Institutional Trap

One of the main obstacles for successful economic development is the formation of institutional traps, inefficient yet stable norms of behaviour. Domination of barter exchange, arrears, corruption and black market activities are examples of institutional traps that have hampered reforms in transition economies. Institutional traps are supported by mechanisms of coordination, learning, linkage and cultural inertia. The acceleration of economic growth, systemic crisis, the evolution of some cultural characteristics and the development of civil society may result in breaking out of institutional traps. Examples from the history of the United States and Russia are considered.arrears; barter; civic culture; civil society; coordination failures; corruption; cultural inertia; hysteresis; institutional trap; linkage effect; lock-in; multiple equilibria; path dependence; rent seeking; reputation; systemic crises; transaction costs; transformation costs; transitional rent; trust

Strategic monetary and fiscal policy interaction in a liquidity trap

Given the recent experience, there is growing interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. Using the Dixit-Lambertini (2003) framework of strategic policy interaction between the Treasury and the Central Bank, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target is given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as a Stackelberg leader, is given optimal output and inflation targets. This solution achieves the optimal rational expectations pre-commitment solution. This result holds true for a range of specifications about the Treasury's behavior. However, when there is the possibility of a liquidity trap, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one. liquidity trap; strategic monetary-fiscal interaction; optimal Taylor rules.

THE INSTITUTIONAL MIDDLE-INCOME TRAP

Most students of international development are familiar with the term “middleincome trap,” which refers to the penchant for countries to reach middle-income status and then stagnate1. In this short note I am proposing a similar and related phenomenon: the “institutional middle-income trap” or “institutional reform trap” whereby institutional development in middle-income developing countries starts out well but then stagnates, or does not reach its goal – which is usually to develop a world class institution. Universities are a particular example of this phenomenon. These observations are based on extensive institution building experience in 10 developing countries, more than half of which are classified as middle-income. They are also initial thoughts on which I plan to build in the futur

Permanent Redistribution Society: The Role of Reforms

We discuss the typical mistakes in carrying out reforms that promote redistributive activities and give rise to redistribution cycles; each cycle includes the stages of reform, stabilization and recovery. We provide arguments that show that a possible way out of the institutional backwardness trap is a rational combination of institutional reforms and policies to stimulate economic growth.reforms; redistribution; institutional trap

Government-Business Relations and Catching Up Reforms in the CIS

The paper addresses the problem of similarities and divergence of transition paths at the later stage of transition in the countries of the Commonwealth of Independent States. The main aim is to clarify the influence of specifics of government-business relations on economic reforms carried out at the later stage of transition in countries, which have been relatively less successful during the earlier transition. The paper discusses potential channels of influence of institutional organization of government-business relations on economic reforms and compares government-business relation models and paths of transition in Russia, Kazakhstan and UkrainePost-Soviet economies, catching up reforms, institutional trap, government-business relations

Technology trap and poverty trap in Sub-Saharan Africa

Since the industrial revolution, advances in science and technology have continuously accounted for most of the growth and wealth accumulation in leading industrialized economies. In recent years, the contribution of technological progress to growth and welfare improvement has increased even further, especially with the globalization process which has been characterized by exponential growth in exports of manufactured goods. This paper establishes the existence of a technology trap in Sub-Saharan Africa. It shows that the widening income and welfare gap between Sub-Saharan Africa and the rest of world is largely accounted for by the technology trap responsible for the poverty trap. This result is supported by empirical evidence which suggests that if countries in Sub-Saharan Africa were using the same level of technology enjoyed by industrialized countries income levels in Sub-Saharan Africa would be significantly higher. The result is robust, even after controlling for institutional, macroeconomic instability and volatility factors. Consistent with standard one-sector neoclassical growth models, this suggests that uniform convergence to a worldwide technology frontier may lead to income convergence in the spherical space. Overcoming the technology trap in Sub-Saharan Africa may therefore be essential to achieving the Millennium Development Goals and evolving toward global convergence in the process of economic development.Technology Industry,Economic Theory&Research,Achieving Shared Growth,ICT Policy and Strategies,E-Business

Trust-Based Trade

There is substantially more trade within national borders than across borders. An important explanation for this fact is the weak enforcement of international contracts. We develop a model in which agents build reputations to overcome this institutional failure. The model describes the interplay between institutional quality, reputations and the dynamics of international trade. It also rationalizes several empirical regularities. We find that history matters for trade volumes, but that its effects vary with the institutional setting of the country. The same is true for the efficacy of trade liberalization programs. Moreover, while stricter enforcement of contracts enhances trade in the short run, it makes it harder for individual traders to develop good reputations. We show that this indirect negative effect may produce an "institutional trap": for sufficiently low initial levels of contract enforcement, a small tightening in enforcement reduces future trade flows. We find also that search frictions aggravate the problems created by weak enforceability of contracts, even if they impose no direct cost on agents, but that trade liberalization can mitigate these negative effects.International trade, Export dynamics, Contract enforcement, Reputation

The Five-Phases of Economic Development and Institutional Evolution in China and Japan

Based on the variable rate of gross domestic product per capita growth and its sources, this paper first identifies five phases of economic development that are common to China, Japan, and Korea: M (Malthusian), G (government-led), K (à la Kuznets), H (human capital based) and PD (post demographic-transition). But there are also marked differences in the onset, duration, and institutional forms of these phases across these economies. In order to understand these differences, this paper explores the agrarian origins of institutions in Qing China and Tokugawa Japan (and briefly Chosŏn Korea) and their path-dependent transformations over those phases. In doing so, the paper employs game-theoretic reasoning and interpretations of divergent institutional evolution between China and Japan, which also clarifies the simplicity of prevailing arguments that identify East Asian developmental and institutional features with authoritarianism, collectivism, kinship-dominance, Confucianism and the like. Finally, the paper examines the relevance of the foregoing developmental discussions to the institutional agendas faced by the People’s Republic of China (PRC) and Japan in their respective emergent phase-transitions. In what way can the PRC avoid the “middle income trap”? What institutional shortcomings become evident from the Fukushima catastrophe and how can they be overcome in an aging Japan?development phases; institutional evolution; agrarian origin; prc economy; middle income trap; post demographic transition; east asia; norm

Alice Through the Looking Glass: Strategic Monetary and Fiscal Policy Interaction in a Liquidity Trap

The recent experience with low inflation, and the experience of several economies has reopened interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. To reduce the real interest rate, and to stimulate the economy, the modern literature highlights the role of high inflationary expectations. Using the Dixit-Lambertini (2003) framework of strategic policy interaction, we find that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal inflation target given to the Central Bank. Second, the Treasury, who retains control over fiscal policy and acts as leader, is given optimal output and inflation targets. This keeps inflationary expectations sufficiently high and achieves the optimal rational expectations pre-commitment solution. Simulations show that this arrangement is (1) optimal even when the Treasury has no inflation target but follow’s the optimal output target and (2) ‘near optimal’ even when the Treasury follows its own agenda through a suboptimal output target but is willing to follow an optimal inflation target. Finally, if monetary policy is delegated to an independent central bank with an optimal inflation target, but the Treasury retains discretion over fiscal policy, then the outcome can be a very poor one.liquidity trap; strategic monetary-fiscal coordination; optimal Taylor rules

Contingent Loan Repayment in the Philippines.

Using data from the Philippines, this article seeks to understand how households in the study area apparently manage to avoid falling into a debt trap in spite of frequent borrowing. Findings suggest that this is achieved via three institutional features. First, most informal debt carries no interest. Second, for all debts, repayment is postponed in case of a borrower’s difficulty; this is the only insurance feature of debt repayment. Third, while debt principal is seldom forgiven or reduced, interest‐bearing debt does not carry additional interest if debt repayment is delayed. This prevents interest charges from accumulating and debt from snowballing.Dette; Crédit;