Business Magazine

Building Institutions for Economic Growth

Posted on the 03 April 2012 by Center For International Private Enterprise @CIPEglobal

It is widely recognized that encouraging long-term economic growth requires competition, innovation, and the spread of new technologies. But these, in turn, require sound underlying institutions, the rule of law, and a state committed to the efficient provision of public goods.

In the latest Economic Reform Feature Service article, Dr. Boris Begović, President of the Center for Liberal-Democratic Studies and a professor at the University of Belgrade School of Law, argues that these fundamental requirements are interlocking, and all must be present for economic growth to take hold.

While the rule of law, including the protection of private property and enforcement of contracts, is vital to a functioning market economy, effective judicial institutions alone are not enough. “The rule of law is a necessary, but not sufficient, precondition to economic growth,” Begović writes, “because economic freedom goes beyond the rule of law to bring about innovation and increased productivity through market competition.”

Reforming dysfunctional institutions can be politically difficult, and Begović notes that it is important to consider sequencing as well as the role of informal norms and behaviors versus formal rules and laws:

[f]ormal rules do not matter if they are not applied or their application is not probable. That puts specific tasks before institutional reform, such as the building of authorities that will efficiently implement rules, and this building requires resources and time. It is not enough to simply transfer the formal rules of behavior from one country to another.

In other words, while the basic outlines of the kinds of institutions that provide a good economic foundation are known, each country will need to take its own path to build them.

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