Institutions and Economic Development

March 11, 2018


Economic growth and development in the second half of 20th century was dominated by debates between proponents of endogenous and exogenous growth theories. The former implied that growth stems primarily from investment in human capital, innovation, and knowledge that can lead to positive externalities and spill-over effects. Proponents of the latter criticised this view, highlighting that external factors such as the rate of technical progress heavily influence the ability of an economy to grow. These theories collectively constitute the paradigm to approach economic growth in theoretical terms and, subsequently, in choosing adequate policy instruments to overcome potential challenges, namely incentivizing technological progress through different means. This paradigm, however, narrows one’s view of how growth and development actually occur. Technological progress flourishes in a rich institutional, social, and legal environment that deeply influences its speed and robustness. This has become particularly clear in the case of post-Soviet and developing countries, whose policymakers faced many unexpected challenges in achieving the goal of sustained growth. One could think about why capitalism developed in England and not in France in the 16th and 17th centuries, or why comparable economic reforms have led to a more stable and protracted growth in the case of Poland than in many other post-Soviet countries. From an institutional perspective, it can be claimed that what made a difference between these cases was precisely the variety of institutional structures and the corresponding legal systems. By taking these differences seriously, it is possible to adopt a comparative legal approach and focus on additional factors such as compliance, corruption, and enforceability, which entail a serious equilibrium effort between newly adopted formal rules and informal ones which depend on moral and cultural specificities.



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