Working Paper: CEPR ID: DP6764
Authors: Dani Rodrik
Abstract: The focus of policy reform in developing countries has moved from getting prices right to getting institutions right, and accordingly countries are increasingly being advised to move towards "best-practice" institutions. This paper argues that appropriate institutions for developing countries are instead "second-best" institutions - those that take into account context-specific market and government failures that cannot be removed in short order. Such institutions will often diverge greatly from best practice. The argument is illustrated using examples from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability.
Keywords: Economic Development; Governance
JEL Codes: O1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Weak judicial systems in Sub-Saharan Africa (P37) | High transaction costs for businesses (D23) |
| High transaction costs for businesses (D23) | Reliance on relational contracting (L14) |
| Weak judicial systems in Sub-Saharan Africa (P37) | Reliance on relational contracting (L14) |
| Entry regulations (Z38) | Suppression of entrepreneurship (P12) |
| Entry regulations (Z38) | Creation of rents that stimulate entrepreneurial activity (R38) |
| Trade liberalization (F13) | Economic integration and growth (F15) |
| Choice of institutional strategy (L21) | Trade liberalization (F13) |