Development and Poverty Reduction: Do Institutions Matter? A Study on the Impact of Local Institutions in Rural India

The paper examines the impact of local institutions on development and poverty in the rural areas of India. Recent research on the role of institutions on the path of economic development indicates the importance of both “macro” and “micro” institutions including local institutions. The study finds a large number of both formal and informal local institutions in the surveyed villages, and a substantial degree of interaction of the households with the institutions. These include both formal institutions such as service cooperatives and dairy cooperatives, as well as informal institutions such as savings groups, community associations and labour groups. The study finds that apart from the standard factors included such as land, capital and labour, the presence and membership in local institutions plays a significant role in explaining the variation in household incomes and gain in capital assets over time. Savings/ micro-credit groups, and dairy cooperatives are found to be particularly important. Further, membership in these institutions is not found to be related to high asset levels or high caste – it is often inversely so. This indicates a stronger developmental role. Recorded opinions of the households supports the findings on the impact and beneficial role of local institutions. The study confirms that institutions do matter, and that local institutions can and do make a significant contribution in helping development in the rural areas, especially so for the lower income groups.