Change, Institutional

The Two Schools of Institutional Change

There are currently two very different approaches to the problem of institutional change. In development research, including research in comparative [Page 222]political economy, there is now almost a consensus that the problem of massive poverty (and the many resultant social ills) in most developing countries is due to their dysfunctional social, legal, and political institutions (e.g., Daron Acemoglu & James Robinson, 2008). This problem, also known as the “good-governance” or the “quality-of-government” problem, has been well captured by the economist Dani Rodrik (2007, p. 153), who argued that the encounter between neoclassical economics and developing societies has revealed the great extent to which market economies rely on a complex and not well understood set of social, legal, and political institutions. Rodrik's list of such institutions is extensive: a well-specified system of property rights, effective regulation that hinders monopolies from dominating markets, uncorrupted governments, the rule of law, and social welfare systems that can accommodate risks. In addition, Rodrik adds the importance of informal institutions that foster social cohesion, social trust, and cooperation. Following Douglass North, Rodrik criticizes neoclassical economics for omitting the importance of such institutions and argues that the problem is that most economists usually take them for granted. In fact, most poor countries are plagued by a very different set of institutions, such as systemic corruption, systematic infringements on property and human rights, and low levels of social trust and lack of institutions that can handle individual and collective risks. In this type of analysis, the main problem is to explain why societies with a set of institutions that are clearly dysfunctional in terms of general social well-being generally seem unable to adopt the “new set” of institutions that Rodrik lists and that are known to lead to economic prosperity and social well-being. As Bo Rothstein (2005) notes, the central problem in this type of analysis is that the historical record clearly shows that dysfunctional institutions, such a systemic corruption, clientelism, and patronage, are very hard to change. Political and economic leaders in these systems may be able to change the institutions from above, but since they are the group that collects the most rents from the system, they have no incentive to induce change, at least not in a short-term perspective. Change of these systems from below is difficult because agents who want change face a formidable collective action problem. Thus, as Douglass North, John Wallis, and Barry Weingast (2009) have shown, in this research area, the main issue is the lack of institutional change despite the pressing human need for such change. For example, systemic corruption not only hurts economic growth, causes extreme poverty, and induces civil strife, but it also has devastating humanitarian consequences in areas such as provision of health care, level of infant mortality, and access to safe water.

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