...of the economic growth process and it connection to institutions is highly important for explaining why certain countries are less developed than the other ones. Economic growth is defined as “An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries. (http://www.investopedia.com/). The role of institutions in economic growth was first proposed in writings of Adam Smith in 1776. Later in 1993 Douglass North received a Nobel Prize for his work on connection between institutions and economic growth. By studying history, analyzing data and statistics we can see that high quality institution have positive effect on economic growth and therefore on income in a long and short runs. In order to prove it we are going to find out what economic institutions are, why they are matte, what are the reasons behind different institutions in different countries and finally support it with historical facts. 1 Links between economic growth and economic institution What are institutions? The term “Economic institutions” can be defined in mach different way and have multiple meanings. On the one hand North (1990, p.3 ) defines institutions in a...
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...MICROFINANCE INSTITUTIONS AND ECONOMIC GROWTH OF SMALL & MICRO-ENTERPRISES (SMES) ACASE STUDY OF (UWMFO) MICRO FINANCE INSTITUTION BY HENRY EGYEYU DEDICATION To the memory of my grand father Daniel Egeyu Whose love & enthusiasm for academia first kindled mine? ABSTRACT This research study investigates the impact of microfinance institutions on entrepreneurial development of Small & Micro-enterprises (SMEs) that are craving for growth and development in a war revived district called Gulu. The researcher used questionnaire as an instrument of primary data collection. Tables and simple percentages were used in data presentation. For clear analysis, the study centers on two broad variables; the dependent variable which is entrepreneurial development and the independent variable which is microfinance institutions. Three different hypotheses were formulated and tested using various statistical tools such as chi-square test, analysis of variance and simple regression analysis. The study reveals that (i) there is a significant difference in the number of entrepreneurs who used microfinance institutions and those who do not use them; (ii) there is a significant effect of microfinance institutions activities in predicting entrepreneurial productivity; and (iii) that there is no significant effect of microfinance institutions activities in predicting entrepreneurial development. The researcher concludes...
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...Economic Growth is the increase per capita gross domestic product (GDP). There is a distinction between nominal and real economic growth, where the first is the growth rate including inflation, while the second is the nominal rate adjusted for inflation. Moreover economic theorists distinguish short-term economic stabilization and long-term economic growth. The topic of economic growth is mainly related to the long run. Short-run variation of economic growth is termed the business cycle. The long-run path of economic growth is one of the central questions of economics. In 1377, the Arabian economic thinker Ibn Khaldun provided one of the earliest descriptions of economic growth in his Muqaddimah (known as Prolegomena in the Western world) (cited in Weiss, 1995): When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life. Economic growth is an important part of economic theory and one of the most significant problems economists tried to explain is the differences of growth...
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...Review of Review of Economics and Institutions ISSN 2038-1379 DOI10.5202/rei.v1i2.1 ECONOMICS and INSTITUTIONS Vol. 1 – No. 2, Fall 2010 – Article 1 www.rei.unipg.it The Role of Institutions in Growth and Development Massachusetts Institute of Technology Daron Acemoglu Harvard University and Weatherhead Center for International Affairs James Robinson Abstract: In this paper we argue that the main determinant of differences in prosperity across countries are differences in economic institutions. To solve the problem of development will entail reforming these institutions. Unfortunately, this is difficult because economic institutions are collective choices that are the outcome of a political process. The economic institutions of a society depend on the nature of political institutions and the distribution of political power in society. As yet, we only have a highly preliminary understanding of the factors that lead a society into a political equilibrium which supports good economic institutions. However, it is clear that it is the political nature of an institutional equilibrium that makes it very difficult to reform economic institutions. We illustrate this with a series of pitfalls of institutional reforms. Our analysis reveals challenges for those who would wish to solve the problem of development and poverty. That such challenges exist is hardly surprising and we believe that the main reason for such challenges is the forces we have outlined...
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...What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era? Maddison (2006) stated that he “would characterise the whole period 1000-1820 as ‘protocapitalist’”. He believes the transition from pre-modern to modern economic growth took place at around 1820. This will set the stage for this discussion. Within that period, there were two groups of countries which were differentiated by their deviation in economic growth. They were the Group A nations, which included Western Europe, Western Offshoots and Japan, while the rest of the world made up the Group B nations. The contours of world development in this era, largely shaped by Douglass North’s theory of institutions, can be categorise into two main subsets which are Gross Domestic Product (GDP) per capita and population demographics, for the purpose of this essay. North (1990) defines institutions as “the rules of the game in a society or, more formally, are the humanly devised constraints that shape human action”. Institutions exist in every economy, in the form of either formal or informal constraints, developed to define the choice sets, within which individuals and organisations make their decisions. Economic growth is heavily dependent on the productivity of an economy, which in turn is affected by the costs involved. In the neoclassical world of complete information, the gains of trade are only negated by the costs...
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...Don’t blame geography for growth patterns There is a well-known economic growth debate whether geography affects growth patterns directly or merely through an indirect channel affecting the choice of economic policy and institutions. The view that geography is at the center of the story in shaping the rhythms of economic development dates back to Montesquieu and has been recently revived by Jared Diamond in his book “Guns, germs and steel: The fates of human societies.” This perspective was applied to explain long term patterns of economic growth by Jeffrey Sachs, who argues that growth is related to geographic variables like climate, disease ecology and distance from the coast (Sachs 2003). On the other hand, economists like Acemoglu, Johnson and Robinson, and Engerman and Sokoloff argue against simple geographic hypothesis and illustrate that geography can only affect patterns of growth through the choice of institutions that influence economic performance. Looking at the current situation, one can observe tremendous differences in living standards between developed and developing countries. There is a variety of explanations why economic performances have diverged so extremely. However, the two main candidates to explain the causes of the big divergence are geography and institutions. The geography hypothesis emphasizes nature forces and geography as the main factors determining economic performance. Acemoglu, Johnson and Robinson (2002), however refute this hypothesis...
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...ECON3007 Economic Policy Analysis Topic: Institutions and Economic Reforms Wendy Carlin This topic focuses on the role of institutions in economic growth and the implications of this for the design of economic reforms. We examine why some large-scale economic reforms have been surprisingly successful and others have been disappointing. It will be argued that the consistency between existing institutions in the economy and the reforms is an important factor in determining reform success. We look at property rights and contracting institutions, at the experience of transition economies – both in the former Soviet bloc and China and at reform policies including privatization. The empirical techniques that we study include cross-sectional and panel regressions using aggregate (i.e. country-level) data and micro-economic data. Key readings: Institutions and growth: Acemoglu, D., Johnson, S. and Robinson, J. A. (2001) (AJR) “The Colonial Origins of Comparative Development: An Empirical Investigation”. The American Economic Review, Volume 91, Number 5. Use the UCL Economic Journals page and choose the Atypon link. Acemoglu, D., Johnson, S. (2005) (AJ) “Unbundling Institutions” Journal of Political Economy Volume 113, Number 5, 949-995. Use the UCL Economic Journals page. Deaton, A. (2009) ‘Instruments of Development: Randomization in the Tropics and the Search for the Elusive Keys to Economic Development’. NBER Working Paper 14690. Use google. Transition: China and Russia ...
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...The Effects of Corruption and Economic Growth Cassandra Rogers Economics 523 Dr. David Dieterle Table of Contents Abstract……………………………………………………………………………………………3 Effects of Corruption on Economic Growth………………………………………………………4 Definition of Corruption..................................................................................................................4 Economic Rent…………………………………………………………………………….4 Bribery…………………………………………………………………………………….5 Trade Restrictions…………………………………………………………………………5 Is Corruption Good or Bad for an Economy………………………………………………………6 Low Levels of Corruption…………………………………………………………………6 Vietnam’s Economic Growth……………………………………………………..7 High Levels of Corruption………………………………………………………………...8 Conclusion………………………………………………………………………………………...8 References………………………………………………………………………………………..10 Abstract Corruption alone is not what fails an economy in growth. There are other factors to consider, such as, a weak and unstable government institution. Corruption can actually bypass these irregularities and possibly create growth in an economy. Studies show that there is no actual link between corruption and economic growth in “free” countries. In fact, low levels of corruption in free countries can be beneficial in economic growth. However, high levels of corruption can damage economic growth no matter the type of government institution or not. Effects of Corruption on Economic Growth If you ask citizens today, a great majority would probably...
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...Introduction In modern economic society, while the global countries economic become more and more integrated, each member country focuses on the financial developments and economic growth, so that they can occupy one position in the modern competitive economic environment. Financial development involve lots of factors, including producing information about possible investments and allocating capital; monitoring the firm performance and corporate governance; trading, diversification, and management of risk; mobilization and pooling of savings; and easing the exchange of goods and service. Usually the financial development level is primarily determined by the local institutional quality, the extent of government police, geographic elements, native income level and cultural tradition. These factors formed the economic environment in which the banks and other financial firms to make decision for investment project and exogenous financing, furthermore, the customers decide whether consumption or saving, moreover, the financial intermediaries finance the fund in which approach from savers to borrowers. The well financial system can perfect the effect of information, enforcement and transaction cost on the saving rate, investment decision and technological innovation, and steady state growth rate. Financial market channel the fund to investment opportunities to get the profit, so if the financial system cannot work well, the economic growth also more or less affected. The essay mainly...
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...income disparity across the world countries, an issue that has drawn the lines dividing the world and challenging its unity. The coexistence of the prosperous nations with flourishing economies and high income, which are mainly the Western nations and recently the states of the Far East, and the poverty-stricken third-world trapped into intractable socio-economic problems is one of the many striking contrasts of today’s world. At a time when the international development is discussed more than at any time in the history, the study of the reasons for the income disparity between the poor and the rich countries remains of great interest and importance for the world. Increasing the importance of such studies is the endeavors of the international organizations to redress the economic imbalance in the world. Despite the presence of a plethora of literature attempting to shed light on the reasons for this economic imbalance between the affluent and poor countries, still, in the academia, various schools of thought, removed from a single unanimously agreed stance, keep being present. The analysis of various perspectives on the economic imbalance and the study of the historical development of the...
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...In this study, we look back to the decade old debate over the role of trade openness and institutions on economic growth which is yet unsettled. This paper explores the partial effects of openness and institutional quality on economic growth across countries in the world using panel data set utilizing the available panel series for institutional quality. Using generalized method of moments (GMM) which uses internal instruments, we estimate a specification for standard growth equation. Our estimates take into account the endogeneity of the explanatory variables. We find both trade openness and institutional quality have significant and robust role on economic growth. This result is new to the ongoing debate over growth effects of trade and institutional quality. We also find partial effects of openness on per-capita economic growth is higher for the developing countries, while neither openness nor institutional quality was found significant for developed countries. We also find significant differences in coefficients of real openness and current openness; however both were found statistically significant. Does foreign trade exert a causal influence on economic growth of the countries? Does institutional quality play a causal role on economic growth? And finally, do both simultaneously have partial effects on economic growth? Answering these three questions, voluminous researches, both in theory and empirics, have been carried out over the last two decades. Literatures, sought...
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...this introduction on Nigeria’s economic development challenge, this paper reviews business economics, outlining the relationship with innovation and social entrepreneurship. It also presents a holistic framework for economic development covering the individual, firm and macro levels, and outlines the roles of stakeholders at each level, in fostering national development. It concludes by calling on all stakeholders to play their part in leveraging entrepreneurship and all aspects of business economics to unleash the wealth of human capital that Nigeria is endowed with so that more people can participate in the transformation of Nigeria. Nigeria as the most populous country in Africa is naturally endowed with millions and millions of acres of arable land, 38.5 billion barrels of stated oil reserves, vast gas reserves, a variety of unexploited minerals, and a wealth of human capital by virtue of its estimated population of 150 million. It is the world’s eighth largest exporter of oil, and Africa’s second largest economy, after South Africa. Nigeria accounts for 15 per cent of Africa’s population, contributes 11 per cent of Africa’s total output and 16 per cent of its foreign reserves while it accounts for half of the population and more than two-thirds of the output of the West Africa sub-region. It has been at the forefront of the resolution of many political challenges in Africa. Over the last decade, Nigeria has implemented far reaching economic reforms aimed at improving macroeconomic...
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...much about success as failure – are not – as earlier authors have argued - economic policies, geography, culture, or value systems – but rather institutions, more precisely the political institutions that determine economic institutions. Acemoglu and Robinson theorize that political institutions can be divided into two kinds - “extractive” institutions in which a “small” group of individuals do their best to exploit - in the sense of Marx - the rest of the population, and “inclusive” institutions in which “many” people are included in the process of governing hence the exploitation process is either attenuated or absent. Needless to say Acemoglu and Robinson’s theory is more subtle than this simple summary. They argue that for any economic success political institutions must be sufficiently centralized to provide basic public services including justice, the enforcement of contracts, and education. Given that these functions are carried out, inclusive institutions enable innovative energies to emerge and lead to continuing growth as exemplified by the Industrial Revolution. Extractive institutions can also deliver growth but only when the economy is distant from the technological frontier. These extractive institutions will ultimately fail, however, when innovations and “creative destruction” are needed to push the frontier. Hence, while success may be possible for a while under extractive institutions...
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...of Financial Institutions in the financial development and economic development Financial intermediaries perform an important role in the development process, particularly through their role in allocating resources to their most productive uses. More efficient financial markets help economic agents hedge, trade, pool risk, raising investment and economic growth. Financial institutions provide consumers and commercial clients with a wide range of services and different types of banking products. The importance of financial institutions to the wider economy is apparent during market booms and recessions. During economic upturns, financial institutions provide the financing that drives economic growth, and during recessions, banks curtail lending. This can exacerbate a country's financial problems and draw attention to the fact that economies are heavily reliant upon the financial sector. The importance of financial institutions and passed legislation made it easier for more people to obtain products and services from these entities. In many countries, banks are encouraged or even compelled to lend money to home buyers and small businesses. Readily available loans encourage consumer spending, and this spending leads to economic growth. There is now a clear realization that sustainable development will not and cannot be achieved by governments acting alone. In this context, the expertise of the private sector plays an important role. Role of Financial Institutions in the financial...
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...Economic policy is the government attempting to stabilize the economy for the good of all people. Ways in which the government attempts to reach their goals is by being in charge of setting the right levels of taxation, government budgets, money supply and interest rates in the economy. All of these actions that the government takes influence the economy in some way. “Some types of economic policy actions can include setting interest rates through a federal reserve, regulating the level of government expenditures, creating private property rights and setting tax rates” (economic policy). Economic policy has many goals. Economic growth is one goal. If incomes of consumers and businesses are increasing over time then economic policy is working well for the economy and its people. Full employment is another goal. This goal for economic policy is to ensure that every member of the labor force who wants to work will find work. The last goal to mention is price stability. The goal of price stability is to stop both deflation and inflation from occurring. If inflation is set too high then prices of goods in the economy will be too high and not sold as much because consumers will not be able to afford them. “In an effort to eliminate uncertainty, the Fed has set a target rate of a steady 2% inflation rate” (McMahon). The Federal Government has an involved role in maintaining America's economy; they need to find the right balance working with numbers and economic expertise. When...
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