class 4: institutions Flashcards
Why are there differences in both wealth and development of states?
“Explanations for why the economic fortunes of countries have diverged so much abound. Poor countries, such as those in sub-Saharan Africa, Central America, or South Asia, often lack functioning markets, their populations are poorly educated, and their machinery and technology are outdated or nonexistent. But these are only proximate causes of poverty, begging the question of why these places don’t have better markets, better human capital, more investments, and better machinery and technology. There must be some fundamental causes leading to these outcomes, and via these channels, to dire poverty.” Acemoglu
how can we define institutions?
The term institution has been defined in different ways.
- Douglass North describes institutions very broadly, as the formal and informal rules governing human interactions.
- There are also narrow (and easier to grasp) definitions of institutions that focus on specific organizational entities, procedural devices, and regulatory frameworks.
- At a more intermediate level, institutions are defined in terms of the degree of property rights protection, the degree to which laws and regulations are fairly applied, and the extent of corruption.
- Much of the recent research into determinants of economic development has adopted the intermediate definition.
what types of institutions are there?
- Market-creating
- Protection of property rights
- Contract enforcement - Market-regulating
- Externalities
- Economies of scale (e.g. natural monopolies)
- Imperfect information - Market-stabilizing
- Low inflation
- Minimize economic volatility
- Avert financial crises - Market-legitimizing:
- Social protection and insurance
- Redistribution of wealth
- Conflict management
what are the roles of institutions?
Reduce transaction costs related to:
- Uncertainty (e.g., contract enforcement, rule of law)
- Imperfect information (e.g., food labelling, warrantees)
By:
1. Guaranteeing the respect and enforcement of property rights to a large portion of the population
2. Limiting the actions of elites, politicians and other powerful groups in society
3. Promoting equality of opportunities which includes competition) for the whole society
4. Promoting the good circulation of complete information
how can we measure institutions?
- Quality of governance: Governance consists of the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the government’s capacity to effectively formulate and implement sound policies; and the respect of citizens and the governments for the institutions that govern economic and social interactions among them.
- Corruption
- Political rights
- Public sector efficiency
- Regulatory burden
- Protection of property rights
- Constraints on the executive (political leaders and presidents)
what can we use to rate the quality of institutions?
-International Country Risk Guide (ICRG)
-Key sovereign credit rating agencies in the world
-Global Governance Index (World Bank)
what does the International Country Risk Guide (ICRG) use?
- Corruption in government
- Rule of law
- Bureaucratic quality
- Ethnic tensions
- Repudiation of contracts by government
- Risk of expropriation
In 2023, in the country’s risk rating and ranking, what were the less risky countries?
switzerland
denmark
singapore
In 2023, in the country’s risk rating and ranking, what were the riskiest countries?
syria
venezuela
yemen
what are the key sovereign credit rating agencies in the world?
moody’s coporation, fitch ratings and standard & poor’s
what are the key features of the key sovereign credit rating agencies in the world?
- Constantly evaluate the borrowers risk level and respond by changing the rating.
- All based in US and generally evaluate USA as the safest haven on the globe, positioning all the other countries down the scale.
- Play crucial role in giving signals to the world investment community and thus deciding who’s able to access the credit resources and who is not.
- Are heavily criticized for inability to forecast the financial crisis of 2007-8 in the developed world as well as foresee other negative developments.
- Negative changes of a credit rating could have serious consequences on countries: Fitch Downgrades the United States’ Long-Term Ratings to ‘AA+’ from ‘AAA’ (Aug, 2023); Fitch Downgrades Estonia to ‘A+’ (Jul, 2023) ; Fitch Downgrades Ecuador’s Long-Term IDR to ‘CCC+’ (Aug, 2023) ; Moody’s downgrades Niger’s ratings to Caa2, places ratings on review for further downgrade (Aug, 2023)
what are some of the best countries in terms of credit risk (AAA)?
australia
canada
denmark
what are some of the countries which are under the Trading Economics (TE) credit rating of 30 (/100) :
angola, argentina, niger, etc. (a lot)
what is the Global Governance Index (World Bank) based on?
Based on 6 clusters:
1. Voice and accountability
2. Political stability and absence of violence
3. Government effectiveness
4. Regulatory quality
5. Rule of law
6. Control of corruption
what are the ranges of governance performance inGlobal Governance Index (World Bank)?
Estimate of governance: ranges from -2.5 (weak) to 2.5 (strong) governance performance.
