Institutions and Development

It is now common in the institutional economics literature to define institutions in the very general sense of rules of structured social interaction. In any society there is, of course, a plethora of such rules (including those that undergird even a so-called free market economy). In the context of economic development the focus is on those rules that act as a substitute for missing markets in an environment of pervasive risks and severe transaction and information costs that individuals and groups face in their economic transactions with others. In the literature on rural development at the micro-level there have been many attempts to understand institutions like land tenure, informal arrangements for credit and risk-sharing, and interlocking of credit contracts with those for future delivery of labour services or output, in the context of missing credit, insurance and futures markets and imperfect enforceability of various formal contracts. (For an overview of some of the major theoretical issues in this literature and empirical references, see Bardhan and Udry, 1999.) Radical economists have often cited some of these production relations in a poor agrarian economy as institutional obstacles to development; but if we carry out a programme of abolishing them without paying attention to their micro-economic functional rationale, we may not always help the intended beneficiaries of such programmes. Merely abolishing land tenancy by legislation, for example, often drives tenancy underground or leads to pre-emptive eviction. On the other hand, understanding an institution in terms of its functional role under a given set of constraints, is neither to condone the constraints nor to claim