“The institutional bases” of economic development of the “Third World countries”


ПОД- СЕКЦИЯ 6. Механизмы регулирования экономики.


Arman Martirosyan

Candidate of Economic Science, Assistant of Professor of the Chair of Economic Theory of the Department of Economics of the Yerevan State University, Yerevan, Armenia.


Margarita Yeghiazaryan

Candidate of Economic Science, Assistant of Professor of the Chair of Economic Theory of the Department of Economics of the Yerevan State University, Yerevan, Armenia.




“The institutional bases” of economic development of the “Third World countries”


     In the world practice market economy is considered to be the best “model” for the “Third World” countries[1] and particularly for economic development as well as for effective use of resources. It is evident that it differs from capitalistic economic system with its ideological principles. Capitalistic economy was formed on the basis of the liberal thoughts of founders of classical political economy. It was accepted that the economy is a self- regulatory system. So there is no need for state intervention.  Unlike the above, market economy is based on Keynes theory according to which the economy is no longer a self- regulatory system and the state’s “visible hand” is needed to control that system. Periodically recurring economic crises, which were impossible to abolish without state intervention and in the case of self regulation it would be time consuming, served as a reason of the change of ideas, principles and ideology. If in the West European countries, in the USA, in Canada, in Japan capitalistic economic system had reached certain degree of evolution and historical, public, economic and other conditions contributed to the formation of market economy; in a number of developing countries (particularly some African, Asian countries) the circumstances were different. The influence of traditional factors was actual; the state had an important role in both public and in economic relations. From the formal point of view public and economic relations were regulated by the established legislation though at the same time relations were mainly based on the charismatic characteristics of the leader and on some traditional factors. In such countries the above mentioned was used in favor of developing market economy. International organizations had financed programs for economic reformations. In this way the international society wants to make the evolution process in developing countries foreseeable and regulated. But we should take into consideration that the organization of economy, democracy manifestation and the principles of market economy differ in societies with Buddhism, Christian and Islamic principles [1]. It is notified that in the economic structures of A. Toynbee, G. Gelbreyt and other institutionalists the society is not observed as a homogenous “mass” and the role of non-economic factors in the economic life is considered to be very important. Let’s remember Veblen Effect, the creative “elite” in Toynbee’s economy, the role of religion factors and the significance of other institutions. In the scope of these discussions the “civilization” approach to social, economic developments is important [2, p.12-14]. Although revolution processes in the Islamic world  seem to prove the contrary in the sense that at this stage of development an idea is spread  that the final aim in these “provoked” actions is the establishment of a market economy characterizing democracy “within a rational pro-Islamic perception” like in the Soviet Union. Anyway even in this case we think that the role of the above mentioned characteristics and the institutes should not be underestimated though it is evident that the localization of the western experience definitely will not take place.

     In the process of choosing directions of economic development besides savings and investments, wages, solvency and other factors according Classic and Keynes approach,  the role of  traditions and customs, system of values and expectations,  written and  unwritten laws,  influence of  other institutes and should also be taken into consideration.  

     From this point of view the institutional economic approaches referring to the economic development by the scientist, Stockholm University professor and UN expert G. Myrdal are notable. “Asian Drama: Study of Poverty of the Nations” a three volume book published by G. Myrdal 1968, New York is very interesting. Asian countries such as India, Burma, Thailand, Malaysia, Indonesia and other countries are the subject of study [3]. By studying the experience of economic development in Third Countries he concludes that “Western recipes” of recovery are not so efficient. It seemed that they were managed attract investments to the main fields of economy but excessive growth in various economic sectors and social stratification of the society were noticed. It was more difficult to reconstruct the whole economic system, to ensure investment in the whole economy, to exclude bribes, the growing trends of which become deeper.  In these relations the reflection of the Asian factors is important and should be taken into consideration. Myrdal considered the fact that for example the largest cattle population is in India but neither meat nor milk are used, and this takes place in the country, where poverty level is high on the global scale. Besides there are more than a ten official languages in the country, there is no national and public homogeneity. This phenomenon is not a result of modern public and economic relations but it is connected with norms, written and unwritten laws coming through ages. Historically the realization of social functions is linked to some groups since classes appeared. The right to property was derivative in society members and groups functions [4, p.12-14]. The existence of the property was not an initial circumstance for the peace of soul or for the self- consciousness of the society. Modesty, noble lifestyle as well as how a person became an owner was important. It was important to maintain good relations with neighbors [5]. It is also notable that religious beliefs are almost the same. For example along with development of public relations some changes have also taken place in Catholic Church which cannot be said for the above observed “sector“. At last “the role“ and intervention of the State in public, political and economic spheres are essential. This approach also comes since ancient times. Even in the Ancient World the state ran and organized the works of irrigation, construction of pyramid, temples and other institutions. It had a great role in formation of an atmosphere of stability in the country and contribution to the economic development. The state was the big owner of the land. However the land was belonged also to private and to “public” owners [2, p.16-27].  In these circumstances the “extended role” of the state in economic, public life is important, but for implementation of its functions “strong, effective, and rich” finance institutions should exist. In such countries the flows of financial resources through state “channels” very often are provided by international organizations which are interested in financing programs that in line with the market economy. Sometimes it causes the emergence of the shadow economy as far as the officials artificially establish such rules, bureaucratic norms which do not correspond to the accepted principles in the country. Or workplaces are created, there is an excess supply of labor but there are no employees. In this case the correspondence of workplaces and concrete working possibilities are not taken into consideration. So mutually exclusive goals are created and it prevents the economic progress. In this level the economic progress and development are perceived as the guarantee of social equality. In this respect the international community witnesses “Islamic socialism” and “Buddha socialism” of Burma [6, p.181-211].

     In the context of discussed issues the neo-institutional approaches of Peruvian scientist E. De Soto could be notable. By studying the conditions of formation and development of the market economy in Peru for 1940-1981 he recorded high tendency of urbanization (35-65%) which was explained through transition from the agrarian economy to the industrial economy. If in West Europe the urbanization and emergence of cities were accompanied with creation new jobs, in present developing countries this tendency is not evident. The situation is getting worse in the result of migration (external and internal). Certainly the next stage of the development of industrial economy is the post-industrial phenomena in which we can observe tendencies of “de-urbanization” [7, p 400-490]. Particularly the population is moving to scientific and educational centers from the industrial centers [8, p. 78-81].  At this level of analysis the main spheres of the economy- house building, trade and transportations [9] are distinguished. Changing trends and transition tendencies are significantly visible in them.

     Suppose the urbanization is characterized by pace of urban expansion, so directly or indirectly people are involved in this process, enlarge their flats, and build new ones; tendencies of construction of roads and other facilities are noticed. In the course of time recurrently even illegal buildings become legalized. From the first sight negative phenomena of formation and development of shadow economy are evident, though the opinion of Peruvian economist and Director of Freedom and Democracy Institute De Soto differs referring to this problem. Anyway he also finds positive tendencies as far as for many migrants and simply for residents more or less normal housing and working conditions are formed. Previously they could not have such possibilities. By expansion of illegal activity and land “seizure” these entities could provide further progress both for them and for others. New jobs are created, tax payments are made. All of this contributes to the acceleration and increase in commodity turnover. It is evident that the chain of these actions depends on some shadow economic activity.

     The next important sphere is the trade and economic relations in which the elements of shadow activities are also evident. According to A. De Soto the shadow turnover of that sphere in Peru is about 322 million dollars yearly [10, p.43]. The entities in this sphere organize their job with difficulty. They have to install and remove their pavilions every day to organize street or other trade activity. In reality these entities show enough rationality. By collecting and analyzing the information they decide where to concentrate their activity and provide all necessary conditions for this. Small markets are arranged, direct or indirect agreements are concluded with officials of different levels. This kind of activity is rational because decrease of expenses occurs. Otherwise it will be required much time and expenses to overcome legal and generally institutional obstacles and they should pay for high transaction expenses. Within these institutions tendencies of unique labor division are evident. Such relations are regulated by written or non-written laws and rules. Such institutions can be mutually beneficial for a number of society members such as their sponsors – the people who use products and services of those institutions. Moreover prices there can be lower and turnover can be greater than in the legally established markets as far as taxes and other payments are of the smaller value. According to different calculations there are millions of dollars in turnover.

As a conclusion, we can insist that during formation and development market economy above mentioned institutional factors necessarily should be considered, which will promote efficiency of (self)regulation of economic processes and welfare of nations.  



  1. Toynbee, A Study of History, Vol. 12, London, 1961
  2. A.R.Martirosyan, The history of Economic Thought, Educational materials, Yerevan 2005.
  3. G. Myrdal, Asian Drama: An Inquiry into the Poverty of Nations. New York, 1968.
  4. The History of Economic Thought, Educational handbook, Editor G.A.Gharibyan, Authors: G.S. Galstyan, A.R. Martirostyan, K.R. Avetisyan, M.R. Yeghiazaryan, A.H. Hakobdzanyan, H.G. Margaryan, A.R. Nersisyan, Yerevan 2009.
  5. L. S. Vasilev, Genesis problems of the Chinese thought
  6. G.Myrdal, Modern problems of “the Third World”. Moscow, 1972.
  7. M. Gillis, D. Perkins, M. Roemer, D. Snodgrass, Economics of Development. 4 – th Edition, New York, 1996.
  8. R.M. Nureev, Development Economics: Models of market economy formation and modernization, Moscow 2008.
  9. E. De Soto, Other way. The Mystery of Capital:  Why capitalism Triumphs in the West and Fails Everywhere Else”, “Olimp Business” Moscow, 2004.
  10.  E. De Soto, Other way. The invisible revolution in the Third World, “Catallaxy”, 1995, Volume 3. Illegal trade.



[1]  While defining the third world countries or developing countries we’ll distinguish the following characteristics: the lack or scarcity of the modern means of production; high level of unemployment, high level of employment in agriculture; the absolute value and the per capita value of GDP; life duration (suppose in Germany the life duration for men is 77 years, and that for women is 82, correspondingly in Cambodia it is 57.3,61.9, in Afghanistan it is 43.9, 43.8, in Mozambique it is 41.7, 42.4 and so on). http://ru.wikipedia.org/, the level of democratic reforms and the legislation. In this case we will choose those developing countries in which the per capita income does not exceed 3975 US dollars (World Bank source of classification principles http://data.worldbank.org/about/country-classifications). On the basis of institutional characteristics we’ll distinguish countries of the Asian continent, the developments in which differ from the scene of the classic ones. Moreover the choice of a unique model for development in some cases brings to “uneven achievements”.