Why Latin American Nations Fail
Matias Vernengo and Esteban Pérez Caldenty discusses the limitations of the mainstream New Institutionalist school of development economics.
While traditionally the study of institutional economics focused on a very broad range of interests and made contributions in several different areas, including the structure of power relations, the beliefs systems, and also social norms of conduct, the New Institutionalist turn in mainstream economics places the weight of its explanation on property rights.
Within the logical construct of neoclassical economic theory, the contribution of the New Institutional Economics is a necessity, basically because exchange and production in a market economy requires the prior definition of property rights (endowments and their distribution are part of the data jointly with technology and preferences that are needed to establish a market equilibrium). Because neoclassical theory is a-historical, the same framework derived from a priori reasoning must have universal validity and be applicable to any particular historical episode underscoring,
Their new book “Why Latin American Nations Fail” starts from the premise that institutions are an essential component of Latin America’s development problem. but that the New Institutionalist view and the focus on property rights is part of the lack of success of mainstream policies that have dominated development economics in theory and practice in the past decades. The New Institutionalist view overplays the role of the market and downplays the role of the state in the process of economic development
Their analysis concludes in five major points:
First, development policy must focus on improving the character and quality of national institutions.
Second the most important condition to promote development is a strong, but flexible and dynamic, government involvement across a wide variety of areas including investment, industrial policies and innovation, education and other social policies, besides the areas that traditionally fall under the scope of public policies.
Third, states and governments rather than limiting their functions to that of mere ´referees´, regulators or market plumbers, must assume the role of architects and market makers in the design and establishment of institutions.
Fourth institutions, must allow the expansion of demand to promote growth and development. Financial markets permit the growth of domestic economies according to their potential. Demand oriented policies means placing the focus on income and not substitution effects.
Finally, government involvement is not tantamount to centralized government. Development institutions and demand oriented policies cannot work properly without bureaucratic autonomy.