Limits of the New Institutional Economics Approach to African Development

Abstract:

In the last two decades, there has been a marked shift in the research on Sub-Saharan Africa from standard neoclassical analysis to new institutional economics (NIE). The increasing emphasis on NIE is reflected in a wide range of works by international financial institutions and scholars. However, the NIE approach retains fundamental limitations due to its narrow interpretation of institutions, its over-reliance on analysis of transactions costs and property rights, and its ahistorical attachment to markets and private sector firms as major engines of development. Furthermore, NIE typically fails to look “inside institutions” to identify the complex cultural factors that shape the interests and behaviors of the members of institutions. This paper engages in a critique of NIE analysis of Sub-Saharan Africa’s economic development, and suggests the need for a nuanced analysis of property rights and culture, along with development programs to address inequality and poverty and to foster state-led development.

Keywords:

• culture
• institutional economics
• property rights
• Sub-Saharan Africa

JEL Classification Codes:

• O10
• O40
• B52

Notes

¹ The Nobel Prize winners are Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson. The best-selling book was Why Nations Fail (Acemoglu and Robinson 2012). NIE research has been published in the American Economic Review (Acemoglu, Johnson and Robinson 2001), and it dominates many development journals and World Bank publications.

² See www.govindicators.org for information on governance and governance indicators.

³ In most Sub-Saharan African programs, attempting to establish formal rights to land without an existing title, ownership is usually granted to the male person with the clearest claim to the land.

⁴ Reducing women’s access to land is, of course, problematic in many more ways than just the impact on agricultural productivity. Gender equality and empowerment should form a key part of any development project.

⁵ Most Sub-Saharan African countries have incomplete records regarding land ownership.

⁶ Jean-Philippe Platteau (1996) calls for community-based solutions and pragmatic and gradualist efforts to re-institutionalize land tenure and promote adaptation to modern realities. This would be inexpensive, and it would have the potential to achieve widespread support in a way that, to date, IFI approaches have not.

⁷ Acemoglu, Johnson, and Robinson (2001) imply here that culture is not an important institution. Specifically, they consider culture to be less important than property rights, transactions costs, and the enforcement of contracts. Thus, they establish a hierarchy of institutions without providing sufficient justification for it. Meanwhile, OIE economists place the role of culture as central to economic analysis.

⁸ As long as the control of land is associated with social status, land is unlikely to be bought and sold based on market calculations. The association between land and one’s ancestors in Sub-Saharan Africa also promotes strong bonds to particular plots of land. Furthermore, even when land is sold in a market, traditional tenure access to land can trump formal land ownership in determining which persons have rights to use the land. Given the importance of land to wellbeing and cultural practices, land in Sub-Saharan Africa is indeed a “fictitious commodity” (Polanyi 2001), and the market for land cannot function effectively in the current institutional environment.

⁹ The poverty rate in Sub-Saharan Africa was 58 percent in 1999 and 42.7 percent in 2012, using the poverty line of $1.90 per day (see http://povertydata.worldbank.org/poverty/region/SSA). During the same time period, officially disbursed foreign aid to Sub-Saharan Africa increased by 220 percent, from $18.6 billion to $59.5 billion (Nega and Schneider 2015). Meanwhile, African economies grew steadily at a rate of almost 2.6 percent per capita from 2001 to 2010 during Africa’s commodity boom (Nega and Schneider 2015). Thus, a huge increase in aid and rapid economic growth resulted in a significant decline in poverty, but the decline was much smaller than it should have been, given these favorable economic conditions. The PRSPs and other developed countries’ aid programs that target poverty have had a limited impact to date.

¹⁰ Brazil’s program, the Bolsa Familia, was very effective in reducing poverty and inequality.

¹¹ In the same way that the Grameen Bank tapped into existing cultural attitudes and values to improve micro-lending and investment, Sub-Saharan African communities could build on established relationships to construct formal and informal economic institutions.

Additional information

Notes on contributors

Geoffrey Schneider

Geoffrey Schneider and Berhanu Nega are both professors of economics at Bucknell University.

Berhanu Nega

Geoffrey Schneider and Berhanu Nega are both professors of economics at Bucknell University.