Chapter 2: Institutions for High-Quality Growth: What They Are and How to Acquire Them
* Dani Rodrik Sakenn pe prie dan sa fason (Everyone can pray as he likes.) Mauritian folk wisdom1 INTRODUCTION This chapter opens with a discussion of the types of institutions that allow markets to perform adequately. While we can identify in broad terms what these are, there is no unique mapping between markets and the non-market institutions that underpin them. The chapter emphasises the importance of ‘local knowledge’, and argues that a strategy of institution building must not over-emphasise best-practice ‘blueprints’ at the expense of experimentation. Participatory political systems are the most eﬀective ones for processing and aggregating local knowledge. Democracy is a meta-institution for building good institutions. A range of evidence indicates that participatory democracies enable higher-quality growth. The comparative experience with economic growth over the last few decades has taught us a number of important lessons. One of the more important of these is the importance of private initiative and incentives. All instances of successful development are ultimately the collective result of individual decisions by entrepreneurs to invest in risky new ventures and try out new things. The good news here is that we have found homo economicus to be alive and well in the tropics and other poor lands. The idea of ‘elasticity pessimism’ – the notion that the private sectors in developing countries would fail to respond quickly to favourable price and other incentives – has been put to rest by the accumulating evidence. We ﬁnd time and again that investment decisions, agricultural production, or exports turn out...
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