Healing Sick Institutions

A small body of evidence and a large body of assertion — both bodies growing — support the vague idea that ‘institutions matter for economic development’. This affirmation is intelligible first for what it negates. Many economists, in their models if not in their advice, bracket out institutions. Standard macroeconomic models, for example, do not include changes to property rights or improvements in contract law. In the limiting economic simplification of perfect markets and perfect information, there is no role for firms as institutions. As Joan Robinson once joked, the job of the manager of a firm is to look up in the book of blueprints the correct page corresponding to current (and future) factor markets. But new research asserts that institutions are both approachable in economic terms and important in their effects on efficiency and equity. What is the evidence? There are no exact studies, in part because there is no exact model. Indeed, exactly what ‘institutions’ might mean is vague and unclear, and in sober moments adherents admit that there is as yet no accepted paradigm. But useful statistical evidence does exist. As shown in other chapters in this volume, some cross-country studies show significant relationships between economic growth and a variety of variables that might be labelled institutional: ‘economic rights’ (in some studies and specifications, political rights as well), ‘contract-intensive money,’ corruption, and a number of sociocultural indicators.1