Chapter 10
Institutions
Among economists such as Dani Rodrik and particularly economic historians
such as Daren Acemoglu and Douglass North, ‘good institutions’ are regarded
as the key deep determinant of economic growth. If there is a conventional
orthodoxy about the most important deep determinant – then it is institutions.
Geography, goes this argument, is not unimportant but the problems manifest
by bad geography can be overcome by good institutions. Tropical diseases (to
pre-empt discussion from Chapter 11) are more likely to find cures if pharma-
ceutical firms have incentives to invest in relevant R&D, or countries that are
landlocked are more likely to find investors willing to build transport links to
overcome that isolation if those investors receive sufficient protection.
But institutions are also misunderstood. Douglass North defines institutions
as being a mix of formal rules such as laws and constitutions and informal rules
such as trust and conventions. Institutions, then, are often confused with
‘organizations’, which are ‘groups of individuals bound together by some
common purpose to achieve certain objectives’, such as political parties, firms
or trade unions. This chapter shows that institutions influence economic
growth via the proximate determinant of investment. That investment can be in
physical capital,technological innovation or human capital. How investment
may (or sometimes may not) promote economic growth is discussed in detail
in Chapter 3.
Institutions and economic growth
Douglass North and other economic historians have placed ‘good institutions’
at the centre of their explanation for the ‘rise of the West’ after 1500 CE.
Institutions as a deeper determinant influence economic growth via the proxi-
mate determinants, one of which is investment. Good institutions may moti-
vate investment in physical capital, technological innovation and human
capital. These links are shown in Figure 10.1.
What are institutions?
Douglass North, the Nobel Prize-winning economic historian, pioneered the
modern study of institutions. He described institutions as:
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