published in: Journal of Economic Growth, 2005, 10 (3), 229-270
This paper argues that openness to goods trade in combination with an unequal distribution
of political power has been a major determinant of the comparatively slow development of
resource- or land-abundant regions like South America and the Caribbean in the nineteenth
century. We develop a two-sector general equilibrium model with a tax-financed public
sector, and show that in a feudal society (dominated by landed elites) productivity-enhancing
public investments like the provision of schooling are typically lower in an open than in a
closed economy. Moreover, we find that, under openness to trade, development is faster in a
democratic system. We also endogenize the trade regime and demonstrate that, in political
equilibrium, a land-abundant and landowner dominated economy supports openness to
trade. Finally, we discuss empirical evidence which strongly supports our basic hypotheses.
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