ECON3380 Ch-9 Institutions Adjust to Economic Growth PDF

ECON3380 – Ch-9 Institutions Adjust (or Not) to Modern Economic Growth  Institutions Adjust (or Not) to Modern Economic Growth (Omit page 227-230 and page 247- 248) Objectives: Examine and appraise the importance of the following major sectors of the economy: The instit...

ECON3380 – Ch-9 Institutions Adjust (or Not) to Modern Economic Growth  Institutions Adjust (or Not) to Modern Economic Growth (Omit page 227-230 and page 247- 248) Objectives: Examine and appraise the importance of the following major sectors of the economy: The institutional framework Finance and banking The role of the state  The Institutional Framework Legal and social environments conducive to economic advancement: 1. Wide scope to individual initiative and enterprise: Entrepreneurship, and freedom to operate businesses competitively; 2. Freedom of occupational choice: Effective use of human resources;  The Institutional Framework (Cont.) 3. Geographical and social mobility: Opportunity to improve one’s condition and excel; 4. Respect for private property and the rule of law: Created suitable conditions for investment and business expansion; 5. Use of rationality and science: Enlightened and innovative social attitudes.  Legal Foundations Britain’s Common Law Provided protection for private property: Foundational to capital accumulation and investment; Incorporated various customs of merchants: Built upon principles developed in specialized commercial courts.  Legal Foundations (Cont.) France’s Code Civile Treated property as sacred and inviolable right: Absolute respect for private property; Gave valid contracts the force of law: Business transactions became more efficient; Authorized loans at interest: The move helped business and industrial development in Roman Catholic nations in Europe.  Legal Foundations (Cont.) Code de Commerce Great economic significance: It was the first comprehensive legal framework that outlined the governance structure of the various forms of business enterprises including the modern corporation. Recognized three types of businesses: Simple partnership Limited partnership Corporation – one of the important social institutions of modern capitalism.  Economic Thought and Policy Adam Smith’s Wealth of Nations An important book that laid down the foundation of modern capitalism; Called for abolition of “unreasonable” restrictions on individual enterprise: To promote competition (which leads to innovation and fair price);  Economic Thought and Policy (Cont.) Education and literacy: It had a great contribution to human capital; Helped to have a trained and skilled labor force; Innovative educational systems: The French started specialized schools of business and engineering; The Germans adopted an improved system that was made available to a larger number of students.  Finance and Banking Three cases about the interaction between the economic and the financial sectors: 1. The finance sector can play a positive role: A dynamic and growth-inducing role; 2. It can play a neutral role: A merely permissive role (neither positive nor negative); 3. It can play a negative role: An inadequate, highly restrictive, inefficient, and corrupt financial system can hinder economic development.  Finance and Banking (Cont.) The Bank of England: Monopoly on note issues Acted as a central bank (although not effectively) Provided financial services to the government The role of private merchant banks: Dealt with foreign exchange, and financing international trade Listed foreign securities in the London Stock Exchange The British banking system did not play a huge role in its industrialization: It neither hastened nor hampered the nation’s economic development.  Finance and Banking (Cont.) The banking system in France played a minimal role in its industrialization: Due to restrictive policies, it failed to live up to its full potential. The Belgian banks promoted economic growth: Stimulated an investment boom in the nation Made huge contribution to the industrialization of the nation  Finance and Banking (Cont.) Special feature of German banks: They engaged in both short-term credit and long-term investment; At the beginnings of the 20th century, the German banks were the strongest in the world. The D-banks: They facilitated foreign commerce in addition to meeting domestic needs;  Served well the banking needs of German customers;  Stimulated Germany’s export market by providing credit to exporters and foreign merchants.  Finance and Banking (Cont.) A German institutional innovation – The Reichsbank: It had monopoly on note issue; It acted as an effective central bank; Helped the credit banks in tough times, and thus made it possible for them to take greater risk. The German banks contributed greatly to its industrial and economic development.  Finance and Banking (Cont.) The banking system in the United States had a checkered career: This was due to the struggle between the Hamiltonians and the Jeffersonians. The Hamiltonians favored a strong role for the Federal Government; The Jeffersonians preferred to leave it to the individual states.  Finance and Banking (Cont.) The absence of a central bank caused periodic financial panics and economic depression; Without an effective central bank, monetary policy was un-coordinated; To remedy this defect, Congress created the Federal Reserve System (FRS) in the early 20th century; The FRS (or the Fed) was created in 1913.  The Role of the State The role of the state (or government) in the economy defied simplistic formulations; Here the main ones: 1. Creation of the legal environment for economic endeavor; Rule of law and respect for property rights; 2. Be involved in promotional activities; Promoting tourism; tax exemptions for businesses etc…  The Role of the State (Cont.) 3. Regulatory functions; Regulations to protect workers’ health and safety; 4. Engage directly in productive activities; Owning economic enterprises (e.g., Export Development Canada or EDC).