Nothing Special   »   [go: up one dir, main page]
Scribd Logo
Upload

Welcome to Scribd!

  • 24 views

    BSM940 Lecture2 Institutions and Development

    Uploaded by

    Nishant Shah
    - Institutions are important for economic growth as they provide rules and coordination that allow businesses and individuals to productively engage in economic activity. Examples include property rights and monetary systems. - Changes in institutions that increase coordination and predictability, like strengthening property rights or developing financial systems, can accelerate economic growth over the long run. Conversely, changes that decrease coordination and predictability can retard growth. - Countries that have successfully developed strong, complementary institutions have seen unprecedented increases in living standards over generations, like many East Asian nations in the late 20th century.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd

    BSM940 Lecture2 Institutions and Development

    Uploaded by

    Nishant Shah
    24 views20 pages
    - Institutions are important for economic growth as they provide rules and coordination that allow businesses and individuals to productively engage in economic activity. Examples include property rights and monetary systems. - Changes in institutions that increase coordination and predictability, like strengthening property rights or developing financial systems, can accelerate economic growth over the long run. Conversely, changes that decrease coordination and predictability can retard growth. - Countries that have successfully developed strong, complementary institutions have seen unprecedented increases in living standards over generations, like many East Asian nations in the late 20th century.

    Original Description:

    eco

    Copyright

    © © All Rights Reserved

    Available Formats

    PPTX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    - Institutions are important for economic growth as they provide rules and coordination that allow businesses and individuals to productively engage in economic activity. Examples include property rights and monetary systems. - Changes in institutions that increase coordination and predictability, like strengthening property rights or developing financial systems, can accelerate economic growth over the long run. Conversely, changes that decrease coordination and predictability can retard growth. - Countries that have successfully developed strong, complementary institutions have seen unprecedented increases in living standards over generations, like many East Asian nations in the late 20th century.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    24 views20 pages

    BSM940 Lecture2 Institutions and Development

    Uploaded by

    Nishant Shah
    - Institutions are important for economic growth as they provide rules and coordination that allow businesses and individuals to productively engage in economic activity. Examples include property rights and monetary systems. - Changes in institutions that increase coordination and predictability, like strengthening property rights or developing financial systems, can accelerate economic growth over the long run. Conversely, changes that decrease coordination and predictability can retard growth. - Countries that have successfully developed strong, complementary institutions have seen unprecedented increases in living standards over generations, like many East Asian nations in the late 20th century.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 20

    BSM940

    Economic Environment of Business

    Lecture 2

    Institutions, Economic Growth and Development


    Tomasz Mickiewicz
    Aston Business School, Economics & Strategy

    Why institutions matter?


    Institutions solve the problem of coordination; and coordination is required so that businesses can produce economic value. They are known, enforceable rules of behaviour that come with penalties (sanctions) for not obeying. These rules need also be consistent with each other, hence we talk about institutional systems. Institutions enhance coordination because they make the actions of other individuals more predictable to us. They create consistent expectations. For economic development, it is important that the institutions induce enough confidence in individuals to risk innovative experiments of their own. One key example of an economic institution is property rights. Another is money.
    (people are expected to follow rules so dey become predictable) progress (money in terms of value)

    (innovation is disruption. It hinders stability as it indicates chage)(accept cange for economic

    Institutions and economic growth


    Gross Domestic Product per head is important, as it is an indicator closely associated with multiple measures of human wellbeing, such as life expectancy, educational access, environmental quality and personal liberties. Increasing productivity is a consequence of improvements in physical capital (better machines), human capital (better education) and better rules of coordination (institutions).

    Question
    For 5 minutes, please discuss with the person next to you Can you find an example of change in institutions in some country that accelerated economic growth / or a change in institutions that retarded growth? (please remember that such an impact can only be observed over a long time)

    Fast growth is a relatively recent experience


    For most of human history stagnation was a norm and development was painfully slow. Fast growth begun with industrial revolution in Britain in early 18th century, followed by North West Europe and North America. In 19th century and first half of 20th century this region was growing at an unprecedented rate of 1.4% annually, despite the self-inflicted madness of two world wars. Since mid 20th century, South East Asia became the main region of growth, starting with Japan and so called four Asian Tigers Economies (South Korea, Taiwan, Singapore and Hong Kong), followed by China since late 1970s, India since 1990s and others. By now China is the second largest world economy and Japan is third. Within less than two generations, East Asians achieved a 12- to 15fold rise in real per-capita incomes. This experience that affected over 2 billion people is unprecedented in human history.

    Growth and demographic transition


    The rise in living standards came along with an unprecedented rise in world population. When GDP rose, gains were often channelled into better health care, famine relief and improved nutrition. Mortality rates decreased rapidly, with birth rates adjusted downwards with a lag more gradually, leading to temporary surge in population (demographic transition). Example: in 1740 a woman in France expected to live 25 years. A quarter of all children born in Paris were abandoned by their mothers. Currently, an average life span of a woman born in France is 81 years.

    Source: Kasper, Streit and Boettke (2012), p. 15.

    Basic growth story (1): mobilising production factors Roy F. Harrod (1939) Evsey Domar (1946)
    Output is generated using capital and labour (production function), there is some substitution but law of variable proportions applies, so marginal product will diminish with substitution. Or even more extreme assumption: Labour has to be combined in a fixed proportion with capital; labour cannot be traded off for capital. Implications Increase in savings rate will increase growth rate (via investment in capital stock) Growth may be a temporary phenomenon as the growing amount of capital will lead to declining productivity of capital (e.g. John Maynard Keynes, echoing earlier prediction of Karl Marx who prophesied a downfall of capitalism in 19th century).

    A refutation: overinvestment in the Soviet block


    Figure 1.5. Investment and GDP growth in 1989
    12 Chile 10 8 Vietnam 6 GDP growth rate (%) Ireland

    4 Mongolia 2 Russia 0 0 -2 Bulgaria -4 Hungary -6 Argentina Investment as share of GDP (%) Turkmenistan 5 10 15 20 25 30 35 40 45 50

    Comparator Economies

    Communist Economies Linear (Comparator Economies)

    -8

    Source: World Bank, World Development Indicators

    Source: T.Mickiewicz (2010), Economics of Institutional Change, Palgrave, p. 30.

    (2) Introducing technology Robert Solow (1956) & Trevor Swan (1956)
    Assumptions
    Labour and capital can be substituted for each other There are diminishing returns to capital, however this may be counterbalanced by productivity growth over time, driven by technological progress

    (3) Introducing human capital Paul Romer (1990)


    Assumptions Individual labourers not only produce based on their labour power (quantity), but also human capital Improvement in human capital may offset the problem of diminishing returns associated with physical capital Implications Developing countries may find it difficult to catch up with developed countries; in the latter the stock of human capital is larger and the quality of human capital is generally better Problem Still no role for economic environment

    (4) Introducing Institutions to Growth Theory (North, 1990): Institutional Environment and Incentives
    Savings and investment: Why should I save unless I have an assurance that the financial intermediary between me and the investor will offer a return on my money (and unless the real value of savings is preserved over time)? Will private actors form a financial intermediary unless it can enter into contracts that would be honoured by borrowers (and savers) or can be enforced if not? Why should I invest in an environment of uncertainty?

    Technology and human capital Why should I invest in better technology if others can imitate my technology costlessly once it is developed? Why should I invest in human capital if I can be forced to work as a serf?

    The origins of institutions: internal institutions


    Rules may be shaped by long-term human experience. Useful rules tend to be perpetuated and become a tradition. If adopted by sufficient number of people to create a critical mass, rules are eventually followed by everyone in the community. They will be spontaneously enforced and emulated. While rules that ameliorate human interaction are reinforced, arrangements that fail to satisfy human aspirations will be rejected and abandoned this is a process of gradual feedback and adjustment. We call such rules internal institutions, as they arise within the community and are enforced by spontaneous reaction from the people who are directly affected.

    The origins of institutions: external institutions


    External rules are designed by someone with authority, are made explicit in legislation and regulations and formally enforced by an authority outside society, such as government. These rules are designed and imposed by agents who may have acquired this role by force, inheritance or as the result of a political process. In many cases external rules are met with voluntary compliance, but they are ultimately enforced by legitimated means of coercion, for example police and judiciary. Political agents may use external rules and enforcement to their own benefit. To alleviate this problem, the political processes themselves need to be subject to certain (higher order) rules. The effectiveness of external institutions depends greatly on whether they are complementary to the internally evolved institutions.

    Values
    At the level that is deeper than both external and internal institutions we find (fundamental) values. Values are organising points for human preferences guiding choices and actions. They are accorded by most people most of the time as most important principles used in considering what is good or bad. Other, lower order, preferences are subordinated to them. Examples of such values may be freedom, justice, security or economic welfare. A communitys shared values support cohesion and motivate people to act consistent with institutions. Values are deeply anchored in the traditions and are not easily changed. They form part of the communitys identity. They may be tied to firmly held religious beliefs. Some difference in values may imply that the institutions that make the market economy may differ in detail across nations with implications for businesses (e.g. of developed countries: Japan v. US; see tutorials).

    Overlapping institutional systems


    Institutions the systems of rules informed by the underlying, shared values define a community: a family, a neighbourhood, a nation, or an international professional association. The constitute the social cement that makes and defines a society. Individuals may belong to a great variety of different, overlapping communities, obeying different sets of institutions. Systems of economic institutions may also be more or less open to others. Both overlaps and openness may be features that facilitate adaptations in institutions to changing external conditions, like technology.

    Public policy and institutions


    Public policy is the systematic pursuit by political, collective, means of certain objectives. Public policy is conducted not only by government agents (parliamentarians, politicians, administrators), by also by representatives of organised groups, e.g. labour unions, industry associations, consumer and welfare lobbies, bureaucracies and social groups (media, academics). These organised groups may influence collective actions, i.e. actions on behalf of the community. Public policy will normally proceed within given institutional constraints, but policy actions may also alter institutions, either explicitly or as a side effect.

    Readings
    For this lecture please read Kasper et al., chapters 1 and 2.

    Topic for tutorials: Fisher Body and General Motors


    Follow up. Please reflect on how governance structures evolved, both as a result of the autonomous organisations learning from the outcomes of their earlier choices and from them responding to changes in the external environment. More readings
    Ramon Casadeus-Masanell and Daniel F. Spulber (2000). The Fable of Fisher Body. Journal of Law and Economics, Vol. 43, pp. 67-104. Robert Freeland (2000). Creating Holdup Through Vertical Integration: Fisher Body Revisited. Journal of Law and Economics, Vol. 43, pp. 3-66.

    Growth is different from development. Development is sustainabl. Growth can be temporary. Eg. Some reforms by a political party to stay in force. (dese are not good for long term). Groth is easier to measure and so considerd as an indicator.

    You might also like