Posts Tagged ‘Institutions’

The Economics and Politics of Corruption in India

August 26, 2011

By Anjum Altaf

Is there an alternative to taking sides on the Anna Hazare controversy? Could one step back and gainfully employ an historical and institutional perspective to understand it better? Would it help to argue that the mismatch in speeds at which economic and political institutions have rooted themselves in Indian society is contributing to a disorienting disconnect between modern ends and pre-modern means?

The supply and demand of goods and services is mediated through the economic market and Indians have been dragged into it whether they liked it or not; they had no choice. The theory of perfect and imperfect economic markets is well known. In brief, markets can exhibit friction, they can fail, and they can exclude large segments of the population without effective demand. In all such cases, the state has to step in thereby creating the interface between economics and politics. (more…)

Second-Best Institutions

January 19, 2008

Reader Ali Sohail has pointed us to a paper (Second-Best Institutions) by Dani Rodrik of Harvard University that asks why “best practices” are an unhelpful way to think about institutional reform. 

The paper is about economic institutions but it complements very nicely the theme we explored in the last post regarding governance and pure democracy in developing countries—that the best can be the enemy of the good and that the best is often dangerously innocent of contextual realities. 

Here are some relevant excerpts from Dani Rodrik’s paper: 

The focus of reforms in the developing world has moved from getting prices right to getting institutions right… “Governance reforms” have become the buzzword for bilateral donors and multilateral institutions, in much the same way that liberalization, privatization and stabilization were the mantras of the 1980s. 

But what kind of institutions should reformers strive to build? 

Developing nations are different from advanced countries in that they face both greater challenges and more constraints.  That this may require “appropriate” institutions differing from those that prevail in rich countries is an old theme that goes back at least to Alexander Gerschenkron (1962).

The type of institutional reform promoted by multilateral organizations… is heavily biased towards a best-practice model. It presumes it is possible to determine a unique set of appropriate institutional arrangements ex ante and views convergence towards those arrangements as inherently desirable…. This approach is grounded in a first-best mindset which presumes the primary role of institutional arrangements is to minimize transaction costs in the immediately relevant domain–without paying attention to potential interactions with institutional features elsewhere in the system.

I shall argue that dealing with the institutional landscape in developing economies requires a second-best mindset.  In such settings, a focus on best-practice institutions not only creates blind spots, leading us to overlook reforms that might achieve the desired ends at lower cost, it can also backfire. 

Real-world reformers operate in a second-best environment of their own, which means they need to keep an eye on how proposed solutions affect multiple distortions. Sometimes binding constraints will lie elsewhere and they need to guard against adverse interactions with other distorted margins. At other times, there will be multiple ways of removing a constraint, some of which may be politically much more feasible than others. Finally, the nature of the binding constraint will change over time, requiring a change in focus as well.  Best-practice institutions are, almost by definition, non-contextual and do not take account of these complications. Insofar as they narrow rather than expand the menu of institutional choices available to reformers, they serve the cause badly.

Back to Main Page