In this Box you have to synthesize the theoretical and empirical aspects that explain the gap between rich and poor nations. Theory suggests that a “tax” on capital reduces investment, wages, and output; on the flip side, in practice, weak institutions in the form of bribes or heavy regulatory burden among other variables, lead to the same result.
The challenge in this Box is to lay out both lines of reasoning (growth theory and institutions) and illustrate the point using the resources below.
– Go to worldbank.org and look for the World Development Indicators (the direct link is: https://databank.worldbank.org/source/world-development-indicators). Once you are there pick a developing country (or countries —could be more than one) and also look for the USA. Retrieve the data for GDP per capita starting in the year 2000, up to the latest available year. There are many variables with that name so pick: GDP per capita (constant 2015 US$); the series are constantly updated, the latest base-year available is 2015. Create your own graph.
– Look online for the Worldwide Governance Indicators (the direct link is: https://info.worldbank.org/governance/wgi/). In the Interactive Data Access tab find the countries that you have picked from the World Bank. There are six categories for institutional scores; you will find a percentile ranking and an absolute score. In the Table View tab you can find the absolute score, which ranges between -2.5 to 2.5, this is better suited for this analysis so use that one. Pick the latest year, 2022, to create your own plot of the score of your countries for each indicator side-by-side. You can also find them in the WDI database by searching under the exact name of the indicator.
In this box talk about the income gap between the countries in general [25 points].
Explain through the lens of the theory and institutions why this is the case [25 points].
Discuss whether there is evidence of convergence/divergence in income [25 points]
and the differences in institutional quality [25 points] among your selection of countries.
The charts (one for GDP per capita and another for Governance Indicators) should have a title and have both axis labeled (variables and units).
When talking about the theory from the book’s chapter be sure touch on the set up of the model, interpretation, and its predictions. The only outside reference for this assignment to get a sense of the role of institutions in economic performance is Hali Edison, “How strong are the links between institutional quality and economic performance?”, Finance and Development, June 2003, Vol. 40, Num. 2, International Monetary Fund. There is a large literature on the topic, but this a good introduction, so don’t look further for this assignment. In the Box focus on the complementarity between the theory and the concept of institutions to explain the issue to a reader that does not much about either, but who is just puzzled about standards of life around the world. This type of exercise is also useful for, say, a firm looking to expand into foreign markets.
Boxes are not research papers. Except for the data, please do not rely on outside sources for this.
