The non-aligned states: An analysis of institutional formality, economic confidence, and their impact on economic diversification

Assessing North's methodological appraisal that institutions cannot be felt or measured, (North, 1990: 107) this dissertation defines and operationalizes "effective" institutions. The model provided specifies the relationship between variations in the formality of institutions, variations in economic confidence, and empirically tests their impact upon economic diversification in the Third World. Institutional formality refers to the degree to which authoritative political structures (institutions) are dedicated to disabling elite discretion (i.e., formality) regarding the protection of private property rights and contract rights. Economic confidence refers to the general perception that the state credibly protects private property and enforces contracts. It is this perception that most structures the costs or benefits surrounding long term, complex economic activity. It is the prevalence of complex, irrevocable, and impersonal forms of economic exchange that distinguishes the Developed from the Underdeveloped World. Economic diversification captures the critical element of economic development: It refers to the proportion of a country's economy comprised of complex production, namely manufactures and manufactures as a percentage of exports.;Institutions structure the constraints and opportunities that promote complex contracting. This model tests the assumption that the formalization of institutions and increased economic confidence lead to economic diversification. This two equation simultaneous system generates two principal hypotheses. First, the greater the institutional formality the greater is the economic confidence. Second, the greater the perceived economic confidence, the greater will be economic diversification.;The data for the empirical analysis are pooled cross-section time-series and comprised of observations from thirty-eight countries from 1984-1992. (N = 342). As this model is a two equation simultaneous equation system, the quantitative technique used is Two-Stage Least Squares estimation. The results of the quantitative tests on these data demonstrate that there is strong and significant empirical evidence supporting the theoretical relationships specified by this model.