ECON 551
Advanced Topics in Development Economics
Department of Economics • UIUC
Semester offered: Fall 2005
Instructor: Hadi Salehi Esfahani
Course Description:
The central concern of development economics is the causes and consequences of the vast
variations in economic policy and performance across countries and geographic locations.
Understanding these causes is essential for improving the ways in which nations around the
globe attempt to raise their incomes and alleviate poverty. Current research has
systematically shown that institutions (the rules by which people interact in a society) play
fundamental roles in shaping a country's development path. But, the details of the roles
played by many institutions are complex and remain to be fully understood. As a result, such
issues have become the subjects of lively research.
This course examines a number of theoretical and empirical topics concerning current research
on development and institutional economics. The topics are at the intersections of
development economics with other fields; particularly, political economy, macroeconomics,
public finance, and trade.
The students who take this course are expected to be familiar with graduate level economic
theory and econometrics. They are also expected to be comfortable with the use of MS Word
and MS Excel and be able to use econometric packages such as Stata or Eviews.
Learning Tools:
The lectures in this course present a series of papers that inform students about the important
issues and results of recent research. The issues concern both economic puzzles and the
techniques for dealing with those puzzles. To ensure that students gain a deep understanding
the issues, the course requires each participant to give two presentations and write a term
paper, all of which entail theoretical and empirical work. These assignments and papers are
meant to motivate students to get more intimately involved in the subject and, thereby, gain
first-hand experience in theoretical and empirical research.
As an added incentive for engaging in the subject, the students are required to participate in
the discussions during the presentations by the instructor or by their fellow students. For
evaluating the level and quality of participation, a peer evaluation mechanism will be used.
Besides lectures and class discussions and assignments, we will maintain discussion on
development issues through the online learning support service, Illinois Compass. The
Compass website for the course provides reading material, assignments, PowerPoint slides
shown in class, and day-to-day information about the course. The students are encouraged to
use this site for questions and messages at any time. I will be checking the site frequently to
offer quick responses to messages.
For the term paper and presentations, the students should choose an area of their interest and
reexamine the results of published papers in that area, using variations on the theoretical or
empirical methodologies of those papers. The students can also choose to work on new issues
if they have an idea for good topic and feel confident that they can take the research forward.
A variety of cross-country panel data will be made available to facilitate the students' research
projects.
Grading:
The overall grade in this course will be based on the two presentations and a paper, each
having a weight of 30 percent of the total grade, and a peer evaluation with 10 percent
weight.
Databases:
World Development Indicators: http://devdata.worldbank.org/dataonline/ (IP subscription).
Penn World Tables: pwt.econ.upenn.edu/Downloads/index.htm.
International
subscription).
Financial
Statistics:
ifs.apdi.net/imf/ifsbrowser.aspx?branch=ROOT
(IP
Barro-Lee (2000) education data set: www.cid.harvard.edu/ciddata/ciddata.html.
Geography,
Diseases,
and
www.cid.harvard.edu/ciddata/ciddata.html.
Sach-Warner
Openness
Datasets:
Database of Political Institutions: www.worldbank.org/research/bios/pkeefer.htm.
International Country Risk Guide Dataset (ICRG): Proprietary
Cross-National Time-Series Database (CNTS): Proprietary
Heritage
Foundation's
Index
www.heritage.org/research/features/index/.
of
Economic
Freedom:
Freedom House Country Ratings of Political Rights and Civil Liberties:
www.freedomhouse.org/ratings/index.htm.
Political
Regime
Characteristics
www.cidcm.umd.edu/inscr/polity/index.htm.
and
Transitions
(Polity
IV):
Fractionalization Dataset (Alesina et al.): www.stanford.edu/~wacziarg/papersum.html
Political Particularism Around the World (Wallack et al,):
http://www.stanford.edu/~jseddon/public2001_1.zip
Courts and Judicial Efficiency (Lex Mundi Dataset): iicg.som.yale.edu/.
Legal Origins and Religious Affiliations (La Porta et al.):
post.economics.harvard.edu/faculty/shleifer/papers/qualgov.pdf.
SCHEDULE OF LECTURES
1. What Are Institutions? What Roles Do They Play?
Acemoglu, Daron. 2003. Lecture Notes for Political Economy of Institutions and Development,
14.773, MIT: 1-32.
Akerlof, George A. 1976. "The Economics of Caste and of the Rat Race and Other Woeful
Tales," Quarterly Journal of Economics, 90: 599-617.
Akerlof, George A. 1980. "A Theory of Social Custom, of Which Unemployment May Be One
Consequence," Quarterly Journal of Economics, 94: 749-775.
Greif, Avner. 1994. "Cultural Beliefs and the Organization of Society," Journal of Political
Economy, 102.
Greif, Avner, Paul Milgrom, and Barry R. Weingast. 1994. "Coordination, Commitment, and
Enforcement: The Case of the Merchant Guild," Journal of Political Economy, 102.4: 745–
76.
McGuire, Martin C., and Mancur Olson, Jr. 1996. "The Economics of Autocracy and Majority
Rule: The Invisible Hand and the Use of Force,” Journal of Economic Literature, 34.1: 72–
96.
Murphy, Kevin M., Andrei Shleifer, and Robert W. Vishny. 1993. "Why is Rent-Seeking So
Costly to Growth?" American Economic Review, 83.2: 409-414.
North, Douglass C. 1994. "Economic Performance through Time," American Economic Review,
84.3: 359-368.
2. Broad Empirical Evidence on the Role of Institutions
Acemoglu, Daron. 2005. Lecture Notes for Political Economy of Institutions and Development,
14.773, MIT: 33-79.
Acemoglu, Daron, Simon Johnson and James Robinson. 2004. Institutions as the Fundamental
Cause of Long-Run Growth, MIT.
Acemoglu, Daron, Simon Johnson and James Robinson. 2001. "The Colonial Origins of
Comparative Development: An Empirical Investigation." American Economic Review, vol.
91 (5) 1369-1401.
Alesina, Alberto, Arnaud Devleeschauwer, William Easterly, Sergio Kurlat, and Romain
Wacziarg.
2003.
"Fractionalization." Journal of Economic Growth, 8: 155-194.
Esfahani, Hadi Salehi, and Maria Teresa Ramírez. 2003. "Institutions, Infrastructure, and
Economic Growth," Journal of Development Economics, 70.2: 443– 477.
Glaeser, Edward L., Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer 2004. "Do
Institutions Cause Growth?" Journal of Economic Growth, 9: 271-303.
Knack, Stephen, and Philip Keefer. 1995. “Institutions and Economic Performance: CrossCountry Tests Using Alternative Institutional Measures.” Economic and Politics, 7.3: 207227.
Rodrik, Dani, Arvind Subramanian, and Francesco Trebbi. 2002. "Institutions Rule: The
Primacy of Institutions over Geography and Integration in Economic Development."
ksghome.harvard.edu/~.drodrik.academic.ksg/institutionsrule,%205.0.pdf
3. Democracy and Development
Acemoglu, Daron. forthcoming. "Constitutions, Politics and Economics; A Review Essay on
Persson and Tabellini's 'The Economic Effects of Constitutions'," Journal of Economic
Literature.
Acemoglu, Daron, Simon Johnson, and James Robinson. 2005. The Rise of Europe: Atlantic
Trade, Institutional Change and Growth, American Economic Review, 95.3: 546-579.
Acemoglu, Daron, and James A. Robinson. 2004. "Kleptocracy and Divide-and-Rule: A Model
of Personal Rule," Journal of the European Economic Association, 2: 162-192.
Acemoglu, Daron. 2005. Politics and Economics in Weak and Strong States.
Acemoglu, Daron, Simon Johnson, James A. Robinson and Pierre Yared. 2005. Income and
Democracy.
Acemoglu, Daron. 2005. The Form of Property Rights: Oligarchic vs. Democratic Societies.
Lizzeri, Alessandro and Nicola Persico. 2004 "Why Did the Elites Extend the Suffrage?
Democracy and the Scope of Government, With an Application to Britain's 'Age of
Reform'," Quarterly Journal of Economics, 119: 707-765.
Jack, William and Roger Lagunoff. Forthcoming. "Dynamic Enfranchisement," Journal of Public
Economics.
North, Douglass C., and Barry Weingast. 1989. "Constitutions and Commitment: The Evolution
of Institutions Governing Public Choice in Seventeenth-Century England." The Journal of
Economic History, 49.4: 803-831.
Przeworski, Adam. 2004. "Democracy and Economic Development." In Edward D. Mansfield
and Richard Sisson (eds.), The Evolution of Political Knowledge. Columbus: Ohio State
University Press.
Padro-i-Miguel, Gerard. 2004 "Captured by Government: Ethnic Conflict and Political
Accountability. Income Distribution and Macroeconomics, NBER Summer Institute.
4. Institutions and Government Controls
Boycko, Maxim, Andrei Shleifer and Robert W. Vishney. 1996 “A Theory of Privatization”, The
Economic Journal , 106, 309-319
Esfahani, Hadi Salehi. 2000. "Institutions and Government Controls," Journal of Development
Economics, 63.2: 197-229.
Esfahani, Hadi Salehi. 2002. "A Political Economy Model of Resource Pricing with Evidence
from the Fuel Market," Manuscript, University of Illinois.
Esfahani, Hadi Salehi, and Ali Toossi Ardakani. 2004. "What Determines the Extent of Public
Ownership?" Manuscript, University of Illinois.
Hart, Oliver, Andrei Shleifer, and Robert W. Vishny. 1997. "The Proper Scope of Government:
Theory and an Application to Prisons," Quarterly Journal of Economics, 112: 1127-1161.
Laffont, Jean-Jacques, and Jean Tirole. 1991. "The Politics of Government Decision-Making: A
Theory of Regulatory Capture," Quarterly Journal of Economics, 106.4: 1089-1127.
LaPorta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1999. "The
Quality of Government," Journal of Law, Economics and Organization, 15.1: 222-279.
Levy, Brian, and Pablo T. Spiller. 1994. "Regulations, Institutions and Commitment in
Telecommunications: A Comparative Analysis of Five Country Studies," Proceedings of
the World Bank Annual Conference on Development Economics, Washington, DC: The
World Bank: 215-266.
Rajan, Raghuram, and Luigi Zingales. 1998. “Power in a theory of the firm”, Quarterly Journal
of Economics, 113.2: 387-432.
Shleifer, Andrei, and Robert W. Vishny. 1994. "Politicians and Firms," Quarterly Journal of
Economics, 109: 995-1025.
Shleifer, A. S. Djankov, R. La Porta, and F. Lopez-de-Silanes. 2002. "The Regulation of Entry,”
Quarterly Journal of Economics.
Shleifer, A. S. Djankov, R. La Porta, and F. Lopez-de-Silanes. 2003. "Courts," Quarterly
Journal of Economics.
Shleifer, A. S. Djankov, J. Botero, R. La Porta, and F. Lopez-de-Silanes. 2004. "The Regulation
of Labor," Quarterly Journal of Economics.
5. Institutions and Fiscal Performance
Acemoglu, Daron. 2005. Lecture Notes for Political Economy of Institutions and Development,
14.773, MIT: 55-104.
Alesina, Alberto, and Roberto Perotti. 1996. "Fiscal Discipline and the Budget Process,"
American Economic Review, 86.2: 401-407.
Alesina, Alberto, Ricardo Hausmann, Rudolf Hommes, and Ernesto Stein. 1999. "Budget
Institutions and Fiscal Performance in Latin America," Journal of Development Economics,
59: 253-273.
Jones, Mark P., Pablo Sanguinetti, and Tommasi, Mariano. 2000: "Politics, Institutions and
Fiscal Performance in a Federal System: An Analysis of the Argentine Provinces," Journal
of Development Economics, 61: 305–333.
Persson, Torsten, and Guido Tabellini. 1997. "Separation of powers
accountability," Quarterly Journal of Economics, 112.4: 1163-1202.
and
political
Persson, Torsten, Gérard Roland, and Guido Tabellini. 2000. "Comparative politics and public
finance", in Journal of Political Economy, 108: 1121-1161.
Persson, Torsten, and Guido Tabellini. 2004. "Constitutional rules and fiscal policy outcomes"
American Economic Review, 94.1: 25-45.
Poterba, James M. 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American
Economic Review, 86.2: 395-400.
Rauch, James E. 1995. "Bureaucracy, Infrastructure and Economic Growth: Evidence from US
Cities During the Progressive Era," American Economic Review, 85.4: 968-979.
Woo, Jaejoon. Forthcoming. "Economic, Political, and Institutional Determinants of Public
Deficits." Journal of Public Economics. 87.3-4: 387-426.
Woo, Jaejoon. 2003. "Social polarization, industrialization, and fiscal instability: theory and
evidence," Journal of Development Economics, 72.1: 223-252.
6. Institutions and Monetary Policy
Alesina, Alberto, and Roberta Gatti. 1995. "Independent central banks: low inflation at no
cost?" American Economic Review, 85.2: 196-200.
Baghery, Fatolah M., and Nader Habibi. 1998. "Political Institutions and Central Bank
Independence," Public Choice, 96.1-2: 187-204.
Banaian, King, Richard C.K. Burdekin, and Thomas D. Willett. 1998. "Reconsidering the
principal components of central bank independence: The more the merrier?" Public
Choice, 97.1-2: 1-12.
Campillo, Marta., and Jeffrey A. Miron. 1997. "Why Does Inflation Differ Across Countries?" in
Christina D. Romer and David H. Romer, eds., Reducing Inflation: Motivation and
Strategy. National Bureau of Economic Research Studies in Business Cycles. Cambridge,
MA: NBER. [Also, NBER Working Paper No. 5540].
Cukierman, Alex, and Steven B. Webb. 1995. "Political Influence on the Central Bank:
International Evidence," The World Bank Economic Review, 9: 397-423.
Cukierman, Alex, Webb, Steven and Neyapti, Blinn. 1992. "Measuring the Independence of
Central Banks and its Effects on Policy Outcomes," World Bank Economic Review, 6.3:
352-98.
de Haan, Jakob, and Willem J. Kooi. 2000. "Does Central Bank Independence Really Matter?
New Evidence for Developing Countries Using a New Indicator," Journal of Banking and
Finance, 24.4: 643-664.
Fischer, Stanley. 1995. "Central-Bank Independence Revisited," American Economic Review,
85.2: 201-206.
Hayo, Bernd, and Carsten Hefeker. 2002. "Reconsidering Central Bank Independence,"
European Journal of Political Economy, 18: 653–674.
Keefer, Philip, and David Stasavage. 2001. "Checks and Balances, Private Information, and
the Credibility of Monetary Commitments," International Organization, 56.4: 751-774.
7. Institutional Determinants of Trade Policy
Acemoglu, Daron. 2005. Notes on Introduction to the Theory of Voting, Lobbying and Political
Agency, 14.773, MIT.
Esfahani, Hadi Salehi. 2005. "Searching for the (Dark) Forces Behind Protection," Oxford
Economic Papers.
Gawande, Kishore, and Usree Bandyopadhyay. 2000. "Is Protection for Sale: Evidence on the
Grossman-Helpman Theory of Endogenous Protection," Review of Economics and
Statistics, 82.1: 139-152.
Grossman, Gene, and Elhanan Helpman. 1994. "Protection for Sale," American Economic
Review. 84.4:833-850.
Helpman, Elhanan. 1997. "Politics and Trade Policy," in David Kreps and Kenneth Wallis, eds.,
Advances in Economics and Econometrics: Theory and Application, Cambridge:
Cambridge University Press.
Lee, Jong-Wha, and Swagel, Phillip. 1997. "Trade Barriers and Trade Flows across Countries
and Industries," The Review of Economics and Statistics, 79: 372-382.
Pack, Howard. 1994. "Productivity or Politics: The Determinants of the Indonesian Tariff
Structure," Journal of Development Economics. 44: 441-451.
Rodrik, Dani. 1995. "Political Economy of Trade Policy," in Gene M. Grossman and Kenneth
Rogoff, eds., Handbook of International Economics, Vol. III, Elsevier Publishers,
Amsterdam: 1457-1496.
Trefler, Daniel. 1993. "Trade Liberalization and the Theory of Endogenous Protection, An
Econometric Study of US Import Policy," Journal of Political Economy, 101.1: 138-160.
8. Institutions and Economic Policy Reform
Acemoglu, Daron. 2005. Notes on Modeling Institutional Change, 14.773, MIT.
Alesina, Alberto. 1994. "Political Models of Macroeconomic Policy and Fiscal Reforms," in S.
Haggard and S. B. Webb (eds.), Voting For Reform: Democracy, Political Liberalization,
and Economic Adjustment, a World Bank Book. New York: Oxford University Press.
Alesina, Alberto, and Allan Drazen. 1991. "Why Are Stabilizations Delayed?," American
Economic Review, 81: 1170-1188.
Drazen, Allan and Vittorio Grilli. 1993. "The Benefit of Crises for Economic Reform," American
Economic Review, 83: 598-607.
Fernandez, Raquel, and Dani Rodrik. 1991. "Resistance to Reform, Status Quo Bias in the
Presence of Individual-Specific Uncertainty." American Economic Review, 81: 1146-1155.
Li, Wei, and Lixin Colin Xu. 2002. "The Political Economy of Telecom Privatization and
Competition," Journal of Comparative Economics, 30.3: 439-362.
Rodrik, Dani. 1994. "The Rush to Free Trade. Why so Late? Why Now? Will it Last?," in S.
Haggard and S. B. Webb (eds.), Voting For Reform: Democracy, Political Liberalization,
and Economic Adjustment, a World Bank Book, New York: Oxford University Press.
Rodrik, Dani. 1996. "Understanding Economic Reform Policy," Journal of Economic Literature,
34.1: 9-41.