Universal Dependencies - English - GUM

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2. New Institutional Economics: Theoretical Foundations and Application to the Argentine Case

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2.1. New Institutional Economics, Property Rights, and Credibility of the State’s Commitment

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Throughout the second half of the 20th century, we have witnessed the return of institutions to economic analysis.

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The awarding of the Nobel Prize in Economics to its main representatives (Douglass North, Ronald Coase, Oliver Williamson, and Elinor Ostrom) has contributed to its greater recognition.

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The two main notions of this economic approach are the concepts of transaction costs and institutions, analyzed by Coase and North, respectively.

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Coase [13,14] argues that economic transactions involve costs, and where these costs outweigh the gains, the exchange will not take place.

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For its part, North defined the institutions as the “rules of the game”: they determine the structure of the economy, establish incentives for economic behavior, and affect social interaction [12].

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Thus, institutions also determine the level of uncertainty to which individuals are subject, stimulating or discouraging transactions.

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A viable economy requires an institutional structure that reduces existing uncertainty and guarantees property rights.

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In other words, it is critical that economic agents believe that their property rights will not be taken away by other public or private actors [15].

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Achieving these objectives requires the creation of inclusive institutions, which guarantee the right to private property, incorporate an impartial legal system, and promote a society based on equality of conditions [16].

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Of course, the state takes a lead role in promoting this type of institution.

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The state must protect property rights, provide public services, and ensure a sound judiciary.

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It is responsible also for imposing order and promoting a climate of cooperation among agents, penalizing all violators of contracts [17].

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The path to a prosperous society is not an easy one.

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It is society that establishes, through political processes, the type of economic institutions that are adopted.

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If there are disagreements about the policies to be implemented, then the group that wins the political game will make the final decision.

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On the one hand, a society that adopts policies promoting inclusive political institutions will develop pluralist and centralized institutions.

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Inclusive institutions guarantee the right to private property, to an impartial legal system and promote a society based on equal conditions.

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These institutions benefit not only the elites, but society as a whole.

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The consequences of implementing inclusive institutions are reflected in increased activity, productivity, and economic growth.

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On the other hand, if extractive political institutions are implemented, then power will be consolidated within a small number of groups.

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In governments with extractive policies, the group in power usually extracts resources from the rest of the population for its own enrichment and well-being.

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Another feature of this type of government is that powerful interest groups oppose increased pluralism because it typically results in the loss of their privileges.

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Those in power have little interest in their power devolving to a greater number of agents, as would occur under political institutions that were more pluralistic [16].

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It follows that the role of the state is essential.

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The institutional structure of a state and its constitution are responsible for restricting predatory action—even by the state itself—and for creating rules that benefit the community [18].

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Moreover, compliance mechanisms must reflect ex ante and ex post standards [12].

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But what happens when property rights are not respected?

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What if it is the state itself that exhibits predatory behavior?

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All these questions have a place in this case analysis.

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The expropriation of YPF is a case in which the Argentine State presents predatory behavior, encouraged by an extractive institutional framework.

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If the decisions taken by the state are not based on the general interest and, in their execution, do not respect property rights, the number of transactions will be reduced, which will result in unfavorable economic performance.

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In a scenario with insecure property rights, asymmetric information, and a judicial system that acts as a lax enforcement mechanism, as discussed in the following sections, the FDI is difficult to attract.

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2.2. Institutional Structure of the Argentine State

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In order to understand policymaking and its effects, one must have adequate knowledge of the focal country’s institutional framework.

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Most of Argentina’s governments have been of the predatory type.

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The country’s unequal economic growth originated in the colonial era and reflects how the Spanish metropolis influenced the establishment of extractive institutions [7].

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Argentine politics are therefore highly unstable.

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Achieving political order would require the government to limit its actions and guarantee the rights of citizens—neither of which has yet occurred in Argentina.