How Do Informal & Formal Institutions Affect Economic Development in East Asia and West?

Abstract

This research explores how informal and formal institutions affect economic development differently in various East Asian country groups and West. Based on previous studies, we theorize that informal and formal institutions – social trust and protection of property rights – promote economic development in West, but hinder economic development in East Asia, due to different market mechanisms. In West, informal and formal institutions promote economic development by constraining government from acting on its whim, sustaining liberal market. On the contrary, such constraints may hamper economic development in East Asia, where government plays a central role sustaining market. Using two-way fixed effects panel data analysis from 1995 to 2010, our analysis confirms our expectation for East Asia. The result is robust after analysing similar country groups – East Asia and East Asian democracies. This research makes contribution to previous studies by empirically testing different market mechanisms for development in the two regions.