Working Paper: NBER ID: w14050
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: No keywords provided
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) | significant costs for businesses (J32) |
| inadequacy of formal contract enforcement (D86) | economic activity (E20) |
| enhancing relational contracting (L14) | economic growth (O49) |
| entry regulations (Z38) | suppress entrepreneurship (L53) |
| presence of rents from entry regulations (R38) | stimulate entrepreneurial activities (O31) |
| institutional arrangements (D02) | economic outcomes (F61) |
| different paths to trade liberalization (F13) | successful global integration (F69) |