The Cambridge Realist Workshop: Ha-Joon Chang on Institutions and Economic Development: Theory, History and Policy

Redactor: Jae Ho Chung, Queens' College

Monday, November, 28th

   Ha-Joon Chang recently gave a talk for the Cambridge Realist Workshop, organised by The Cambridge Social Ontology Group (for more information on the Realist workshop, please look at http://www.econ.cam.ac.uk/seminars/realist/index.htm). Dr. Chang provided a critical examination of the currently dominant view on the relationship between institutions and economic development. First, Dr. Chang pointed out that the dominant discourse suffers from a number of theoretical problems - its neglect of the causality running from economic development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for development. Second, he pointed out that the evidence showing the superiority of liberalized institutions relies too much on cross-section econometric studies, suffering from defective concepts, flawed measurements and heterogeneous samples. Lastly, he argued that the dominant discourse has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.

   Dr. Chang argued that the dominant discourse suffers from two categories of problems. First, it almost exclusively assumes that the causality runs from institutions to economic development, ignoring the important possibility of reverse causality, i.e. economic development changes institutions. Second, in considering the ‘institutions to development’ part of the causality, the dominant discourse theorizes the relationship in a too simplistic, linear, and static way. Discussions regarding theoretical problems involved many provocative questions such as:

1)      Do better institutions lead to more effective economic development?

2)      Are liberalized institutions better for economic development?

A.      Do institutions that provide greater economic freedom lead to faster growth?

B.       Is a stronger protection of private property rights better for growth?

C.       Is the relationship between institutions and economic development always the same?

    Dr. Chang also noted that there is now a huge amount of cross-section econometric studies indicating a positive correlation between the degree of liberality of institutions and economic growth across countries. He presented several areas where potential problems arise regarding the evidence presented by the supporters of the dominant discourse:

1)      Cross-section versus time-series

2)      Measuring the quality of institutions

3)      Problem of sample heterogeneity

    Dr. Chang also noted that the dominant discourse has a poor understanding of how institutions themselves change. The issue of the costs of establishing and running institutions is ignored, making their proposals for institutional reforms appear more attractive than what they really are. In methodological terms, they are either hopeless optimistic about the prospects of institutional change (the Global Standard Institutions discourse) or unduly fatalistic (the climate-culture school). Dr. Chang argued that only theories taking into account both structural constraints and real human agencies seriously can guide us between these two extremes.

    Dr. Chang concluded that: “institutions have become politically too important to be left to those who believe in these simplistic and extremist arguments.” I strongly recommend his article to students who are interested in the role of institutions in economic development.

 His paper can be downloaded from: http://hajoonchang.net/downloads/pdf/JOIEInstitutionsAndDevelopment.pdf