Reference no: EM13310618

1. It is the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance. While the rules may be changed overnight, the informal norms usually change only gradually. Since it is the norms that provide "legitimacy" to a set of rules, revolutionary change is never as revolutionary as its supporters desire, and performance will be different than antici-pated. And economies that adopt the formal rules of another economy will have very different performance characteris-tics than the first economy because of different informal norms and enforce-ment. The implication is that transferring the formal political and economic rules of successful Western market economies to third-world and Eastern European economies is not a sufficient condition for good economic performance. Privati-zation is not a panacea for solving poor economic performance.

2. Polities significantly shape economic per-formance because they define and en-force the economic rules. Therefore an essential part of development policy is the creation of polities that will create and enforce efficient property rights. However, we know very little about how
to create such polities because the new political economy (the new institutional economics applied to politics) has been largely focused on the United States and developed polities. A pressing research need is to model third-world and Eastern European polities. However the forego-ing analysis does have some implications:

(a) Political institutions will be stable only if undergirded by organizations with a stake in their perpetuation. (b) Both in-stitutions and belief systems must change for successful reform since it is the men-tal models of the actors that will shape choices. (c) Developing norms of behav-ior that will support and legitimize new rules is a lengthy process, and in the absence of such reinforcing mechanisms polities will tend to be unstable. (d) While economic growth can occur in the short run with autocratic regimes, long-run economic growth entails the develop-ment of the rule of law. (e) Informa constraints (norms, conventions, and codes of conduct) favorable to growth can sometimes produce economic growth even with unstable or adverse political rules. The key is the degree to which such adverse rules are enforced.

3. It is adaptive rather than allocative effi-ciency which is the key to long-run growth. Successful political/economic systems have evolved flexible institu-tional structures that can survive the shocks and changes that are a part of successful evolution. But these systems have been a product of long gestation We do not know how to create adaptive efficiency in the short run.

Attachment:- MNG_Question.pdf