Enrico Colombatto

Why is Corruption Tolerated

It is maintained that a closer analysis of the features of the underlying contract reveals that under many circumstances corruption is in fact a rational and understandable reaction to institutional failures, which are often far from accidental. Sometimes it can even be considered legitimate, when instrumental in achieving goals shared by the vast majority of the electorate.To this purpose, three different stylized institutional frameworks are analyzed: developed, totalitarian and transition countries. The origin, scope and consequences of corruption vary significantly across the different frameworks. The normative conclusions should therefore be adjusted accordingly.

Law, Informal Rules and Economic Performance

Capitalism has outperformed all other systems and maintained a positive growth rate since it began. Svetozar Pejovich makes the case within this book that a major reason for the success of capitalism lies in the efficiency-friendly incentives of its basic institutions, which continuously adjust the rules of the game to the requirements of economic progress. The analysis throughout is consistent and is supported by evidence. Key components of the proposed theory are the rule of law, the market for institutions, the interaction thesis, the carriers of change, and the process of changing formal and informal institutions.

The Elgar Companion to the Economics of Property Rights

Foreword by Steve Pejovich Introduction Part I: The Birth and Evolution of Property Rights Part II: Property Rights and the Law Part III: Current Issues from a Property Rights Perspective Index.

An Institutional View of LDC Failure

Abstract The search for rent-seeking opportunities in democracy harms growth and may lead to political turbulence, thereby opening the way to the bureaucratic nomenclature or to totalitarian rule. In the former case, the priority goes to rent-extraction policies; in the latter, the dictator tends to be short-sighted, or just a representative of a few, powerful rent-seeking coalitions. Strong, “enlightened,” and wide-ranging coalitions could perhaps internalize the costs of rent seeking. But this may not be realistic. More likely, poor policies will be followed by other equally poor policies.

A comment on economic growth and social development

Abstract It has recently been claimed that economic growth depends on social development, but not vice-versa. This paper reconsiders the nature of such links. It is argued that those claims find only weak support in the data and that the theoretical framework is too fragile to justify a satisfactory economic interpretation of the estimates.

Are Property Rights Relevant for Development Economics? On the Dangers of Western Constructivism

Although the importance of property rights as the engine of growth remains beyond dispute, this article tries to show that the crucial issue is not so much the definition of the allegedly ‘optimal’ property right system, as the understanding of the ideological elements that justify property rights in the first place – entrepreneurship and self-responsibility. Unless one clearly perceives the nature of the ideological structure that legitimises the rules of the game in a given society, it is virtually impossible to understand why growth-conducive property-right systems fail to emerge and be accepted. Put differently, property rights are certainly necessary for growth. But they are no tools for policy-making. Getting them right – or transferring them from other contexts - is not enough, especially if their assignment and enforcement remains a top-down process, whereby local politicians or international technocrats suggest and enforce institutional arrangements experienced elsewhere.

Towards a non-Darwinian Theory of Institutional Change

The paper emphasizes two flaws in mainstream economics: the failure to understand actual human behavior in many real contexts and the failure to take account of transaction costs. By emphasizing the role of knowledge, institutions, transaction costs and path dependence, new institutional economics has provided a powerful answer to these shortcomings. Nevertheless, a number of questions remain open. In particular, path dependence is far from being a continuous process. Its dynamics and its irregularities are by and large unexplained. Hence, a strong need for a convincing evolutionary theory of environmental change. This article does not deny the validity of the Darwinian view applied to the theory of the firm and of competition in a free-market economy. The paper, however, maintains that the natural-selection process that characterizes the Darwinian approach is ill suited to describe economic evolutionary processes. It is shown that a combination of functional analysis and natural selection may indeed be a better solution, for it solves some of the puzzles raised by public choice theory without violating the fundamental tenets of the new institutional economics approach. Still, although this combined view may well explain why the institutional features are retained by the system, it does not clarify why they are introduced in the first place. A third possibility is put forward in the second part of the paper, where a new evolutionary theory is suggested. Within this framework, agents are assumed to behave according to their preferences within the existing rules of the game. At the same time, new ideas and sometimes new ideologies may influence their behavioral patterns. The combination between needs and ideologies generates environmental change, especially if so-called ‘ideological entrepreneurs’ are able to transform latent and shared beliefs into an institutional project and enforce it.

Exchange-rate management in eastern Europe: A public-choice perspective

Abstract The paper presents a public-choice analysis of the existing exchange-rate regimes in transition economies, with special reference to Eastern Europe. The links between policy making, rent seeking and exchange-rate regimes are thus examined in detail from a theoretical point of view, and then compared with the existing empirical evidence. Some comments about the role of the West and of international organizations are also put forward.

An Explanation of the Dynamics of Protectionism

Trade policy has been the rule during this century. Traditional theories, however, fail to provide convincing explanations about why the nature of trade policy has changed over time and about why protectionist pressures have not always been successful. This article suggests that change in the nature and intensity of protectionism depends on the deviation of economic performance from expectations, on the demand for institutional change, and on the size of the existing distortions. This view is then applied in order to shed new light on the role of trade policy before and after World War II.

Hayek and Economic Policy (The Austrian Road to the Third Way)

By examining Hayek’s approach to economic policy, this paper tries to show that his understanding of a free-market society was ambiguous, if not contradictory. Hayek was indeed following the Austrian tradition by rejecting technocratic views of policy-making. Nevertheless, he advocated a constitutional approach ultimately based on the rule of law created behind a veil of ignorance. Regulation and a fairly extensive welfare state are not ruled out either, and are subject to evaluation through a mix of rule of law (what that means), public opinion, common sense. After close inspection of the Road to Serfdom, the Constitution of Liberty, Law, Legislation and Liberty this contribution concludes that not only does Hayek fail to provide clear answers to the fundamental questions of economic policy. He also advocates a Third Way characterised by enlightened social engineering. In particular, the state has the duty to provide a suitable framework for the individual to develop his action, and to meet those social needs that the market fails to satisfy.