Arrunada Seminar: Nuno Garoupa – From the Washington Consensus to Arruñada’s Institutional Foundations of Impersonal Exchange

7 January 2013 at 10:12 am 3 comments

| Nuno Garoupa |

From the Washington Consensus to Arruñada’s Institutional Foundations of Impersonal Exchange

Since the Washington Consensus and the deregulation movement took place thirty years ago, administrative simplification and reduction of bureaucracy has been on the agenda of policymakers. In fact, economists tended to agree that a strongly market-based approach requires an effective public administration imposing light burdens on economic players (thus creating a business-friendly economic environment). This view was later popularized by De Soto’s The Other Path in 1989 which inspired the work of many international organizations and the (by now) famous Doing Business Project in the late 1990s. Simplification, cutting red tape, one-stop bureaucratic agencies, reduction of licenses and procedures, de-formalizing business activities have become popular slogans with many governments around the world.

The important work of Benito Arruñada takes a fresh look at these issues. We all know that the Washington Consensus promotes deregulation, but it also defends strong legal security for property rights (understood in a nontechnical way, that is, both rights in rem and rights in personam) in the tradition of Coase, Williamson and North. In his book, Arruñada convincingly shows that certain simplifications of procedures and some forms of de-formalization actually hurt important safeguards. In other words, there could be an intrinsic and convoluted trade-off between the popularized programs of administrative simplification and adequate legal certainty. Eliminating certain formalisms might save some apparent costs in the immediate, but augment considerably transaction costs in time, therefore damaging the proper functioning of markets.

Economists have a tendency to see formalism as an example of capture by private interests, thus promoting rents, increasing transaction costs and, as a consequence, damaging business activity (including business creation and investment) and economic growth. In the context of contractual registries, Arruñada explains that some formalism responds to efficient institutional design precisely to reduce transaction costs and facilitate impersonal exchange. More importantly, in the absence of such formalism, efficient transactions might not take place and market failures could be more acute.

My understanding of the policy implications from Arruñada’s work is simple. First, not all simplification is good, not all formalism is bad. A degree of formalism is important to promote development and trade in a globalized world of impersonal exchange. Second, when de-formalizing, policymakers should consider the extent to which they are eliminating unnecessary procedures (those in place to satisfy mainly a few particular private interests) and not institutions governing property rights protection. Finally, the appropriate formalization in the context of contractual registries (for property as well as for business transactions) responds to a set of determinants identified by Arruñada that could vary across jurisdictions. Concerning de-formalizing, there is no such thing as a “one-size-fits-all” policy.

Professor Nuno Garoupa. H. Ross and Helen Workman Research Scholar. Co-Director, Illinois Program on Law, Behavior and Social Science

Entry filed under: Ephemera. Tags: .

Arrunada Seminar: Amnon Lehavi – Economics, Property Rights, and Third Parties Arrunada Seminar: Giorgio Zanarone – The Contracts behind Contracting

3 Comments Add your own

  • 1. Recomendaciones « intelib  |  7 January 2013 at 10:22 am

    [...] Arrunada Seminar: Nuno Garoupa [...]

  • 2. Benito Arruñada  |  19 January 2013 at 2:38 pm

    Thanks a lot, Nuno. I would like to point out a connection between theory and policy in this area. In particular, between (1) the “contractual” view of property rights in economics and (2) the biases and errors committed by measurement initiatives in the spirit of the Washington consensus, such as Doing Business and their subsequent simplification policies.
    In essence, economics has been assuming that “property” (understood in a general sense, including not only real property but business and corporate contracting) is a purely “contractual” phenomenon. More precisely: it assumes that markets are composed by single exchanges (two parties, one contract). Instead, most exchanges in modern economies are sequential and, therefore, involve at least three parties and two contracts. Crucially, sequential exchange often requires more sophisticated institutions.

    Efforts to measure and reform these institutions, including the ones that Nuno mentions, were bound to fail because—given the contractual focus of economics—they often lacked an understanding of what is the function of the institutions they were purporting to reform. Understandably, they often ended up confusing priorities, as it happens when administrative simplification leads to GIGO policies, speeding up the paperwork of unreliable registries that are not trusted by judges.

  • 3. web design  |  28 February 2013 at 1:55 pm

    My relatives every time say that I am wasting my time here at net, but I know I am getting experience all the time by reading thes nice articles or reviews.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Authors

Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts

Guests

Former Guests | posts

Networking

Recent Posts

Categories

Feeds

Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).

Follow

Get every new post delivered to your Inbox.

Join 219 other followers