Stranger than Fiction? Institutions and Economic Development.

Author:Chang, Ha-Joon
Position:UNU-WIDER Logo

Mainstream economists used to treat institutions as mere 'details' that gets in the way of good economics. Then from the mid-1990s, everyone, including the IMF and the World Bank, suddenly started to emphasize the role of institutions in economic development. There are a few reasons behind this rather dramatic change. First, the institution-free technocratic reform programmes of the 1980s have almost universally failed. Second, a number of devastating largescale financial crises in developing countries around the turn of the century have prompted debates on the need for reforming financial and other institutions in order to prevent and deal with such crises. Third, there have been increasing attempts by the developed countries to introduce 'global-standard' institutions to developing countries. Fourth, there have been some important theoretical developments in institutional economics--both orthodox and heterodox.

Stranger than Fiction?

Despite the heightened interests in institutions, there are still some important gaps in our understanding. First of all, we still do not know what institutions in exactly which forms are useful for economic development in which contexts. For example, everyone may agree that a 'good' property rights system is essential for economic development, but there is no agreement on what a 'good' property rights system is. Second, even when we can identify a particular institution as beneficial in a given context, we often do not know how we can build such institution.

A recent WIDER volume (1) argues that, in order to fill these intellectual gaps, we first need to develop new discourses on what may be called the 'technology of institution building'. For example, it is not enough to say that developing countries need better fiscal institutions. We need to be able to tell them how to build such institutions. Second, we need more case studies of institution building--historical and more recent. Real life experiences of institution building are often 'stranger than fiction'--that is, they are often more imaginative than what theoreticians have suggested on the basis of broad generalization and abstract reasoning.

Against 'Institutional Mono-tasking'

Institutions can, and do, serve multiple functions. Unfortunately, in the mainstream discourse, there has been a tendency to assign a single function to each institutional form, described as 'institutional monotasking'.

The failure to understand the functional multiplicity of...

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