Institutions and
Development
Prepared by Ms Sundae Cortez
Expected Learning Outcomes:
At the end of this chapter, the students are expected to:
● Know examples of institutions
● Discuss how institutions contribute to development/growth
using social conflict and developmental perspectives
INSTITUTIONS
● Institutions are the rules of structural social interaction
(both formal and informal) that structure the incentives in
human exchange either economically, politically or socially
(North, 1981).
● Greif (1993) elaborated that institutions are an integrated
system of beliefs, norms, organizations and rules that
generate a regularity of behavior.
INSTITUTIONS
North (1990) further said,
institutions are man-made,
non-technological features that
influence economic outcomes by
constraining behavior.
Types of Institutions:
● Formal institutions - refer to
property rights, legal
systems, rule of law, and the
constitution of the country.
○ They are enforced by official
entities such as courts, judges,
police, bureaucrats, etc.
Types of Institutions:
● Informal Institutions - refers to
how individuals behave in
everyday life in terms of their
belief (religion), history, culture,
or social acceptability.
○ Also, informal institutions are
“behavioral regularity based on
socially-shared rules, usually
unwritten, that are created,
communicated, and enforced
outside of officially-sanctioned
channels.”
How Institutions are formed
● Social Conflict Perspective
● Developmental Perspective
Social Conflict Perspective
Institutions are formed because
societies choose those institutions
that will maximize social surplus.
However, not all members of
society choose, thus they are not
efficient.
Developmental Perspective
According to this perspective,
institutions form and emerge from
within countries over time and that
economic, political, and social
development cause institutions to
change. Further, development and
institutions are caused by human
capital.
Institutional and
Developmental Outcomes
Reducing the costs of doing business
Development is the expansion of
economic activity (markets), the degree
to which individuals and groups are able
to enter into arms-length transactions.
If the costs of transacting are high, then
economic activity would be
constrained. Institutions ease the
effectiveness with which transactions
take place, minimizing the costs of
doing business.
Ensuring competitive processes
Since institutions determine the
incentive structure for affecting
individual and group behavior, the rules
governing the market affects the nature
of how competitive the market will be.
Regulation of industry, tax laws,
distributional issues, the adoption of new
technologies, or in other words, the
degree to which rent-seeking is prevalent
and determined by the nature of formal
and informal institutions and their
interplay.
Outcomes
Informal institutions affect
economic development
through its influence on
individual behavior.
Outcomes
Conversely, formal
institutions also impact
economic development. The
policies of the government
will either invite or
discourage investors.
