Institutions, Markets and Economic Development

Aims of the chapter

To understand the role of institutions, both formal and informal, in promoting economic development and human flourishing.

To analyse markets as institutions in themselves and as regulated by social institutions.

To draw the policy implications of this institutionalist view of markets.

To assess the relationship between the human development approach and the role of institutions in development in general, and in markets in particular.

Key Points

Institutions are rules and norms that enable human interaction to take place. How they operate is critical if economic development is to be achieved. ‘Getting institutions right’ has become a key priority in development policy. Thus the main focus of mainstream economists has been on particular rules, such as property rights, regulatory institutions, macroeconomic stability and social insurance as the main institutions enabling the economy – especially markets – to work well.

There are also social conventions, moral rules and informal norms that underpin how people interact and influence how the economy works. These rules and norms may often be discriminatory. Social identities and differences based on gender, age, ethnicity, race, religion, caste and so on affect how people engage with institutions and markets.

Mainstream economics has neglected to analyse the ways in which actual markets operate. Its support for markets as the best mechanism for delivering the greatest welfare is based on unrealistic assumptions that do not always take into account the actual institutions markets involve. Other economic approaches demonstrate that social identity and power relations matter and that markets are ‘socially regulated.’

The human development approach recognizes that valuable capabilities can be expanded through institutions but also that institutions can constrain the achievement of capabilities, particularly in contexts where social norms discriminate between people.

The human development approach is not for or against markets but recognizes that they may assist in promoting freedom and equity. However, markets are affected by deeply-rooted social norms and social identities that may enable some people to do well while discriminating against others. Addressing such inequities requires not only rules and regulations agreed through democratic processes but also a sustained effort to reverse the underlying power relations, as well as the attitudes and beliefs, based on the informal norms from which they arise.