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Rodrik (2008)- Second-Best Institutions

Rodrik (2008)- Second-Best Institutions - Second-Best...

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Second-Best Institutions Dani Rodrik (2008) Working Paper Abstract: The focus of policy reform in developing countries has moved from getting prices right to getting institutions right, and accordingly countries are increasingly being advised to move toward “best-practice” institutions. This paper argues that appropriate institutions for developing countries are instead “second-best” institutions—those that take into account context-specific market and government failures that cannot be removed in short order. Such institutions will often diverge greatly from best practice. The argument is illustrated using examples from four areas: contract enforcement, entrepreneurship, trade openness, and macroeconomic stability. Problems with first-best practices of institutions “…presumes the primary role of institutional arrangements is to minimize transaction costs in the immediately relevant domain—without paying attention to potential interactions with institutional features elsewhere in the system.” “I shall argue that dealing with the institutional landscape in developing countries requires a second-best mindset.” 3 Illustrations from 4 Areas: 1. Courts and Contract Enforcement: a. African state economies are based on relational economics: “…long- term, personalized relationships with their suppliers or consumers, and sustain cooperation through repeated interaction.
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