The Role of Institutions in Development

Abstract

Economists interpret “institutions” in at least two ways. Institutions can be the “rules of the game” (which provide the context —such as markets “in which actors make decisions), or they can be organizations (typically, systems of nonmarket relations). What is the role of public policy in influencing the rules of the game, and what is its role in public sector economic organizations? Informal conventions and informal rules of the game make institutions function differently than their formal structure might lead us to expect. Governments can intervene and influence the rules of the game, but their interventions should be based on an adequate perception of existing formal and informal arrangements and on processes of adaptation that were under way before intervention was initiated. The literature does not adequately explore the normative arguments for public economic organizations, nor has there been enough rigorous analysis of the causes of public sector failure. Many institutions are dysfunctional in terms of development, however, not because they are inefficient but because their intended purposes conflict with the requirements of economic growth. Diagnosing the causes of good or bad performance by public organizations could provide the basis for exploring a rational public sector organizational strategy.