A lot, actually.
If you think lack of formal rules (in property rights or contract enforcement) always constrains economic activity, watch this. And if you think an improvement in formal institutional rules always improves efficiency, watch this.
These are the videos I had embedded in my presentation on institutional reform at the AEA meetings--but alas could not use, due to lack of wireless internet at the New Orleans Hilton. Read on to see the connection.
I argued in my talk that the new "governance agenda" is taking on some of the bad habits of the old Washington Consensus. Specifically, a lot of thinking about institutions seems to be based on the following presumptions:
- We have a pretty good idea about what to reform and how (and what’s lacking is just political will)
- The requisite reforms are pretty much the same across the world (which gives us license to rely on cross-national benchmarking and on best-practices)
- The more of the reform agenda we do, the better off we are (assuming implicitly that second-best issues are not central)
I argued instead that
- We can get a lot of economic growth in a very poor institutional environment: formal institutions of property rights and contract enforcement are not always a binding constraint (just as lack of traffic lights does not prevent traffic from flowing smoothly in Vietnam)
- Institutional reforms that do not take second-best interactions (such as interactions with informal institutions, labor-market distortions, or learning externalities) can do more harm than good (just as poorly enforced traffic lights in St. Petersburg create more accidents than their absence would result in)
- An approach that focuses on "best practices" and cross-national benchmarking is unlikely to do much good in developing nations
- Appropriate reform strategies are inherently second-best. For example, when relational contracting works decently (as it apparently does in a setting like Vietnam), the focus of institutional reform might be not on improving judicial system, but on improving information gathering and dissemination about “good” and “bad” firms and on improving formal contract enforcement for specific categories of firms that do not have access to relational contracting, such as new entrants and foreign firms
Bill Easterly gave a paper in the same session that was similar in many respects, but a lot more downbeat, and much more pessimistic about the ability of economists to prescribe useful reforms. As I joked in the session, there is no disagreement between the two of us on these issues that would not be resolved with a good dose of Prozac (for Bill!).