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COMPARATIVE ECONOMIC
SYSTEMS
I. Introduction
1. The fundamental economic fact of life
Scarcity arises due to the existence of finite set of economic
resources:
• natural
• capital
• human; human capital
• non traditional inputs: social, cultural and historical forces
2. Choice and the economic problem
Economic problem:
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• WHAT to produce?
• HOW to produce?
• To Whom or who gets the product?
• How to provide for the future?
3. Definition of Economic System
the set of institutional arrangements used to allocate scarce
resources.
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II. The world Economy, history and economic systems
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1) Factors for the Industrial Revolution:
• rapid growth of science and technology
• the first transportation and communication revolution
• the creation of institutions that favored economic progress
2) Economic progress occurs when at least one of the
following conditions is met:
• opportunities arise to settle empty areas w/ fertile land and
resources
• opportunities arise to increase trade and the movement of
capital among countries
• technological innovations occur
• economic institutions improve.
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3) The world economy since 1950
• The shock of a great depression, two world wars, and restrictions on immigration
had led to little economic interconnectedness between countries.
• In the years after WWII, the world economy was dominated by the US economy:
• The world economy
– In the late 1940s, the countries of the world were mainly focused on pursuing separate
econ paths. The US was the one great econ power at the time, while Europe and Japan
concentrated on rebuilding from war. The Soviet Union was attempting to show the
superiority of a controlled economy. Latin America saw extreme econ inequalities,
while Asia and Africa were characterized chiefly by poverty.
– World economy by population and GDP
• The US dominated the world economy by size in 1950 with more than one-quarter of total
output but just 6% of world population. The world's poorest economies were China and India,
each making up only 4% of the world's GDP. China dominated world population with 22% of
world’s people.
– The world economy around 1950 had a low level of connectiveness, with relatively low
levels of trade in goods and services and relatively little international movement of
labor or financial capital.
• Now look at the state of the global economy more than a half-century later and
you'll see that much has changed:
• The roots of modern globalization:
– New institutions—GATT, now World Trade Organization (WTO); International
Monetary Fund (IMF); The World Bank
– European Union
– North American Free Trade Agreement (NAFTA).
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Many countries in the late 1940s realize that the reduction in world trade in
wartime and during the Depression had hurt their economies; thus, they were
willing and eager to open their economies to a greater degree of international
competition.
Significant reduction in the costs of transportation and communication also
helped lower barriers to international trade.
The world economy has expanded in the last half century but has
also changed shape. The preeminence of the US econ has
diminished, while China and India carry for more weight in the
global economy. Further, international trade makes up a far larger
portion of the world economy than it once did.
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Global population and economies have grown in size since 1950
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Population more than doubled from 2.5 billion to 6.5 billion in 2006
Shares of world population have changed, the US declined a bit, while those of
Africa and India rose a bit.
The size of the global econ grew but the shares of the US and European
economies declined, while shares of countries across Asia-China, India, Japan, all
increased. In 2006, the U.S. share was only 22% of the global GDP. China and
India are experiencing unprecedented economic gains. By 2040, the economy of
China could become larger than the economies of the United States, Western
Europe, and Japan—combined.
GDPC offers a rough comparison of standard of living across countries. The US
lead in per capita GDP has diminished with regard to Europe, Japan and China,
although it has increased with regard to Africa
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– International institutions, radical changes in communication and information
technology, and stronger national commitments to globalization have led to increased
economic interconnectedness. The world economy has become more interconnected in
many ways since 1950, with greater trade in goods and services, higher level of
migration, and larger flows of international capital.
– The collapse of Communism
• Reform is an attempt to improve an ES w/o changing its fundamental character.
• Transition is the process of change from one type of ES to another.
• East Germany, Hungary, Poland, etc. 15 independent states.
• China
• In the opening decades of 21 century, the US economy will be relatively less
important in the world economy, and the economies of China and India will
become more important
– As the US share of the world economy decreases, the influence of US experience and
input will diminish in terms of changes in world econ growth and institutions.
Understanding issues in the major countries and regions of the world and challenges
that confront the world economy will be of increasing importance to US citizens.
III) The choice of ESs in 21 century.
• The ultimate goal of the study of Comparative ES is to learn what works and in
what settings. In 21 century we must study a large number of differences in
economic institutions-differences that affect economic performance.
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IV. Simeon Djankov et al, “The New Comparative Economics”
1. Definitions:
a) Disorder
the risk to individuals and their property of private expropriation in
the form of murder, theft, violation of agreements, torts,
monopoly pricing, and so on.
b) Dictatorship
the risk to individuals and their property of expropriation by the
state and its agents in the form of murder, taxation, violation of
property, and so on.
c) Corruption
a phenomenon that reflects both disorder and dictatorship.
d) Institutions function to control the twin dangers of dictatorship
and disorder
To understand capitalist institutions, one needs to understand the
basic tradeoff b/w the costs of disorder and those of
dictatorship.
e) Institutional Possibility Frontier (IPF)
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• The IPF reflects the institutional possibilities of the society: how much
disorder can be reduced with an incremental increase in the power of
the state.
• IPF is convex to the origin.
• An institution (such as a legal or a regulatory system) is a point on IPF.
• Downward sloping 45 degree line holds constant the total social costs
of dictatorship and disorder.
• The point of tangency with the IPF is the efficient institutional choice
for a given society or a sector within a society.
• Shape and the location of the IPF (the efficient choice) vary across
activities within a society, as well as across societies.
• We refer to location of the IPF as “civic capital”
• Determinants of civic capital:
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Culture
Factor endowments and the physical environment
History of cooperation in a community (its social capital)
Technology
Government
Human capital
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2. Institutions in Transition
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Differences between Russia and FSU non-reformers on the one
hand, and East European reformers on the other:
• Russia has experienced a much more dramatic decline in
dictatorship and, therefore, a rise in disorder, than countries
like Belarus and Uzbekistan.
• Russia’s IPF is probably less attractive than that of the East
European countries and, at the same time, its shift along the
IPF was probably greater.
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The economic and social change in each country should be
considered in light of its own institutional possibilities, rather
than some idealized view of perfect law and order.
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