Institutions and Development

A Conceptual Reanalysis

Alejandro Portes

Recent years have brought a significant change in the evolution of economics and sociology, including an unexpected convergence in their approach to issues like firms and economic development. This convergence has pivoted around the concept of "institutions," a familiar term in sociology and social anthropology but something of a revolution in economics, dominated so far by the neoclassical paradigm. This development has been accompanied by confusion about what the new master term means and, importantly, by a failure to mine prior theoretical work that sought to order, classify, and relate the multiple aspects of social life that are now brought under the same umbrella concept.

This chapter seeks to reverse these trends by recalling key concepts and distinctions in sociological theory and illustrating their analytic utility with examples from the recent literature on economic development. The argument is that recourse to these concepts and distinctions enhance our ability to analyze economic and "economically relevant" phenomena (Weber [1904] 1949).

THE NEW INSTITUTIONALISM

As Peter Evans (2004b) has pointed out, the long-held consensus in economics that equated increasing capital stocks with national development has given way to an emerging view that the central role belongs to "institutions." He approvingly quotes Hoff and Stiglitz (2001: 389) to the effect that "development is no longer seen as a process of capital accumulation, but as a process of organizational change." Sociologists of development, including Evans himself and several nonorthodox economists, have been saying the same thing for decades without their arguments succeeding in swaying the economic mainstream (Evans 1979, 1995; Hamilton and Biggart 1988; Portes 1997; Hirschman 1958, 1963). Not until two Nobel laureates in economics, Joseph Stiglitz and Douglass North, elaborated the same arguments were some of those in the mainstream convinced. When North declared that "institutions matter," other analysts started to take them into account.

By 2004 the development economist Gerald Roland (2004: 110) declared that "we are all institutionalists now." Sociologists have generally welcomed this "institutional turn" (Evans 2004a; Nee 2005) as a vindication of their own ideas, albeit with a critical omission. Swayed perhaps by the promise of interdisciplinary collaboration in the wake of the new ideas, they have overlooked a fundamental fact: economists do not routinely deal with the multiple elements of social life or their interaction, and, in their attempts to do so, they often confuse them, producing impoverished or simply erroneous perceptions of reality.

Other observers have noted the same problem and put it in still more critical terms. Geoffrey Hodgson (2002: 148) states, "The blindness may be partial, but the impairment is nevertheless serious and disabling. What is meant by this allegation of blindness is that, despite their intentions, many mainstream economists lack the conceptual apparatus to discern anything but the haziest institutional outlines.... [They] have not got adequate vision tools to distinguish between different types of institutions, nor to appraise properly what is going on in them."

This judgment may be too harsh because, after all, institutional economists have taken the first steps toward incorporating key elements of social reality into their analyses. However, the level of interdisciplinary collaboration needed to do this optimally is still lacking. The first question is what institutions actually are. The answer that emerges from economics is a disparate set of factors that range from social norms to values and all the way to "property rights" and complex organizations such as corporations and agencies of the state (Haggard 2004; Williamson 1975, 1985). North (1990: 3) defined institutions as "any form of constraint that human beings devise to shape human interaction," a vague definition that encompasses everything from norms introjected in the process of socialization to physical coercion.

From this thin definition, all that can be said is that institutions exist when something exerts external influence on the behavior of social actors: the same notion that Durkheim identified as "norms" more than a century ago and not sufficient to capture the dynamics of communities and societies.

Neoinstitutionalism has also traveled to the realm of politics, where it has been used, as in economics, to denote the constraints that the social context puts on the actions of "rational man," thus leading to "bounded rationality" (Dolsak and Ostrom 2003; Elster, Offe, and Preuss 1998). While itself unimpeachable, this assertion leaves open the question of what are the features of social context that actually "bound" rational action. Saying simply that everything depends on time and place leads us nowhere theoretically, as this statement is nonfalsifiable.

Moving things further, Elinor Ostrom has proposed a neoinstitutional analysis of the "Commons," seeking to solve the dilemma between self-interest and the collective good among users of the same readily available, but exhaustible common property resources. Ostrom (1990; Ostrom et al. 2002) argues that neither the state nor the market does a very good job in these situations, since they seek to impose external rules on the relevant actors. Rather, actors can devise their own enforceable institutional arrangements (i.e., norms) to escape the tyranny of atomized self-interest. These norms again vary with time and place. As we will see shortly, Ostrom's analysis is compatible with a sociologically informed analysis of institutional development, but the latter has the advantage of going beyond the simple assertion that such arrangements vary with the local context.

In sum, development economists and neoinstitutionalists seek to flesh out North's insight that social constraints matter. But in the absence of a solid theoretical framework, the practical results of this institutional turn have been what might be expected. In the hands of development practitioners, the new consensus has led to the attempted...