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This paper explores ‘new institutional economics’ theory in relation to markets and economic development. It argues for a conceptual framework which instead of looking at institutions primarily in terms of their contributions to making competitive markets work better, sees such markets as one form of institution fulfilling exchange and coordination functions in an economy. A key element in this is recognition of the importance of processes of change in non-standard market arrangements in economic development, and there are strong theoretical, practical and historical grounds for more consistent policy in this area.
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Introduction
In the last 15 years or so development economics has increasingly recognised the importance of institutions in economic behaviour (e.g. Nabli and Nugent, 1989, Harriss et al., 1995,Poulton et al., 1998). This has included micro-economic analysis of transaction costs and contractual arrangements (e.g. Binswanger and Rosenzweig, 1986; Stiglitz, 1986) and recognition of the importance of institutions in processes of economic growth (eg North, D.C., 1990). The most recent contribution to this is the 2001/2 World Development Report, entitled ‘Institutions for Markets’ (World Bank, 2002), arguably bringing institutions into mainstream development policy thinking. Welcome (and overdue) though this increasing analytical emphasis on institutions may be, we argue in this paper that it does not yet go far enough in its consideration of the role of institutions in development, and consequently, that policy prescriptions fail to address critical constraints to development. Unfortunately these shortcomings are most severe in poor rural areas where the challenges of poverty are greatest.
The paper is arranged in four sections. After this brief introduction we explore ‘new institutional economics’ theory in relation to markets and economic development, and argue for a conceptual framework which instead of looking at institutions primarily in terms of their contributions to making competitive markets work better, sees such markets as one form of institution fulfilling exchange and coordination functions in an economy. This leads to examination of the types of institutions that development policy should promote in different situations. The third section of the paper puts forward three different examples that illustrate the theory. We conclude with a brief discussion of policy implications
Footnote:
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Some of the ideas presented here have been developed under various activities funded by the Department for International Development (DFID) of the United Kingdom. However, the interpretations and conclusions expressed in this paper are entirely those of the authors and should not be attributed to DFID, which does not guarantee their accuracy and can accept no responsibility for any consequences of their use.
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Centre for Development and Poverty Reduction, Imperial College Wye, Wye, Ashford, Kent, TN25 5AH, UK.
http://www.wye.ic.ac.uk/AgEcon/ADU/index.html
Email: A.Dorward@ic.ac.uk
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