The Relationship Between Institutions and Economic Development Essay

The Relationship Between Institutions and Economic Development - turn out ExampleNeoclassical growth theory limits to identify the prerequisites of economic public presentation, such as capital collection and technical progress. To explain why people save, invest, learn and seek familiarity, different institutional systems and values that victory or failures are based on must be paid special attention. The relationship between institutions and economic growth has been a central debate of the economic arena for a long time. A century ago, the free society realized that the institutional system plays a fundamental fictitious character in economic development-no longer seen as an inevitable gradual transition from local autarky to specialization and class of labor. The establishment and the function of institutions reflect the transition from chaos to order by the creation and enforcement of rules or procedures spot economic and social life. Thus, the institutional system ensur es the normal course of real and nominal economy. However, only good institutions are growth-promoting (Milo, 2007, p.23). There is a vast empirical literature that studies the impact of institutions on economic performance, particularly on growth (Easterly and Levine (2003), Acemoglu et al. (2001), Fukuyama (2006)). From the reverse connection perspective, the first hypothesis stating that economic growth enhances the good functioning of institutions is associated with the name of Martin Lipset, who argued that increased income and human capital accumulation are the best ways to have potent institutions. The second hypothesis states that limited central authorities and therefore, good institutions, lead to superior economic performance. This point of view is also included in the works of Montesquieu and Adam Smith and, later, in those of the ambassadors of neo-institutionalism (Buchanan, Coase, North, and Williamson). In short, the basal idea of institutionalism is that institu tions create the rules of economic game the latter provide economic incentives and thus ferment the carriage of economic agents. Competition, productivity, innovation and private firms develop in an institutional environment that fosters efficient behaviors and penalizes in susceptibility. If economic performance is unsatisfactory, ultimately, institutions will be changed. Reformulated, economic and social changes are institutional changes. One of the most important issues that influence the analyses of linkages between institutions and economic development is that there is no general consensus on the definition of institutions. Chang (2005) highlights three get a line functions of institution in fostering economic performance Coordination and administration Learning and innovation Income redistribution and social cohesion. In some Asian economies in transition from socialism to capitalism, the rapid progress of free market institutions has trim down the transaction costs. In ot her situations, they have remained high as a result of insufficient knowledge of market mechanisms, of ambiguous rules and bureaucracy, weak legal system and corruption. Stable political structures, well-defined and recognized keeping rights and legal enforcement of contracts have reduced transaction costs, explaining the success of the worlds most powerful economies. achievement cost theory was used in the analysis of general interest issues such as the role and governance practices, definition of market institutions or in explaining the differences between economic performances of nations. Related to the last division mentioned, the theory developed in close connection with the role of institutions in fostering economic efficiency by reducing trading costs. North concluded that capitalist and democratic institutions (free market, state, justice) are the result of efforts to play down transaction costs (North 1991,