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Institutions were at the foundation of development economics, when it was first established as a separate branch of economics. Indeed, one important impetus behind the emergence of development economics was the recognition that developing countries have socio-economic institutions that are different from the ones that exist in the industrialised countries. The chapter provides a long term analytical perspective on the theory of institutions in economic development—from old institutionalism to new institutional economies—and critically assess todays’ mainstream view on institutions and economic development. Specifically, we engage with four main analytical issues, that is, (i) the definition of institutions, (ii) the conceptualisation of the role of institutions, (iii) the theory of the relationship between institutions and economic development, and (iv) the theory of economic development. Building on this critical review, the chapter then highlights the importance of focusing on the variety of types, forms and functions that institutions have taken historically, and even more critically on their collective nature. In this respect, we build on Abramovitz’s concept of social capability understood as “tenacious societal characteristics” embedded in productive organisations, as well as a variety of political, commercial, industrial and financial institutions. The chapter develops the idea of social capability by analysing and providing historical examples of six specific types of institutions and their role—forms and functions—in the industrialisation process. The institutional taxonomy includes six types of institutions: (i) institutions of production, (ii) institutions of productive capabilities development, (iii) institutions of corporate governance, (iv) institutions of industrial financing, (v) institutions of industrial change and restructuring and (vi) institutions of macroeconomic management for industrialisation. The chapter concludes by emphasising the importance of developing productive capabilities, not just at the individual or the firm level but also at the sectoral and social level, in the process of economic development, and especially industrialisation.
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Insights from Classical and Marxist economics, in contrast, were used much more by early development economists—Albert Hirschman, Simon Kuznets, Arthur Lewis and Michal Kalecki being the best examples—because their theories were based on the institutions of early capitalism, which were much more similar to those that existed in developing countries in the 1940s and the 1950s.
The other important work is La Porta et al. ( 2008).
However, the DB index has often been criticised for being partial, not least by the former chief economist of the World Bank, Paul Romer, who, while he was in the job, argued that a former director in charge of the index manipulated it, so that Chile would rank lower than otherwise, in an apparent attempt to hurt the left-leaning government of Michelle Bachelet (Source: https://www.wsj.com/articles/world-bank-unfairly-influenced-its-own-competitiveness-rankings-1515797620).
The evaluation by the Independent Evaluation Group (IEG) of the World Bank has expressed a strong reservation about the ‘governance’ components of the CPIA (IEG 2010).
This thought is behind the extraordinary claim that “the most important contributions to the study of institutions and development have nothing to do with … issues like legal systems, state-owned enterprises, financial regulation and corporate governance to corruption and political systems” (Keefer 2011: 547). Also note the emphasis on institutional function (security of property rights) over institutional forms.
Moreover, in measuring the quality of private property rights, the focus is on the protection of property holders against ‘appropriation’ by the government, when a lot of appropriation happens by other private-sector agents (van Noor 2018).
Notable exceptions can be found in the work of Elinor Ostrom on governing the commons (for which she received—the only female winner—Nobel Prize in Economics), as well as contributions by Masahiko Aoki and Yujiro Hayami on the role of communities alongside markets in economics development (see Ostrom 1990; Aoki and Hayami 2001).
As highlighted by Gregory Tassey ( 2005: 103), basic science is a public good, while “the fact that specific elements of an industrial technology are quasi-public goods means that their efficient development over the entire life cycle requires a mixture of public and private funding, distributed according to the magnitude and duration of various market barriers”.
With the spreading of international trade, institutions in charge of developing, certifying and enforcing technical standards have acquired a central role. Standards play an important role in technological innovation activities, especially with the increasing complexity of product and their product system features.
This has enabled the Wallenberg family in Sweden to have controlling stakes in companies whose collective capitalisation accounts for around 50 per cent of Stockholm stock exchange.
The German financial infrastructure also includes the German Bank for Settlements (AG) and an articulated multi-layered system of public saving banks and credit cooperatives working with SMEs.
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- Institutions and the Process of Industrialisation: Towards a Theory of Social Capability Development
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