"Political institutions and the long-term effects of commodity booms: evidence within a theoretical framework of economic stagnation"

Abstract

n early stages of development, macro-level reforms are fundamental for economic growth. However, as economies advance, the importance of complementary micro-level reforms grows, accompanied by an intensification of lobbying pressures that do not often promote growth. This situation shifts the focus to the capacity of the political system to sustain long-term economic progress. Without institutional adaptation, stagnation becomes likely through two key mechanisms. First, economic development brings greater regulatory and legal complexity, requiring a political system capable of implementing and sustaining growth-enhancing reforms. Second, outdated political institutions distort incentives for resource allocation, making excessive redistribution to interest groups more politically appealing than investing in productivity-enhancing public goods. This misalignment undermines long-term growth potential. To explore these dynamics, the analysis begins with a sample of economies that have either stagnated or ceased to converge toward the frontier. It then incorporates a commodity boom scenario to reinterpret the theoretical model proposed by Besley et al. (2013), illustrating how such external shocks interact with institutional and political dynamics. This extended framework is empirically examined using the case of Chile by tracking the evolution of key parameters that shape economic outcomes. The analysis concludes that during times of widespread commodity boom prosperity, there are no incentives to improve the political system, as immediate commodity boom wealth diminishes the perceived need for reform and encourages excessive redistribution. But when the boom ends, outdated institutions hold back growth, showing how lack of reform of the political system can block economic growth.