Perspectives from New Institutional Economics
Edited by Claude Ménard
Chapter 10: Formal versus informal institutions in economic development
Philip Keefer and Mary M. Shirley INTRODUCTION The theory and recent cross-country evidence linking institutions and economic growth suggest that institutional development ought to be at the core of economic development policy. However, neither the academic literature nor development practitioners have so far been able to devise concrete guidelines on how countries can move from a situation of insecure property rights and arbitrary and inefﬁcient government policy making to an environment of security and predictability. The purpose of this chapter is quite narrow when measured against this signiﬁcant gap in our understanding of economic development. Our objective here is to review the theory and evidence that underlines the importance of this gap; to offer some quantiﬁcation of the links between more traditional economic policy reform and the institutional quality of countries; and to crystallize the dilemmas that confront policy makers who appreciate the need to embark on institutional reform. We review cross-country and case-study evidence demonstrating that good macroeconomic policy is not enough to trigger growth. Instead, countries that score better on cross-country measures of the security of contract and property rights, one measure of institutional development, derive a much stronger growth effect from good macroeconomic policies than do other countries. In fact, by some estimates countries with good institutional scores and weak macroeconomic policies have higher growth rates than countries with good macro policies and weak institutions. While the evidence is compelling that secure property and contract rights are key to development, the institutions that undergird...
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