Endogenous Institution Formation Under a Catching-Up Strategy in Developing Countries
44 Pages Posted: 20 Apr 2016
Date Written: December 1, 2008
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
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