Pakistan Institute of Development Economics


A Tale of Two Markets and the Role of Prosperous Market-Augmenting Governments
Author: Sung-Kyu Lee

This paper aims to examine the role of market-augmenting government and the two general conditions for achieving economic prosperity. Markets exist ubiquitously, but the markets in rich countries are substantially different from those in poor countries. In rich countries, the markets are the main source of prosperity and thus are called prosperous markets. For a country to achieve rapid economic growth, the country should obtain gains not only from the mutually advantageous trades, but also from the rights-intensive, property rights-intensive or contract rights-intensive productions. The mutually advantageous trades and individual rights-intensive productions take place both in the government-contrived markets and in the rich countries. The countries having a market-augmenting government coined by Olson (2000) tend to grow most rapidly. A market-augmenting government should not only be ‘strong’ enough to guarantee secure and well-defined property rights and contract enforcement rights to the people, but also be ‘inhibited’ so as not to deprive or damage individual rights. The two general conditions to achieve economic prosperity are secure and well-defined individual rights, and the absence of any predation. These conditions are realised in countries with market-augmenting governments and rights-respecting democracies.



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