I will describe "Second-Best Institutions" using illustrations from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.

1. SECOND-BEST
INSTITUTIONS
Prepared by
Student of the FES-2,
Finance-2, group 1
Zaika Anna

2. Functions of
the good
institutions
Provide security of property
rights
Enforce contracts
Stimulate entrepreneurship
Foster integration in
the world economy
Maintain
macroeconomic stability
Manage risk-taking by
financial intermediaries
Supply social
insurance and safety nets
Enhance voice and
accountability

3. The topic
will be about
"Developing
economies
requires a second-
best mindset"
Contract enforcement
Entrepreneurship
Trade openness
Macroeconomic stability
1.
2.
3.
4.

4. COURTS <RELATIONAL
CONTRACTING
COURTS AND CONTRACT
ENFORCEMENT
<

5. COURTS <RELATIONAL
CONTRACTING
COURTS AND CONTRACT
ENFORCEMENT
<Why?

6. COURTS AND CONTRACT
ENFORCEMENT
About the courts:
Сourts are highly inefficient
Сourts are costly to use
Сourts are potentially corruptible

7. COURTS AND CONTRACT
ENFORCEMENT
About the relational contracting:
Relational contracting builds long-term, personalized relationships
with their suppliers or consumers
Relational contracting sustains cooperation through repeated
interaction
Relational contracting screens potential business partners by
gathering information about them

8. The situation
We have 2 locations:
1.
2.
Courts and contract enforcement*

9. The situation
The same:
Courts and contract enforcement*
Build long-term relationships
based on trust;
Demand immediate
payment;
Screen out unreliable firms;
Renegotiate when things run
into trouble.
The strategies were similar:

10. The situation
There is a difference:
Courts and contract enforcement*
Relational
contracting able
to sustain so
much more
economic
activity.
Relational
contracting are
not able to
sustain so much
more economic
activity.

11. The situation
Why?
Courts and contract enforcement*

12. The situation
Courts and contract enforcement*
1.
The legal system has
(so far) not
constrained the
growth of Vietnam’s
private sector.

13. The situation
Courts and contract enforcement*
2.
Relational contracting in
Africa has so many of the
same features of that in
Vietnam.
=>
It is not the inadequacies of
the legal system that
constrains Africa’s growth
either.

14. The situation
Courts and contract enforcement*
3.
An effort to strengthen
judicial (third-party)
enforcement can easily do
more harm than good in the
presence of relational
contracting.

15. ENTRY REGULATIONS AND
ENTREPRENEURSHIP
The reasons for the suppression of
entrepreneurship
Entry costs may
be
high
Property rights
may
not be well
protected
The contracting
environment
may be poor
The perceived
returns
may be low

16. ENTRY REGULATIONS AND
ENTREPRENEURSHIP
Entry regulations
Licensing and registration requirements:
Raise the cost of entry reduce competition
Generate rents for incumbents
1.
2.

17. ENTRY REGULATIONS AND
ENTREPRENEURSHIP
Entry regulations
Licensing and registration requirements:
Raise the cost of entry reduce competition
Generate rents for incumbents
1.
2.
Is this a
normal
situation?

18. ENTRY REGULATIONS AND
ENTREPRENEURSHIP
Is this a
normal
situation?
No
It generates static inefficiencies and
undermines productivity growth over
time.

19. ENTRY REGULATIONS AND
ENTREPRENEURSHIP
Is this a
normal
situation?
Yes
Rents may be a necessary condition for
adequate levels of entrepreneurship to
emerge in non-traditional economic
activities.
Rents play a useful role in sustaining
long-term relational contracts

20. IMPORT
LIBERALIZATION
AND GLOBAL
INTEGRATION Suggest integrating into the global
economy, eliminating quantitative
restrictions and other
administrative measures in trade
and lowering their import tariffs.
Textbooks

21. BUT DOES
THESE
RECOMMENDAT
IONS BE
EFFECTIVE?
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
Consider such locations

22. BUT DOES
THESE
RECOMMENDAT
IONS BE
EFFECTIVE?
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
In these locations the reduction in import
tariffs did not play a significant role in the
beginning of the development of foreign
orientation:

23. BUT DOES
THESE
RECOMMENDAT
IONS BE
EFFECTIVE?
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
The only country was an exception:

24. BUT DOES
THESE
RECOMMENDAT
IONS BE
EFFECTIVE?
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
WHAT IS GOING ON HERE?

25. WHAT IS GOING
ON HERE?
An important feature to global
integration:
Alternative pathsgenerate
supply incentives at the margin
for new tradable activities,
without removing protection for
existing activities
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
2 advantages:
one having
to do with
efficiency
the other
with
political
economy

26. WHAT IS GOING
ON HERE?
Efficiency reason
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
The Asian model of liberalization
protects employment in the transition
to the new long-run equilibrium

27. WHAT IS GOING
ON HERE?
The political economy advantage
IMPORT LIBERALIZATION AND GLOBAL INTEGRATION*
The Asian model of liberalization blunts
the adverse impact on the firms in
import-competing sectors and
therefore removes an important
obstacle to trade reform.

28. CREDIBILITY
OF MONETARY
POLICY AND
ECONOMIC
PERFORMANCE
The government was able to
relax the lack of policy credibility
on the monetary policy front.
1990
1989 1990

29. THE
CONVERTIBILITY
LAW
But once the binding constraint
became lack of competitiveness
(following the Asian financial
crisis and the Brazilian
devaluation in particular) rigid
rules that prevented currency
depreciation became the
problem.
1990
1989 1990
CREDIBILITY OF MONETARY POLICY AND ECONOMIC PERFORMANCE*

30. Institutional rigidity pays off
when lack of credibility and time
inconsistency are the main
problems of the day.
THE
CONVERTIBILITY
LAW
CREDIBILITY OF MONETARY POLICY AND ECONOMIC PERFORMANCE*

31. COLCLUDING
So, governments can learn a lot
by looking at what works and
doesn't in other settings. Real-
world need to keep an eye on
how proposed solutions affect
multiple distortions.

32. THANK YOU
FOR
ATTENTION!