EC104 Topic 10

amarjotsidhu's version from 2015-06-05 14:54

Section 1

Question Answer
New Institutional Economic History perspective (as defined by North)institutions are the underlying determinants of economic performance; institutions are formal and informal constraints that structure behaviour; they are persistent; institutional reform is opposed by vested interests - govt. failure is possible
NIEH institutions that we encounter in modern societymore formal = property rights, modes of governance; more informal = credible commitments, persuasive abilities, ideological values, etc.
Why do institutions matter for growth?property rights institutions = key to long run growth; colonisation strategies which reflect disease environment have a lasting impact; heritage of legal system persistent
which institutions matter for growth?capital accumulation and technological progress = key sources of growth; they affect incentives to invest and to innovate; social capabilities
Social capabilitiesincentive structure in a society that inform investment decisions and innovation efforts. Key aspect = appropriability of returns which depends on security of property rights and enforceability of contracts
Ideal state'strong, constrained and uncaptured'
Informal institutionshard to quantify; 'trust' reduces transaction costs, increases incentives to invest and innovate; trust = positively correlated with growth; trust is stronger is good formal institutions but weaker is class/ethnic divides e.g. high trust in Norway and weak in Brazil
NIEH interpretation of Qing China (Brandt 2011)political equilibrium that made institutions path dependent; central absolutist state, land based fiscal system, meritocratic bureacuracy; Chinese state lacked fiscal capacity and faced big agency costs in extracting surplus; allowed elites to obtain rents in return for tax revenues; it fell behind and did not take advantage of MEG; govt. did not have capacity/will to be a 'developmental state'; was a 'closed access society' = distributed rents while creating barriers to entry which stifled innovation, elites wanted to maintain their own position = DECLINE
NIEH on US emergencesuperior institutions for extracitions of minerals, property rights and R&D
NIEH on Britain Early parliamentary institutions superior for investors - protect investments and limited taxation
NIEH on Europe in the Golden AgeWestern European institutions (due to Marshall Plan) are better than those of Eastern Europe
How much do institutions matter (growth regressions)?formal institutional quality accounts for 1/4 of growth difference between East Asia and Africa; rule of law varies greatly; poor governance in African countries
Institutions in Europe todayformer communist countries that joined the EU in 2004 have committed to relatively good institutions through EU membership; institutional quality much better than Russia = enhancement of growth prospects e.g. Czech Republic
Do institutions guarantee good growth?growth not automatic, requires good institutions and policies (Social capability); type of growth changes as catch up proceeds; reforms required as technology changes but politics makes this difficult; mercantilism works best in early stages
Cathc up growthopportunity for really rapid growth from low initial productivity level -> requires social capability; persistence of bad institutions may preclude catch up; bad institutions = fall behind
Gerschenkron - adapt institutionsinstitutional design and role of govt. might be different in conditions of 'backwardness; substitutes for prerequisites; initially, optimal boundaries of firm wider and coordination problems more serious
Changes in type of growth at different development stages of developmentcontinual reform required; even quite successful catch up may stall well short of complete convergence e.g. Japan
Japanhad a 'lost decade' though mismanagement of the financial sector; post-war settlements had long lasting effects
Difference between US and poorer countriesUS had superior GDP pc levels because of better institutions; other countries will not be able to catch up (conditioned on inferior institutions)

Section 2

Question Answer
Neoclassical approachno transaction costs, no externalities, no increasing returns to scale, no informational asymmetries
Incomplete convergenceincome inequality between regions, implies a non-uniform distribution of economic activity
Galup. et al on incomplete convergenceshow few dense regions of production/population and many sparse areas
New Economic Geography approchtransaction costs exist; increasing returns to scale; fixed factors -> points to uneven spatial distribution and incomplete convergence
NEG on very high transport costs NEG models suggest that when transport costs are very high, industry is uniformly located with respect to agricultural production (50/50). As transaction costs fall, b being located near other industrial producers generates costs savings which are not eroded by transport costs to final consumers = occurrence of 'bifurcation' = discrete shift in the distribution of industry and one country emerges as the specialist manufacturer with lower unit production costs, higher wages, larger markets, higher export shares and higher income
Supplier and makret accessimports of intermediate goods = costly = supply access matters; exports to consumers costly = market access matters
Costs of distance - Limao50% higher transport costs in landlocked countries
Distance coststransport fees and insurance; time and information
NEG and industrialisationsees de-industrialisation of Asia and of the rural environment with manufacturing activity concentrated in few centres in NW Europe and North America is a clear example of bifurication; falling transport costs = important in concentration of activity in specialised regions = these regions become major global markets, giving them an advantage in access which leads to further development and inequality
Path depedency 1: agglomeration high costs for missing out; asia has established manufacturing hub = high supplier costs; lower production costs; increased competitiveness of products; higher wages; improved market access; africa, LA, have missed out on this ' benefits of locating in an agglomeration outweigh the higher wages and rental locations of such locations, driving regional inequality; wage differentials have to get very high before relocation e.g. recent first heavy industry relocating to Asia
Agglomeration economiesexternalities in infrastructure = ports, highways, workforce exists, clients located here ; provision of public goods
NEG on citiesurban productivity higher than rural/small town; cities are diverse = new ideas, spillovers, creation of new industries ; specialised workers and trades/services, thick markets, lower search costs, improved interaction = knowledge spillovers = lower information acquisition costs ; once a region is a hub, it can sustain increasing wages (lower wage areas may be higher cost) = DIVERGENCE between hubs and periphery
Path dependency 2: physical geographycurrent spatial distribution will last decads; positive physical features = navigable riversa, coasts with ports, rich soil; negative physical features = tropics (disease, difficult to farm), high mountains, deserts, distance from ROW
Relationship between market access and deomstic incomestrong correlation between distance from your main trading partners , weighted by their economic size and domestic income.
Current market access superiorirtyNW Europe and North America enjoy the best market access and remain amongst densest areas of economic activity; re-emergence of Asia as an industrial hub (concentrated along East Asia)
Examples of agglomerationLancashire cotton industry, finance in London, 'tech' in Silicon Valley
ICTDisrupted physical concentration; technology and physical interaction are complements, not substitutes; lower costs of routine business; increases value of location for high value, trust based interactions; has not made agglomeration less of a feature of the economic environment
Implications for econ policyCooperation with coastal neighbours; reducing transaction costs between neighbours raises all market access = positive externalities