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Second-Best Institutions

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  • Dani Rodrik

Abstract

The focus of policy reform in developing countries has moved from getting prices right to getting institutions right, and accordingly countries are increasingly being advised to move towards "best-practice" institutions. This paper argues that appropriate institutions for developing countries are instead "second-best" institutions - those that take into account context-specific market and government failures that cannot be removed in short order. Such institutions will often diverge greatly from best practice. The argument is illustrated using examples from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 2 (May)
Pages: 100-104

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:2:p:100-104

Note: DOI: 10.1257/aer.98.2.100
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References

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  1. Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self Discovery," CEPR Discussion Papers 3356, C.E.P.R. Discussion Papers.
  2. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2002. "Distance to Frontier, Selection, and Economic Growth," NBER Working Papers 9066, National Bureau of Economic Research, Inc.
  3. Simeon Djankov & Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2003. "The New Comparative Economics," Harvard Institute of Economic Research Working Papers 2002, Harvard - Institute of Economic Research.
  4. Hall, Peter A. & Soskice, David (ed.), 2001. "Varieties of Capitalism: The Institutional Foundations of Comparative Advantage," OUP Catalogue, Oxford University Press, number 9780199247752, September.
  5. Richard B. Freeman, 2000. "Single Peaked Vs. Diversified Capitalism: The Relation Between Economic Institutions and Outcomes," NBER Working Papers 7556, National Bureau of Economic Research, Inc.
  6. Marcel Fafchamps, 2004. "Market Institutions in Sub-Saharan Africa: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262062364, December.
  7. Klinger, Bailey & Lederman, Daniel, 2006. "Diversification, innovation, and imitation inside the Global Technological Frontier," Policy Research Working Paper Series 3872, The World Bank.
  8. Andres Velasco & Alejandro Neut, 2003. "Tough Policies, Incredible Policies?," NBER Working Papers 9932, National Bureau of Economic Research, Inc.
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Blog mentions

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  1. On the pitfalls of institutional reform in developing economies
    by Economic Logician in Economic Logic on 2008-07-11 15:34:00

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  1. > Schools of Economic Thought, Epistemology of Economics > Heterodox Approaches > Institutional Economics
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