Institutions and Development
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Institutions and Development

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.
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Chapter 3: Market-Supportive Institutions

Mary M. Shirley


To understand underdevelopment we must first understand development. Even though today’s poor countries will follow very different paths from industrializing Europe, European history is our main guide to the forces that shaped modern, open access states. Democracy, unbiased rule of law, largely unfettered access to information and ideas, and competitive market economies only emerged over the last 300 years, but they have roots deep in the past. A voluminous literature analyzes the roots of today’s modern, wealthy societies and I cannot do justice to it all. Scholars disagree about what Mokyr has called “the enduring riddle of the European miracle” (Mokyr 2002). I have focused on the explanations favored by institutional economists, especially Douglass North and Avner Greif. These authors give special emphasis to the influence of historically evolved beliefs, knowledge, norms, and rules on economic actors over time, an interpretation that is especially valuable for understanding the effects of ideas and institutions on development today. Even this subset of economic history is large and growing; I can only briefly survey this literature here. HOW DID MARKET-SUPPORTIVE INSTITUTIONS EMERGE? For thousands of years people were governed by “tribute-taking empires” such as the Chinese, Ottoman, Persian, or Roman empires (Tilly 1992, p. 21). Tribute-taking empires proved durable, but they never fostered the institutional innovations that led to modern, impersonal markets. The empires’ distant central governments provided order and some public goods, but they also engaged in frequent wars with external rivals and suppressed internal rebellions. These perpetual...

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