The Institutions of American

Economic Growth

Prof. Wojciech Bieńkowski

Warsaw University - OSA
Spring, 2016
 
1. Formal institutions:
- constitutions
- law & regulations
- government agencies responsible for law enforcment (administration,
police, army, Internal Revenue Services, ect)
- financial institutions
2. Informal institutions
- culture, religion, work habits, tradition, ect
3. Relationship between formal & informal institutions and its importance for
economic development
4. Main theories on the importance of institution for economic development
(Schumpeter, Buchanan, Coase, Norh, Dunning)
5. Basic research on the importance of institutions for economic development
at present (ie. The World Bank Annual Report on “Doing Business –
2008”)
 Institutions - clasification

Factors of competitiveness:
Assets:
– Natural resources,
– Accumulation wealth,
– Quantity and quality of human resources,
– Financial resources,
– International environment,
Processes:
– Social economic system,
– Economic policy,
– Quality and stability of institutions.
 Institutions - clasification
Definition:
• the formally devised
constraints that shape
human interaction
• institutions are results of
formal, or explicitly defined
processes of collective
action,
• institutions may also be
informal, or implicitly
defined or understood.
3 main documents which form institutional
foundations of US

the Declaration of
Independence
/adopted on July 4, 1776/
3 main documents which form institutional
foundations of US

the Constitution
/adopted on September 17, 1787;
ratification completed on June 21,
1788/
 3 main documents which form institutional
foundations of US
The Bill of Rights are the first ten amendments to the United States Constitution:
First Amendment – Establishment clause, freedom of religion (Free Exercise Clause),
speech, and press, and peaceable assembly as well as the right to petition the
government.
Congress shall make no law respecting an establishment of religion, or
prohibiting the free exercise thereof; or abridging the freedom of speech, or of
the press; or the right of the people peaceably to assemble, and to petition the
Government for a redress of grievances.
Second Amendment – Right to keep and bear arms.
A well regulated Militia, being necessary to the security of a free State, the right
of the People to keep and bear Arms, shall not be infringed.
Third Amendment – Protection from quartering of troops.
No Soldier shall, in time of peace be quartered in any house, without the consent
of the Owner, nor in time of war, but in a manner to be prescribed by law.
Fourth Amendment – Protection from unreasonable search and seizure.
The right of the people to be secure in their persons, houses, papers, and effects,
against unreasonable searches and seizures, shall not be violated, and no
Warrants shall issue, but upon probable cause, supported by Oath or affirmation,
and particularly describing the place to be searched, and the persons or things to
 3 main documents which form institutional
foundations of US
Fifth Amendment – Due process, double jeopardy, self-incrimination, eminent domain.
No person shall be held to answer for any capital, or otherwise infamous crime,
unless on a presentment or indictment of a Grand Jury, except in cases arising in the
land or naval forces, or in the Militia, when in actual service in time of War or public
danger; nor shall any person be subject for the same offence to be twice put in jeopardy
of life or limb; nor shall be compelled in any criminal case to be a witness against
himself, nor be deprived of life, liberty, or property, without due process of law; nor shall
private property be taken for public use, without just compensation.
Sixth Amendment – Trial by jury and other rights of the accused.
In all criminal prosecutions, the accused shall enjoy the right to a speedy and public
trial, by an impartial jury of the State and district where in the crime shall have been
committed, which district shall have been previously ascertained by law, and to be
informed of the nature and cause of the accusation; to be confronted with the witnesses
against him; to have compulsory process for obtaining witnesses in his favor, and to
have the Assistance of Counsel for his defense.
 3 main documents which form institutional
foundations of US
Seventh Amendment – Civil trial by jury.
In suits at common law, where the value in controversy shall exceed twenty
dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be
otherwise reexamined in any court of the United States, than according to the rules
of the common law.
Eighth Amendment – Prohibition of excessive bail, as well as cruel and unusual
punishment.
Excessive bail shall not be required, nor excessive fines imposed, nor cruel and
unusual punishments inflicted.
Ninth Amendment – Protection of rights not specifically enumerated in the Bill of Rights.
The enumeration in the Constitution, of certain rights, shall not be construed to
deny or disparage others retained by the people.
Tenth Amendment – Powers of states and people.
The powers not delegated to the United States by the Constitution, nor prohibited
by it to the states, are reserved to the states respectively, or to the people.
Culture related informal institutions
Harmony between formal and informal
institutions as a condition sine qua non of
effective development.
 Case Persia - Iran
Mohammad Reza Pahlawi
• The Shah made major changes to curb the power of certain ancient elite
factions by expropriating large and medium-sized estates for the benefit of
more than four million small farmers.
• The Shah sought to modernize Iran on Western lines and mask his
repressive, corrupt regime, principally through the non-violent White
Revolution. At its core was land redistribution to peasants, a campaign
against rural illiteracy and female political emancipation. Extensive social
welfare provisions were added later. These, and other measures, which
included banning marriage until 15; giving women a right to divorce;
allowing polygamy only with the wife's consent; the glorification of pre-
Islamic Iran; and widespread Western fashions and consumer behavior, by
their perceived anti-Islamic character.
• He instituted exams for Islamic theologians to become established clerics
(mullahs), which were widely unpopular and broke centuries-old religious
traditions. The mullahs were accustomed to having total control over
admission to their ranks.
 Transaction cost and „the rule of three”
Transaction costs refer to the costs involved in market exchange. These include the costs
of discovering market prices and the costs of writing and enforcing contracts.
 Main theories on the importance of institution for
economic development
Joseph A. Schumpeter
/1883-1950/

– Major publications:
 The Theory of Economic Development: An
inquiry into profits, capital, credit, interest and
the business cycle/1911/
 Business Cycles: A theoretical, historical and
statistical analysis of the Capitalist
process/1939/
 Capitalism, Socialism and Democracy/1942/
– His most important contributions to
economic analysis is the theory of business
Main theories on the importance of institution for
economic development
Ronald H. Coase
/1910/
– Major publications:
 The Nature of the Firm /1937/
 British Broadcasting: A Study in Monopoly /
1950/
 The Problem of Social Cost /1960/
 The Firm, the Market, and the Law /1988/
– winner of the Nobel Prize in Economics
for his discovery and clarification of the
significance of transaction costs and
property rights for the institutional
structure and functioning of the economy
Main theories on the importance of institution for
economic development
James M. Buchanan
/1919/
– Major publications:
 Public Principles of Public Debt /1958/
 Democracy in Deficit: the political legacy of
Lord Keynes /1977; together with Richard
Wagner/
 The Limits of Liberty: Between Anarchy and
Leviathan /1975/
 The Calculus of Consent: Logical Foundations of
Constitutional Democracy /1962; together with
Gordon Tullock/
– winner of the Noble Prize in Economics
for his development of the contractual
and constitutional bases for the theory
of economic and political decision
 Main theories on the importance of institution for
economic development
Douglass C. North
/1920/
– Major publications:
 Economic Growth of the United States from 1790 to 1860
/1961/
 Growth and Welfare in the American Past /1971/
 The Rise of the Western World, A New Economic History
/1973; together with Robert Thomas/
 Structure and Change in Economic History /1981/
 Institutions, Institutional Change and Economic Performance
/1990/
– winner of the Nobel Prize in Economics for having
renewed research in economic history by applying
economic theory and quantiative methods in order to
explain economic and institutional change /1993;
together with Robert Fogel/
 Main theories on the importance of institution for
economic development

Oliver E. Williamson
/1932/
– Major publications:
 Transaction Cost Economics:  The
Governance of Contractual Relations /1979/
 Transaction Cost Economcs /1987/
 The Nature of the Firm: Origins, Evolution,
and Development /1993; together with
Sidney Winter/
– recipient of the H.C. Recktenwald Prize in
Economics for his contributions to the
development of transaction cost theory and
institutional economics /2004/
Main theories on the importance of institution for
economic development
John Williamson
/1937/
• Major publications:
– Exchange Rates and Trade Policy /1983; together with Fred
Bergsten/
– What Washington Means by Policy Reform /1990/
– The Role of the IMF: A Guide to the Reports /2000/
• Williamson originally coined the phrase Washingtgon
Consensus /in 1990 to refer to the lowest common denominator
of policy advice being addressed by the Washington-based
institutions to Latin American countries as of 1989,these
policies were: Fiscal disciplin , A redirection of public
expenditure priorities toward fields offering both high economic
returns and the potential to improve income distribution, such as
primary health care, primary education, and infrastructure , Tax
reform, Interest rate liberalization , A competitive exchange rate
,Trade liberalization, Liberalization of inflows of foreign direct
investment , Privatization, Deregulation, Secure property rights/
 IMF: World Competitiveness Yearbook
/WCY/
• The IMD World Competitiveness Yearbook (WCY) is one of the world’s most
thorough and comprehensive annual report on the competitiveness of nations. It is
published without interruption since 1989.
• Metodology:
– the WCY divides the national environment into four main Competitiveness
Factors: Economic Performance, Government Efficiency, Business
Efficiency and Infrastructure
• Each of these four factors has been broken down into five sub-factors, each
highlighting different facets of competitiveness. Altogether, the WCY features 20
such sub-factors.
• The WCY uses different types of data to measure quantify able and qualitative issues
separately. Statistical indicators are referred to in the WCY as Hard data /weight of
approximately two-thirds in the overall ranking/.
• An additional 119 criteria are drawn from our annual Executive Opinion Survey and
are referred to in the WCY as Survey data /a weight of approximately one-third/.
 IMF: World Competitiveness Yearbook /WCY/

• Each sub-factor does not necessarily include the same number of criteria (for example, it takes
more criteria to assess Education than to evaluate Prices).
•Each sub-factor, independently of the number of criteria it contains, has the same weight in the
overall consolidation of results, that is 5% (20 x 5 = 100).
World Bank: Doing Business Report

Doing Business is a series of annual

reports investigating the regulations that
enhance business activity and those that
constrain it. Doing Business presents
quantitative indicators on business
regulations and the protection of
property rights that can be compared
across 178 economies—from
Afghanistan to Zimbabwe—and over
time.
World Bank: Doing Business Report
World Bank: Doing Business Report
 World Economic Forum: Global Competitiveness Report

• Authors of the Global Competitiveness Report define

competitiveness as the set of institutions, policies, and factors
that determine the level of productivity of a country.
• The methodology used to assess national competitiveness has
necessarily evolved over time as authors of the report have taken
into account the latest thinking on the factors driving
competitiveness and growth. It was in this context that in 2004
the World Economic Forum introduced the Global
Competitiveness Index (GCI), a highly comprehensive index for
measuring national competitiveness, taking into account the
microeconomic and macroeconomic foundations of national
competitiveness.
 The 12 pillars of competitiveness (GCI index)

Weights of the three main groups of pillars

at each stage of development
 How is the stage of development decided for
each country?
• Countries are allocated to stages
of development based on two
criteria.
• The first criterion is the level of
GDP per capita at market
exchange
• The second criterion measures
the extent to which countries are
factor driven. We proxy this by
the share of exports of primary
goods in total exports (goods
and services) and assume that
countries that export more than
70 percent of primary products
are to a large extent factor
driven
Example: WEF - Global Competitiveness Report 2014/2015
Global Competitiveness Index
Example: World Bank – Doing Business Report 2016
Example: World Bank – Doing Business Report 2016