How Trade with China Threatens Western Institutions by Robert Gmeiner

Author:Robert Gmeiner
Language: eng
Format: epub
ISBN: 9783030747091
Publisher: Springer International Publishing

Institutions: The Root of Economic Advantage

Economic institutions can be defined broadly as societal structures and arrangements governing economic behavior. They invariably involve government, which makes and enforces laws. Free market economic institutions are broadly recognized as a fundamental source of economic growth and prosperity (Hall and Lawson 2014; Acemoglu et al. 2005). Free market institutions include those necessary for a free market system to function. These include secure property rights, effective contract enforcement and an independent judiciary, openness to international trade, a lack of excessive regulation, sound monetary policy, a transparent regime for operating businesses, and minimal government involvement in the economy. Comparative advantage in trade stems in part from a country’s own domestic institutions (Belloc 2006; Belloc and Bowles 2017; Costinot 2009; Nunn and Trefler 2014). Recall from Chapter 3 that no single institution is the source of economic advantage; economic prosperity has resulted from a combination of complementary institutions that maintain rules of the game such that economic activity is worthwhile.

Major theories of trade, such as Hecksher-Ohlin-Vanek and the new trade theory do not address the effects that institutions and trade have on each other (Krugman 1979, 1980; Helpman and Krugman 1985). There is a small body of research on international trade when institutions differ between countries, but it is substantially different from the theory advanced in this book. Anderson and Marcouiller (2002) showed that poor institutions inhibit trade, although this is an empirical study as opposed to a complete theory of trade. Additionally, Levchenko (2013), who wrote that institutions will not improve in either of two trading countries if one country has a comparative advantage in a good that relies on those institutions, but did not address political capture, which is a prominent mechanism in this book’s theory. Sigman (2002) showed that countries do free ride on neighbors’ more stringent water pollution rules by polluting more when rivers are shared. Her work refers more to specific pollution rules and does not explore this international free riding comprehensively from a theoretical standpoint.

Economic growth, or the production of more goods and services, takes place when entrepreneurs act on potential profit opportunities. These profit opportunities only exist when economic institutions create an environment that encourages commercial activity. Entrepreneurship is a proximate cause of growth, but it only takes place when economic institutions make it worthwhile, making institutions a fundamental cause of economic advantage.

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