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 5: Can we Measure Institutions and Institutional Change?

Mary M. Shirley


Measuring institutions turns out to be far more difficult than it sounds. Economists have put considerable effort into defining and testing institutional variables for cross-country growth regressions, but far less effort has gone into measuring institutions in specific countries. Specificity is crucial because, as North et al. (forthcoming) argue, the same institutions work very differently in limited access and open access societies. I describe this problem for democracies later in this chapter. Because they lack specificity, few current institutional measures are what Steve Knack calls “actionable,” that is, able to help researchers analyze the causal effects of specific institutions, help citizens demand better institutions and hold leaders accountable, help reformers design successful and sustainable improvements in institutions, and help aid-givers judge when countries are able to use aid more effectively (Knack 2006). In this chapter I first consider the evidence that institutions are correlated with growth and how this literature measures institutions. I next discuss specific problems of measuring democracy. If institutions matter for growth then democracy should matter, since democracy represents a prime subset of institutions. Yet it has proved impossible to find a clear relationship between democracy and long-run growth, probably because we cannot measure institutions adequately. Despite such weaknesses, institutional indicators are widely used by aid agencies. The previous chapter concluded that aid can neither improve nor avoid harmful institutions, but at least in theory aid could usefully assist countries that are already improving their...

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