rules such as laws, property rights, central banks) and informal rules such as norms, customs e.g queuing, waiting your turn, they structure how people and organisations behave, North described it as being the rules of the game in society, douglas believe it was good to be able to limit govs power and protect peoples pottery and wealth 

Example: Through Norths reading the Glorious Revolution in 1688 england- before revolution kings had high power over country finance and crown sometimes forced epople to lend money and grated monopolies that allowed business to control industries- but after revolution- institutional changes- parliament gained power- able to make finance decisions, courts independent and propety rights more secure 

Significance: Markets coordinate through instutions though property, contracts, money, justice and competion that make the exchange possible, it helps markets operate- laws and courts protect property rights and enforce contracts allowing businesses and indv to trade w more confidence, institutions influence econ dev and attract investment if the institution is effective, instuons can also help to make decisions like gov or laws to inforce, institutions allow markets to grow, they also limit gov power and encourage investment .  

Inclusive insutions

Inclusive institutions- Rules that constrain the rulers and channel resources to the wider population group 

Definition: Inclusive institutions are political and economic institutions that allow a broad section of society to participate in economic activity, access opportunities and benefit from economic development.

In The Colonial Origins of Comparative Development (2001), Acemoglu, Johnson and Robinson explain how historical colonial conditions influenced whether countries developed institutions that protected property rights and encouraged investment, or extractive institutions that concentrated power and wealth.

Key idea: A country’s economic development depends partly on the institutions established historically and how they shape people’s incentives to invest and participate in the economy.

Example: Australia legal system generally protects private property and allows people to establish businesses and participate in Amrkets

Significance: For the state: Inclusive institutions constrain the power of political elites and support broader participation in decision-making.

For markets: Protection against arbitrary expropriation encourages people and businesses to invest, because they have greater confidence they can benefit from their activities.

For economic development: Institutions can help explain persistent differences in income between former colonies. The authors argue that institutional differences are an important cause of long-run economic outcomes

Critical juncture

Critical juncture-  A period when several paths become unusually open 

Definition: A critical juncture is a major historical event or period that disrupts existing political and economic arrangements and creates opportunities for new institutions to develop. The choices made during this period can shape a country’s long-term development.

In The Colonial Origins of Comparative Development (2001), Acemoglu, Johnson and Robinson explain how European colonisation created different institutional paths across countries. Colonial conditions influenced the institutions colonisers established, and these institutions often persisted long after colonial rule ended.

Key idea: A historical event can shape institutions in ways that influence a country's economic development for generations.

Example: cemoglu, Johnson and Robinson (2001) argue that European colonisation was a critical historical period that shaped the institutions of many countries.

European colonisation: European powers established different institutions in different colonies. Where European settlement was more feasible, colonists were more likely to establish institutions that protected settlers’ property rights. In other places, colonial powers often created extractive institutions designed to benefit a narrow group.

These institutional differences could persist long after colonial rule ended, influencing later economic development.

Significance: cemoglu, Johnson and Robinson (2001) argue that European colonisation was a critical historical period that shaped the institutions of many countries.

• State: Critical junctures can reshape state institutions, including who holds political power and how effectively the state governs.

• Markets: Institutions influence property rights, contracts and who can participate in economic activity.

• Economic development: Institutional choices made during critical junctures can create long-term advantages or disadvantages by shaping investment, incentives and access to economic opportunities.

State capacity

State capacity-  The ability to formulate, implement and enforce collective goals 

Definition: State capacity is the ability of a state to implement policies, enforce rules, coordinate economic activity and influence social and economic development.

In Atul Kohli’s (2004) State-Directed Development, state capacity helps explain why some states are more effective than others at directing industrialisation and working with businesses to achieve economic goals

State capacity is not simply about how large a government is; it is about how effectively it can implement decisions and influence society and the economy.

Example: Kohli examines how Japanese colonial rule in Korea (1910–1945) shaped institutions and influenced later industrial development.

• The colonial state developed administrative structures and coordinated economic activity to support industrialisation.

• However, these efforts primarily served Japanese imperial and military interests.

• The experience left institutional legacies that influenced South Korea’s later development.

This illustrates that a state can possess significant capacity to organise economic activity without prioritising the welfare or political rights of the population it governs.

Significance: State: State capacity determines how effectively governments can implement policies, enforce rules and coordinate economic activity.

• Markets: States influence markets by establishing rules, supporting industries and coordinating relationships between government and businesses.

• Economic development: Capable states can help promote industrialisation by directing resources, supporting businesses and coordinating investment. gains also matteR

Cohesive capitalist state KOHLI

Cohesive capitalist state-  A capable state closely allied with organised producers

Definition: A cohesive-capitalist state is a state with a strong, coordinated bureaucracy that works closely with business and capitalist groups to promote industrialisation and economic development.

In Atul Kohli’s (2004) State-Directed Development, the concept helps explain how state institutions and relationships between the state and business can support economic growth.

Cohesive = the state has strong organisation and coordination.

Capitalist = it works with private businesses and supports capitalist production.

State-directed = the government actively guides economic development.

Example: Kohli examines how Japanese colonial rule in Korea (1910–1945) shaped the state institutions and economic structures that influenced later South Korean development.

• Strong state organisation: The colonial administration developed the capacity to organise and direct economic activity.

• State-business coordination: Economic activity was coordinated to support industrial and strategic objectives.

• Unequal benefits: These arrangements primarily served Japanese imperial interests, and the benefits for Korean workers and peasants were limited.

This example illustrates how a cohesive relationship between the state and capitalist interests can support industrialisation without necessarily serving the interests of the wider population.

Significance:

• State: A strong bureaucracy allows the state to coordinate economic activity and work closely with businesses.

• Markets: Rather than leaving development entirely to market forces, the state actively influences investment and industrial priorities.

• Economic development: State-business cooperation can help coordinate resources and promote industrialisation.