5/8/2018

ECONOMIC INSTITUTIONS
AND DEVELOPMENT
Econ 190.2: Monetary, fiscal, and development policy

What are institutions

• Institutions are the rules of the game in a society or,

more formally, are the humanly devised constraints
that shape human interaction. [North, 1991]

• It is a system of rules, beliefs, norms and organizations

that together generate a regularity of social behavior.
[Greif, 2006]

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What are institutions

What are institutions

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What are institutions

Rules
Enforcement mechanisms
Organizations

facilitate the performance of

economic activity

Levels of institutions

1. Formal rules (e.g. government policies, constitution)

2. Informal rules (e.g. conventions, norms, codes of
conduct [including religious])

Possible conflict between the two levels

 corruption (kinship and self-interest vs. formal
rules on cooperation)
 policy on population (religious beliefs vs. state
policy on family planning)
 punishment (state law on illegal detention vs.
a religious group’s punishment for erring
members)

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Why institutions are important

• Studying institutions sheds light on why some

countries are rich and others poor, why some enjoy a
welfare-enhancing political order and others do not.

• Socially beneficial institutions promote welfare-

enhancing cooperation and action. They provide the
foundations of markets by efficiently assigning,
protecting, and altering property rights; securing
contracts; and motivating specialization and exchange.

[Greif, 2006]

Institutions and development

• Good institutions also encourage production by

fostering saving, investment in human and physical
capital, and development and adoption of useful
knowledge. They maintain a sustainable rate of
population growth and foster welfare-enhancing
peace; the joint mobilization of resources; and
beneficial policies, such as the provision of public
goods. [Greif, 2006]

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Institutions and development

Two types of economic (& political) institutions
[Acemoglu and Robinson, 2012]
1. Inclusive economic institutions – those that allow and
encourage participation by the great mass of people in
economic activities that make best use of their talents and
skills and that enable individuals to make the choices they
wish.
 to be inclusive, economic institutions must feature secure
private property, an unbiased system of law and provision of
public services that provides a level playing field in which
people can exchange and contract; it also must permit the
entry of new businesses and allow people to choose their
careers.

Institutions and development

Two types of economic (& political) institutions
[Acemoglu and Robinson, 2012]

2. Extractive economic institutions – those that that are

designed to extract incomes and wealth from one subset of
society to benefit a different subset.

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Institutions and development

• The quality of the institutional foundations of the
economy and the polity is paramount in determining a
society’s welfare.
 individuals do not always recognize what will be
socially beneficial nor are they motivated to
effectively pursue it in the absence of appropriate
institutions.
• A central question in the social sciences and history is
therefore why societies evolve along distinct
trajectories of institutional development and why some
societies fail to adopt the institutions of those that are
more economically successful.
[Greif, 2006]

South Korea
(Lee, J.H. [1997] and Song [1990])

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Miracle of the Han River

- refers to rapid economic growth in Seoul

where the Han River flows
- from war-torn economy to becoming an
OECD member (15th largest economy)
- lead to rapid industrialization and
urbanization, exponential rise in living
standards
- rise of multinational chaebols

Miracle of the Han River

25000 GDP per capita of South Korea (1950-2008)

(in Int$)
20000

15000

10000

5000

0
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007

Source: Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD
Angus Maddison, University of Groningen

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Miracle of the Han River

1. Reconstruction period 1945-1961
- rebuilding a postwar economy twice
(WWII and Korean war)
- Japanese occupation (1910-1945)
Korean resources for Japanese only
- population decimation due to Korean war
- rebuilding of factories and production
facilities

Miracle of the Han River

1. Reconstruction period 1945-1961
- protectionist trade regime and import
substitution strategy
- overvalued domestic currency
- exports: agri products only
- continuous high inflation
- land reform/land redistribution in 3 years
- gov’t of Syngman Rhee toppled by student
revolution followed by a military coup

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Miracle of the Han River

2. Export orientation 1962-1973
- devaluation of currency by almost 100 %
against USD
- encouraged/promoted export of goods
- encouraged inflows of foreign capital
- shift from agricultural to manufacturing
- problem of price instability improved

Miracle of the Han River

3. Crisis and recovery 1974-1982
- promotion of heavy and chemical industries
(shipbuilding, steel and petrochemicals)
- heavy foreign borrowing; reached $25B in 1980
- economy deteriorated due to oil shock of 1970s
- inflation: from 3.2 percent in 1973 to 20
percent in 1974
- political and social instability: assassination of
President Park Chung Hee
- GDP growth rate: - 2.7 % (first time since 1957)
- improved harvest and stabilization policy lead
to quick economic recovery

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Miracle of the Han River

4. Adjustment and growth 1983-1992
- GDP growth rate: 12% in 1983
- inflation level dropped to 4 % for the five
years
- policies of liberalization and deregulation
- rise of chaebols (Samsung, Hyundai, LG)

Miracle of the Han River

Cheonggye Stream (Chonggyecheon, Seoul)

Source: https://www.facebook.com/photo.php?fbid=1515085731349&set=
a.1515081971255.78648.1660624001&type=3

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Miracle of the Han River

Cheonggye Stream (Chonggyecheon, Seoul)

Source: https://www.facebook.com/photo.php?fbid=1515085331339&set=
a.1515081971255.78648.1660624001&type=3&permPage=1

Miracle of the Han River

Cheonggye Stream (Chonggyecheon, Seoul)

Source: https://www.facebook.com/photo.php?fbid=1515108131909&set=
a.1515081971255.78648.1660624001&type=3&permPage=1

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Miracle of the Han River

Cheonggye Stream (Chonggyecheon, Seoul)

Source: http://en.wikipedia.org/wiki/File:Seoul-Restoration_site_02.jpg

Miracle of the Han River

Cheonggye Stream (Chonggyecheon, Seoul)

Source: http://english.visitkorea.or.kr/enu/SI/SI_EN_3_1_1_1.jsp?cid=1021966

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Miracle of the Han River

Did you know…
- Martial Law was imposed in SoKor at least
4 times?
- their constitution was amended several times with
the objective of prolonging the term of the
president?
- that military takeover/coup d'état occurred at least
twice and leaders of both became presidents?
- majority of the past presidents were implicated in
massive corruption/bribery?
- SoKor is still, technically, at WAR with NoKor; threat
of invasion is always a possibility

Miracle of the Han River

What did they do right?
- heavy investment in human capital (massive spending
on education) [Lee J.H., 1997]
1960: Korean adults avg of 4.3 schooling yrs.
1990: Korean adults avg of 9.9 schooling yrs.
- strong/sound economic policies: export-oriented
- commitment to land reform: only in 3 years!
- system of making past leaders accountable
at least two former presidents were found
guilty and were imprisoned for corruption
charges
- strong-willed leaders committed to economic
growth and development

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Miracle of the Han River

How did they do it?
- good and reliable INSTITUTIONS

- the continued existence of a REAL,

IMMINENT and GRAVE EXTERNAL
THREAT: war and invasion

- trust and credibility matter

Singapore
(Lee, K.Y. [2000] and EDB website)

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The Singapore model

30,000
GDP per capita of Singapore (1965-2008)
(in Int$)

25,000

20,000

15,000

10,000

5,000

0
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD
Angus Maddison, University of Groningen

The Singapore model

1960s: Turbulence and economic uncertainty
- 1965: Singapore became independent
(expulsion)
- unemployment was at 14 %
- birthing problems of a starting nation (building
a government from nothing)
- external threat from Malaysia and Indonesia’s
Konfrontasi
- birth of Jurong Industrial Estate: the first
industrialization program (labor-intensive
industries)

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The Singapore model

1960s: Turbulence and economic uncertainty
- problem on public housing: social issues (crime
and health issues);
rampant squatter settlements
- impending British pull out in Singapore
(closure of British military bases)

The Singapore model

1970s: Towards skills-intensive industries
- problem on British military pull-out: loss of
20 % of GDP; 30,000 direct and 40,000 indirect
jobs
- entry of multinational corporations (MNCs): HP,
Texas Instruments, GE
- formation of Singapore Airlines
- SG becomes world’s 2nd busiest port
- manufacturing became the largest sector in the
economy
- US became SG’s hinterland

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The Singapore model

1980s: Second industrial revolution
- the rise of high-tech and capital intensive
industries
- rise of research & dev’t. (R&D)
- Apple Computer manufactured PCs starting
1981
- growth of the financial sector:
* MAS - Monetary Authority of Singapore
* SES - Stock Exchange of Singapore
* SIMEX - SG Int’l. Monetary Exchange
strengthening of rules and investor confidence
- real GDP growth average: 8%

The Singapore model

1980s: Second industrial revolution
- 1987: birth of Mass Rapid Transit (MRT)
- heavy policy emphasis on education
* the “Great Marriage Debate”
1980 census: educated women not marrying
* growth of universities
National University of Singapore
Nanyang Technological University
Singapore Polytechnic

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The Singapore model

1990s and beyond: Technological and service industry
boom
- became a tech hub in Southeast Asia
- mildly affected by the 1997 Asian Financial
Crisis
*experienced short recession
- growth of the tourism industry

The Singapore model

Did you know…
- that Singapore has NO natural resource?
- that water is an imported good in SG?
- during the 1960s, the government was always on
the lookout for a possible Malaysian
invasion/retaking of SG?
- SG Air Force used to train their forces in and utilize
the facilities of Clark Airbase in the late 1970s up to
the late 80s because of limited territory size?
- SG had to endure a series of bloody racial riots
between Chinese and Malays?
- SG had to endure 29 bombings in the 1960s during
the Konfrontasi?

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The Singapore model

What did they do right?
- heavy investment in human capital (massive spending
on education) [Lee 2000]
* ensuring a strong pool of qualified civil servants
(through overseas education)
- strong/sound economic policies: export-oriented
- NO to “begging-bowl” approach.
- maximized the role of MNCs in economic growth:
provider of jobs and technology transfer
- strong-willed leaders committed to economic
growth and development and strengthening of laws
& institutions (MacDonald House Bombing of 1965)

The Singapore model

How did they do it?
- threat of failure is a good motivation
to succeed

- absence of extractive institutions

- trust and credibility matter

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WRAPPING UP

5,000
GDP per capita of PHL, SG, SOKOR
4,500 (1950-1970) in Int$

4,000 KOR
SIN
3,500
PHL
3,000

2,500

2,000

1,500

1,000

500

0
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

Source: Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD
Angus Maddison, University of Groningen

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Wrapping up

Institutions matter.

Wrapping up

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Wrapping up

Source: http://getrealphilippines.wordpress.com/2011/01/09/lky_phil/

“… Millions of Filipino men and women had to leave their country for
jobs abroad beneath their level of education. Filipino professionals
whom we recruited to work in Singapore are as good as our own.
Indeed, their architects, artists, and musicians are more artistic and
creative than ours….

The difference lies in the culture of the Filipino people. It is a soft,

forgiving culture. Only in the Philippines could a leader like Ferdinand
Marcos, who pillaged his country for over 20 years, still be
considered for a national burial. Insignificant amounts of the loot
have been recovered, yet his wife and children were allowed to
return and engage in politics….

Some Filipinos write and speak with passion. If they could get their
elite to share their sentiments and act, what could they have not
achieved?”

- Lee Kuan Yew, 2000

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END

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