New Institutional Economics in Development Economics

This paper tries to find in the literature some answers to one of the most important questions that economists currently examine that is: why there is such a huge difference in average income levels across the world economy and what are the deep causes of this disparity among nations? It starts adopting the point of view of the New Institutional Economics (NIE), which emphasizes the role of institutions as the most important catalyst of economic growth and development. It then relates this hypothesis with the geography one, according to which geography is key because it determines climate, natural resources, disease, and transport costs, and the integration view, which stresses the importance of openness to international trade and financial flows.
After this first distinction, it describes the most important characteristics of NIE. This is a school of thinking that, starting from some neoclassical assumptions as the idea of individuals as maximising agents, develops a theory of institutions as a set of constraints that, regulating human behaviour, allows markets, and so economies, to reach a higher efficiency. Among different institutional frameworks, property rights protection and enforcement obtain a particular role, as the most important engine for development, and sometimes as a proxy for the whole institutional framework. This happens thanks to their direct effects on important proximate causes of growth: in fact a well-designed property rights system helps to create a favourable climate for investment and so it allows nations to accumulate both physical and human capital.
The study, then, illustrates, maintaining an institutionalist point of view, some criticism to NIE, in particular from the scholars adopting an Old Institutional Economics (OIE) point of view. First of all, there is no agreement on the definition of institutions, that OIE also describes as enabling and constitutive not only as constraints. But, above all, there is no shared view on the theory of institutional evolution. OIE approach is based on an alternative theory of individuals as economic agent. OIE refuses the theory of homo economicus, and it adopts a theory of men as culturally moulded by institutions; moreover, there are different conceptions regarding the definition of the market, seen as an institution itself and so as a social construction, the role of the state and of policies it adopts, and of politics in determining economic outcomes.
Regarding policy implication, it is shown how NIE is not a monolith but contains two alternative policy implications, namely experimentalism (or gradualism) school and convergence school, while OIE approach leads to a policy theory similar to the gradualism school one and to a resolute rejection of the so-called institutional monocropping.
Finally, this study considers that, whatever institutionalist approach we adopt, institutionalism studies the deeper determinants of growth. These determinants should be distinguished from the study of the so-called proximate causes of economic development. Most growth theories from Solow onward have concentrated on these latter causes, namely physical and human capital accumulation, technological innovation, and structural change. All these factors surely perform a fundamental role in any process of economic development but the real question to address is: why did some societies manage to accumulate and innovate more rapidly than others? To answer this question, it becomes necessary to analyse what relationships occur between proximate and deeper causes, and to determine the economic links through which deep determinants manage to influence proximate ones and so to decide which societies will manage to innovate, accumulate and so develop and which will not. In this field it is possible to recognize widespread agreement regarding the role of institutions, particularly regarding the protection and enforcement of property rights. Key assumption of both institutionalist approaches is that institutions matter in shaping economic performances. However, the demarcation between NIE and OIE relates to the role of policies, politics. The latter gives great importance to policies, and so to politics and to the state as the most important institutions able to deal with policies and so to achieve development, particularly through a structural change. But to do so it requires a remarkable policy space, that is the possibility to adopt the policies and the institutional framework that better fit with the specificity of each country. NIE also acknowledges that better institutions lead to better policies, but sometimes it seems as if some institutions, such as property rights, could represent an automatic mechanisms to attain economic growth.