Institutions Matter, but Which Ones?

In the last two decades institutional economics of development has been enriched by historical and, more recently, quantitative analysis of the effects of the quality of institutions on the pace and pattern of economic development. Following the leadership of Douglass North, this literature has shown how important secure property rights are in encouraging investment and innovations, allowing for the investor and the innovator to reap the harvest of their efforts. There is, however, a general impression in the literature as it has developed since then that if one can get the rule of law that protects property rights (and preferably, the laws themselves are of the Anglo-Saxon type which are supposed to protect minority shareholders against insider abuse in the corporate sector), the market will take care of much of the rest. This preoccupation of the literature with the institution of security of property rights, often to the exclusion of other important institutions, severely limits our understanding of the development process. For example, historically the way the various coordinating institutions in a society function has made a big difference in development. In general, economies at early stages of development are beset with coordination failures of various kinds and alternative coordination mechanisms -the state, the market, the community organizations -all can play different roles, sometimes conflicting and sometimes complementary, in overcoming these coordination failures, and these remain important even if private property rights were to be made fully secure. Also, these roles change in various stages of development in highly context-specific and path-dependent ways. To proclaim the universal superiority of one coordination mechanism over another is naive, futile and a-historical.