The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich

By Frederic S. Mishkin | Go to book overview

Two
How Poor Countries Can Get Rich:
Strengthening Property Rights
and the Financial System

In America and many other cultures, we are taught that the key to success is hard work. Yet, when we look at many less-developed countries, we see people who work extremely hard for long hours. Their wages are low and so they remain poor, and their countries as a whole remain poor. If hard work does not make a country rich, what does?

The right institutions make a country rich. Nobel laureate Douglass North defines institutions as the “rules of the game in a society, or, more formally, humanly devised constraints that shape human intervention.”1 The institutions that are most crucial to economic growth enable a country to allocate capital to its most productive uses. These institutions establish and perpetuate strong property rights, an effective legal system, a stable financial system, and sound government regulation of the financial sector.2


Strong Property Rights and an Effective Legal System

A country can have a successful economy only if it has strong property rights, that is, if it protects a person's property from expropriation by the government or other parties. Property rights are the most fundamental institution required for economic growth. Without them, people will have little incentive to make investments because the fruits of their investments (the returns) can be easily taken away. Weak property rights thus lead to low investment, and without investment an economy cannot grow.

-19-

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