Archive for August 4th, 2011

Is there an optimal financial structure for development

August 4, 2011

I thought the debate is settled. It doesn’t matter whether you have a bank based fin system or a market based fin system. What matters is how effective and efficient they are. Anyone can do the job. In other words financial structure does not matter.

This new paper from Asli Demirguc-Kunt, Erik Feyen and Ross Levine argues differently (many more papers on fin systems here) (HT: All Finance Blog):

In this new paper they say fin structure does matter. Infact countries should shift towards market based system as they grow.

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Is Islam Compatible with Capitalism?

August 4, 2011

Guy Sorman of City Journal has this nice article on a controversial topic.

He says biggest reason for stagnation of most Arab/Islam economies is political. Political leaders push for variants of crony capitalism to protect their powers. In absence of a proper institutional framework, there is limited growth barring phases of rise in price of oil/natural resources.

He starts with this nice experience of his visit to Egypt where you immediately see the absence of rule of law right at the airport. It is interesting to note how little has changed as Egypt was very similar in 1800s as well. At that time there were no airports but one got similar treatment at Cairo’s cafes:

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Formal vs Informal institutions: Case of Trade between North Korea and China

August 4, 2011

This is a fascinating paper by the trio — Stephan Haggard, Jennifer Lee, and Marcus Noland.

The role of institutions in growth and development is debated on many aspects. One such aspect is the role of informal institutions in growth. SOme economists have shown how commerce prospered in earlier times in absence of formal institutions. They are inefficient but still get the work done:

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