The Knowledge and Policy Limits of New Institutional Economics on Development - Paper

Institutions have become the buzzword in development int the past decade, more and more books, articles and Noble Prices go to the field of study where culture and economics interact. Tamanaha's paper "The Knowledge and Policy Limits of New Institutional Economics on Development" wades into the debate by not only highlighting the different interpretations of 'institution' but also the limits that this new institutionalist drive encounters.

Abstract:     

"New Institutional Economics (NIE) has secured impressive achievements in academia and policy circles. The World Bank and other development organization in the past two decades have expended billions of dollars on efforts to build “good governance” and the “rule of law” informed by the NIE theory that economic development requires supportive political and legal institutions. NIE appears to be the new consensus view of development thinking, supplanting the neo-liberal Washington Consensus that dominated global development policy in the 1980s and 1990s. NIE scholars interested in development are currently engaged in an effort to map and measure the institutional terrain with the expressed purpose of producing policy advice on how to improve economic performance through institutional reform.

This essay elaborates on the barriers that stand in the way of the knowledge and policy goals of NIE. Foremost is the “interconnectedness of society:” cultural, technological, legal, political, and economic activities all affect one another and are affected by one another, often in ways that are subtle and all but invisible; each situation unique in its constellation of social forces and is dynamic, constantly changing in reaction to surrounding influences. To show why these aspects cannot be overcome by NIE scholars, I explore the ongoing struggle to identify a shared conception of “institution” — and I explain why this cannot be solved. For reasons I go on to elaborate, NIE scholars also will not be able to get a precise grip on the surrounding institutional influences that affect economic development. This incapacity shows up time and again in NIE research. The same barriers that stand in the way of knowledge also promise to stymie the policy ambitions of NIE scholars who seek to promote economic development. NIE scholars today, it turns out, are repeating lessons announced five decades ago in the law and development field. The problems were insuperable then and will remain so. Owing to these barriers, little advice can be offered beyond commonsense recommendations — pay attention to local circumstances, experiment to find out what works, don’t apply a “one size fits all” model. Interconnectedness, dynamism, and uniqueness are behind this advice. While critical of NIE knowledge and policy objectives, this essay is not negative in orientation. NIE research is illuminating. Greater awareness of the limits will help orient future work in the field in the most fruitful directions."

 

I am not so sure NIE has fully supplanted the Washington Consensus, but it is true that the language around development has shifted towards governance, institutions, rule of law and the like. Whether this represents a larger shift in global thinking remains to be seen, as many discussions around global economic social and political relations are still stuck in the old paradigm (i.e. austerity, organized crime, migration)... and these have as much impact (or more) on development than the development sector itself. While NIE does acknowledge the importance of informal institutions, the greater focus on formal/legal ones does a disservice to the discipline and undermines its utility for practitioners.

The author also points out something that anybody coming into economics from another academic area realizes really quick: economic tools are very, very abstract and inadequate to deal with actual social dynamics. While there is more interest in behavioral economics and other attempts to bridge that gap, there is always a nagging feeling that economists are reinventing the wheel and catching up with discussions that other subject had, at least, a couple of decades ago.

Overall the paper is a good primer on where New Institutional Economics is and the debate on what an institution is.