ECONOMIC DEVELOPMENT WITH ENDOGENOUS POLITICAL PARTICIPATION

This paper combines two approaches to the relationship between economics and politics. The first, standard in the economic literature, takes political arrangements as exogenous and examines the way in which different political regimes influence economic performance. A second approach, normally followed by political scientists, takes economic performance as exogenous and analyzes the way in which the political structure of society responds to it. I integrate both approaches in a simple model that provides a framework to think about the observed correlations between income per capita and political participation. Extensions to the basic model show the possibility of multiple equilibria, and are used to analyze totalitarianism and the role of urbanization.     

Thy Neighbor's Curse: Regional Instability and Economic Growth

We show that regional instability, defined as politicalinstability in neighboring countries, has a strong negative effecton a country's economic performance. The magnitude of this negativeexternality is similar in size to that of an equivalent increasein domestic political instability. We also identify two mainchannels through which regional instability lowers economic performance.First, regional instability disrupts trade flows. The sharesof merchandise and manufactured trade are lower in countrieswith high regional instability. Second, regional instabilityleads to increased military outlays. Defense expenditures arehigher in countries with high regional instability. In contrast,the share of government expenditures allocated to education islower in countries with politically unstable neighbors. Our resultssuggest the existence of negative spillovers among politicallyunstable neighboring countries. These adverse regional influencesshould be taken into account when projecting the future economicperformance of countries. The evidence presented also suggeststhat the gains from reducing regional instability extend farbeyond the welfare of the country experiencing political unrest.Policies directed at settling current territorial disputes ina peaceful and orderly manner can have large beneficial effectsfor parties not directly involved in the conflict.