Economic Growth and Development

[t]he humanly devised constraints that structure human interaction. They

are made up of formal constraints (e.g., rules,laws, constitutions), informal

constraints (e.g.,norms of behaviour, conventions, self-imposed codes of

conduct),and their enforcement characteristics. Together they define the

incentive structure of societies and specifically economies. (1994:359)

A constitution, for example, may set out formal rules about the circumstances

under which a president may be removed from office, the laws that are not

subject to legislative changes such as the right to private property or liberty,

and the separation of the judiciary from the executive. Institutions can also be

informal. The common practice on the London Underground of letting people

off the train before trying to board makes for the more efficient running of the

transport system. Formal rules are ultimately backed up by the coercive appa-

ratus of the state, through a system of fines and imprisonment. Informal rules

are supported by a variety of mechanisms, including social sanctions (being

glared at may operate in the case of someone pushing their way onto a train

before everyone has exited).

Institutions are often confused with ‘organizations’, which North defines as:

[g]roups of individuals bound together by some common purpose to achieve

certain objectives. Organisations include political bodies (e.g. political

parties, the Senate, a city council, regulatory bodies), economic bodies (e.g.

firms, trade unions, family farms, cooperatives), social bodies (e.g., churches,

206 Patterns and Determinants of Economic Growth

Figure 10.1 Institutions as a deeper determinant of economic growth

GDP growth

Investment in

physical and

human capital

See Chapter 3 See Chapter 5

Figure 10.1

Institutions

Technology/

productivity

(TFP)