Institutional adjustment and adjusting to institutions
Klitgaard, Robert
Institutional economics can make a positive contribution when applied to such classic development problems as markets that regularly fail the poor, corrupt and inefficient government agencies, and how to take account of indigenous institutions. Well-functioning markets often depend on well-functioning states. In order to improve how well government institutions are functioning, one must understand the reason for poor performance - corruption, poor incentives, and often, overcentralization. The paper proposes an approach for overcoming constraints to incentive reforms and provides a model economic framework for resolving the incentive problem. It recommends a therapeutic approach for addressing the issue of corruption. The paper also advocates that development institutions not only adjust government agencies, but adjust to them. This means giving the institutions resources and respect, empowering stakeholders, and working with them. Outside institutions can sometimes help government officials address sensitive issues and make credible commitments. The World Bank can play a catalytic role in this regard. The paper suggests that the aid relationship is itself in need of adjustment, and that international development institutions may themselves benefit from the types of measures being proposed.
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