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

Justin Lin () and Zhiyun Li ()
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Zhiyun Li: University of Oxford

No 4794, Policy Research Working Paper Series from The World Bank

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.

Keywords: development strategy; institution; price distortion; output control; directive allocation system (search for similar items in EconPapers)
JEL-codes: D02 O17 O20 P41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2008-12-01
New Economics Papers: this item is included in nep-dev
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