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Unformatted text preview: ECON 4411A, Fall 2011 Development Economics Summary Notes: Week 11, Lesson B Government Failures and the Move to a Market Economy Quote of the day: Making the simple complicated is commonplace; making the complicated simple, awesomely simple, that’s creativity. Charles Mingus Institutional and Cultural Preconditions to the Functioning of the Market A well-functioning market system requires special social, institutional, legal, and cultural conditions often absent in developing nations. Nathan Keyfitz and Robert Dorfman have identified 14 institutional and cultural requirements for the operation of effective private markets: 1. Trust (in banks, insurance companies, suppliers, etc.) 2. Law and order (enforcement of contracts) 3. Security of persons and of property 4. Balancing competition with cooperation (for a safe workplace and a cleaner environment) 5. Division of responsibility and diffusion of power (an independent judiciary) 6. Community altruism (a social “safety net” for the impaired, chronically unemployed, elderly, etc.) 7. Social mobility, legitimation of ambition, and toleration of competitiveness 8. Materialistic values as a stimulus, to greater production 9. Deferring gratification to generate private saving 10. Rationality unconstrained by tradition 11. Honesty in government 12. Efficient forms of competition, as opposed to monopolistic control 13. Freedoms of information (along with protection of privacy) 14. Flows of information without restrictions or favoritism 1 Conditions for a well-functioning market system With the existence of these institutional and cultural preconditions, we would highlight the basic factors a well-functioning market system requires. It is im- portant to mention these conditions because many times we forget market re- forms involve much more than eliminating price distortions, privatizing public enterprizes, and declaring markets free. The obstacles to market reforms in Eastern Europe, Russia, many African and Asian economies and the problems with the market system are due to a large extent to the absence of some of the institutional preconditions above and the market requirement listed below. Conditions for a well functioning market system are: 1. Property rights clearly established and demarcated. 2. Commercial laws and courts to enforce them must exist, especially con- tract and bankruptcy laws. 3. Freedom to establish businesses in all sectors except those with significant externalities, without excessive licensing requirements: analogous freedom to enter trades and professions and to attain government offices (equal economic opportunity). 4. A stable currency and a reliable and efficient system for making transfers (a banking system)....
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This note was uploaded on 01/26/2012 for the course ECON 4411 taught by Professor Ruth during the Fall '11 term at Georgia Tech.
- Fall '11