Institutions and Development

Institutions and Development

Advances in New Institutional Analysis series

Mary M. Shirley

A landmark contribution to our understanding of economic development. This significant book argues that fundamental changes in deeply rooted institutions do not happen because of outsiders’ money, advice, pressures, or even physical force; which explains why foreign aid has not, and can not, improve institutions. The impetus for changing institutions must come from within a society, and the author shows how groups of local scholars contribute to institutional change and development when the political opportunity presents itself.

Chapter 4: Can Foreign Aid Promote Development?

Mary M. Shirley

Subjects: development studies, development studies, economics and finance, development economics, institutional economics


The preceding chapters described how institutions emerged to support increasingly open access to economic and political activity and allowed the specialization and innovation that were critical to the evolution of today’s wealthy, developed countries. These crucial institutions are weak or missing in today’s underdeveloped countries. Instead, poor societies are characterized by high transaction costs, corrupt and inefficient bureaucracies, weak enforcement of laws, lax protection of property rights, and the absence of mechanisms to hold bureaucrats and politicians accountable for their actions. Access to economic opportunities, rule of law, and protection of property and persons are privileges available only to elites. Can foreign aid change these damaging circumstances and help nurture the institutions that promote development? Is it fair to ask whether foreign aid can promote development? Much aid is dedicated to reducing the immediate misery of people in poverty, not to development. But improving the lot of direct beneficiaries by distributing food, shelter, health care, or money is not the only mission of aidgiving agencies. Aid organizations are also dedicated to the proposition that underdevelopment can be eliminated and poverty eradicated. The World Bank mission statement is emblematic: “Our dream is a world free of poverty.” Increasingly aid agencies also recognize that development requires improved institutions, as these quotes show: ● ● “Addressing the challenge of building effective institutions is critical to the Bank’s mission of fighting poverty.” (World Bank 2002, p. iii) “Sustainable and equitable development requires a democratic, modern and efficient state that promotes economic growth,...

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