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Institutional Development in Developing Countries in a Historical Perspective - Lessons from Developed Countries in Earlier Times

Author: H Chang
Date: 2001
Size: 36 pages (176 KB)

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Summary

In recent years, many donors have come to believe that well-functioning institutions are a prerequisite for economic development. But is their view supported by history? This paper, presented at a meeting of the European Association of Evolutionary Political Economy, examines the evidence and argues that donors may be making unrealistic demands for improved governance in developing countries.

The prevailing agenda on institutional development and good governance recommends that every country should adopt a set of institutions that are supposedly essential for growth. These usually include: democracy; clean and efficient bureaucracy and judiciary; protection of property rights; good corporate governance institutions; mature financial and public finance institutions; and well-developed social welfare and labour institutions. But were all of these present in the now-developed countries (NDCs) during their early stages of development? Analysis shows that in many cases they were not. In fact, developed countries were institutionally less advanced than today’s developing countries at similar stages of progress.

The paper charts the evolution of the aforementioned categories of institutions in today’s developed countries. Their institutional development was a long, slow process, which varied considerably from country to country. The evidence shows that:

• In 1820, during their early period of industrialisation, none of the NDCs had universal suffrage even for men. There were very few formal institutions and little effective regulation.
• By 1875, when industrialisation was fully under way, institutions in the NDCs had developed significantly, but were of a far lower quality than expected of those in developing countries today.
• Even in 1913, when the richest NDCs had reached the level of today’s richer developing countries, their institutions still did not match up to the global standards now deemed essential for economic development.
• It took NDCs a long time to develop institutions – in some cases not decades but centuries.
• Despite this, the NDCs in their earlier times grew much faster than developing countries over the last two decades, suggesting that many institutions follow, rather than lead economic development.

From this historical perspective, current demands for developing countries to adopt high-quality institutions over a very short time period seem unrealistic. While it is sometimes possible to copy institutions from country to country, this is not always an easy process. Thus, to help ensure that institutional development is effective, donor support should take account of the following:

• Which institutions are really required for economic growth? Demanding that developing countries adopt unnecessary institutions can incur considerable costs without sufficient benefits.
• While certain institutions may be regarded as essential, the most appropriate form for these institutions will vary from country to country.
• Institutional development takes a long time. The five-to-ten year transition periods currently given to developing countries are inadequate, and donors should be more patient.
• Developing countries now have more advanced institutions than NDCs at the same stage. Thus expectations that they meet higher standards quickly are unrealistic. Donors should display more historical sensitivity.
• Unless the current governance agenda is reformed, it will remain ineffective in addressing development failures in many countries, and could even harm their development.

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Source: Chang, Ha-Joon, 2001, 'Institutional Development in Developing Countries in a Historical Perspective - Lessons from Developed Countries in Earlier Times', Paper presented at the European Association of Evolutionary Political Economy (EAEPE), 8th-11th November, Siena, Italy.
Author: Ha-Joon Chang , Ha-Joon.Chang@econ.cam.ac.uk