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COMPARATIVE ECONOMIC SYSTEMS

I. Introduction1. The fundamental economic fact of lifeScarcity 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.

– Global population and economies have grown in size since 1950• 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) Disorderthe 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) Dictatorshipthe 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) Corruptiona phenomenon that reflects both disorder and dictatorship. d) Institutions function to control the twin dangers of dictatorship

and disorderTo 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:

– 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.

– 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.