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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

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14050.

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Date of creation: Jun 2008
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Publication status: published as Dani Rodrik, 2008. "Second-Best Institutions," American Economic Review, American Economic Association, vol. 98(2), pages 100-104, May.
Handle: RePEc:nbr:nberwo:14050

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  1. Daron Acemoglu & Philippe Aghion & Fabrizio Zilibotti, 2006. "Distance to Frontier, Selection, and Economic Growth," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 37-74, 03.
  2. Andrei Shleifer & Simeon Djankov & Edward L. Glaeser & Rafael La Porta & Florencio Lopez de Silanes, 2003. "The New Comparative Economics," Yale School of Management Working Papers ysm355, Yale School of Management.
  3. Andres Velasco & Alejandro Neut, 2003. "Tough Policies, Incredible Policies?," NBER Working Papers 9932, National Bureau of Economic Research, Inc.
  4. 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.
  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. Hausmann, Ricardo & Rodrik, Dani, 2002. "Economic Development as Self-Discovery," Working Paper Series rwp02-023, Harvard University, John F. Kennedy School of Government.
  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. Hall, Peter A. & Soskice, David (ed.), 2001. "Varieties of Capitalism: The Institutional Foundations of Comparative Advantage," OUP Catalogue, Oxford University Press, number 9780199247752, Octomber.
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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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