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What Is The Role Of Institutions According To North? How Far Does This Theory Go Towards Explaining The Contours Of World Development In The Pre Modern Growth Era?

1855 words - 8 pages

What is the role of institutions according to North? How far does this theory go towards explaining the contours of world development in the pre-modern growth era?
Maddison (2006) stated that he “would characterise the whole period 1000-1820 as ‘protocapitalist’”. He believes the transition from pre-modern to modern economic growth took place at around 1820. This will set the stage for this discussion. Within that period, there were two groups of countries which were differentiated by their deviation in economic growth. They were the Group A nations, which included Western Europe, Western Offshoots and Japan, while the rest of the world made up the Group B nations. The contours of world ...view middle of the document...

In order to maximise private benefit, individuals and organisations will seek to cooperate. As a result, the behaviour of the community will become predictable and certain, since the behaviour of the community is the sum of the behaviour of parties within it. In other words, institutions establish a stable structure for economic, political and social interactions. With increased certainty, and therefore, lower costs of exchange, gains of trade can be reaped at a higher margin which would foster economic growth.
The diagram below shows the dead-weight loss, represented by Area ABC, in a situation where there is a price increase in real terms, due to the risks involved, and decrease in quantity traded because of the uncertainty on the arrival of the goods. This highlights the importance of efficient institutions in reducing the costs of exchange.

A
A
D
D
P2
P2
Price
Price

C
C
P1
P1

B
B

S
S

Q1
Q1
Q2
Q2

Quantity
Quantity

Private, instead of social, benefits are often the focus when devising such rules, formal institutions in particular. Coupled with the fact that the relative bargaining power of different parties is a major determinant of the structure of the rules, it explains the persistence of inefficient institutions, a distinctive characteristic of Group B nations. It is precisely the form of institutional framework that determines the path of development a particular economy will take, either towards growth, decline or stagnation which eventually shaped the contours of world development.
Maddison (2006) noted that Group A nations had “their average per capita income grew nearly four times as fast as the average for the rest of the world”.
Nations | Annual Average Compound Growth Rate |
Average Group A | 0.13 |
Average Group B | 0.03 |
World | 0.05 |
Table 1: Rate of Growth of GDP Per Capita, 1000-1820 A.D.
Different forms of institutions developed in areas like trade, scientific learning and social behaviour resulted in the divergence of the rate of growth of GDP per capita.
During the 1200s, the Venetian Republic experienced sharp economic growth through institutional frameworks which promoted merchant capitalism and fostered entrepreneurism. Legal and political institutions were devised to protect property rights. In addition, the development of accountancy assisted in enforcing contracts and financial institutions gave access to credit and insurance. These greatly reduced the uncertainty of transactions and incentivise productive-enhancing activities like large scale international trade, which led to increased income per capita and economic growth. Contrastingly, in Morocco, the tribal chiefs found it profitable to protect merchant caravans but they lack the military might and political structure to devise and enforce property rights. The lack of development of informal rules into permanent institutional framework to cater for a larger market forestalled the expansion of any form of...

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