Economies without free and democratic institutions unambiguously fall into poverty. To grow out of poverty, countries need free elections – but they also need free and easy communication of information through freedom of the press, assembly and speech. These are the central findings of experimental research by a team of economists from the United States and Europe, published in the July 2009 Economic Journal.
The study has implications for how to help poor countries grow out of extreme poverty, and can help to explain why there are poor democracies such as Venezuela with a highly censored media. The authors hope that development economists, for example at the World Bank, could begin to use experimental economic models such as this.
The researchers put groups of students into four ”game” situations in a computer-simulated economy. They were given ”resources” with which to produce, consume and trade. To grow, the economy needed to reach a threshold level of capital, which required the group to co-ordinate their actions to save resources for future rounds.
In the first simulation, the group was unable to communicate at all and acted with short-sighted self-interest, consuming all the resources. The economy did not reach the threshold.
The second simulation introduced communication via unrestricted chat rooms – but the commitments made were not binding and individuals could benefit by reneging on promises. Again, the economy did not reliably escape the poverty trap.
The third simulation removed communication and randomly assigned two social planners to make competing proposals for the amount each individual should invest, consume and trade – and these were voted on. The lack of communication meant that the two social planners did not need to compete to win votes, thus the level of investment proposed fluctuated widely and growth was not guaranteed.
Only in the fourth simulation, where individuals were allowed to vote and communicate, did the group consistently co-ordinate and escape the poverty trap. The voting ensured that promises were accountable, and communication meant that the social planners had to promise the socially desirable level of investment.
The coordination problem has several applications. For example, the threshold can be seen as the level of infrastructure or capital stock required for sustainable development, and the motivation to consume straight away can be seen as the desire for wealthy individuals and companies to invest outside their country or for politicians to be corrupt.
”The Impact of Simple Institutions in Experimental Economies with Poverty Traps” by Mónica Capra, Tomomi Tanaka, Colin Camerer, Lauren Feiler, Veronica Sovero and Charles Noussair is published in the July 2009 issue of the Economic Journal. View article.
The experimental subjects were undergraduates at Emory University and the California Institute of Technology.
Emory University | +1 404 727 6387 | firstname.lastname@example.org
Arizona State University | +1 480 727 0948 | email@example.com
California Institute of Technology | +1 626 395 4054 | firstname.lastname@example.org
California Institute of Technology | + 31 13 466 2416 | C.N.Noussair@uvt.nl
Tilburg University | + 31 13 466 2416 | C.N.Noussair@uvt.nl