Lee has a thought provoking post about institutions over at his blog. Responding to criticisms that the idea is too diffuse and difficult to pin down, he expresses admiration for Paul Romerās use of the term ārulesā rather than the vaguer terms āinstitutionsā and āgood governanceā (though this is ancillary to his main point, that migration reduces the importance of institutional change). Heās right ā it is a more concrete term, but I still take great issue with the way the concept has been used by Romer.
Romer has made rules the centrepiece of his Charter Cities idea. For him, rules are the laws, regulations and norms that govern an economy and society. The Charter Cities idea runs on two central premises: one is that developing country Governments donāt have the right rules or the capacity to enforce them properly. The second is that the ācorrectā rules are known and can be imported, as can enforcement capacity.
I donāt for a second doubt that rules and enforcement are deeply important for economic development, whether you want to call the bundle of policy associated with all of this institutional economics or governance reform. There are a great number of examples of this historically. When historians debate why the Great Transformation of the Industrial Revolution and rapid economic development occurred in the West and not in other historical centres of commerce such as China, India and parts of the Middle and Near East, one of the most important factors is the emergence of a clear set of rules relating to property and financial intermediation, as well as the improving functioning of the legal system in Britain and the US in particular. Another example is the emergence of property law in the US, which Hernando De Soto has convincingly argued was central to the development of capitalism in the US.
There are also examples of rules that were imported to power economic progress. In particular, when the British brought their banking and legal system to India, it caused a massive spark in Indian businesses: increased investment and hence a more dynamic economy emerged out of the ability to lend and borrow against clear rules.
That said, the reality of how rules emerge and are enforced is far more complex than Romer and many advocates of good governance and institutional approaches to economics recognise. Iāve seen a lot of people write some variation of āwe know what good rules areā or āwe have a good understanding of what institutions stimulate developmentā. Despite this, Iāve never seen anyone actually set down on paper exactly what the correct legal framework and institutional makeup for development is. If we really did know what worked, surly someone would have written a fairly uncontroversial but best-selling book about this, right?
The basic problem is that we have a fairly good knowledge of what rules and institutions work pretty well where we live, and we assume that these are objectively āgoodā rules and institutions. Not enough consideration is given to matters of variance across time and space. This is extremely important when considering rules and institutional policy for developing countries.
The first point to make is that rules vary in important ways across space. This is obvious. When people say that āwe know the rules that make for good developmentā do they think that rules (any rules) are the same in all places? A passing interest in world affairs will demonstrate that very important rules are different in different places. Take laws on rape. Most people would assume that laws on something as awful as rape would be relatively straightforward. Theyāre not. The legal framework around constitutes rape varies across countries quite significantly. Statutory rape is a good example of this. In France, in order to be convicted of statutory rape, it has to be proven that the accused knew the age of the victim. In other words, itās actually a legitimate legal argument in France to say āwell, she sure looked old enough!ā Such knowledge does not need to be proven under UK law, for example. Even the basic set of possible verdicts can vary. In some countries, a case can return a verdict of ānot provenā ā which is different to saying the defendant is guilty or innocent.