Friday, November 10, 2006

Institutional variables and Economic Growth (I)

Economic theory has different explanations for economic growth, in particular economic development models have stressed in their statistical and econometric estimations, the key role that capital accumulation, technology advances and human capital quality (endogeneous variable)have on economic development. But recently there are a growing interest in what it is called the instrumental variables ,and its effect on economic growth, let say for instance quality of institutions, cultural values and religious beliefs.-
The issue becomes more relevant ,when it is important to have explanations for the steady efforts made since the eighties, to improve growth performance in Latin America, and the outcome measured in terms of poverty reduction ,income inequality corrections and social mobility prospect leaves still some questions .
Before going into the roots of the problem, what if we ask ourselves the following :Who benefits most from the current level of poverty and income inequality?. Most of the policy orientated to fulfil economic growth goals ,are based on the importance of the private business, deregulation, property right protection, the rule of law and the like. However , there is not too much attention about the barrier entry an entrepreneur has to overcome to begin a new business. In other words, the whole idea of market economy functioning is based on the abilities of current business man and entrepreneurs to create wealth ,but without taking into account the barriers they might have to face to get into business and out of the state dependence. It looks like it is part of the State business to keep some portion of citizens as captive costumers for its free services(public education ,health, security, and so on) so to justify its bureaucracy and expenses levels.
Entry barriers to start out new small business , seems like the protection the state needs to keep alive its social network The more people go into the chance of trying its own way to do a better living condition, the less they will depend upon such state services. In fact, all of those who succeed ,would be able to pay a better education for their children , a better health services , improving their welfare beyond what it is case while they are depending only on the state. It follows that in this situation ,those who do not succeed will really need state support ,but as long as the amount of such people is less than before ,the quality of public services would be higher because the same amount of financial resources would be shared by fewer people than before.
Therefore, to improve the quality of public services it is not necessary to have higher public expenditure, but to allow more people to try their own way facilitating their access to new business opportunities .
An additional implication of such state services dependency is that the bureaucracy, charge a fee for it, merely corruption .Each step people has to get over for starting new business, means the chance of charging such a fee. In fact ,corruption is higher in those places where the State has a stronger entry barrier for new business opportunities to be available for anyone. The incentive to keep the current level of state dependency, is about the chance of charging such a fee which has not a cost as long as control mechanism are soft . These cost are low or zero, when the mechanism of control are rather light , or they do not exit at all.
So, given that the effects of free market economy policies ,fall on those who are inside its borders of participating of the business opportunities available, the ones who are left out are those who will be kept inside the state own borders.

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