The role of institutions in development has come under increasing scrutiny in recent years. Many studies have found that high-quality, well-performing institutions go hand in hand with positive development, but evidence regarding the causes of this remains thin. In response, this paper from the OECD Development Centre proposes an analytical framework that maps out key channels of influence between institutions and development outcomes.
The framework is based on the concept that institutions are part of a local setting influenced by history and culture. The nature of different institutions also plays a major role in determining their relationship with development. These are important considerations for policy makers hoping to achieve institutional reform. Changing traditional institutions like informal rules and social customs may take a long time, or even prove impossible, whereas newer institutions can be transformed more quickly. Thus, to be successful, policy reforms must fit with existing social structures. Research that seeks to improve the links between such structures and formal institutions would help policy makers achieve this.
Research measuring the impact of institutions on development outcomes, particularly growth, has increased in recent years. However, a review of existing country studies reveals many questions that remain unanswered. These gaps include:
- A clear concept of what ‘institutions’ mean in this context. Definitions range from the narrow perspective of rules and norms to broader aspects such as political systems and organisations.
- Evidence of the relationship between different levels of institutions.
- An analytical framework. That proposed in the paper suggests examining five variables: the type of institution, its time horizon for change, the local setting, human actors and the characteristics of the development outcome being considered.
- Precise policy recommendations – especially in the field of cross-country studies that examine growth.
For future research to be particularly relevant to policy makers, there is a need to examine the links between institutional change and the ways in which policies can bring about institutional innovation. Recommended areas of study are:
- The relationships and links between different levels of institutions. For example, to what extent do established norms thwart modernisation of the institutional framework?
- The social and private costs and benefits of informal institutions.
- The determinants of change of traditional institutions. Past experience shows it can be difficult to reform centuries-old institutions. In this context, it would be useful to identify the factors that drive change.
- Policy options to improve the ties between formal institutions and existing social structures. As the latter may be hard to change, there is a need to understand how formal and informal levels can be better linked.
- Comparative case studies. Applying the proposed analytical framework to two or more case studies would help formulate policy options that are precise yet relevant beyond individual country circumstances.
