Institutions for high-quality growth: What they are and how to acquire them

This article opens with a discussion of the types of institutions that allow markets to perform adequately. While we can identify in broad terms what these are, there is no unique mapping between markets and the non-market institutions that underpin them. The paper emphasizes the importance of “local knowledge”, and argues that a strategy of institution building must not over-emphasize best-practice “blueprints” at the expense of experimentation. Participatory political systems are the most effective ones for processing and aggregating local knowledge. Democracy is a meta-institution for building good institutions. A range of evidence indicates that participatory democracies enable higher-quality growth. Sakenn pe prie dan sa fason (Everyone can pray as he likes.) —Mauritian folk wisdom This paper was originally prepared for the International Monetary Fund’s Conference on Second-Generation Reforms, Washington, DC, November 8–9, 1999. I thank Ruth Collier, Steve Fish, Mohsin Khan, Saleh Nsouli, conference participants, and an anonymous referee for helpful comments. Dani Rodrik is professor of international political economy at the John F. Kennedy School of Government, Harvard University. He is also the research coordinator for the Group of 24 (G-24), a research associate of the National Bureau of Economic Research, and a research fellow of the Centre for Economic Policy Research (London). He serves as an advisory committee member of the Institute for International Economics, senior advisor of the Overseas Development Council, and advisory committee member of the Economic Research Forum for the Arab Countries, Iran and Turkey. Professor Rodrik’s recent research is concerned with the consequences of international economic integration, the role of conflict-management institutions in determining economic performance, and the political economy of policy reform.     

The dilemma of government responsiveness

The expectation that the government will respond to future circumstances, say bailing out a dictator to avoid a bloodbath, or raising taxes on immovable capital investments, often hinders the establishment of appropriate incentives for efficient behavior. The government's dilemma, simply, is that it may be unable to commit future governments not to be responsive. Contracts and constitutional provisions are mechanisms to limit responsiveness. So too are arrangements that increase the cost of being responsive, or build reputations for adhering to certain patterns of behavior. A promising strategy for being responsive is to base government actions on variables not under the control of individuals, such as unalterable characteristics or aggregate outcomes. These are at best palliative measures: Informed policy making must recognize the tension between providing appropriate incentives and permitting government to be responsive.