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The Role of Institutions in Economic Change

Author: H-J Chang and P Evans
Date: 2005
Size: 42 pages (3.1 MB)

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Summary

Mainstream economic thinking tends to avoid the subject of institutions, viewing them simply as a constraint on free markets. This book chapter argues that institutions play a significant role in economic change and challenges the ‘thin’ view of institutions within mainstream economics. It advances an alternative approach based on a ‘thick’ view of institutions, which recognises the key role of culture and ideas, and the constitutive role of institutions in shaping the values and world views of groups and individuals.

Institutions are systematic patterns of shared expectations, accepted norms and routines of interaction that have a strong impact on the motivations and behaviour of sets of interconnected social actors. Despite the resurgence of institutionalist thinking both inside and outside of economics, there is no coherent theory of institutions. Conventional institutionalist explanations represent a ‘thin’ view of institutions and tend to reduce institutions to efficiency considerations or instrumental reflections of interests.

Thin approaches are intellectually inadequate and lead to welfare-damaging outcomes on the ground. In contrast, a broader institutional analysis is needed to develop a more adequate vision of how institutions shape economic behaviour and outcomes, and secondly, to create a more systematic and general understanding of how institutions are formed and change over time.

There are three main views on institutions:

• Institutions as constraints: mainstream economists usually perceive institutions as constraints on the ‘natural order’ of free markets that create inefficient rigidities. Many of the so-called New Institutional Economists also use the rhetoric of institutions as constraints.
• Institutions as enablers: in contrast to mainstream economic thinking, institutions may be viewed as unnatural forces and in this context it is more appropriate to view institutions as enabling devices, rather than as constraints.
• Institutions as constitutive: institutions may be constitutive because all institutions have a symbolic dimension and therefore promote certain values or world views among the people who are subject to them.
• An alternative institutional approach moves beyond the traditional view of institutions as constraints and views institutions as devices that enable the achievement of goals requiring supra-individual coordination and more importantly, as constitutive of the interests and world views of economic actors.

An alternative institutional analysis is needed to fully recognise the role of institutions in economic growth and to move beyond the ‘thin’ economist models that dominate the current discourse on institutions. An alternative approach would have implications for contemporary political economy, especially for the possibility of more equitable global economic growth. An alternative approach requires:

• Adopting a more culturalist perspective in which institutional change depends on a combination of interest-based and cultural/ideological projects and in which world views may shape interests as well as vice versa. Changing institutions requires changing the world views that inevitably underlie the institutional forms.
• Understanding how the process of constructing and maintaining institutions generates tensions and contradictions that force change and, furthermore, how exogenous shocks may set off or redirect such processes.
• The developmental state and the World Trade Organisation (WTO) are very different examples of institutional transformation. However, both are central to an understanding of the benefits of a ‘thicker’ institutional analysis.
• Both the developmental state and the WTO reinforce the basic premise that thin institutional approaches lead to misleading conclusions regarding institutional dynamics and illustrate that institutions are constructed in response to changes in interests and ideology (or world view).
• The rise and eventual demise of the developmental state reflects a complex process of individual agency, changing world views and shifting political alliances, rather than an ‘inexorable economic logic’ of the world system as a whole.
• The case of the WTO emphasises that world view plays a dominant role in generating institutional change. The WTO also demonstrates that the global political economy is a system under construction, with the economic logic of the resulting system dependent on the outcome of the process of institution building.

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Source: Chang, H. and Evan, P., 2005, ‘The Role of Institutions in Economic Change’, in Reimagining Growth. Towards A renewal of Development Theory, eds. S. De Paula, and G. Dymski, Zed, London pp. 99-129
Author: Ha-Joon Chang , Ha-Joon.Chang@econ.cam.ac.uk