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Endogenous Institution Formation under a Catching-up Strategy in Developing Countries1

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  • Yifu Lin, Justin

    (The World Bank)

  • Li, Zhiyun

    (University of Oxford)

Abstract

This paper explores endogenous institution formation under a catching-up strategy in developing countries. Since the catching-up strategy is normally against the compartive advantages of the developing countries, it can not be implemented through laissez-faire market mechanisms, and a government needs to establish non-market institutions to implement the strategy. In a simple two-sector model, the authors show that an institutional complex of price distortion, output control, and a directive allocation system is sufficient to implement the best allocation for the catching-up strategy. Furthermore, removing any of the three components will make it no longer implementable. The analysis also compares the best allocation and prices under the catching-up strategy with their counterparts under no distortions. The results of this paper provide important implications for understanding the institution formation in the developing countries that were pursuing a catching-up strategy after World War II.

Suggested Citation

  • Yifu Lin, Justin & Li, Zhiyun, 2008. "Endogenous Institution Formation under a Catching-up Strategy in Developing Countries1," Policy Research Working Paper Series 4794, The World Bank.
    • Handle: RePEc:wbk:wbrwps:4794
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    References listed on IDEAS

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    More about this item

    Keywords

    development strategy; institution; price distortion; output control; directive allocation system;
    All these keywords.

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O20 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - General
    • P41 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Planning, Coordination, and Reform

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