How do formal and informal institutions influence each other and the process of development? This paper presents a critical review of the literature on institutional change and the role of institutions. Issues of equity, economic rules and regulations, caste, religion, social capital and elite groups impact on the dynamics of institutions. It is necessary to further analyse the ways in which informal institutions both shape formal institutions and change the interactions of agents in social organisations.
Institutions are understood as formal and informal rules and regulations. They include tax laws, legal regulations, political freedoms, ethno-linguistic fractionalisation, religion, and infrastructure.
The recent literature on the impact of institutions on development has largely concentrated on the impact that institutions have on economic growth. Institutional quality may cause poor countries and people to stay poor, but it is unclear how it plays a role. The review highlights issues of:
- Equity: Institutional quality itself is determined levels of equity – inequitable economies develop exploitative and inefficient institutions. Democracy could contribute to setting up institutions that guarantee equality, but unfair wealth distribution can block the emergence of effective democracy.
- Economic rules and regulations: In Russia, regional differences illustrate the role played by local protection of property rights and absence of federal laws and regulations in increased innovation and growth.
- Caste: Caste reservations have helped to entrench the importance of caste for access to jobs. In India, upper-caste villages have more primary schools and also have better-equipped schools. Schools represent institutions that will influence both growth and wider development outcomes. Access to public goods depends not only on provision but also on the perceived social and political entitlement to these goods.
- Religion: Reformed curricula and the introduction of female teachers in Bangladeshi madrasas (religious educational institutions) is associated with attitudes conducive to democracy. Exposure to female and younger teachers leads to more favourable attitudes among graduates towards working mothers, desired fertility, and higher education for girls.
- Social capital and elite groups: The enhancement of social capital in villages helps to resolve problems in systems of collective governance. Social capital is defined as trust, norms of reciprocity, sanctions and networks which allow co-operation. Social capital decreases the transaction costs of organising activities. Access to social capital may depend on a person’s power and location, however. Such inequality may undermine the sustainability of community groups.
A development-orientated institutional perspective needs to emphasise more explicitly the role of informal institutions in shaping formal ones (such as the law). It is therefore necessary to further analyse the ways in which informal institutions (customs) gradually change the actions and interactions of agents in all sorts of social organisations (households, groups and villages, as well as firms and governments).
