bsp2005 ay201314 pz lecture 3 wk 10

8/12/2019 Bsp2005 Ay201314 Pz Lecture 3 Wk 10

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Asian Business

EnvironmentsBSP2005 Week 10

Lecturer

Peter Zeitz


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Why do many states with inclusive politinstitutions fail to adopt good economicinstitutions?

Weak vs. Strong States State strength is similar to a technology. A Strong state tends to persist over time.

Weak states do not become strong easily.

Many democracies are relatively weak states. Common characteristic of weak democracies

Ethnic/Religious Diversity e.g. African states combined historically antagonistic ethnic groups

Weak states are associated with extremely bad growth outc Many examples of strong extractive states that have been exceptio

prosperous.

Not so for weak states.


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Who Benefits from Economic Growt

GDP is divided among labor and capital owners Median voter is a worker.

Inclusive growth implies policies that maximize labor income. Wages set by collective bargaining

Minimum wage

Strong Antitrust Enforcement


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Who Benefits from Economic Growt

GDP is divided among labor and capital owners Median voter is a worker. Inclusive growth implies policies that maximize labor income.

Wages set by collective bargaining

Minimum wage

Strong Antitrust Enforcement

Elites earn most capital income.

Extractive growth implies policies that maximize capital income. No collective bargaining

No minimum wage

No Antitrust enforcement Recall the Carlos Slim, worlds wealthiest individual

P

4


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Division of labor and capital incomein democracies and non-

democracies


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DecTr

s iAs


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Current institutions are enduringconsequences of past historical eve

Inclusive institutions first developed in United Kingdom Persistently strong institutions in Western Europe

European colonizers spread different types of institutions around the Hmm country has dense population, natural resources, and centralized indig

government Extractive institutions are already there. Just need to replace the indigenous leaders. Many countries in Central and South America -> Extractive Economic Institutions, Com

State

Hmm country has relatively dense population relative to fertility, lacks indig

government Utilize as source of slaves -> Extractive Economic Institutions, Weak State Most of Sub-Saharan Africa

Hmm country has sparse population and lacks natural resources Settle there, use inclusive economic institutions, eventually inclusive political institutio United States, Canada, Singapore, Hong Kong -> Inclusive Economic Institutions, Stron These settler economies have done very well in the long-run.


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What if Singapore was located in AfIllustrative Example: Mauritius

Extremely isolated African Island-state

Uninhabited until 1710

Population is a mix of African, Indian, French and Chinese immigrants

Lacks natural resources

Strong democracy

Major African financial center; export-focused industry

GDP per capita (nominal and PPP) similar to Malaysia19 times higher than neighboring Madagascar


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Some evidence that extractive elites Hard to Get rid of

Mita: Legally Designated Slave gathering Area inempire

Map shows Mita boundaries in Peru and Bolivia


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Institutions and Firm Operations: AnExample


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Why this is surprising?

No obvious characteristics of workers or machines explain tdifference.

US workers are typically migrants who may not speak Englisnever have been to school.

They begin working several times more efficiently than Asia

with no experience whatsoever. Workers in US and China, Japan, and India often use the exa

model of imported British machine.

Even in Asia, managers and engineers are often British.


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Management and Institutions

In Britain and China firms are organized under asubcontracting system.

Highly decentralized Forepersons hire, pay, and supervise machine operatives Management paid forepersons based on performance. Very similar to practice in Britain; effective in Britain

Chinese Labor Institutions Different from British. Bribery, organized crime plays a central role in the hiring process

Agency Problem: Bribery makes subcontracting leeffective in China than in Britain.


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Chinese Labor Institutions

Patron-client relationships mediate hiring.

Workers pay foreperson annual fees for jobs (twoweeks wages).

Forepersons belong to criminal organization, GreeGang.

Gang brokers sale of labor. Controls recruitment of rural labor (fee-based or indentures).

Gang networks important in urban job search.

Instigates strikes and riots to coerce firms.


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Forepersons as a Barrier toProductivity

Chinese forepersons are quite powerful compared to managers.

*Forepersons+ do not do much work nor know much and usually dnot stay in the mills all the time. Most Chinese managers are afrai

them and would not dare do or say anything against their will. (Le

1925)

Forepersons maintain power by inciting workers to strike, riot, or

Forepersons profit from job placements.

Gang earns additional profits through control of recruitment. Blacklists discourage workers from seeking jobs directly.

Collective action is used to force excessive hiring.

"the principal trouble [in management labor relations] is that mill is practically forced to employ more people than is neces

and wages are only of secondary importance. (Barker 1934)


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Institutions around the World

What are the best institutions for economic growth? Is there a single set of institutions that is optimal for every nation at every point in time?

Is it important that a country adopt a single set of institutions or amultiple institutional paths to development?

Perspectives in Acemoglu and Robinson are very Eurocentri

focused on 19thand 20thcentury history. Perhaps inclusivedemocracies are not the only/best way of sustaining growth

Is it adequate to characterize countries as either democracies or ndemocracies?

A considerable diversity of institutions exists within each group.


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China has never been a true colony.

By best practice based measurements, Chinese institutionworse than average for developing economies.

Quality of government, rule of law, corporate governance

The coexistence of bad institutions and great growth C

Puzzle Use of Western standards to measure institutions ignores im

Chinese institutions that deal with incentive problems.

Institutions are related to Chinas long imperial history.

XusChina Puzzle


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Personnel Finance Justice Industry

Central Adm Function

Personnel Finance Justice Industry

Province A Province B Pr

Territorial Control

Emperor


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Personnel Finance Agriculture Industry

Central Adm Function

Personnel Finance Agriculture Industry

Province A Province B Pr

Territorial Control

Central Gov't


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Regionally DecentralizedAuthoritarianism (RDA) China is one of the most politically centralized countries in t

Provincial level officials appointed by central govt.

Provincial level officials appoint lower-level officials.

Personnel control is an incentive instrument.

Highly decentralized economy - subnational governments copolicies and resources.

Fiscal Decentralization (provinces do the vast majority of govt spe

Firms fall under influence of local governments.

The RDA determines Chinas policies, development and prob


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Centralized Political Governance

The central government controls personnel matters of subnational governments.

delegates and rescinds powers to regions.

Centralized personnel control deals with incentive problems Appointment, promotion, demotion, and cross-region rotation of

leaders are control instruments.

Rewards, penalties, and regular performance assessment are continstruments.


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Regional Experiment Key to InstitutiChange Economic reforms are risky and controversial (contrary to id

and harmful to vested interests).

Regional decentralization allows for low risk experimentation. Reform can fail without bringing down the country.

Regional competition encourages some provinces to invent institutional arrangements to promote economic growth.

Land Reform, Special Economic Zones, Privatization, New Forms of

What about the evidence?


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What about the evidence?How does a Chinese provincial leader gepromoted?

1) By knowing people

2) By submitting tato the Centra

(achieving GDP

doesnt matter in

3) By having educational cre

bsp2005 ay201314 pz lecture 3 wk 10

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