5.3.6 Institutional Frameworks
Economic actors interact and organize themselves to generate growth and development
through institutions (and policy making). While organizations are material entities
possessing offices, personnel, equipment, budgets, and a legal character; institutions
are systems of rules, decision-making procedures, and programmes that give rise
to social practices, assign roles to participants in these practices, and guide
their interactions. Organizations may administer institutions (Young, 1994).
Institutions exhibit substantial continuity and offer narrow and infrequent
windows of opportunity for reform (Aghion and Howitt, 1998; Rip et al., 1998).
Institutions operate in larger settings characterized by material conditions
such as the nature of available technologies and the distribution of wealth,
by cognitive conditions such as prevailing values, norms, and beliefs, and by
transaction costs, costs of co-ordination, laws, etc. (Young, 1994; Coase, 1998).
The market is a set of institutions, expectations, and patterns of behaviour
that enable voluntary exchanges based on the willingness to pay of the
parties to the exchange (Haddad, 2000). One major concern of the new institutional
economics is the boundary between the market on which transactions are negotiated
and organizations such as the firm (Simon, 1991).
On one level, all barriers can be considered institutional in origin, because
markets, firms, governments, etc. are all institutions. In this section, however,
the focus is on those barriers that derive from widespread or generic attributes
of institutions. The distinctions are necessarily arbitrary, and some overlap
between the discussion in this and other subsections is inevitable.
Institutions are a form of capital, social capital (Coleman, 1988). Social
capital, like natural and human capital, is at the same time an input and an
amenity. As an input, it enhances the benefits of investments in other factors
and, thereby, shares the shift feature of technology (World Bank,
1997). Social capital is a public good and suffers, therefore, from underinvestment.
Generally, weaknesses in social capital resulting from prevailing beliefs, norms,
and values are an important generic barrier to the effectiveness of institutions.
At the microeconomic level, social capital may be viewed as a social network,
and as associated norms which may improve the functioning of markets and the
productivity of the community for the benefit of the members of the association
(Coleman, 1988; Putnam, 1993; World Bank, 1997; Young, 1999). At the macroeconomic
level, social capital includes the political regime, the legal frameworks, and
the governments role in the organization of production in order to improve
macroeconomic performance as well as market efficiency (Olson, 1982; North,
1990). Institutions may remedy market failures due to asymmetric information
through information sharing (Shah, 1991). Societies in which trust and civic
co-operation are strong, a component of social capital, have significant positive
impact on productivity and provide stronger incentives to innovate and to accumulate
physical capital. Trust and civic co-operation tend to affect human capital
productivity especially (Knack and Keefer, 1997).