In this month’s sidebar I wish to share a few observations from my two decades teaching economics in 20 countries, the vast majority of which are relatively poor, with GDP per capita below the world average— in some cases well below. While each country is unique, and it would be inaccurate to paint all of them using the same brush, the emerging economies in which I have worked appear to confront the same underlying problem that has retarded economic growth in much of the world— the absence of strong institutions. Economic historian Douglass North (1920 – 2015) received the 1993 Nobel Prize in Economic Sciences for his research on institutions, which he defined as “humanly devised constraints that structure the political, economic and social interactions.” These institutions “consist of both informal (customs, codes of conduct) and formal rules (laws, property rights) and … provide the incentive structure of an economy; as that structure evolves, it shapes the direction of economic change towards growth, stagnation, or decline.”
The one institutional characteristic of emerging economies that I find ubiquitous is the lack of well-defined and well-enforced property rights, and a major contributor to this deficiency is a high level of corruption. Strong property rights are key to economic freedom, which creates an environment conducive to economic innovation and progress.
I recently returned from teaching in Estonia, part of the Soviet Union prior to its independence in 1991. It’s remarkable that in less than two decades, this small Baltic country transitioned from a state within a command economy to an innovative market economy in the European Union. With strong institutions, Estonia is now one of the top 10 economically-free countries in the world, according to economic freedom indices published by both the Heritage Foundation and the Fraser Institute. A young Estonian high school teacher told me that he owns Berkshire Hathaway stock and wants to attend a Berkshire Hathaway shareholders’ meeting in Omaha. This teacher’s ability to purchase shares of Berkshire Hathaway reflects a high level of economic freedom and opportunity. In fact, this freedom has helped make Estonia the country with the most start-up companies per capita.
What I’ve seen in Estonia differs significantly from my observations in other countries, such as Ukraine, Egypt, Indonesia and Paraguay. Ukraine struggles with high corruption and low economic freedom: Imagine my surprise when the driver of a car in which I was riding bribed a police officer to avoid a speeding ticket. Such actions occur regularly in corrupt countries. When conducting experiential economic trading activities in workshops with Egyptian educators, my co-faculty and I had to take special precautions to ensure our trading rules were not violated. Such “cheating” is endemic in economies exhibiting high levels of corruption, even in classroom contexts. Indonesia, Paraguay, and many other emerging economies also struggle with high corruption, which weakens economic growth.
Ultimately, we should all be thankful for the relatively low levels of corruption in our country, and we must be vigilant to maintain our high-quality institutions.