Question

Problem 2: 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

Please show steps.

Answer 1

a. the statement is true.

if the government practices high expropriation then people will be disincentivised to work for capital formation(both human and public).

think: why would you earn and invest with your hard work if there is a high chance that your earned property will be seized by the government. e.g you studied hard, earned degrees then went to do a high paying job because of it and you bought land and build a house. within a few months government sends you to notice that your property will be seized for building a highway. now if your property gets seized then someone who got to know your condition will have now less incentive to send their kids to school and making them graduates. hence high expropriation risk due to poor governance will lead to less capital formation.

b. this statement is true.

European colonies made sure that they have sets of good institutions where they can establish a settlement. hence disease-prone areas didn't have enough good institutions because fewer people from Europe lived there.

c. this statement is also true,

a property right is a right that a party is assigned the ownership of the property. private property rights are essential to make the market mechanism work. for e.g, you own your house hence if somebody damages your house you have a saying in the process of claiming compensation for it, but you cannot go and claim compensation if the road is being damaged by a group of people because you don't own the road. but if the government is corrupt then those people will go away without being punished/penalised because they'll bribe the police/govt officials. hence poor government will lead to poor protection of property rights and contract enforecements.