The Palgrave Handbook of Comparative Economics

What is a good economic system? What objectives should it seek? What institutions and mechanisms for coordinating economic activity are beneficial for system performance? These are the key and age-old questions that motivate comparative economics. Philosophers and religious authorities provided early answers. Later, Ibn Khaldun and Adam Smith posited that people were motived by self-interest and that the objective of an economic system was to meet these desires. Efficient production and distribution could be achieved by using markets, but institutions came to be seen as critical as well. Comparative economics cannot find one objective criterion by which to judge economic systems because systems pursue many goals including rapid growth and a fair income distribution. So judgments about what is a good economic system remain controversial.

This chapter surveys the Soviet economic system beginning with accounts of scientific planning by an enlightened Politburo. Contributions by Kornai, Berliner, and Granick from the 1950s provided the first accounts of the dysfunctionalities of enterprises. The opening of the Soviet archives offered the first insider accounts of planning in practice, of a leadership torn by vested interests, coordinated not by plans but by “resource mobility” and “petty tutelage.” Enterprise gross output targets had to be fulfilled “at any price.” Just about any superior could change the plan, which was never finalized. Managers and planners were loath to deviate from the “achieved level” irrespective of changes in tastes and technology. “Scientific planning” froze the economy in place, while market economies created new technologies and new products.

This chapter starts with clarifying the basic concept: institutions, institutional systems and policies (Sect. 2). Section 3 compares the dynamics of a highly centralized system with highly decentralized one. Section 4 discusses four basic dimensions of institutional systems: mechanism of succession, civil rights, rule of law and economic rights. Based on that I sketch five main types of institutional regimes: socialism, quasi-socialism, liberal capitalism, quasi-liberal capitalism and crony capitalism. Section 5 discusses two major institutional transformations in the twentieth century: toward socialism and away from it. Section 6 presents an analytical scheme for discussing the determinants of liberal and statist economic transition in democracy. Section 7 focuses on the recent authoritarian transition after a free election.

The chapter assesses the new comparative economics’ (NCE) contribution to the analysis and comparison of economic systems and economies. It highlights the NCEs aims and research program and compares these to the traditional field of comparative economic systems (CES). The comparison shows that both approaches are useful for a better understanding of the working of economies and the management of change. Being different in both their theoretical stance and the method they use, they heuristically compete, but normatively they provide useful contributions in different ways and cases. They should thus continue to compete for improving our knowledge and analysis of different institutional constructions. The chapter also considers the development of the field and looks at the number and topic of scientific publications since 1991.

We explore in this chapter a new direction in comparative economics: comparative economic history. Building on research by archeologists and economic historians, we survey some of the work on differences in institutions in the ancient past. We report on a novel data-gathering exercise on institutions in antiquity, finding two clear clusters: with some systems we call “statist” systems, like in ancient Egypt or China, which relied on some form of central planning in the allocation of resources, with very little private property, while other societies had thriving market systems with strong private property rights. The difference between these institutions in antiquity can be related to differences between individualist and collectivist cultures that play an important role in the modern world.

China was the first in the world to have developed a meritocratic bureaucracy in the form of keju, a civil exam system through which top government officials were selected on a competitive basis. As an institution, keju provided room for social mobility as evidence shows, although “family background” also mattered. More interestingly, keju nurtured a culture of valuing learning and educational achievements that persists to this day in terms of higher human capital and entrepreneurial outcomes as proxied by years of schooling and occupational choice. However, a potentially worrying sign of this persistence is local elite entrenchment, as keju culture is transmitted via the channels of educational infrastructure, social capital, and political elites alongside human capital, suggesting meritocracy may have cast a “long shadow”.

Following Acemoglu and Robinson (2012, Why Nations Fail: Origins of Power, Prosperity and Poverty, Crown Publishers), Havrylyshyn and Srzentic (2015, Institutions Always ‘Mattered’. Explaining Prosperity in Mediaeval Ragusa (Dubrovnik), Palgrave) showed good institutions that explained the prosperity of tiny Ragusa (today’s Dubrovnik). Compiling data for the period twelfth to seventeenth century, on performance, institutions, and social programs, they demonstrated that indeed Ragusa had market-friendly institutions. This chapter goes further asking: why didn’t the older city-states of Dalmatia like Split or Zadar succeed as Ragusa did? New data on institutions show Ragusa was earlier to put in place good institutions, but the others were not far behind. Thus institutions alone do not explain Ragusa’s greater success; they were a necessary but not sufficient condition. The explanation may be: history matters. Venice ruled all Dalmatia except Ragusa and monopolized trade restricting rights of these cities.

This chapter provides comprehensive evidence on the long-run evolution of inequality in former communist countries in comparative perspective. We document a marked U-shaped evolution of income inequality since the beginning of the twentieth century until today. We analyse these trends for three periods, before, during and after communism, and make comparison with non-communist countries. A broad synchronisation of inequality in communist and non-communist countries presents a compelling argument against the “natural” decline of inequality during the development process. Rather, it points to the critical role of policies and institutions in shaping inequality in the long run.

This chapter discusses the economic and political transformation in 29 post-communist countries in the 30 years since the fall of the Berlin Wall. While religious and imperial history continues to explain political trajectories, adoption of strong parliamentarian systems has countered some of the adverse effects of these historical legacies on economic liberalization. The divergence between democracy and political rights over the region is thus four to five times larger than what is observed for economic freedom and ease of doing business. While some early choices when transition started explain some of the economic evolution in the region, history and ethnicity predict democratization well.

This chapter presents basic statistical facts on the process of transformation in Central and Eastern Europe over thirty years. The presentation is intentionally descriptive, to be as neutral as possible. Several measures of performance since about 1990 are reviewed including GDP, direct consumption measures, the Gini coefficient and the Human Development Index. The paths of economic reforms and democratisation are also traced. Overall, we present eleven stylised facts, three of which stand out: virtually all communist countries have changed considerably and have integrated significantly into global relations; in the first decade all suffered considerable decline of output, living standards and widening of income distribution; however, the length of the deterioration, its extent and the eventual improvement varied considerably, with Central Europe generally doing better than the former Soviet states.

The outcomes of reforms in different postcommunist countries have varied greatly depending on the commitment to reform. The population of a reforming country needs to identify itself as a nation, and the strength of civil society and the intelligentsia matter. Poland, Hungary, and the Baltic nations stand out as having developed strong civil societies years before their democratic breakthroughs. A transition starts with a democratic breakthrough, preferably through a peaceful mass mobilization. The reformers need to act fast before the old elite counterattacks. The strength and honesty of the political leader are vital. The leader needs to appoint and support a strong reform team. Timely international support is crucial to get the reforms on the right track. Early founding elections are also important.

The chapter discusses the political economy of transition from plan to market. We start with the political economy before transition when powerful vested interests delayed necessary reforms thus leading to the bankruptcy of the communist regimes. We then move to the political economy of early transition reforms and explain the divergence in the design and the outcomes of those reforms across the transition region. Next, we explain the rise in inequality and respective anti-reform backlash that was observed in many transition countries. We conclude with the analysis of today’s political economy analysis and implications for future reformers.

One of the clearest stylised facts of the transition is also one of the most unexpected: after 1989 Central and Eastern European and the former Soviet Union countries diverged massively. Institutions are a main reason. The European Union (EU) anchor thesis posits that the prospect of membership in the EU played a key role in filling in the institutional vacuum that followed the collapse of socialism. This chapter examines this thesis and assesses the relevant bodies of evidence, focusing on whether the prospect of EU membership accelerated institutional development and, if so, whether this was indeed associated with improved economic outcomes.

This chapter has four sections. The first provides some historical background on central planning and the early debate on whether it could work in the real world. The second deals with the period between the 1940s and the 1980s when the Russian experiment was considered successful and the Soviet Union became a world power and a challenge to the West.The third discusses when central planning began showing its weaknesses and the transition started. This period led to growing contacts with the Western world and with the need, on the part of Russia and other centrally planned countries, for financial and technical assistance. Various international organizations and foreign governments provided assistance. A concluding section discusses some of the problems encountered in this phase.

Thirty years ago, most observers thought that the transition from a planned to a market economy would be a long process. Instead, the changes occurred very quickly, and the transition countries do not look all that different than many emerging market economies. In the first part of the chapter we discuss whether transition was truly special. In the second part, we look at the characteristics of the transition economies. Our data shows that they have similar economic structures and share many similar economic and political problems as other countries at similar income levels. We found only one area where transition stands out as different. The financial sectors of the transition economies are smaller and less well functioning than those in other countries.

The intertwined process of economic and political liberalisation in Central and Eastern Europe, since the fall of the Berlin Wall, has represented a unique opportunity to test, and improve on, our understanding of the origins of prosperity and the drivers of institutional change. In this chapter, we discuss what has been learned, and the open questions that remain, after thirty years of research on institutional change in transition. We summarise the lessons in three chronological steps: the natural experiment stage, the sequencing of reforms stage and finally the cultural legacies stage. We conclude on the need to explore further the formation of individual values and beliefs, explicitly recognising the importance of their social context.

Economists and social scientists have long debated the relative importance of institutions and human capital as fundamental determinants of long-run development. After discussing some of the limitations of the existing literature, we use panel data covering the period 1955–2010 and a novel indicator of property rights protection from Varieties of Democracy (V-Dem) to reinvestigate these relationships. We find that both property rights institutions and human capital are positively related to economic growth, although human capital is relatively more robust when we account for country fixed effects. We also investigate whether the growth effects of property rights institutions are heterogeneous across different levels of development. In contrast to the cross-country evidence, our panel data results suggest that broad-based property rights protection clearly and strongly enhances growth only in advanced economies.

In this chapter, we discuss possible interactions across structural policy domains. While relatively more studied in the context of the post-communist transition literature, our survey suggests that relationships of this type hold more generally and can be important to improve our understanding of the relationship between structural reforms and long-run economic growth. Given its potential relevance for the design of successful reform packages, exploring in a more exhaustive way the notion that the effect of a given reform on economic growth depends on the progress made in other policy areas should be a priority point for future research. This may be particularly relevant to help unlock the growth potential of many developing and emerging countries, namely concerning their integration in the global economy.

This study revisits the potential effect of democracy on economic development in a broad sample of countries, and also separately in a subsample of post-communist countries. The results are reassuring: democracy has a robustly positive impact on economic growth, and also on key factors of economic growth—investment in physical and human capital. Moreover, the sustained level of democracy, embodied in accumulated democratic capital, especially robustly correlates with economic development. When comparing the relative roles of democracy and economic freedom, democracy takes primacy in the global sample while both democracy and economic freedom seems to play important roles in the subsample of post-communist countries.

Development economics is a new sub-discipline in modern economics. Its first generation, the Structuralism, focused on market failures and advised the government to adopt import-substitution strategy to develop modern industries. Its second generation, the Neoliberalism, focused on government failures and advised the government to implement Washington Consensus reform with a shock therapy to transit to a well-functioning market system. Developing countries, following the Structuralism and Neoliberalism, failed to achieve development and transition successfully. This chapter introduces the third generation of development economics, the New Structural Economics, which emphasizes the endogeneity of structure for countries at different levels of development and provides pragmatic guide to formulate industrial policy for accelerating economic development. This chapter calls for a structural revolution in modern economics.

A new strand of “sustainable development economics” (SDE) is reframing comparative economics. We summarize SDE’s three-part analytical challenge for each society: the need to “re-couple” progress on incomes with objective and subjective measures of human well-being; to “de-couple” progress on incomes from processes of environmental degradation; and to “we-couple” gains in living standards such that no group feels excluded from opportunities for progress. In this multi-dimensional context, economic systems are not judged on a single dimension ranging from “good” to “bad,” but instead relative to the different outcomes they generate across a range of domains. In investigating drivers of outcomes, SDE is agnostic regarding appropriate levels of aggregation and considers societal forces including business, academia, and civil society, in addition to public institutions and policies.

This chapter examines the trends and patterns in population health of the former command economies of Central and Eastern Europe and the Former Soviet Union during the past half century. Even following a period of stagnation and decline from the 1960s to the 1980s, few could have anticipated the dramatic increases in mortality and morbidity that plagued large parts of the region during the early 1990s and then developed into grave public health crises in what became known as the ‘mortality belt’ countries of Belarus, Estonia, Latvia, Lithuania, Moldova, Russia and Ukraine. These countries exhibited exceptionally high rates of external cause and cardiovascular-related deaths, which responded rapidly to fluctuating economic fortunes and were the cause of millions of excess deaths during the 1990s, particularly among males. As economic recovery advanced in the 2000s, a pattern of divergence within the region itself set in. Some countries are now converging on Western health standards, while others—notably Russia, Ukraine and Belarus—remain closer to those of the less developed world, despite their more advanced industrial and social welfare heritage. This chapter argues that in these countries while material well-being, investment in public health care, and progressive social policies are important, these—and economic development more generally—also interact with specific cultural, historical and institutional factors that shape the outcomes we observe and that provide important lessons for comparative economics.

This chapter charts the evolution of life satisfaction in former communist or socialist countries of central and eastern Europe and the former Soviet Union during the transition period. In the early years of transition, countries in this region typically clustered near the bottom of global happiness rankings. Over time, this “happiness gap” with other regions has steadily closed, once one allows for differences in income. However, a raw (unadjusted) happiness gap still remains between transition countries and advanced OECD members. Recent research points to a link between life satisfaction and some of the qualities that are needed for successful economies, such as good governance, environmentally friendly policies and measures to promote the inclusion of disadvantaged groups.

China has not experienced subjective well-being prosperity since 1990 despite its unprecedented economic growth in the period. This chapter summarizes a few prior studies of subjective well-being trends in urban China since 1990 and expands on rural well-being in 2000s when data are available. The urban well-being has substantially declined since 1990 with a mild recovery starting in the early 2000s. The rural well-being, consistent with urban, has been climbing up in the 2000s. Both macro- and micro-level data corroborate that material wealth fails to ensure urban subjective well-being over time and factors such as labor market strength, social safety net generosity, and social comparisons are more important in determining the well-being. Suggestive evidence endorses a similar story for rural well-being in China.

This chapter elaborates the economics of China’s “premature ageing” fears and China’s ensuing long-run economic demography transition strategy. Thereafter it draws attention to very recent economic demography trends, including that since the late twentieth century—led by Slovenia among transition economies—countries have tended to get rich after getting “old” instead of when “young”. Although the relationship between economics and demography is more complex than was assumed in 1980s China, nonetheless the long-run economic demography transition strategy that China evolved forms a cogent reference for all countries, transition economies especially.

This chapter reviews the dynamics of economic inequality in the region from the early 1990s until today, distinguishing between actual and perceived inequality dynamics. It then looks at whether inequality matters for the well-being of people, and for their policy preferences. The evidence reviewed shows that the early 1990s saw a sharp increase in inequality, although reliable data from that period is patchy. Over the past 2 decades, on the other hand, income inequality has been declining in the majority of transition economies. These dynamics in observed inequality are somewhat at odds with perceptions of inequality being relatively high, and the chapter reviews some of the possible drivers of the discrepancy, with a focus on inequality of opportunity and considerations of fairness.

Studies on populism in Latin America discussed dysfunctional economic policies resulting in crises. Recently, populists are more pragmatic. Populism is a political strategy based on distributing economic privileges creating a stable clientelistic base, and facilitating authoritarian entrenchment. However, this perspective, based on interests, needs to be supplemented with focus on ideas. While, support for populism in Southern Europe may be explained by weak economic performance coupled with features of income distribution, this does not explain in full the rise of populism in Central Eastern Europe. Qualitative comparative analysis suggests that adding to economic factors, a combination of Communist heritage, and a branch of Catholicism that unlike that in the West is not associated with support for human rights, explains cases of populism in the region.

Recent literature suggests that emigration can affect political and institutional outcomes (voting in elections, government accountability, voting for pro-democratic parties, prevalence of democracy, involvement in and tolerance of corrupt exchanges etc.) in the migrants’ countries of origin. This chapter outlines the conceptual channels through which emigration may affect institutional quality back home, highlighting Hirschman’s model of ‘Exit and Voice’, Levitt’s ‘Social Remittances’ hypothesis, and explanations related to the receipt of monetary remittances. It then reviews the growing empirical literature on the question. A common finding emerging from empirical analyses is that migrants going to countries with better governance are more likely to have a positive effect on the institutional quality back home. The chapter concludes by identifying gaps and suggesting directions for future research.

In this chapter, we propose to complement the public choice theory by incorporating insights from new institutionalism and the tax morale literature. More specifically, we show the relation between concepts like trust, social capital, solidarity, and reputation. By focusing on “trust-based political exchange”, we argue that tax evasion is related to the degree to which citizens trust the government to be honest and to provide services promised, and the degree to which they believe their fellow citizens pay their taxes. This is tested using two hypotheses, relating individual tax evasion to the extent to which citizens support the government and believe it is not corrupt and to which they believe others are paying taxes, respectively. The empirical data support the theoretical hypotheses.

This chapter reviews the literature on the interaction of formal and informal institutions and undertakes empirical tests for the validity of claims about the substitutive role of informal institutions. We address two questions: ‘what works when the formal institutions do not?’ and ‘to what extent do formal institutions constitute real constraints in South East European societies, characterised by strong hold of personalised trust and reliance on personal connections.’ To answer these questions, we analyse survey data from eight countries of South East Europe (SEE). When formal rules fail to be effective, social norms of reliance on ‘trusted people and connections’ predominate as a default option, alongside the complexity of factors surrounding the workings of informal networks that channel and enable such interactions.

From a comparative economics perspective, entrepreneurship is a property of both individuals and, also, countries and their innovation systems. Based on this, the chapter explores the issue of entrepreneurial propensities of different types of capitalist economies. We discuss three analytical approaches which are relevant for exploring the relationship between Varieties of Capitalism and entrepreneurship. We than develop a conceptual approach to explore institutional varieties of capitalism from an entrepreneurial perspective. Our framework builds on the idea of ‘institutional varieties of entrepreneurial opportunities’ (EO) and its three components of technology, market and organizational regime. The key idea is that each opportunity component of entrepreneurial regime (ER) can be generated in different institutional constellations.

We propose that it is an important ongoing research agenda to devise a new classification of economic systems based on empirical observation rather than abstract reasoning, and then subject this to the test of empirical validity by exploring whether this taxonomy explains observed behaviour. However, we do not ourselves yet attempt a new classification of economic systems; rather, we draw on the Varieties of Institutional Systems configuration (Fainshmidt, Judge, Aguilera and Smith, 2018) as the basis for our empirical work. We ask whether, holding country-specific institutional factors, sector-specific technological characteristics and ownership-specific firm-level attributes constant, enterprise performance is contingent on the configuration. We test this idea on the World Bank Enterprise Survey of 30,000 firms in more than 57 countries between 2006 and 2016, using a production function methodology. Our proposition that taxonomic systems matter is supported by the evidence. We find that in these understudied economies, systems based on both free market logic and state capitalism achieve equivalent firm-level performance, while systems allowing rent-seeking and cronyism are less efficient. Thus, this new approach allows for system equivalence (equifinality) as well as system superiority.

Institutional complementarities help to explain how interdependent institutions not only account for the institutional diversity that can be observed across and within socio-economic systems, but also affect economic performance. This chapter presents the results of a bibliometric review of the journal literature that looks at institutional complementarities in comparative capitalism. Conducted on 177 journal articles published during the period 2000–2019, the study aims to map this field of inquiry through a comprehensive assessment of the research themes covered and the methods used, as well as the key authors and the main outlets in which the discussion takes place. The chapter offers insights into the evolution of the field that may help scholars working in this area of inquiry shape future research priorities and dissemination strategies.

This chapter reviews a number of issues of measurement and methodology that arise in comparative economics. There is a view in economics that the most interesting research in social science is about questions of cause and effect. However, identifying causal relationships poses major difficulties, since the just-identifying restrictions required are non-testable. Given these difficulties, descriptive statistics are not only a pre-requisite for identification of causal relationships but valuable in their own right. The comparative dimension also helps in constructing data-driven counterfactuals such as those produced by the synthetic control method and the panel data approach for evaluating the effect of major systemic changes. This chapter concludes on the benefits of methodological pluralism.

This chapter concludes the Handbook of Comparative Economics by revisiting the chapters collected in this edited book and by articulating the links that exist between them. We discuss what we have learned from each of these contributions, and how, together, they contribute to defining what comparative economics is today. We, in particular, emphasize the opening up of the field to a variety of cognate disciplines and a relative effort to incorporate their key contributions, and we discuss some of the ways in which new issues are tackled and new methods are used to tackle them. We conclude on the continued importance of comparative analysis and its relevance to understanding the important issues of the day.