1 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:

2 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.

3 II. The world Economy, history and economic systems

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5 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.

6 III. The economy of 21- century 1)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 2) The Industrialized World. Japan Europe Southeast Asia 3) The Third World

7 4) Multinationalism and Globalism. European Union North American Free Trade Agreement (NAFTA). 5) 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.

8 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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10 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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12 2. Institutions in Transition

13 –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.