Home > Uncategorized > Blogging the 2016 ASSA conference. A critique of New Institutional Economics

Blogging the 2016 ASSA conference. A critique of New Institutional Economics

In The Economists of 10th December 2015 one can find a story about ‘The genius of Gujarati’s‘, Indian people who are highly succesful entrepreneurs in very many countries. Even in India. Their success is based on ambition, focus, hard work and the extended family (which finances new businesses) – all cultural factors which the Gujarati’s take with them when they move from one country to another. The Economist, alas, does not delve into the gender aspects of the Gujarati attitude.

According to Geoffrey Schneider and Berhanu Nega, in their paper for the 2016 ASSA conference, ‘The Limits of the New Institutional Economics Approach to African Development‘, such cultural factors are neglected by ‘The New Institutional Economics’ (NIE), which leads to sub-optimal development policies. People are not just producer/consumers but are, for one thing, also part of a family embedded in kinship structures (including, of course, gender roles). On the cynical side: assigning, in NIE style, ‘Roman Law’ land rights to some people might induce a ‘land grab’. What I missed was a discussion of the influence of population growth on technologies used and ‘induced institutional change’ – the paper might be improved by introducing some ‘Ester Boserup‘ kind of ideas (population growth requires a more intensive kind of agriculture including new institutions – but societies often manage to establish this). Some excerpts.

In the last two decades there was a significant shift in mainstream economics research on development from standard neoclassical analysis to new institutional economics (NIE). We have seen the awarding of four Nobel Prizes to NIE scholars, a best-selling book introducing the NIE perspective on comparative development, and an increasing emphasis on NIE research by mainstream scholars and the international financial institutions (IFIs). This leads Tamanaha (2015, 89) to conclude, “NIE appears to be the new consensus view of development thinking, supplanting the neo-liberal Washington Consensus that dominated global development policy in the 1980s and 1990s.” The effect of the NIE Consensus on development policy can be seen in the increasing emphasis on institutions, and especially governance, by the World Bank, International Monetary Fund (IMF) and Non-Governmental Organizations funding development projects in sub-Saharan Africa (SSA). In response, there has been a flurry of research by Original Institutional Economics (OIE) scholars criticizing the NIE approach

Acemoglu, Johnson and Robinson (2001, 1387) argue that “the reason why African countries are poorer is not due to cultural or geographic factors, but mostly accounted for by the existence of worse institutions in Africa.” The primary institution of concern within NIE is property rights, because NIE economists believe historical data “shows that countries with more secure property rights, i.e., better economic institutions, have higher average incomes”

Property rights, along with the ability to enforce contracts, feature very heavily in the Worldwide Governance Indicators database and Governance Matters series produced by World Bank researchers. These indicators lead Kaufmann and Kraay (2003, 1) to conclude that “better governance exerts a powerful effect on per capita incomes,” where governance is defined by “control of corruption, the protection of property rights or rule of law, and voice and accountability.”

The focus on property rights may be reasonable for some societies in certain historical periods, but the idea that property rights are the most important institution in the development process in contemporary SSA is questionable. This approach neglects the entire institutional configuration in particular places and is therefore prone to error. For example, in Kenya, Senegal, Gambia, and many other countries in SSA, efforts to establish secure rights to land undermined the well-being and productivity of many people, especially women, pastoralists, and others with traditional, subsidiary land rights (Platteau 1996, 40). Due to the complex nature of traditional land tenure and ownership systems that persist in SSA, governments are often unable to assign property rights fairly or effectively. Some of the most productive members of society, particularly women, tend to be excluded from government efforts to extend formal property rights to communal lands.3 Women in rural Africa are incredibly productive farmers, and allocating property rights in a way that reduces their access to land is deeply problematic on many levels…. Another vexing problem is the legitimacy of the existing distribution of property in SSA. In many countries the system of property rights is widely considered to be illegitimate. In South Africa, the fact that the distribution of property has changed little since the end of Apartheid, other than the benefits that have accrued to a very small black elite, means that any policies that might freeze property rights in their current state could generate widespread unrest and destabilize the economy. Also, the establishment of property rights is easily manipulated by the elites, especially in the presence of inadequate records.

The obsession with reducing the role of the state, while seemingly warranted by the level of corruption in many SSA countries, comes about in part because, “NIE focuses on the constraining aspects of institutions, while OIE also
highlights the enabling aspects of institutions” (Tamanaha 2015, 97). Viewing the state primarily as an impediment to development is problematic. There are almost no instances of lateindustrializing countries succeeding without substantial state intervention, so it makes little sense to continue de-emphasizing state-led development. Much better would be to assist SSA countries in improving their state institutions to develop a comparative institutional advantage in industries with growth potential (Schneider 2008). Improving governance, as emphasized in PRSPs, is
important, but the establishment of a developmental state requires more intensive emphasis on improving state capacity.

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