The nature of institutions

A very interesting web site highlighting Italian's case and correlations between variables :


Table: Correlation between economic growth in Italy and measures of government effectiveness, control of corruption and rule of law

Note: The table shows correlation values between total factor productivity (an element of economic growth) in Italy and measures of government effectiveness, control of corruption and rule of law. The closer the figure is to 1 the greater the correlation: for instance an increase in government effectiveness is correlated strongly with an increase in total factor productivity (growth). All of the figures shown are statistically significant at 1%.

A similar pattern emerges from the correlation shown in Figure 3, which uses the competitiveness and quality of institutions indexes elaborated by the World Economic Forum.


Figure 3: Correlation between economic competitiveness and quality of institutions in selected European countries

Note: The figure plots countries on a chart based on a score of their overall competitiveness (vertical axis) and the quality of their institutions (horizontal axis) using measures provided by the World Economic Forum. As can be seen, those states with higher quality institutions also appear more competitive overall.

But what does really mean "quality of institutions" ? Institutions which promote free markets ? So, the correlation between competitiveness seems to be a tautology because they refer almost to the same idea. That's why we can't avoid a reflexion on the definition and nature of institutions. Hence the importance of some contributions youcan find in the handout, especially : HA-JOON CHANG  ("Institutions and economic development: theory, policy and history", Journal of Institutional Economics, 2010, page 1 of 26) who criticizes the role of institutions because of their pro-market nature/definition.

So we have to think about a pro-market economy.What it is ?  



About the handout

Source : The Effects of the Interaction of Formal and Informal Institutions on Social Stability and Economic Development* Svetozar Pejovich, 1999.

1/Show that the notions of institutions and socialisation are closed to each to other,

Institutions must facilitate exchange and production, especially contracts. But contract can't forecast all future events. That's why trust, codes of conduct, moral norms, religious beliefs are so important. But such norms and values are the consequence of the processus of socialisation, that is the process by which human being learn the norms and the values which are necessary to live in the society and to reach one's goals. Informal institutions are concerned here. If your religion doesn't allow you to lie or to cheat, so you will respect any contract and your partners will trust you. Trust is the invisible fuel of all contract. Culture is a really the key to understand the capacity of a nation to do business. In one sense we are prisonners of the past. We can understant that with that quotation : « Informal rules are often called the old ethos, the hand of the past, or the carriers of history. They embody the community’s prevailing perceptions about the world, the accumulated wisdom of the past, and a current set of values. Thus, informal institutions are the part of a community’s heritage that we call culture. They are maintained from one generation to another through various transmission mechanisms such as imitation, oral tradition, and teaching. The enforcement of informal rules takes place by means of sanctions such as expulsion from the community, ostracism by friends and neighbors, or loss of reputation ».

2/Why reputation or trust are important for economic growth (for concluding economic agreements),

If nobody trust you and according to the uncertainty shaping behaviours, it will be difficult to do business. If a shopkeepers has a bad reputation, he will probably have less customers.

3/And about property rights ?

Property rights are at the heart of the economic growth :

Property rights => rules protecting the use and exchange of wealth. Without such rules, nobody will take risks and invest to innovate. And we know that innovation is the condition to push back the technological frontier, especially for modern economies. The enforcement of property rights implies a juridical structure, that is, judges and policemen.


W.W. Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge: Cambridge University Press, 1960), Chapter 2, "The Five Stages of Growth—A Summary,"

1) Where did the take-off fisrt take place? In England with the first Industrial revolution.

2) What are the main features of economic growth? Steadily increase in the GDP resulting in an higher living standard. Immediate economics causes : High investment and savings rates, reinvestment of profit in the firm or in new plants, hard work, innovations (new methods of production, news goods sometimes produced at a very large scale). But deep reasons are institutionals.

3) Why investment is not the primary cause of economic growth and why institutions are the deep determinant? Higher investment rate is not a cause of the economic growth but the economic growth itself. How can we explain the increase in investment rate? By institutions.

Quotations from the text : “old blocks and resistances”, “into its habits and institutional structure the emergence to political power of a group prepared to regard the modernization of the economy as serious high-order political business”, “increasing numbers of farmers are prepared to accept the new methods and the deep changes they bring to ways of life”.

The country has to be prepared to sustain growth and to change. Innovations and economic growth change our way of life ans our behavior. Use of cars, common transports, computers, mobile phones, etc. Some jobs disappears, others develops. So population must accept change, hard working, competing with others, ...

4) Institutions = formal and informal rules shaping human behaviour and leading to economic growth.



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