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Economic Welfare, International Business and Global Institutional Change

Edited by Ram Mudambi, Pietro Maria Navarra and Giuseppe Sobbrio

The distinguished authors in this volume address the fundamental causes for such heterogeneous international experiences, placing particular emphasis on the role of institutions. They demonstrate how the study of economic development is increasingly linked to the development of institutions, which allow for more complex exchanges to occur in markets and societies. Institutions can be understood as rules or constraints that channel individuals' actions in specific directions, and can be formal or informal depending on their genesis. The book highlights the connection between institutions and economic welfare by examining countries at different stages of development. Although the authors' study material effects, they also look at individual well-being which is more strongly influenced by the non-material products of institutions such as opportunity, freedom and relationships. They move on to highlight the role of institutions in global business, in terms of innovation, entrepreneurship and foreign direct investment. In the concluding chapters they focus on the actual process of transition from one institutional framework to another. Amongst other examples, they examine reforms to international financial institutions and constitutional adjustments in transition countries.
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Chapter 12: The Politics of Poverty

Thráinn Eggertsson


Thráinn Eggertsson 1. INTRODUCTION Although the complex causes of economic decline and economic backwardness probably defy generalization, I will attempt in this chapter to examine some of the political aspects of poor economic performance and distill basic themes from the new institutional economics and related fields concerning the interaction between politics and poverty. Static institutional analysis models the link between institutions and poor economic performance roughly in the following terms. A country is poor because its basic structure of formal and informal rules – its institutional environment – creates incentives that have perverse effects for economic progress. In the economic domain, the environment discourages capital formation, directs economic agents away from valuable economic opportunities, and encourages rent seeking. The citizens share norms that are hostile to economic progress and institutional reforms, and political actors prefer policies that undermine long-term growth. In the new institutional analysis, static models take the preferences of actors as given and unchanging. Furthermore, the worldviews of actors are neutral rather than a force driving the analysis. For instance, in analyzing decisions about institutional policy, even in historical times, the investigator usually tacitly assumes that the decision maker shared his or her current social theories or social models. Competing social models or social technologies have no role in these studies, even when they analyze the behavior of actors who are attempting to make complex changes in the structure of their social systems, either for redistributive or remedial purposes. The assumption that rational selfish rulers and administrators have complete...

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