Why is Corruption Tolerated?

It is maintained that a closer analysis of the features of the underlying contract reveals that under many circumstances corruption is in fact a rational and understandable reaction to institutional failures, which are often far from accidental. Sometimes it can even be considered legitimate, when instrumental in achieving goals shared by the vast majority of the electorate.To this purpose, three different stylized institutional frameworks are analyzed: developed, totalitarian and transition countries. The origin, scope and consequences of corruption vary significantly across the different frameworks. The normative conclusions should therefore be adjusted accordingly.     

Towards a non-Darwinian Theory of Institutional Change

The paper emphasizes two flaws in mainstream economics: the failure to understand actual human behavior in many real contexts and the failure to take account of transaction costs. By emphasizing the role of knowledge, institutions, transaction costs and path dependence, new institutional economics has provided a powerful answer to these shortcomings. Nevertheless, a number of questions remain open. In particular, path dependence is far from being a continuous process. Its dynamics and its irregularities are by and large unexplained. Hence, a strong need for a convincing evolutionary theory of environmental change. This article does not deny the validity of the Darwinian view applied to the theory of the firm and of competition in a free-market economy. The paper, however, maintains that the natural-selection process that characterizes the Darwinian approach is ill suited to describe economic evolutionary processes. It is shown that a combination of functional analysis and natural selection may indeed be a better solution, for it solves some of the puzzles raised by public choice theory without violating the fundamental tenets of the new institutional economics approach. Still, although this combined view may well explain why the institutional features are retained by the system, it does not clarify why they are introduced in the first place. A third possibility is put forward in the second part of the paper, where a new evolutionary theory is suggested. Within this framework, agents are assumed to behave according to their preferences within the existing rules of the game. At the same time, new ideas and sometimes new ideologies may influence their behavioral patterns. The combination between needs and ideologies generates environmental change, especially if so-called ideological entrepreneurs are able to transform latent and shared beliefs into an institutional project and enforce it.     

Barking Up the Wrong Tree: A Reply to Haynes & Husan

The Albanian economy in the 1990s experienced a rapid recovery from its near-collapse in 1992. The rapid economic growth between 1993 and 1996 was exceptional by East European standards, and represented the highest rate of sustained economic growth of all transition economies. This investigation indicates that the standard explanations for recovery and growth in transition economies, such as the pace of economic reform or the levels of domestic and foreign investment, do not adequately explain the rapid growth of the Albanian economy. Factors specific to Albania also need to be considered. The main conclusion drawn here is that the success of the Albanian economy in the mid-1990s rested largely upon the inflow of remittances from Albanians working abroad. These remittances are shown to have been much greater in value than was previously assumed by the IMF: in the region of $700 million per annum rather than $400 million. Remittances are also found to have played a much greater role in Albania's economic recovery than was previously recognised. It is demonstrated that the rise of pyramid investment schemes in 1996 was closely linked to the inflow of remittances. Such schemes are also found to have played a part in fuelling the rapid economic growth in the Albanian economy, before their collapse in 1997.     

Feasible taxation in advanced democracies

One usually considers tax pressure as the result of the policymakers’ efforts to increase public expenditure, while populism is resorted to in order to alleviate tensions among the taxpayers. This paper takes a different view. It assumes that populism is exogenous in the short run and defines the tolerable degree of tax pressure required to bring about redistribution; however, taxpayers also resent disappointing economic performances and low-quality public expenditure. Within this context, therefore, policymakers try to find a compromise between their desire to engage in rent-seeking and their electoral ambitions. This paper shows under which circumstances compromise is obtained, how tensions arise, and what outcomes the taxpayers’ reactions may generate.     

An Explanation of the Dynamics of Protectionism

Trade policy has been the rule during this century. Traditional theories, however, fail to provide convincing explanations about why the nature of trade policy has changed over time and about why protectionist pressures have not always been successful. This article suggests that change in the nature and intensity of protectionism depends on the deviation of economic performance from expectations, on the demand for institutional change, and on the size of the existing distortions. This view is then applied in order to shed new light on the role of trade policy before and after World War II.     

Is There an Austrian Approach to Transition?

This paper discusses the meaning of the term transition and its implications for policy making. It is suggested that an Austrian view would enhance a better understanding of what has been happening in Central and Eastern Europe in the past decade. Within this framework, the analysis should be based on three criteria: acquisition of knowledge, individual responsibility, free entry. It concludes that future transition analysis should devote more attention to the way a number of subjectivistic features drive institutional change, as well as to the features of the new opportunity sets made available to individuals.     

Partial adjustment without tears: A tale for the tolar

The design of monetary system in Slovenia was influenced by the heritage of peristent shortages of foreign exchange. This and other considerations prompted a decision that a new currncy-Tolar was to float on two separate foreign exchange markets: a market for current account transactios, and a market for capital account transactios. Actual developments differed considerably from forecasts; an abundance prevailed, and the Tolar remained remarkably strong. The aim of the paper is to present, estimate and test a simple model describing the behaviour of the Tolar in the first period of high uncertainty; and to assess its relevance for the real world. Exchange-rate movements are analyzed as if they were adjusting to the expected price level. The results imply that the dealers do not wait for new data on prices to be disclosed; they, howevr, try and anticipate the likely effects of inflation on the exchange rate. It is shown that interventions by the Central Bank did not affect the SIT/DM exchange rate appreciably. The answer to the question whether other Eastern European countries could have benefitted from the short-run story of the tolar, is inconclusive, if not negative.We are grateful to A. Beltratti, A. Brzeski, Ch. Flinn, P. Sgro, H. Wagener and the referees of this Journal for their comments on a preliminary draft of this paper. Part of this work has been carried out while J. Mencinger was a Fellow at ICER, Turin, to which we are both indebted.     

On economic growth and development

The paper offers a subjectivist approach to economic growth and an institutional view of development. In particular, the term development regards the prevailing rules of the game and their effects on the key variables for economic activity to take off: property rights and productive entrepreneurship. And growth is deemed to be the result of favourable institutional environments where chances are exploited and individuals succeed in improving their living conditions. Methodological and normative investigation questions the validity of the recent and increasing literature on institutional design, where institutional economics actually plays only a modest role. JEL Codes B53, O10