25 January 2011

Player-hating: Some clarifications on institutions

My fiercest critic [I’m sorry for the typos! I’m sorry! Please stop shouting at me!] just harangued me for my lazy and inadequate response to these comments on institutions.

So allow me to make amends.

Anonymous saidknowing that (persistent) social stuff matters isn't at all the same as knowing that institutions matter, and even if we define institutions to mean "persistent social stuff" that still doesn't say what needs fixing.”

Firstly, the terms we use are vague and confusing. What is an institution? What is governance? I like Paul Romer’s use of “rules.” It is easy to think concretely about what rules are, and why they might matter. Even if you think his prescriptions are a little crazy, he does a very good job of explaining the importance of institutions (rules), and you should really watch the TED talk if you haven’t already.

Secondly, you are absolutely right, we don’t know what needs fixing. Which is exactly my point – we know what good institutions are, but we don’t know how to make them.

Here is Dani Rodrik, discussing his canonical empirical paper Institutions Rule in the Finance & Development magazine:

Institutions are thus critical to the development process. But for each of the functions performed by institutions, there is an array of choices about their specific form. What type of legal regime should a country adopt—common law, civil law, or some hybrid? What is the right balance between competition and regulation in overcoming some of the standard market failures? What is the appropriate size of the public sector? How much discretion and how much flexibility should there be in arrangements for the conduct of fiscal, monetary, and exchange rate policies?

Unfortunately, economic analysis provides surprisingly little guidance in answering these questions.

Ed Carr questioned the power of institutions as an explanatory variable, “this is a relative measure - institutions are better than things like geography for predicting outcomes, but they still leave a hell of a lot of variance out there.”

This chart is from the same Rodrik Finance & Development article. There is a fair amount of variation, but in the world of real-world data, that is about as tight a correlation as you are ever going to find.

image

Finally Bottomupthinking askedMaybe the institutions operate so badly simply because they are not really understood by most of those who live in or with them (the wider populace)?”, which leads me to believe that we are again confusing terms? In any case, I think we agree on the difficulty of improving rules, governance, institutions, whatever you want to call it.

Lant Pritchett is doing some very interesting work on the related-but-not-quite-the-same question of state implementation capacity.

At their current pace of progress countries like Haiti or Afghanistan or Liberia would take hundreds (if not thousands) of years to reach the capability of a country like Singapore and decades to reach even a moderate capability country like India.

Pritchett is also one of the most vocal public advocates for migration as a development policy. It perhaps is no coincidence that he has also spent so much time studying development failure and “state capability traps.”

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