(introduction...)

In 1993 the World Bank conducted a study of the "East Asian Miracle" countries with the aim of discovering the reasons behind their successful economic performance.¹ This report quickly became the focal point of a heated debate and sparked a wave of new research, some of it refinements of the arguments made in the report, some of it contradicting them.² Many scholars, especially in the East Asian countries, disagreed with the report's negative verdict on the role of industrial policies.³ At the same time, everyone seemed to agree with another central proposition of the study, namely that East Asian countries had developed an institutional framework that was essential in explaining their rapid growth.⁴

1. World Bank (1993).

2. See, e.g., Campos and Root (1996, pp. 174-77), Root (1996), Stiglitz (1996), and Asian Development Bank (1997).

3. See, e.g., Rodrik (1995), Singh (1995), I. Ohno (1996), K. Ohno (1996a, b), and Yanagihara (1997).

4. There is some ambiguity in the use of the word institution. Here institutions are understood in the sense that the term is used in the New Institutional Economics. (See, e.g., North [1986, 1991] or Nabil and Nugent [1989] for a discussion of different definitions of the term.) The institutional framework refers to the rules that govern the behavior within the state, the relationship between the different agencies of the state, as well as the relationship between state agencies and the private sector. This definition differs from the popular use of the word institution, according to which institutions are often simply equated with organizations; for instance, a bank is called a financial institution. However, an institution is understood as embodying the "rules of the game." Thus the institution becomes the rules and mechanisms by which the bank operates - for instance the rule that a loan has to be repaid with a specified interest rate by a specified point in time as well as the penalty for non-payment and the form of its enforcement. Institutions can be formal or informal. Formal institutions include written rules, laws, and their enforcement mechanisms. Informal institutions include not only behavioral norms and social norms but also common practices that may deviate from the formal rule but which are generally followed. For instance in some bureaucracies there is a rule that the proceeds of corruption are shared among all members of the agency. There is a clear rule defining the mechanism of sharing, and there are also control and enforcement mechanisms. Therefore this rule may be considered an institution.

The two main institutional lessons identified in the East Asian Miracle study were close cooperation between the public and the private sector and an efficient and independent bureaucracy. However, the East Asian Miracle literature was not the only one pointing to the importance of the institutional framework in explaining differences in growth across countries. A broader body of literature had identified other institutional lessons relating to the nature of the political system, the guarantee of property rights and the rule of law, and corruption.

This chapter reviews five institutional factors that have been proposed in the literature as fostering growth:

1. Cooperation between the public and private sectors.
2. The quality of bureaucracies.
3. The rule of law.
4. Corruption.
5. Political stability.