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Moving Beyond ‘Institutions Matter’: Some Reflections on How the ‘Rules of the Game’ Evolve and Change

Author: M Srivastava
Date: 2004
Size: 32 pages (1.18 MB)

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Summary

The role of institutions in influencing development is widely recognised. Yet there are no clear answers regarding which institutions best support development and how to acquire them. This paper for the Crisis States Development Research Centre assesses the effectiveness of various theories in unravelling these complex issues.

The Washington Consensus of the 1970s and 1980s promoted a minimalist state as the best way of ensuring a free-market path to prosperity in developing countries. Institutions were largely ignored. Since then, the importance of their role in shaping development trajectories has been reappraised. However, views on the relationship between institutions and economic development differ widely. Four fundamental dimensions are identified: the multiplicity and multi-layering of institutions, institutional arrangements, institutional appropriateness and institutional change. Three broad theoretical perspectives are explored with the aim of understanding why ‘the rules of the game’ evolve and change: rational choice institutionalism (strategic actions), historical institutionalism (conflicts around power structures) and sociological institutionalism (engagement with cultural systems of meaning). It is argued that none of these pay sufficient attention to the role of ideas and agency, as well as the multi-directional causal relationships between them and institutions.

Multiple institutions operate at different layers of state and society, and their hierarchical structure shapes the influence of any one institution on outcomes. Determining the appropriate institutions or institutional arrangements to spur development poses a tough challenge – as illustrated by contrasting development outcomes in South Korea and India despite their ‘institutional’ similarity. The paper argues that:

• Rational choice institutionalism, where change is driven by the pursuit of efficiency to maximise wealth, is challenged by the existence of inefficient institutions. It overlooks the complex dynamics of change.
• The historical perspective, which considers specificity and context, gives a thicker account of institutional development. However, it tends to focus on structure, ignoring the key role of the actor or agents.
• The sociological tradition sees institutional change as a ‘cultural’ project because it requires changes in the ‘world view’ of the agents involved. It gives broader meanings to issues of power and conflict.
• However, its insights need to be tested and refined through comparative case studies between and within countries.

A multi-faceted, holistic approach to institutional change is recommended. History may produce ‘rules of the game’ that are inefficient and path dependent, but it also leaves spaces for the conception of alternative games that can change outcomes in the present and structure in the future. The paper suggests that:

• Closer attention should be paid to the multiplicity of institutions and people’s capacity to employ multiple preferences while working with them.
• For example, with institutional economic development, the profit motive may be present, but other preferences can work beside it. The desire for just and fair exchange may also be strong.
• The interplay of multiple sets of preferences juggled by individuals should be identified as a spectrum-like structure that allows switching.
• The key roles of ideas and leadership can then be recognised. These may have a major impact on altering the hierarchy of preferences to more socially beneficial forms.
• This process highlights the possibility of innovatively playing ‘the rules of the game’ to unleash institutional potential without necessarily altering basic frameworks.

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Source: Srivastava, M., 2004, Moving Beyond ‘Institutions Matter’: Some Reflections on How the ‘Rules of the Game’ Evolve and Change, Crisis States Discussion Paper Series no. 4, Development Research Centre, London School of Economics.
Author: Crisis States Research Centre, http://www.crisisstates.com/index.htm