Why do institutions matter? Global competitiveness and the politics of policies in Latin America.

Over the past decade, a broad consensus has emerged that 'institutions matter'. (Fukuyama, 2007: XV)

There is an emergent consensus in development studies and policy analysis--a 'new institutionalism'. (1) Its adherents and proponents reject the market fundamentalism of the 1980s and early 1990s, represented by structural adjustment and shock therapy, and with these many of the assumptions about what the untrammelled free market can achieve. For in 'the real world', the utility maximising individual--the keystone of neoclassical economics--is too often subjected to imperfect or asymmetrical information, which has the effect of delimiting or 'bounding' the benefits that ought to accrue to the rational market actor. In this new consensus, the key to understanding both the developmental limits to and potentialities of the market lies, therefore, in the institutions that facilitate and/or hinder rational market action. Institutions are seen as the purposive, problem-solving and collective outcomes of rational actors' individual decisions, and their importance lies in the manner in which they internalise and therefore minimise the transaction costs between economic agents. (2) While this approach may be considered commensurate with rational-choice approaches to economics and political science in general, the new institutionalism focuses in on a paradox: namely, that such bargaining on the part of individual interests can yield 'irrational' results. Sometimes institutions can be dysfunctional, and they may also exhibit 'path dependencies' which make them difficult to reform along more functional lines, since some actors (potential 'losers') must be persuaded to act irrationally (for example, in correcting dysfunctional outcomes despite the status quo's being materially favourable to them) (Grindle, 2001, 2002). In short, and from this essentially rational-choice and game-theoretical perspective, the new institutionalism seeks to develop a comprehensive and functionalist understanding of contemporary governance institutions and processes across the developing world as a means of changing them.

The popularity of this new institutionalism is especially evident in the current concern with 'pro-poor' reforms and the installation of 'good governance' regimes in the global South. In order to gauge the degree to which a 'paradigm shift' has been in process amongst development scholars and practitioners, one has only to read recent editions of the World Bank's annual World Development Report, or take its former chief economist and Nobel laureate Joseph Stiglitz seriously when he writes,

Acronyms

ECLAC: (United Nations) Economic Commission for Latin America & the Caribbean

GCR: Global Competitiveness Report (World Economic Forum)

GDP: Gross Domestic Product