Endogenous Institution Formation Under a Catching-Up Strategy in Developing Countries

44 Pages Posted: 20 Apr 2016

See all articles by Justin Y. Lin

Justin Y. Lin

Peking University - China Center for Economic Research

Zhiyun Li

University of Oxford

Date Written: December 1, 2008

Abstract

This paper explores endogenous institution formation under a catching-up strategy in developing countries. Since the catching-up strategy is normally against the comparative advantages of the developing countries, it can not be implemented through laissez-faire market mechanisms, and a government needs to establish nonmarket institutions to implement the strategy. In a simple two-sector model, the authors show that an institutional complex of price distortion, output control, and a directive allocation system is sufficient to implement the best allocation for the catching-up strategy. Furthermore, removing any of the three components will make it no longer implementable. The analysis also compares the best allocation and prices under the catching-up strategy with their counterparts under no distortions. The results of this paper provide important implications for understanding the institution formation in the developing countries that were pursuing a catching-up strategy after World War II.

Keywords: Economic Theory & Research, Markets and Market Access, Emerging Markets, Currencies and Exchange Rates, Debt Markets

Suggested Citation

Lin, Justin Yifu and Li, Zhiyun, Endogenous Institution Formation Under a Catching-Up Strategy in Developing Countries (December 1, 2008). World Bank Policy Research Working Paper No. 4794, Available at SSRN: https://ssrn.com/abstract=1315615

Justin Yifu Lin (Contact Author)

Peking University - China Center for Economic Research ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Zhiyun Li

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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