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Second-Best Institutions

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  • Rodrik, Dani

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.

Suggested Citation

  • Rodrik, Dani, 2008. "Second-Best Institutions," CEPR Discussion Papers 6764, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6764
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    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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