Tag Archives: institutions

The Economics Nobel Prize and Settler Mortality

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October 25, 2024 — Why have some countries grown rich and others not?   The three winners of this year’s Nobel Prize — Daron Acemoglu, Simon Johnson and Jim Robinson — offered a one-word answer: Institutions.  Specifically, “inclusive institutions,” which refers to an open society, accountable government, economic freedom, and the rule of law.

To illustrate concretely, the World Bank offers country-by-country indicators of six aspects of institutional quality: control of corruption, voice and accountability, government effectiveness, absence of violence, regulatory quality, and rule of law.  At the top of the rankings are Denmark and Finland.  At the bottom are Equatorial Guinea and South Sudan.  Across a broad set of countries, these indicators are indeed highly correlated statistically with national income per capita. read more

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Can the Euro’s Fiscal Compact Cut Deficit Bias?

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     Europe’s fiscal compact went into effect January 1, as a result of its ratification December 21 by the 12th country, Finland, a year after German Chancellor Angela Merkel prodded eurozone leaders into agreement.   The compact (technically called the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) requires  member countries to introduce laws limiting their structural government budget deficits to less than ½ % of GDP.  A limit on the “structural deficit” means that a country can run a deficit above the limit to the extent — and only to the extent — that the gap is cyclical, i.e., that its economy is operating below potential due to temporary negative shocks.   In other words, the target is cyclically adjusted.  The budget balance rule must be adopted in each country, preferably in their national constitutions, by the end of 2013. read more

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Achieving Long-Term Fiscal Discipline: A Lesson from Chile

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            As Chile’s President Michelle Bachelet prepares to hand over power to her newly elected successor, she remains extraordinarily popular.  It is worth reflecting on the fiscal aspects of her term in office, as Chile has important lessons for other countries struggling with fundamental long-term budget problems, which includes a lot of countries right now.

             As recently as June 2008, President Bachelet and her Finance Minister, Andres Velasco, had the lowest approval ratings of any President or Finance Minister, respectively, since the return of democracy to Chile. (See graphs below.) There may have been multiple reasons for this, but perhaps the most important was popular resentment that the two had resisted intense pressure to spend the receipts from copper exports, which at the time were soaring along with world copper prices.  One year later, in the summer of 2009, the pair had the highest approval ratings of any President and Finance Minister since the return of democracy.  Why the change?   read more

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