Academic journal article The American Journal of Economics and Sociology

Institutional Stickiness and the New Development Economics

Academic journal article The American Journal of Economics and Sociology

Institutional Stickiness and the New Development Economics

Article excerpt

Teeth-gritting humility, patience, curiosity and independent thinking are called for in learning how superior foreign technology works and how it can be improved. Without these conditions the technical assistance "does not take." The cut flowers wither and die because they have no roots.

Paul Streeten (1995: 11-12)

I

Introduction

FIRST INTRODUCED BY NORTH (1990), the notion of institutional "path dependence" has received increasing attention among those interested in the connection between institutions and economic growth (see, for instance, Pierson 2000a, 2000b; Buchanan and Yoon 1994). Path dependence emphasizes the increasing returns to institutions, which tend to "lock in" particular institutional arrangements that have emerged in various places for unique historical reasons.

Locked-in institutional arrangements may be suboptimal in the sense that, given today's information, agents would be better off if they moved to some other arrangement. In such cases, it is typically argued that in order to put agents on a new and improved institutional path, some outside entity, like the development community, is required to provide the exogenous "shock" necessary to break society out of the suboptimal scenario. This belief has presently led development economists to emphasize the role of exogenous institutions in determining economic growth. Current analyses of economic development thus concern themselves with finding the "right" institutional mix to promote progress in various countries.

However, the success of these efforts has been spotty at best. For instance, most underdeveloped countries in sub-Saharan Africa and many postsocialist transitioning nations continue to struggle despite development-community attempts to exogenously introduce institutional change. We argue that this failure stems at least partly from the fact that the concept of path dependence as it has been applied to institutions to date tells us only that "history matters" in the development of institutions. It does not, however, tell us how history matters. Research that considers culture suffers from a similar problem. While this work performs an important function in pointing out that "culture matters," it does virtually nothing in terms of telling us analytically or empirically how culture matters (see, for instance, Buchanan 1992; Pejovich 2003; Boettke 2001b).

We aim to provide the missing "how" in these closely related streams of research. We contend that institutional "stickiness"--the ability or inability of new institutional arrangements to take hold where they are transplanted--is central to understanding how history matters for institutions. Furthermore, it is central to understanding how the relationship between history and institutions matters for development economics.

We provide a framework for understanding stickiness based on the regression theorem. (1) The regression theorem maintains that the stickiness, and therefore likely success, of any proposed institutional change is a function of that institution's status in relationship to indigenous agents in the previous time period. This framework for analyzing institutional stickiness is at the core of what call the New Development Economics.

The New Development Economics builds directly on the voluminous body of research that examines the emergence, operation, and effectiveness of spontaneously ordered institutional arrangements. The idea that these institutions tend to be efficient and most effective in promoting the ends of indigenous agents is not original to us. On the contrary, Hayek (1960, 1973, 1991) was among the first to emphasize these aspects of spontaneously emergent institutions, in particular law. Following him, a number of others including Glaeser and Shleifer (2002), La Porta et al. (1998), Djankov et al. (2003), Posner (1973), and Benson (1989) have examined the comparative properties of endogenously emergent common law systems versus exogenously created civil law systems, and in several cases their relationship to economic development, and have empirically confirmed Hayek's insights. …

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