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The World Bank and Institutional Development: Critical Reflections1

By

Howard Stein

Professor

Center for Afroamerican and African Studies (CAAS)University of Michigan,

505 S. State St.,

4700 Haven Hall

Ann Arbor, MI 48109-1092

[email protected]

Introduction

The performance of many developing countries under the auspices of internationalfinancial organizations in recent decades has been dismal. The worst region by far hasbeen sub-Saharan Africa. Per capita income fell by an astounding 43% between 1980 and2000 (World Bank, 2007). The number of people living on $1.25 per day increased from213 million in 1981 to 382 million in 1999 or roughly 58% of the population comparedto 54% in 2000. By 2005, the total numbers rose to 390 million people(Chen andRavillion, 2008).

Partly due to these policy failures there has been a growing dissatisfaction with thetheories underlying these strategies and the emergence of a variety of new approachesthat have begun to challenge them. Perhaps the most influential new vein is located ininstitutional economics with its recognition of the complex interaction between theeconomy and other parts of the social system. This paper will focus on one important newarea, institutional economics and the influence it has had on the World Bank agenda.

The main argument of the paper is instead of using institutional economic theory torethink their policies, the Bank has used the new institutional economic or NIE variant tobuttress the old orthodox agenda and to theoretically reconstruct new items likegovernance. Improving governance, building social capital and enhancing ownershiphave been promoted by the World Bank as the missing ingredients in their developmentstrategies which help explain away the failures of structural adjustment withoutfundamentally challenging the policies at the core of adjustment.

The paper will begin with a brief historical synopsis of the shifting agenda of the WorldBank. A second section will examine the underlying reasons for the interest in NIE. Thenext section will critically explore how NIE has been used by the World Bank. The latterof the paper critically reviews a selection of literature on institutions and development insearch of alternatives to the World Bank approach. A final section explores how one

1An earlier version of this paper was presented at the Glasgow Universitys International Conference onDevelopment Economics Policies and Institutions for growth and development: Is there a heterodoxview?26-27 June 2007. This paper draws on Stein, 2008.


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might design a more institutional-centric approach to development based on OIE ororiginal institutional economics.

The Shifting Agenda of the World Bank

During the 50s and 60s the World Bank concentrated on loans in support ofinfrastructure. From the 1960s there was an increasing expansion into areas likeagriculture and some interest in income distribution, basic needs and poverty reduction inthe 70s. After 1980, the Bank, with a good deal of fealty, adhered to the trinity of neo-classical orthodoxy which included stabilization, privatization and liberalization.

The thinking underlying adjustment arises from relaxed versions of general equilibriumtheory. In its strictest form, markets are presented as neo-classical exchanges arisingfrom the spontaneous interaction of self-seeking individuals not as an institutionalconstruct. All goods are assumed to be homogenous. Prices then provide the onlyinformation necessary to make optimal decisions on what to purchase and produce.

Competition is assumed to operate in all markets so that no individual player has enoughmarket power to affect the price level. Perfect information arises by positing the existenceof markets for every good and service both now and in the future. Individuals can thenmake fully informed rational decisions. Finally, a Walrasian auctioneer ensures overallequilibrium is reached by gathering and processing the information from all markets. Thisallows individuals to feel their way (tatonnement) toward the removal of all excess supplyand demand by adjusting their decisions in each market. The outcome will be social welfaremaximization through Pareto optimality (no person can better off without making anotherperson worse off).

In this ideal world there simply are no reasons for institutions. In a more relaxedversion there is the recognition that markets require a means of payment which introducesthe concept of money. Moreover, there is an additional understanding that markets bydefinition involve the exchange of property rights. In both cases this raises the need forexternal institutions in support of the proper operations of markets. This viewpoint hasgreatly influenced the institution building projects of the World Bank and IMF from theinception of structural adjustment. In the orthodox world, stability of the money supplyensures the value of money; it requires independent well developed central bankinginstitutions. Similarly, private property rights must be properly instituted and ownershipguaranteed upon exchange. While the Bank continues to focus on these two issues, theinterest in institutions began to broaden.

One of the main reasons for this was the deterioration of some regions particularly sub-Saharan Africa during the 1980s. From 1980-90, SSA countries received 31 adjustmentloans which was roughly 50% of all loans allocated world wide during that period (Kapuret al., p.520). Investment declined at an annual rate of 3.9% in the 1980s after growingby 4.0 % 1973-1980. Exports fell by .6% per year. Real per capita income fell by 1.2 percent per annum during 1980 to1989 after growing by .6 % between 1973 and 1980. Percapita food production fell by 6% over the decade. Meanwhile Africa throughadjustment was taking an enormous burden of additional debt with nothing to show for it.


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Between 1980 and 1988, debt increased an annual compound rate of 12% and debt toexports ratio at 17.7% per annum to a completely unmanageable 360%. By 1989 debtrelative to GNP was at 98.3% up from 27.4% in 1980 (Stein and Nafziger, 1991, Tarp,1993, UNDP, 1992).

The 1981 Berg Report or Accelerated Development in SSA indicated that Africancountries had accomplished three major objectives in the first two decades afterindependence, political consolidation, laying down of basic infrastructure and thedevelopment of human resources. However, too little attention was paid to production.The report emphasized that to generate growth the needed more(1)more suitable tradeand exchange rate policies; (2) increased efficiency of resource use in the public sectorand (3)improvement in agricultural policies (World Bank, 1981, pp.4-5). The focus wasto reduce distortions in prices created by state intervention.

By 1989, the World Banks Africa study From Crisis to Sustainable Growth introduceda new set of policy considerations without abandoning the core of adjustment including

the issue of institutions:

It is not sufficient for African governments merely to consolidate the progressmade in their adjustment programs. They need to go beyond the issues of publicfinance, monetary policy, prices, and markets to address the fundamentalquestions relating to human capacities, institutions, governance, the environment,population growth and distribution and technology (World Bank, 1989, p.1)

Beginning in 1989, the World Bank began to expand their developmental lexicon toinclude issues of governance and capacity building, social capital, poverty reduction,sustainable development, decentralization, ownership and others. Initial World Bankstudies aimed at empirically confirming the positive impact of adjustment gave way to aseries of studies aimed at explaining regional exceptionalism or why some areas haddone poorly during the adjustment era. This has included variables like social capital andethnicity.2 The Bank has included other elements aimed at disarming critics byaddressing the general sphere of criticism and even the language but not the content.World Development Reports 1997 and 2000, for example, addressed the issues of stateformation and poverty. The Bank and Fund have even taken the bold step of renamingtheir policy loan mechanisms as anti-poverty devices without seriously changing the corecontent of policy conditionality. Closely aligned with the new anti-poverty focus havebeen debt reduction strategies and the belief that funds released from debt servicingtoward increases in social spending would have a profound effect on poverty reduction.This has been buttressed by the repeated arguments using highly suspect and selectiveevidence that a proper and true commitment to stabilization and adjustment will lead to areduction in poverty.3

2See Stein, 2008, ch.2.3World Development Report, 2000 on poverty is replete with these kinds of arguments and selectivestudies. For example on food subsidies they argue A study in Guinea and Mozambique found thateliminating food subsidies did not her the poor people because the subsidies had not reached them in the


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The question of ownership has been an important part of this literature. In their view,strategies have not worked as designed because they are perceived by recipient countriesas extrinsic and imposed.4 In practice, the Bank has pushed the faade of ownership byplacing Poverty Reduction Strategy Papers (PRSP) at the center of the HIPC and MDRI

efforts. The search for the missing ingredient has also driven the discussion on the roleof institutions and institutional theory by drawing on New Institutional Economics(NIE)

5.

The Rise of NIE

The first annual ACDE conference in 1989 actually had a paper on institutions presentedby Brian Van Arkadie, an economist with a long history of working in Africa,particularly Tanzania. The paper was also eclectic, with more discussion of Marxist andstructuralist contributions than NIE. The paper is replete with a variety of cryptic andovert criticisms of World Bank-type policies, including warnings of the dangers of

applying the same models to different institutional settings and of predefining anduniversalizing the role of states in economies. The reaction by World Bank participantsand invited guests showed little appreciation of this message. According to John Nellis,an economist working at the Bank at the time on public enterprise reform, the next andmost crucial step in the process (and here, not surprisingly, the Van Arkadie paper is nottoo helpful) is to specify precise operational methods and tools by which to improveperformance in institutions. In a comment following Nellis, Pranab Bardhan began tolay out the direction picked up by the Bank a few years later: Until recently, mainstreameconomic theory has by and large ignored institutional issues. Fortunately this is nolonger true. There is now a vast literature which includes the Coase-Williamsonliterature on transaction costs which concentrates on corporate structure andpractices (Van Akadie 1990; Nellis; 1990, Bardhan, 1990).

With the granting of the the Nobel prize to two NIE economists, [Coase (1991) andNorth (1993)], the 1994 annual World Bank Conference on Development Economicsdevoted a full section to New Institutional Economics.

Mr. Williamson arrives in Washington

first place. The lesson is clear: lower overall food subsidies need not be inconsistent with helping poorpeople (World Bank, 2000, p.69).4When countries issue policy documents that converge on orthodox development strategies, international

financial institutions and donors seize upon it as evidence of genuine ownership. Witness the reaction toNEPAD. This rather elides what is a fundamental contradiction between ownership and conditionality. SeeWeeks et al.(2003) for a detailed evaluation of this in the East African context and Cramer, Stein andWeeks (2006) for a more analytical approach using the example of Tanzania.5New institutional economics has been inspired by the work of Coase, Williamson and North. To varyingdegrees, they share the micro-foundations and methodology of neo-classical economic theory. The aim is tofill the perceived interstices in the standard theory that arise when strict assumptions are relaxed (such asperfect certainty) and when observations are in dramatic conflict with those predicted by the theory (egexistence of firms). In NIE institutions constrain and bind the activities of individuals. They therefore tendto be narrowly instrumental.


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Williamson (recipient himself of the Nobel prize in 2009) who was invited by the Bankto present a paper on governance and institutions in developing and reforming countriesattempts to apply his formula to the World Bank agenda. He felt his main contributionwas his bottom-up approach to economic organization. Two issues were importantcredible commitments and remediableness. Credible commitments focused on the

long term guarantees influencing the parties of transaction which reduce contractualhazards while stimulating investment in transaction specific assets. State guarantees toproperty rights can take many forms not just legal guarantees. In China, for example,there are no formal central private property rights. However, federalism has increased thelocal communication of credible commitment and limited the confiscatory capacity of thecentral state encouraging private investment. Understanding the micro-analytics ofinstitutions is more important than general formulations.

Remediableness rejected the notion that for comparison purposes there is an absoluteinstitutional ideal. He provides three reasons. All institutions in practice are flawed, forhistorical reasons incumbency can be much more advantageous than introducing new

institutions and politics can be a barrier to the introduction of new institutions. The keyis a careful assessment of the weakness and strength of proposed institutions utilizing hiscomparative institutional economic approach which draws on of the micro-analyticallogic of economic organizations.

Bureaucrats in Business

The first serious usage of NIE in a World Bank report was a volume on the politicaleconomy of government ownership entitled Bureaucrats in Business(World Bank,1995). The volume was highly contentious and only approved for publication by theBoard after the vice-president and chief economist Michael Bruno threatened to resign.The publication was deemed to be too overtly political for the World Bank. The Bankonly agreed to publish the report when the Chief Consul, wrote a memo justifying thediscussion of politics in the context of its impact on development as long as the issue ofdemocracy was not raised. 6

The report has been heavily criticized in the literature. For example, Chang and Singh(1997) question the reports implicit assumption that the discipline imposed ongovernment bureaucrats is inherently inferior to the private sector particularly in view ofwidespread market imperfections in product and capital markets. Jalilian and Weiss(1997) subject the data in the report to various statistical and econometric tests and findno evidence to support the central proposition in the report that the presence of largestate-owned enterprises leads to lower than expected economic growth. Bayliss and Fine(1998) criticize the analytical framework which emphasizes political prerequisites whichare likely to be absent in the poor countries which according to the report have the mostto gain from privatization. They also accuse the report of the selective use of evidence

6See Stein, 2008.


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and bias in interpretation and too narrow a view of industrial policy which leads toinappropriate policy recommendations.

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What of the role of NIE? Without making any specific reference to the work, elementslike chapter three on contracts rely very heavily on Willamsons theoretical framework.

In line with my argument above, it is apparent that NIE is selectively used to theoreticallybuttress the existing policy framework rather to alter it.

The volume begins with a reaffirmation of the Banks axiomatic belief in privatizationand a series of related questions focused on the continuing resistance to reform when it isknown that the potential gains from privatization are substantial. However, this wasnot the first document to examine these issues.

The 1983 World Development Report was the first to analyze the state owned enterprisesin the context of the management of development. The report notes that:

In theory it is possible to create the kind of incentives that will maximizeefficiency under any type of ownership. But there is a great difference betweenwhat is theoretically feasible and what typically happens ((World Bank, 1983,p.50)

The report goes on to push for alternatives to state owned enterprises including allowingprivate firms to compete, using stabilization funds instead of marketing boards, handingover management to private contracts and liquidation in favor of the private sector.Regulations are also discouraged in favor of market mechanisms to lighten theadministrative burden and reduce costly distortions (p.53)

By 1989, the Bank was altering its tone by noting that the division of responsibilitiesbetween the state should be a matter of pragmatism-not dogmathere need be nopreconceptions about the right type of organization; appropriate incentives count formuch more (World Bank, 1989). Salient to this task is the need for institution-building:

Development takes place through institutions, including markets, whether privatepublic. Institution-building in the widest sense is essential and must for the most

7For example, the report argues that Chile, Korea and Mexico performed well because they reduced stateownership of enterprises. Yet Koreas went through virtually no privatization and was placed in the betterperformance category. They argue that is because they already had a low level of state ownership. Theproblem was that Turkey had an even lower percentage of state owned enterprises and divested more than

Korea but was placed in the poor performance category. How can they argue that successful performersdivested more(p.69). This is bias in selection eg.better performers are placed in categories to prove thatthey are better performers by the criteria of success in that category. Bayliss and Fine(1998) fine alsoquestion the argument that the remaining state owned enterprises did better after divestiture because of thedivestiture due to the freeing up of scarce managerial resources and the resulting competitive pressures.They argue that generally the privatization process uses a great deal of scarce resources and there will belittle overlap between sectors privatized and remaining sectors. The results likely have nothing to do withdivestiture and linked to the same conditions that allowed privatized firms to do well in a world of oppositecausality eg. the good performance of the economy allowed all firms to do well not the economy did wellbecause of privatization.


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part be nurtured by governmentsgovernments need an explicit strategy forinstitution-building for both the public and private sector (World Bank, 1989,p.55)

However, with little or no institutionally-specific theory of the reasons why some state

enterprises operate well and others dont, the report fell back on the same position as1983:

Most state enterprises have a poor performance recordmanagers have sufferedfrom political interference..it has also proved difficult to devise incentivessystems to motivate employees and managers when entrepreneurship, commercialjudgement, and risk taking are need. Increasing recognition of these problems hasspurred a worldwide trend toward privatization[sic-as if international agenciesand conditionality has had nothing to do with this]In some cases the privatesector lacks the capacity to take over, but in time and with imaginationprivatization can work (World Bank, 1989, p.55)

Bureaucrats in Business (World Bank, 1995) supported the Banks confidence inmarket solutions and the primacy of privatization but draws on Willamsons theory toprovide a micro-level analysis aimed at replacing the stylized facts, contentions andsimple numerical exercises aimed at justifying the agenda to that point. Here is a clearattempt to use NIE to fill in the missing lacunae in the World Bank analysis withoutfundamentally altering its commitment to its core policy agenda.

State and privatized companies are analyzed as contractual relationships betweengovernment and public and private managers in the state owned case and a regulatorycontract in the privatized case. Incentives are generated by the interaction of information,commitment and rewards and penalties. Information is constrained and contractualparticipants have differentiated sets which they can use to their own advantage. This is ofcourse Williamsons concept of opportunism and its associated cognitive barriers due tobounded rationality. Contracts need to be designed to incorporate rewards and penaltiesthat encourage transparency and the completion of the contract. This is linked toWilliamsons design of governance structures to deal with opportunism and behavioraluncertainty.8In addition each party needs to be convinced that the other will meet itscontractual terms or in other words fulfill Williamsons principle of crediblecommitment.

What results would one predict in advance from an organization that has beenpreoccupied with demonstrating a case for privatization? Simply the greater theinvolvement of the private sector and the more the recognition of private property rightsthe better the results. Indeed this was the case. Performance of public managers workedleast well, private management contracts were a bit better while regulatory contracts,when properly designed and implemented, worked well for enterprises in monopolymarkets (World Bank, 1995, p.6).

8See Williamson, 1985, ch.2.


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How do they illustrate the results? They readily admit that the enterprises under publicmanagement met most of their contract goals. Most people would suggest this is a prettygood indicator of success. However the study dismisses the relevance of these goals.Instead, they use improvements of profitability of assets and productivity (variousmeasures) which were largely absent in the case of public management contracts and

more present in the case of private contracts (in rather different industries and countries).In contrast for evaluating regulatory contracts they focus on expansion of service, returnsto capital and effects on consumers before and after privatization and associatedregulatory contracts and show generally positive results.

What do we make of this? To begin with they carefully select the sample and in factreadily admit the sample is small and not random, so care must be used in generalizingthe results (World Bank, 1995, p.113) and then go on to generalize the results. Theyonly look at performance of twelve enterprises in six countries for the evaluation of therole of public management contracts as opposed to 20 companies for private managementcontracts in 12 countries. These are done in different sectors for each contract. For the

regulatory contracts they look at six countries in one sector telecommunications. Inalmost every case they compare performance before and after privatization without anyevaluation of the impact of the government funds typically put into the companies beforethey are privatized. Once the superiority is demonstrated NIE is used to explain theseresults.

Information asymmetries create avenues for managers to opportunistically negotiate forreadily achievable targets. Since managers are politically appointed their performancehas little impact on their careers so there is little incentive to adjust to rewards andpenalties. A lack of a third party to enforce contracts creates a commitment problem. Incontrast, regulatory contracts used successful competitive bidding and reducedinformation problems, price regulations were designed to improve performance andlegislatures created laws to define the terms of arbitration and appeal. Commitment couldbe more readily achieved.

The problem here is the World Bank is using the instrumentality of the state to define thenature of the state rather than how the nature of the state will determine how thatinstrumentality is used. You cannot explain why state owned enterprises or regulatorycontracts in Singapore work better than Nigeria due to simple design features. These arecountries with radically different institutional traditions and different patterns of whatconstitutes acceptable behavior (more on this below).

Is this study consistent with Willamsons agenda for the Bank set out in his 1994ABCDE paper? I would argue largely. It is evident that they used a comparativeinstitutional approach and many of Williamsons theoretical tools. However, what is notso carefully handled is his principle of remediableness. Chapter four looks in detail at thequestion of the politics of institutional change. It points to changes occurring when therewas political desirability such as a crisis or regime shift, political feasibility whenpolitical leadership was able to overcome opposition building coalitions and usingcompensation and compulsion to counter the opposition and where the country was able


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to demonstrate credible commitment by governments. However, other aspects ofWilliamsons remidiableness are not incorporated. In particular the notion of incumbencybeyond the political dimension is never incorporated as part of the evaluation of the costsof institutional change including the loss of incumbency from the mass liquidation ofenterprises in many African countries.

9In addition it is evident that the World Bank is

working with an institutionalized ideal contrary to Williamsons admonitions, whereresults can be heavily informed by predetermined beliefs and priorities.

The study writes The evidence makes it clear that reducing the role of bureaucrats inbusiness can bring a country substantial economic gains (p14) Perhaps a more honeststatement would have been The evidence [must] make it clear [or we will not publishthis study] that reducing the role of bureaucrats in businesscan bring a countrysubstantial economic gains.

NIE meets the WDR

World Development Report (WDR) State in a Changing World was the first WDR toseriously utilize NIE theory. Brian Levy a Bank economist since 1989 and a strongproponent of NIE was the principal author with Douglass North on the advisory board.In a manner similar to Bureaucrats in Business NIE is used to theoretically strengthenthe rationale for existing policy priorities.

Chapter four most heavily utilizes NIE. The chapter provides a defense of the neo-liberalism in three key areas liberalization, regulation and industrial policy. Theoveremphasis on deregulation and/or absence of regulatory structures prior toliberalization, the over reliance on privatization and the continual opposition to statesponsored industrial policy in view of the evidence of its successful use in Asiancountries, have been three areas heavily criticized in the literature. The chapter respondsto these points through dismissal (Box 4.2 on six objections to privatization and how toaddress them), reinventing history liberalization in the financial sector is not the sameas deregulation (p.65) and accepting that heavy regulation and industrial policy can beeffective-In the United Kingdomprice-cap regulation gives the utility and incentive tobe efficient and can encourage innovation(p.69) and Post-war Japans development ofits steel, coal machinery and shipbuilding industries illustrates this [industrial policy]rationale for intervention (p.72)-but dismissing the relevance of these issues using newinstitutional economic arguments

How does NIE deal with these issues? Relevant arguments using NIE begins with Levyand Spiller 1993 ABCDE paper. Levy and Spiller (1994) focus on a countrysinstitutional endowment a la North with a Williamson inspired comparison of howregulatory systems are fashioned in telecommunications. The focus is on how to restrainopportunism while permitting sufficient flexibility to allow companies to adapt tochanging circumstance. What has arisen from this study is the principle that ifadministrative capability is weak, which is invariably true in developing countries,

9For example only 55% of the 183 state divestments in Tanzania through 1998 were bankruptcies andliquidations (Gibbon, 1999).


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regulatory rules should be simple and market-like with few information requirements sothat states can provide a credible commitment to avoid arbitrary action. In essence,regulations should be driven by perceived capacities which are low in developingcountries rather than by need which would seem to be greater. Ironically, developingcountries are asked to focus on more market-like mechanisms even though they have the

most poorly formed markets while heavy handed approaches in the richer countries withthe better formed markets are tolerated.

A similar dismissal is used in WDR 1997 on industrial policy. They argue that thetheoretical case for industrial policy rests on the proposition thatinformation andcoordination problemscan be pervasive-more so in developing countries-and go wellbeyond those addressed by well-functioning institutions to protect property rightsInessence the argument centers on the fact, that in underdeveloped markets with fewparticipants, learning can be extremely expensive. Information, more readily available inindustrial countries, here becomes a zealously guarded secret, impeding coordination andmarket development more generally. (World Bank, 1997, p.72) However, they dismiss

the argument since pursuing this style of investment coordination presupposes levels ofpublic and private institutional capability that are beyond the reach of most developingcountries p.73).

Paradoxically, NIE is used to both justify and dismiss industrial policy (Williamson typearguments on proprietary use of information for opportunism but the Northian-typeinstitutional framework to point to weak capacities). So without underlying capabilities,it is the neo-liberal business as usual until institutions can be strengthened the firstchallenge is to focus on the essentials-establishing a lawful state and setting soundeconomic policy (Levy, 1997, p23)

NIE and the Reconstitution of Governance

Following WDR 1997, the Executive Directors of the Bank, in March, 1997 issued a newcompact to build institutions to fight poverty. In response, the Bank organized aconference and published a volume on institutions in development and evaluation.

The commitment to NIE as opposed to OIE (original institutional economics)10was clearsince it is not tantamount to a rejection of the neo-classical model but a broadening ofthe neo-classical model to deal with situational constraints (Piccioto and Wiesner, 1998,xi-xiii).

10OIE or the original institutionalist camp has built on the basic ideas of Commons, Veblen and Polanyiwho reject the microfoundations and methodology of neo-classical economics and attempt to generatealternative and often more complex ways of understanding the operation of contemporary and historicaleconomies. Development, at the fundamental level, is focused on the transformation of human behavior andin understanding the nexus of dynamic factors which lead to the evolution of new institutions. In thistradition, institutional evolution is a process of cumulative change that is a product of a series of interactivedimensions arising from both economic and non-economic factors (more on this below).


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To Wiesner , NIE (he uses the term interchangeably with neoinstitutional economics) canbe interpreted, in Lakatos terms.

11It is part of the protective belt around hard core neo-

classical economic axioms. It does not dismiss pure competition or rational choicebehavior, but attempts to bolster it by dealing with its conceptual problems in areas likeinformation, rent-seeking, and transaction costs (Wiesner, 1998, p.114). But this is

precisely the flaw. Since NIE shares many of core propositions of neo-classicaleconomics, it can be used to qualify, contextualize and ultimately rescue the economictheory justifying neo-liberal policies.

The volume contains an interesting section on Institutions and Governance Structuresaimed at using NIE to provide a theoretical understanding of the rather ambiguousconcept of governance both at the central and local level.

12Papers, for example by

Shirley on public service performance contracts and Levy on creating credibleregulatory policy draw on NIE to try to support the governance concept. Wiesner appliestransaction cost related arguments to explain how rent-seeking by public employeeslimits the externality effect of public goods which in turn creates inefficiencies in

governance. Wiesners paper is particularly interesting since it very much aimed atproviding an NIE explanation for the failures of orthodox reform.

Wiesner examines unions as rent-seekers inside of public entities. In NIE terms, publicsector rent-seekers operate in stealth with a set of priorities which disrupt the operationand purpose of public organizations (which exist because the price system is unable todeal with externalities). They are able to shape and influence their institutions byencouraging the creation of operating rules for their advantage (such as pushinglegislation to limit competition). The public sector rent-seeking groups like unions arehybrid entities interested in creating conditions where information is diffuse andambiguous which increases quasi-rents. Since they are not operating within markets,they have advantages over private rent-seekers due to the absence of competition,asymmetr information and the influence they have on performance evaluation.

Wiesner focuses on why decentralization did not work as planned. Educationdecentralization should have led to improvements in education through revenue sharingtargets. However the efforts were foiled by the teachers union. The union was able to getthe state to pass legislation banning independent evaluations while disallowing theprivate sector from competing with the public sector. Wiesners solution is to createpressures on local governments to assume greater fiscal responsibility which willsupposedly lead to greater efforts to restrict rent-seeking, decentralize or denationalizepublic unions, and increase political decentralization. Again there is nothing wrong withthe Bank effort to decentralize, if only those damn unions were not there which can becountered only if there is even greater decentralization of revenue responsibility andpolitics. What we have here is a reconstruction using NIE tools of the World Bank

11Lakatos' work on the methodology of scientific research programs, which consists of: a hard core ofmetaphysical, irrefutable propositions; positive heuristics, which provide instructions on what tools andquestions should be selected and which should be avoided; and finally a protective belt of theories,empirical conventions and auxiliary hypotheses.12This is recently admitted by NIE Bank economist Levy (2000, p.1).


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agenda including its axiomatic belief that decentralization matches services with localpreferences and therefore will bring the state back to the people(World Bank,1997, ch.7).

As pointed out in the literature the reality can be quite different. There is widespread

evidence of unaccountable local bodies, inadequate funds, weak guidelines, and policiesthat ignore local capacities. Instead of accountability decentralization can generate theopposite

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Bureaucrats in Business and other reports helped open the door for a greater utilization ofNIE in other studies including those with a regional focus.14 By 2002, sufficient interestwas generated in the issue that the Bank commissioned a full World Development Reporton the application of NIE to development.

Critical Reflections on WDR 2002

World Development Report, 2002 focuses on institution building in support of markets.Along NIE lines, institutions are a deductive manifestation of the relaxation of the narrowneo-classical economic notion of the operation of markets. For example, rural markets:

suffer from problems of information, inadequate competition and weakenforcement of contracts. Building institutions that reduce transaction costs forfarmers, therefore, can greatly improve the way agricultural markets operate. This isespecially important for poverty reduction, because poor people are more likely tolive in rural areas and make their living from agriculture-related activities. Well-functioning agricultural markets also have important benefits for the rest of theeconomy. As agricultural productivity improves, farmers leave agriculture for moreproductive employment in industry and services and promoting overall growth.(p.31).

By implication, slow growth in the agricultural sector has nothing to do with 20 years ofadjustment15, but is due to inadequate competition and information which have impededoptimal growth. Institutional constructs are then reified and projected as surrogates to fillthe interstices of a chimerical construct that not only promises operational improvements,economic growth and poverty reduction but even the entire transformation of the structureof the economy!

This is a general problem of the concept of institutions utilized throughout the report.At the definitional level, the World Bank relies entirely on NIE constructs which seeinstitutions as rules, enforcement mechanisms, and organizations. Norms are consideredto be part of rules rather than a separate realm. Conceptually this is rather problematic.

13See Ribot (2003) for examples of the rather perverse impact of decentralization in the management ofthe environment and natural resources.14See for example Burki and Perry (1998) published by the World Banks Latin American and CaribbeanRegional Office.15See Stein 2003 for a critique of the impact of adjustment on agriculture in Africa.


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Rules can often be pro-forma and put in place as a result of a legal or regulatory mechanism.Norms are more generally binding upon groups and directly influence their behavior. Theytend to be somewhat more embedded and directly linked to what is a central tenet of oldertraditions of institutionalism the habits of thought common to the generality of men andwomen (more on this below).

Enforcement mechanisms are a salient element of the neo-classical approach to institutionsdue to its microfoundations. Following Williamson, every individual is opportunistic andutility maximizing which leads to collective action problems; the costs of behavior must besufficiently high to ensure that individuals are rule conforming. Individual decisions toabide by the rules arise by a careful weighing of the marginal costs and benefits. Homo-economicus is omnipresent and influenced by the NIE vision of institutions:

Informal institutions and private formal mechanisms generally rely on their ownmembers for enforcement.Institutions with internal enforcement mechanisms areeffective because there is a mutually recognized system of rewards and penalties. An

important issue in the design of public institutions is ensuring that the incentives thatare created actually lead to desired behavior (p.6).

However, in the rational choice and methodological individualistic world of NIE, rulefollowing in response to sanctions will be possible only if observed by others with the powerand desire to impose sanctions. Where homo-economicus is ubiquitous why should anindividual impose penalties unless it affects their own utility. In reality people frequentlyfollow rules in the absence of monitoring (Rutherford, pp.72-73). What is required is amore complicated understanding of human behavior. In the spirit of OIE, the aim of aninstitution in a developmental context should be the internalization of new norms rather thanresponse of individuals with each decision on the margin to weigh the rewards and penalties.As Etzioni argues the true test of internalization is when the actor learns to follow rulesof behavior in situations that arouse impulses to transgress and there is no surveillance orsanction (Etzioni, 2000, p. 167).

There are other problems with the World Bank approach to institutions including their viewof the role of social norms which are consigned to the sphere of informal institutions. To theBank, formal institutions deal with rules that are codified or legally stipulated whileinformal institutions are outside the legal system and reflect unwritten codes of socialconduct(World Bank, 2002, p.6). To deal with the opportunism of homo-economicus,informal institutions will have to rely on religious or ethnic ties which have extra-legalmechanisms to punish deviant behavior through ostracizing members. However, informalinstitutions can only:

support a less diverse set of activities than do formal legal institutions. Ascountries develop the number and range of partners that market participants dealwith increases and market transactions become more complicated, demanding moreformal institutions. (World Bank, 2002, p.6).


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The formal-informal dichotomy arises from the work of Douglass North (1990). Northdistinguishes between three levels of market development; personalized exchange involvingsmall scale production and local trade; impersonalized exchange that involves some longdistance and cross-cultural trade; and the impersonal exchange of modern economies. Theinstitutions of the first type focus on repeat dealings and cultural homogeneity (common

values). In the second case the exchange requires kinship links, bonding, the exchange ofhostages or merchant codes of conduct. Thus both rely on informal institutions. In contrast,modern economies require third party enforcement and more formal arrangements. Centralto the success of modern markets is the creation of a set of rules that make a variety ofinformal constraints operational otherwise continual enforcement would make transactionstoo costly (North, 1990, pp.34-35). Informal institutions, in this context, are thereforeimpediments to development.

Unfortunately, in the context of development the formal-informal distinction is ratherarbitrary and falsely dichotomizes institutions. If two large corporations have a hand shakeover a million dollar deal is this informal? In contrast if two families record the exchange of

a daughter for an arranged marriage to cement a business arrangement is this a formalinstitution? What is central is not the distinction of formal vs. informal the extent to whichcommon habits of thought have been internalized toward a new ways to cooperate toundertake activities that advance the standard of living. From the work of 19thcenturypsychologists like William James(1893), there has long been the recognition that habituationis salient to the internalization of new social norms. In the context of development, normsmust change not the degree of informality. This will be explored in the latter part of thispaper when discussing the generation of an institutional matrix.

Other false dichotomies arise from the faulty foundations of Banks view of institutions.Take the distinction between the public vs. private sectors role in building markets. Therole of the state is deductively posited:

Governments have an important role in providing public goods, such as laws thatdelineate property rights and the judicial institutions that enforce these rights andestablish the rule of law (World Bank, 2002, p.7).

Any intervention beyond the narrow principles arising from their theoretical model willaxiomatically impede markets since:

governments have been known to impede the development of markets througharbitrary exercise of state power, overtaxation, corruption, short-time horizons,cronyism and the ability to uphold public order (World Bank, 2002, p.7).

Take the issue of overregulation. Markets in developing country contexts are generally seenas more poorly developed. As discussed above, markets would seem to require greaterregulation and larger amounts of state support. Following World Development Report,1997, overregulation is defined not by the state of the markets but by the state of statecapacity:


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the limited capacity of developing country governments to implement regulationsmeans that many activities in poor countries are overregulatedone solution is towrite simple rules and have fewer of them(World Bank, 2002, p.12).

As Chang (2002a; 2002b) cogently argues, markets are the product of political intervention.

Establishing and distributing property rights (witness the allocation of state property tooligarchs in Russia), altering prices (setting minimum wages and interest rates, etc.),regulating products (safety, child labor, etc.), restricting participation (licenses for banks,foreign ownership restriction, etc.), setting the rights and obligations of participants(environmental and zoning laws, etc.), and establishing the rules of exchange (contract law,consumer rights and contract law, etc.) are political decisions. The neoliberal demands todepoliticize markets are nothing but political statements aimed at redrawing the boundariesbetween states and the private sector. Before briefly laying out an alternative approach, itbecomes important to review some of the literature to search for alternatives to the WorldBank vision of institutions.

Institutions and Development: A Note on the Literature

By far the most significant and careful attempt to address the issue of institutions anddevelopment which draws heavily on Africa can be found in the work Marcel Fafchamps(Fafchamps, 2004). The volume relies on data gathered over a number of years fromthree countries Ghana, Kenya and Zimbabwe covering both the manufacturing andagricultural sectors. It covers an impressive array of topics including contractenforcement, the role of ethnicity and discrimination, the question of market formationand the nature of information sharing. However, the volume is a largely captured by theconceptual tools of NIE. The focus is on understanding institutional failure as aninability to address the market imperfections associated with information asymmetriesand enforcement problems (p.457). Fafchamps rejects what he refers to as the neo-classical institutional economic view that institutions should spontaneously arise to dealwith market failures (since it is in the interest of the involved parties). Instead he pointsto coordination, innovation and coercion failures that prevent these institutions fromarising. But these impediments arise out of many of the same microfoundations of neo-classical economics. For example coordination failures arise because some firms wouldprefer to punish their competitors by not informing them of non-paying customers. Self-interested homo-economicus is as present here as in any neo-classical depiction.

Moreover, there is little in this volume to challenge the fundamental orthodoxies of thepast 25 years. Structural adjustment is barely mentioned in the volume, yet it has had adetrimental impact on manufacturing and agriculture (Stein, 1992, 2003). Policyimplications are brief, tentative and would, if implemented, at best have a marginalimpact on the poor climate for production, employment and investment in Africa. Thisis perhaps deliberate and reflects the oft-held view of many mainstream economists thattheir positive analysis is indisputable but more normative policy advice subject to disputesince it is potentially laden with values. As Fafchamps unequivocally states Drawingpolicy prescriptions from economic analysis is a hazardous endeavor. The reason is thatwhile the analysis itself is based on rigorous scientific principles, policy prescriptions are


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not (p.455). Whether this volume offer an analysis subject to rigorous scientificprinciples is certainly subject to debate. Moreover, why bother analyzing the role ofinstitutions if you are not interested in discovering ways to improve economies anddevelop the human condition through their transformation.

Jean-Phillipe Platteaus (2000) also largely focuses on Africa, particularly, although notexclusively on the rural sector. The volume also does not focus on the gaps in orthodoxeconomic strategy. Instead, Platteau points to barriers to the exercise of private propertyrights created by norms of social identity underlying customary land tenure rights, normsof income sharing and moral norms. According to the author, many of these norms are aproduct of low population to land ratios in Africa.

On a theoretical level, the approach can be described as the marriage of populationdensity arguments (along the lines of Ester Boserup) and NIE. The book has few policyrecommendations. Implicitly, the failure of structural adjustment has nothing to do withits theoretical logic, but due to disruptive social norms. Homo-economicus (beings

exclusively focused on their own material improvement) in its full glory would be presentif only there were sufficient pressures from population density. This is an excessivereliance on naturalism in which shared mental constructs seem to be objectifiedreflections of the geographical order.

Other approaches apply institutional analysis to a single development problem. ElinorOstrom et als book (1993) narrowly focuses on the problem of maintaining infrastructurein developing countries. The authors take an institutional rational choice approachwhich relies on assumptions of instrumental rationality and homo-economicus. It alsoassumes that actors will behave differently in reaction to different sets of institutionalrules. Infrastructural maintenance is assumed to fail due to free riding and imperfectinformation eg. the neo-classical assumption that since people share in the benefits ofwell-operating infrastructure, everyone will hope that someone else will do the work, andthe infrastructure will not be maintained. The solution lies in contractual arrangementsbetween individuals for a mutual commitment to maintenance in tandem with communitylevel enforcement of contracts and exclusion of those unwilling to assume a contingentobligation. The volume is solidly in the NIE tradition with its neo-classical assumptionsof human behavior and focus on institutions as solutions to imperfections in markets. Itlargely precludes a broader exploration (along OIE lines) of the causes of developmentproblems like infrastructure maintenance (weak community relations and associatednorms related to social obligations, broken obligations by governments to maintainequipment, lack of finance, a paucity of technical expertise, constraints on time onfamilies too close to subsistence etc.).

Still others apply institutional analysis to examine the historical transformation embeddedin changes associated with development. Ensminger (1992) aim is to understand howmarket forces spread among the pastoral Galole Orma of northeastern Kenya and howthis led to a broader transformation of the society. She uses a model in which the changeof relative prices interacted with the confluence of ideology, institutions, organizationsand bargaining power to alter property rights and to cause an associated breakdown of


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communal obligations and relations. Her analysis relies largely on NIE tools including aprivileging of the individual over the group, representing collective action as a product ofindividual choice and relying on transaction costs formulations when explaining thenature of the exchange process.

The volume is a clear attempt to apply Douglass Norths (1990) view of institutions andinstitutional change to anthropological case study material. Following North, she believesthat institutions are created for a variety of purposes not simply to reduce transactioncosts (as Williamson has argued). She also rejects the narrowly self-interested homo-economicus embedded in cruder models of rational choice and embraces a softer versionof intentionality or means-ends relations. Choice is still very much driven by narrowself-interest but it is also affected by ideology, power, institutions and organizationalstructures. Still her discussions of changing ideology and attitudes in line with theshifting market relations provide insights that are very rich and should be considered inany broader study of economic policy and institutions. It is interesting, quite original butultimately limited by the framework.

Other volumes on institutions and development are largely edited collections, while notas thematically coherent as the books by Fafchamps and Platteau, still largely fall withinthe realm of NIE. For example, Christopher Clagues (1994) rather unsatisfying editedvolume entitled Institutions and Economic Development: Growth and Governance inLess Develop and Post-Socialist Countries is a collection arising from a 1994conference sponsored by the late Mancur Olsens IRIS (Center for Institutional Reformand the Informal Sector) and paid for by USAID.

The volume begins with the view there is a broad consensus among economists andothers on the kind of policies that countries ought to follow to achieve economicdevelopment. The consensus raises two questions. The first focuses on why countriesdisregard at their peril the laws of supply and demand and of macroeconomic balance.The second is to explain why when the recommended policies are put into place (oftenunder the guidance of-and pressures from-the International Monetary Fund), the hoped-for results do not materialize. While some might suggest there is somethingfundamentally wrong with the policies, the editor argues it is due to the failure tonourish appropriate economic institutions of property rights and contractenforcement. Thus poor countries are held back because they resist the IMF andWorld Bank policies for political reasons or fail to put in place the proper property andcontract rights. There is very little in this volume that goes beyond the orthodox notionthat structural adjustment plus the enforcement of private property rights will solve theproblems of global development.

Still other edited collections on institutions and development offer a hodgepodge oftopics and approaches. Valpy Fitzgeralds (2002) provides a collection of papers fromISS (Institute of Social Sciences in the Hague) lecture series in honor of the late KurtMartin. Only three chapters really directly deal with the role of institutions anddevelopment: one by the NIE theorist Richard Nelson on institutions and evolutionarygrowth theory; one fascinating chapter by Frances Stewart on the role of groups in


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development which is quite theoretically eclectic; and a third by Hans Opschoor outliningan evolutionary approach to sustainable development. Other chapters rely on NIE toolsto analyze development issues. For example, Benno Ndulu uses a principal-agentapproach to evaluate foreign aid and comes up with the standard World Bank-typerecommendations on the need for greater partnerships through improvements in

transparency and accountability. Overall, there is little in the volume to advance ourunderstanding of the role of social institutions in development.

Some books use the term institutions in their titles with little analysis of the content ormeaning of this construct. For example Nicolas van de Walle et als Beyond StructuralAdjustment: The Institutional Context of African Development (2003) is less aboutinstitutions, broadly conceived, and more about the impact of second generation reforms(decentralization, civil service reform etc) on key players such as NGOs, central statesand local governments. Like many edited volumes the collection provides a rathermixed and murky message. James Emery from the IFC, for example, argues that the mainimpediment to FDI in Africa is red tape--as if the host of other factors largely eroded by

standard reform packages (poor infrastructure, low effective demand, poorly trained laborforce, low productivity etc.) was of little consequence. This makes a mockery of the titleBeyond Structural Adjustment since this has been the official orthodox line for 25years. Similarly a chapter by Elbadawi and Gelb (a former chief economist for Africa forthe World Bank) argues for a continuation of existing strategies as the most effectivemethodfor improving aid delivery. Other papers are somewhat more critical of the impact ofstandard policies on improving the civil service, on enhancing the accountability of taxadministrations and on the effectiveness of local government. While there is littletheoretical content to the volume, many of the chapters provide a useful description of thenature and impact of some second-generation reforms.

In summary, the literature on institutions and development provides little insight beyondthe flawed approach embedded in the World Bank approach. Most of the work reliesheavily on new institutional economics which shares many of the same microfoundationsas the economics which has driven the World Bank agenda. Not surprisingly, there arefew new insights or strategies being generated. It seems to be a timely moment to rethinkthe development process using a different body of institutional theory. To myknowledge, the last economist to apply OIE to this area was Gunnar Myrdal (the firstinstitutional economist to win a Nobel prize).

Myrdal, Institutions and Development

Myrdal began to adopt institutional economics in the process of writing his study ofAfrican-Americans published in 1944. In the 1950s elements of the earlier work wereused to criticize emerging theories within development economics. For example Myrdal(1957) dismissed the vicious circle of poverty due to its emphasis on a social process as aself stabilizing static system. Instead he posited a cumulative more dynamic process ofcausation where interacting factors including non-economic variables lead to an everworsening situation. However, most of Myrdal (1957) is focused on criticizing the tenets


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of monoeconomics including the emphasis on harmony of interests, laissez-fairism,equilibrium and free trade.

His institutional economic approach as an alternative to the capital-centered models wasmore fully expressed in 1968 with the publication of his massive three volume tome

Asian Drama. Myrdal (1968) lumps the capital-centered models with the classicalschool as Western economics which have little or no application for understanding thecomplexities of South Asian underdevelopment.

In the prologue of Asian drama, Gunnar Myrdal reminded us that the problems of livingare complex and that they cannot be fit into the pigeonholes of our inheriteddisciplines. Based on the advances in the social sciences in 1968, he argued that no onecould possibly draw inferences about social reality from the concepts of economicsalone (p.5). Yet, he also recognized the tendency of economic theorists, more than anyother social science, to arrive at broad propositions and then postulate them as valid forevery time, place and culture (p. 16). The World Bank agenda of the past two decades

has done precisely this; they have projected a narrow economic doctrine onto a complexsocial and economic reality without regard to the time, place or culture with disastrousconsequences.

In contrast an institutional-centric approach in the OIE tradition of Myrdal and othersrecognizes the hollowness of axiomatically posited state-market roles. In this context, thepolicy focus should not be on state retraction from markets in the hope of creating Paretooptimality but in transforming the state-private institutional nexus that can accommodate thedevelopmental process. The focal point of development should be aimed at transforminghuman behavior directly affecting the way people interact. Human beings should be seen incomplex terms not as one dimensional constructs. Instead of focusing singularly oninstitutions to constrain opportunism, we should formulate institutions that expandopportunities. At the core of the transforming development is shifting components of aninstitutional matrix. There are five subcomponents of the matrix including norms,organizations, incentives, regulations and capacities.

Norms are often used interchangeably with rules. Conceptually this is rather problematic.Rules can often be pro-forma and put in place as a result of a legal or regulatory mechanism.Norms are more generally binding upon groups and directly influence their behavior inparticular contexts. Norms provide behavioral guides on what is expected, required oraccepted. Organizations are conceptually (and often legally) recognized entities thatcombine groups of people with defined common rules and purposes. Incentives focus onthe rewards and penalties that arise from different modes of behavior. Regulationsconstitute the legal boundaries that help set the rules of operation in economies.Capacities are related to the underlying capabilities of the constitutive members(individuals and other sub-units) of organizations to operate in an effective manner toachieve the goals of an organization within the confines of its rules and purposes.Each sub-component of the matrix interacts with each other and in turn has the potentialto alter the human behavior which is at the center of the matrix. For development


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purposes, institutional transformation should focus on new forms of correlated behavioraimed at increasing the generalized standard of living of the population of a country.

How does one do this in practice? Take the example of finance. The starting point to aninstitutional strategy is in analyzing and understanding the existing institutional matrix in

each country how they relate to create existing forms of correlative behavior and howthey can be changed to generate new generalized habits of thought. What is required is aclear strategy for a homologous and coordinated process of transformation.

At the core of the transformation of the financial system is the institutionalization of newmodes of purposeful intermediation. If development policy is focused on strategies toimprove the standard of living, then conscious intervention should aim at encouragingfinance into forms of production and accumulation that will generate increases in incomeand employment. In practice how should we approach this?

Assuming the finance-related institutional matrix is inadequate, the starting point is to

alter the regulatory structure and put in place a new set of legal directives that will permitthe creation of new organizational entities to fill perceived gaps. The legislativedimension of the institutional matrix is the most readily adjusted, since it is a directly andrapidly altered in response to political will. The institutionalization of regulatorystructures, on the other hand, is a more complicated yet a necessary component offinancial transformation.

Regulatory changes influence human behavior in a number of ways. We know thatpeople respond to the guidance of the rule itself; the likely behavior of the regulatoryimplementing agency; the influence of the resources, capacities, and the constraints onthe ability of individuals to deal with new regulations; and the feedback effect of theparticipant in the process. An additional dimension is the intrinsic motivation ofindividuals, groups, or organizations to change their behavior in response to a newregulation.

From the start, legally specified operating rules must include incentives for lending forproductive purposes and penalties for financing speculation. Active enforcement agenciesmust be in place before new financial organizations are created. In the past, regulatorystructures and stipulations have generally tended to lag behind the appearance of neworganizations, and often times, have arisen after financial disarray, rather than as anecessary ex ante counterpart to these new organizations (Stein et al, 2003).

Countries which rely on bank finance as a source of private investment will require newbanking organizations with charters for specific kinds of lending, such as export-orientedmanufacturing banks. The risky nature of these loans due to their duration and purpose(financing market entrants, the purchase of new technology, the start-up of newoperations in existing firms, etc.) means that the state must share risk subject tocontingent behavior. It also must develop aggressive auditing procedures to ensure thefulfillment of contingent criteria. Initially, in regimes prone to corruption, non-


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discretionary rewards and penalties should be applied. 16Once operating proceduresbecome institutionalized, there should be less need for intrusive instruments as newnorms evolve and new forms of correlative behavior arise between the players infinancial systems including loan recipients, lenders, and regulatory agencies. The pace isimportant, along with the states initiation and fostering of a small number of new

financial organizations which should be the starting point in a mimetic, isomorphicworld.17

To support any organizational and regulatory transformation, specialized training unitsmust be in place to supply sufficient labor to support the growth process. Too often, newfinancial units have been organized without taking into account manpower capacities,with consequences to the operation of these organizations. Capacity should neither bestatic nor strictly technical; rather, it should be continuously upgraded through on- andoff-site training, as well as sufficient incentives and time to encourage the internalizationof new techniques. Internalization occurs when actors follow rules which arouse impulsesto transgress and no surveillance is present. Members of financial organizations must

have the ability to understand the rules, responsibility to act on the rules, and awarenessof the potential consequences of not following the rules, even though they may be neitherrewarded nor punished. New regulations, along with associated incentives, set in motiona process of transformation. This process eventually leads to new forms of correlatedbehavior, which occur not from the exercise of regulations, but from their internalization.Ultimately, new norms eventually can form and be the guide to the relative merit ofparticular routines and rules. Norms become habits of thought when they are internalized,and institutions when a sufficient number of people have internalized them.

Conclusions

The paper focused on the origins, nature, and impact of the rise of NIE at the World Bank. Itbegins with a brief synopsis of the history of the Banks agenda and the role of institutionsin structural adjustment. Although NIE related work had been done by Bank economists inthe early 90s, an important turning point was the presentation of a paper by OliverWilliamson in 1994 (following Norths Nobel Prize in 1993) at the annual ABCDEconference. In terms of Bank documents, key reports were the 1995,Bureaucrats inBusinessand the 1997 World Development Report on the State and World DevelopmentReport, 2002.

The reports and Williamson paper are critically evaluated. The main argument in thesections related to the Bank agenda is that instead of using institutional economic theory toactually rethink and reevaluate their policies which would have seemed especiallyappealing given the overwhelming evidence of the failures of its earlier programs theBank has used it to buttress the same orthodox agenda. This task has been made easier bythe usage of a common core of neoclassical economic constructs which underlie bothstructural adjustment and new institutional economics. Overall, NIE has not had a majorinfluence on the World Bank at the operations level. However, as noted by some Bank staff,

16See Myrdal, 1968 on non-discretionary intervention and corruption .17See Stein, 2008, chapter 5 on the theory of isomorphism in an organizational context.


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Etzioni, Amitai. "Social Norms: Internalization, Persuasion and History."Law & Society34, no. 1, 2000: 157-178.

Fafchamps, Marcel. Market Institutions in Sub-Saharan Africa Cambridge. MA: MIT

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