A ‘ New Institutional Economics ’ Perspective on Market Augmenting Government

The discussion below evolved out of my role as rapporteur for the conference, and is based on the papers presented at the conference not on their revised versions. 2 Interestingly, the final version of the paper, Clague,et.al.(1999), is much less focused on the first two issues noted below. Just as many others in this conference, my initial encounter with the notion of market augmenting government arose through the work of Mancur Olson. Upon seeing an early version (1994) of his paper with Clague, Keefer and Knack on Contract Intensive Money 2 , several elements of the concept present in that paper suggested themselves as insightful ways to look at the world. First, the paper argues that there are two types of markets-those where transactions are or tend to be self-enforcing, which are illustrated by spot markets, and those where they are not, which are illustrated by future-oriented markets. Second, the paper also suggests that the role of government in both types of markets is different. In the former, governments provide law and order services and money as a reliable medium of exchange services; in the latter, they must provide, in addition, contract enforcement services. Third, the paper stresses that most markets in modern economies are future-oriented and that a failure to provide contract enforcement services prevents development. Finally, it goes on to propose contract intensive money (CIM) ,or the ratio of demand and time deposits to the broad money supply (M2), as a measure of the effectiveness of governments in providing contract enforcement services and to test its explanatory power in various ways. The second element of this paper provides a narrow and descriptive view of what we are presently calling market augmenting government services. Earlier work by North (1990) provided a useful characterization of markets into traditional and modern and emphasized the need for an impartial judiciary in the latter type. Nevertheless,