Question

Problem 9: Which of the following statements about the role of institutions in economic growth is TRUE and which of the following statements is FALSE? Explain. (a) Higher expropriation risk due to low-quality governance and poor insti- tutions might account for low levels of human and public capital in poor nations (b) The quality of institutions in countries colonized by Europeans is corre- lated with whether climate/disease allowed European settlers to live in those areas (c) Low-quality institutions make it difficult to protect property rights and enforce contracts (d) Low-quality institutions are central to the theory of poverty traps that states that countries need a 'big push' to facilitate convergence in living standards to the developed world Problem 10: The reason why the Romer model predicts sustained economic growth, unlike the Solow model, is that a) Ideas, unlike physical capital, are non-rivalrous b) Ideas, unlike physical capital, do not depreciate c) The accumulation of new ideas, unlike the accumulation of physical cap- ital, does not run into diminishing returns to scale d) All of the above

Answer 1

For problem 9 -

Statement - Which of the following statements about the role of institutions in economic growth is TRUE and which of the following statements is FALSE? Explain.

Answer - (a), (b), (c) are TRUE. (d) is FALSE

Explanation - The quality of institutions - both governance based and education based directly impact the shape and direction the economy of that country or region takes. Institutions are responsible for taking governance to people and ensure the principles of justice and fairness are followed in the processes and procedures while doing so. Hence, low quality and poor institutions create problems like low levels of human and public capital, especially in poor nations where there is a greater reliance on these institutions.

Similarly, low quality institutions also lead to poor enforcement of property rights and contracts.

The quality of institutions in colonial empires of Europeans depended on the extent of engagement the Europeans had with these institutions. This invariably depended on the climate and disease factors.

For (d), it is true that low quality institutions are kind of central to poverty traps, there are questions on whether the convergence of living standards is the right direction for economic growth or not.