The Economic Foundations of Institutional Stagnation in Commodity-Exporting Countries

Many poor countries are plagued with growth-impeding institutions. We develop a three-sector general equilibrium model linking economic stagnation in these countries to poor export terms of trade. We examine the extent to which changes in the terms of trade affect private agents’ incentive to coalesce to oppose the adoption of growth-promoting institutions. We show that under certain conditions, below a threshold terms of trade level, private agents gain from coalescing to oppose the adoption of growth-promoting institutions. Above this threshold, gains from coalescing disappear, fostering institutional change.