Growth , Development , and Appropriate Versus Inappropriate Institutions ∗

In this paper, we present a simple model that offers a unified framework for the analysis of economic growth and economic development. In our model, the transformation of production relationships, a key feature of the process of economic development, goes hand-in-hand with economic growth. The main driving force of this pattern is that economic growth in relatively backward economies is associated with adoption and imitation of existing technologies and investment in existing lines of business, while growth in advanced (frontier) economies is driven by innovation. Consequently, the process of economic development takes the form of a transformation of economic relationships in many spheres. The framework we present, though simple, enables us to offer a number of new ideas about the relationship between institutions/organizations, economic growth and economic development. Most important is that there will be a process of organizational and institutional change associated with the process of economic development. This process of change is also associated with the notion of “appropriate institutions/organizations”. Equilibrium organization of production and the broader institutions of the society may differ with the stage of development (and with the distance of an economy’s technology to the frontier technology in the world). Nevertheless, the model also shows how attempts to impose such “appropriate institutions” from the outside can turn them into “inappropriate institutions,” i.e., into barriers to further convergence of a developing economy. JEL Numbers: O31, O33, O38, O40, L16.