Accoding to Oliver E. Williamson, the new institutional economics turned on two propositions: "institutions do matter," and "the determinants of institutions are susceptible to analysis by the tools of economic theory."
One very important contribution brought by Williamson is the use of the four levels of social analysis relevant in the study of institutions:
The top level is the social embededness level. This is where the norms, customs, traditions, etc. are located. Religion plays a large role at this level. Level 1 is taken as given by most institutional economists. Institutions at this level change very slowly--on the order of centuries or millenia. The concept of "embededness," both at the level of society and in the context of ongoing network relations, has been advanced to help explicate one major issue: "What is it about informal constraints that gives them such a pervasive influence upon the long-run character of economies?" Now, different kinds of embeddedness should be distinguished--cognitive, cultural, structural, and political. Still, the concept of embededness remains in need of greater theoretical specification. An identification and explication of the mechanisms through which informal institutions arise and are maintained would especially help to understand the slow change in Level 1 institutions. Informal institutions have mainly spontaneous origins--which is to say that deliberative choice of calculative kind is minimally implicated. Given these evolutionary origins, they are "adopted" and thereafter display a great deal of inertia: some because they are functional (as with conventions); others take on symbolic value with a coteric of true beleivers; and many are pervasively linked with complementary institutions (both formal and informal). Be that as it may, the resulting instituions have a lasting grip on the way a society conducts itself. One thing to remember, though: insular societies often take measures to protect themselves against "alien values."
The second level is referred to as the institutional environment. The structures observed here are partly the product of evolutionary processes but design opportunities are also posed. Going beyond the "informal constraints" (sanctions, taboos, customs, traditions, and codes of conduct) of a Level 1 kind, we now introduce "formal rules" (constitutions, laws, property rights, etc.). This opens up the opportunity for first-order economizing: get the formal rules of the game right. Constrained by the shadow of the past (influenced by Level 1 factors), the design instruments at Level 2 include the executive, legislative, judicial, and bureaucratic functions of government, as well as the distribution of powers across different levels of government (federalism). The definition and enforcement of property rights and of contract laws are important features. Although such first-order choices are unarguably important to the economic productivity of an economy, [cumulative] change of a progressive kind is very difficult to orchestrate. Massive discontent--civil wars, foregin occupations, perceived threats, breakdowns, military coup, or financial crisis--will, occasionally, produce a sharp break from established procedures. Rare windows of opportunity to effect broad reform are thereby opened. Such "defining moments" are nevertheless the exception rather than the rule. At least partly because of our primitive understanding, the response to such opportunities is often one of "failure."
The third level is where the institutions of governance are located. Although property remains important, a perfectly functioning legal system for defining contract laws and enforcing contracts is not contemplated. Since it is costly t o settle disputes in court, much of the contract management and dispute settlement action is dealt with directly by the parties--through private ordering. The need to come to terms with contract laws (plural) rather than an all-purpose law of contracts (singular) is posed. The governance of contractual relations becomes the focus of analysis. So conceived, a governance structure obviously reshapes incentives. Any issue that arises as or can be reformulated as a contracting issue can be examined to advantage in transaction cost economizing terms. A huge number of phenomena turn out to be contractual variations on a common theme. This second-order economizing--get the governance structures right--is realized at Level 3. The possible reorganization of transactions among governance structures is re-examined periodically on the order of a year to a decade, often at contract renewal or equipment renewal intervals.
The fourth and final level is that which neoclassical analysis works. Optimal apparatus, often marginal analysis, is employed, and the firm for these purposes is typically described as a production function. Adjustments to prices and output occur more or less continuously. Agency theory, which emphasizes ex ante incentive alignment and efficient risk bearing rather than ex post governance, nonetheless makes provision for non-neoclassical complications. One area that needs to be developed, though, as compared with technological innovation, the study of organizational innovation has been comparatively neglected. New institutional economics has attempted to rectify this: the idea being that "truly among man's innovations, the use of organization to accomplish his ends is among both his greatest and his earliest."
Source:
Oliver E. Williamson. 2000. "The new institutional economics: Taking stock, looking ahead."
June 29, 2008
June 25, 2008
Accelerated Inflation of 2007-2008
Rising food prices contributed to an acceleration of inflation across Asia in 2007, and in 2008, the further rise in food prices has reached alarming proportions. According to the latest paper by the Economics and Research Department of the Asian Development Bank, this accelerated inflation may be more structural then cyclical. This means that the repercussions of this situation may continue for more years.
The Problem
The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes--it hurts the poor the most. Concerns over high prices are mounting because inflation eats into real incomes and expenditures, and can undermine the gains from poverty reduction and human development that developing countries have achieved over the last decade or so.
Using unit-level household expenditure survey datasets of four countries (Bangladesh, India, Indonesia, and the Philippines), Rana Hasan, Maria Rhoda Magsombol and myself wrote the section on how the recent events are particularly problematic for the poor. The average share of food in total expenditure is inversely related to income across quintile groups: poorer population subgroups spend a larger share of their total expenditures on food than richer ones. As a result, the poorer population subgroups are more vulnerable to rising food prices.
As it turns out, the fact that the increase in food prices has been driven to a large extent by increases in the price of rice (more on this below) has a special significance for the poverty and distributional impacts of the recent increase in food prices in Asia. This is because of the large share of rice in expenditures--not just food expenditures, but also total expenditures--in Asian economies, especially among the poor.
And so the implication is obvious. The sharp rise in the price of rice, and food more generally, across Asian countries can be expected to wreak havoc among the lower-income groups. In particular, it can be expected to increase the misery of those who are already living below the poverty line. Worst, it can be expected to drive the nonpoor into poverty.
The Causes
Structural factors are fundamental in explaining what has happened to international rice and food grain prices in recent years. Falling global stocks of rice and other cereals are indicative of the fact that production growth has fallen below consumption growth for several years. In addition, the current steep increases in the price at which rice is traded in international markets reflect not only shortfalls in production relative to current consumption, but also reflect the attempt of economies to rebuild stocks themselves, putting even greater upward pressure on demand relative to supply.
Looking at the demand-side factors:
1. Growing world population and strong income growth in emerging economies around the globe. (The second factor is associated with dietary change toward higher-quality food such as mean and dairy products: production of these requires large amounts of grains in the form of livestock feed).
2. Competing use of food grain to produce ethanol as a substitute for oil (i.e., BIOFUELS). Biofuel demand is rising and is leading to diversion of grain, soybeans, sugar, and vegetable oil from use as food or feed.
Among the supply-side factors:
1. Urbanization and competing demand for land for commercial purposes, instead of agricultural.
2. Cropping patterns away from food to biofuels may also reduce the available supply of land devoted to food.
3. Most important, neglect of investment in agricultural technology, infrastructure, and extension programs (e.g., financial) is also to blame for the tepid growth in the supply of rice.
The Solution
In the long run, the notion of food security should move beyond the relatively static focus on food availability and access, to one of higher productivity. As the majority of the poor in developing Asia live in rural areas and depend on agriculture, higher agricultural growth will provide food security by increasing supply, reducing prices, and raising incomes of poorer farm households.
But yields of food crops in most of Asia remain low in comparison with other major producing countries, which is attributed to:
1. Poor crop management skills of farmers.
2. Use of cheaper (and low quality) seeds.
3. Lack of agricultural infrastructure and postharvest technologies to ensure high recovery of harvested grain.
4. Limited research and the gap between available research and practical applications.
5. Inadequate funding for research and development.
Much neglected agricultural sector reforms need to be put into place to promote the use of modern technmology, new seed varieties, and better financial systems.
The Problem
The rise in food prices is worrisome precisely because food price inflation is the most regressive of all taxes--it hurts the poor the most. Concerns over high prices are mounting because inflation eats into real incomes and expenditures, and can undermine the gains from poverty reduction and human development that developing countries have achieved over the last decade or so.
Using unit-level household expenditure survey datasets of four countries (Bangladesh, India, Indonesia, and the Philippines), Rana Hasan, Maria Rhoda Magsombol and myself wrote the section on how the recent events are particularly problematic for the poor. The average share of food in total expenditure is inversely related to income across quintile groups: poorer population subgroups spend a larger share of their total expenditures on food than richer ones. As a result, the poorer population subgroups are more vulnerable to rising food prices.
As it turns out, the fact that the increase in food prices has been driven to a large extent by increases in the price of rice (more on this below) has a special significance for the poverty and distributional impacts of the recent increase in food prices in Asia. This is because of the large share of rice in expenditures--not just food expenditures, but also total expenditures--in Asian economies, especially among the poor.
And so the implication is obvious. The sharp rise in the price of rice, and food more generally, across Asian countries can be expected to wreak havoc among the lower-income groups. In particular, it can be expected to increase the misery of those who are already living below the poverty line. Worst, it can be expected to drive the nonpoor into poverty.
The Causes
Structural factors are fundamental in explaining what has happened to international rice and food grain prices in recent years. Falling global stocks of rice and other cereals are indicative of the fact that production growth has fallen below consumption growth for several years. In addition, the current steep increases in the price at which rice is traded in international markets reflect not only shortfalls in production relative to current consumption, but also reflect the attempt of economies to rebuild stocks themselves, putting even greater upward pressure on demand relative to supply.
Looking at the demand-side factors:
1. Growing world population and strong income growth in emerging economies around the globe. (The second factor is associated with dietary change toward higher-quality food such as mean and dairy products: production of these requires large amounts of grains in the form of livestock feed).
2. Competing use of food grain to produce ethanol as a substitute for oil (i.e., BIOFUELS). Biofuel demand is rising and is leading to diversion of grain, soybeans, sugar, and vegetable oil from use as food or feed.
Among the supply-side factors:
1. Urbanization and competing demand for land for commercial purposes, instead of agricultural.
2. Cropping patterns away from food to biofuels may also reduce the available supply of land devoted to food.
3. Most important, neglect of investment in agricultural technology, infrastructure, and extension programs (e.g., financial) is also to blame for the tepid growth in the supply of rice.
The Solution
In the long run, the notion of food security should move beyond the relatively static focus on food availability and access, to one of higher productivity. As the majority of the poor in developing Asia live in rural areas and depend on agriculture, higher agricultural growth will provide food security by increasing supply, reducing prices, and raising incomes of poorer farm households.
But yields of food crops in most of Asia remain low in comparison with other major producing countries, which is attributed to:
1. Poor crop management skills of farmers.
2. Use of cheaper (and low quality) seeds.
3. Lack of agricultural infrastructure and postharvest technologies to ensure high recovery of harvested grain.
4. Limited research and the gap between available research and practical applications.
5. Inadequate funding for research and development.
Much neglected agricultural sector reforms need to be put into place to promote the use of modern technmology, new seed varieties, and better financial systems.
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