The adoption of new technologies is fundamental for economic development. This might have led one to expect that the more technologically backward a country the more fervently it would adopt new technologies.  Yet in fact, one of the greatest difficulties with the process of economic development is precisely the resistance among entrenched interest groups to technological change.  Because such groups anticipate the resultant loss of income they may try to block the introduction of new technologies through outright conflict.  Famous historical examples are the Luddites and the Captain Swing revolts.    Other blocking mechanisms do not rely on direct conflict and usually aim at securing some form of protection from the government.  This is clear in the case where firms and workers lobby against trade liberalization or deregulation of markets.  There are also indirect mechanisms that can involve, for example, deliberate failure to protect property rights.  The reason is that groups who become wealthier as a result of the adoption of new technology can dispute the political position of an incumbent group, providing the incumbent with an incentive to undermine property rights protection and hence technology adoption.

Acemoglu, Daron and James A. Robinson (2000) “Political Losers as a Barrier to Economic Development”, American Economic Review, 90 (2): 126-130.

Partly prompted by the recent financial crisis, a debate has resurfaced about the implications of inequality and political instability for prosperity.  One strand of this literature, associated with Lewis (1955) and Kaldor (1956), argues that higher inequality is beneficial for growth because wealthier groups hold the resources necessary for investment.  Another strand, which is the focus of this post, shows that the channel through which inequality affects growth is political.  In an unstable political environment, which can be created by high income inequality, investment is discouraged by a higher risk of expropriation and voters’ preferences towards redistributional policies, both of which affect growth adversely.

Alesina, A. and R. Perotti (1996) “Income Distribution, Political Instability, and Investment” European Economic Review, 40(6): 1203-1228. [Working paper version]

Bénabou, R. (2000) “Unequal Societies: Income Distribution and The Social Contract” The American Economic Review, 90(1): 96–129. [Working paper version]

Bourguignon, F. and T. Verdier (2000) “Oligarchy, Democracy, Inequality and Growth” Journal of Development Economics, 62(2): 285–313.

Campante, F. R. (2011) “Redistribution in a Model of Voting and Campaign Contributions” Journal of Public Economics, 95(7-8): 646-656. [Working paper version]

Cosgel, M., A. B. Ergene (2012) “Inequality of Wealth in the Ottoman Empire: War, Weather, and Long-Term Trends in Eighteenth-Century Kastamonu” Journal of Economic History, 72(2): 308-331. [Working paper version]

Galor, O. (2009) “Inequality and Economic Development: An Overview ” Mimeo.

Persson, T. and G. Tabellini (1994) “Is Inequality Harmful to Growth?” American Economic Review, 84(3): 600-621. [Working paper version]

Saint-Paul, G., and T. Verdier (1993), “Education, Democracy and Growth” Journal of Development Economics 42: 399-407. [Working paper version]

Woo, J. (2009) “Why Do More Polarized Countries Run More Procyclical Fiscal Policy?” Review Of Economics And Statistics, 91(4): 850-870.

One of the great debates in economics concerns the determinants of economic development, investment and growth.  Most recently, this literature has focused on whether geography or institutions play the more decisive role in determining economic development.  A major issue in this debate concerns the appropriate treatment of the endogeneity of the economic institutions themselves.  Much of the literature has been concerned with finding valid instruments to control for this endogeneity, or with finding natural experiments in which institutions changed exogenously such as the fall of the Berlin Wall.  It is probably fair to say that explanations centring on key institutions that enforce contractual arrangements and protect property rights from expropriation by the state dominate the literature at the present time.  But recent work has made a persuasive case that both institutions and geography matter by studying the interaction of colonial history and geography to identify the partial effects of institutions and geographical endowments.  An early concern of the growth literature was on how resources move from agriculture to a ‘modern’ manufacturing sector, and another recent theme takes insights on the importance of geography and institutions to return to that earlier issue of how resources move between sectors.  With the importance of ‘clusters’ of institutions now generally accepted, another strand of the literature seeks to identify in greater detail the precise mechanisms through which particular institutions enhance economic activity.

Acemoglu, D., S. Johnson, and J. A. Robinson (2001); “The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review, 91(5): 1369-1401. [Working paper version]

Acemoglu, D., S. Johnson, and J. A. Robinson (2002);  “Reversal of Fortune: Geography and Institutions in the Making of Modern World Income Distribution.” Quarterly Journal of Economics, 117(4): 1231-1294. [Working paper version]