Chapter 3: The Effects of the Interaction of Formal and Informal Institutions on Social Stability and Economic Development
3. The eﬀects of the interaction of formal and informal institutions on social stability and economic development* Svetozar Pejovich INTRODUCTION We observe that the standard of living, economic stability, and growth rates are not the same in India and Japan, Germany and Portugal, the Czech Republic and the Ukraine. It is also apparent that exogenous shocks have diﬀerent consequences in diﬀerent countries. The opening up of the Americas produced varying economic outcomes in Spain and England. The end of colonial rule did more to increase the standard of living and stimulate economic development in Southeast Asia than in Africa. The end of Communist rule had a diﬀerent eﬀect in the Czech Republic than in Slovakia. Finally, we should also note that the same legal rules have diﬀerent consequences on economic performance. Thus, according to Douglas North (1990): Many Latin American countries adopted the US Constitution (with some modiﬁcations) in the nineteenth century, and many of the property rights laws of successful Western countries have been adopted by Third World countries. The results, however, are not similar to those in either the United States or other successful Western countries. Although the rules are the same, the enforcement mechanism, the way enforcement occurs, the norms of behaviour, and the subjective models of the actors are not [the same]. The purpose of this chapter is to develop a testable theory, the interaction thesis capable of explaining why there are diﬀerences in economic stability and growth...
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