Institutional Environment and Entrepreneurship in Developing Countries

There has been growing interest in the relationship between the institutional framework that exists in a country and the level and type of entrepreneurship practiced in that country.[1]  For example, when discussing the important and fundamental role that institutions play with respect to economic development, Acemoglu began by referring to the evidence from economic analysis that has confirmed that differences between countries with respect to prosperity and per capita income are strongly related to differences in the traditional factors of production: human capital, physical capital and technology.[2]  He went on to argue that these findings raised a fundamental question for researchers: why is it that some countries have less human capital, physical capital and technology than other countries and/or make worse use of these factors than other countries (i.e., failure to identify and/or exploit entrepreneurial opportunities effectively)?  Certainly some of the differences can be attributed to geographical differences or cultural factors; however, Acemoglu observed that “[i]nstitutions have emerged as a potential fundamental cause”.[3]  In the same vein, Chu argued that countries that have achieved relative affluence in relation to others have done so in large part because they were able to establish and maintain “efficient” institutions while countries that have remained undeveloped have suffered from the lack of efficient institutions.[4]  Milo described and analyzed several different institutional indicators and concluded that there was a positive relationship between economic performance and institutional quality among member countries of the ASEAN and noted, in particular, that the strong relative economic performance of countries such as Malaysia, Singapore and Thailand was consistent with their high scores on measures of institutional quality.[5]

Other scholars, while often using different definitions of “institutions”, have reached similar conclusions: “institutions explain economically and statistically significant differences in per capita incomes across countries”.[6]  Olson tackled the question of why there continued to be widely differing standards of living around the world if, in fact, markets everywhere were working efficiently.[7]  He first investigated whether the variations among countries might be attributable to different resource endowments (i.e., poorer countries have problems with economic growth and social development because “they lack land and natural resources, physical and human capital, or access to the latest technology”[8]).  He systematically dismissed this proposition noting, for example, that there was evidence showing that knowledge was and is equally available to all countries at a reasonable cost, population density does not explain economic performance, capital flows are driven by the quality of institutions and there was no basis for assuming that citizens of richer countries were innately “smarter” than citizens of poorer countries.  Olson thus concluded that “the large differences in per capita income across countries cannot be explained by differences in access to the world’s stock of productive knowledge or to its capital markets, by differences in the quality of marketable human capital or personal culture”.[9]  Assuming this to be true, “[t]he only plausible explanation left is that differing performances are caused by differences in the quality of countries’ institutions and policies”.[10]  Olson predicted that poorer countries that elect to adopt better economic policies and institutions would enjoy higher rates of growth in per capita incomes in relation to richer countries because they were so far short of their potential prior to the adoption of the new policies and there was such a huge gap to close between actual and potential income in those countries.[11]

Holcombe took a different approach by arguing that differences in economic performance of countries could be explained by the “entrepreneurial opportunities” that are available in those countries and that decentralized free economies are the ones that do the best job of generating more opportunities that can be seized for their profitability and which also continuously generate new opportunities that ultimately will create an “endogenous engine of economic growth”.[12]  He placed so much importance on the availability of entrepreneurial opportunities that he argued that often-used techniques for launching economic development such as encouraging investment in industrial activities and research and development, calling for increased savings and funding education would not, in and of themselves, be successful unless and until fundamental market reforms, including the creation and support of appropriate institutions, were made to facilitate creation of entrepreneurial opportunities.  As an example, Holcombe pointed out that when developing countries have educated their citizens they often migrate to other countries due to lack of entrepreneurial opportunities in their homelands and pointed out that this sort of “brain drain” will continue until governments in those countries create and support institutions that are conductive to entrepreneurship.[13]

It should be noted that there are some who have questioned the relationship between institutional development and entrepreneurship in developing countries.  Lingelbach et al., whose studies of “what makes entrepreneurs in developing countries different” are described elsewhere in this chapter, argued that the data collected from studies of new- and growth-oriented firms in developing countries suggested “several important, but counterintuitive findings: freer, more competitive, poor countries are not correlated in a statistically significant way with higher levels of opportunity entrepreneurs; recent economic growth in a poor country is not correlated in a statistically significant way with higher levels of opportunity entrepreneurship; and protection of property rights and levels of corruption don’t seem to matter either”.[14]  In spite of these assessments of the data, the general consensus appears to be that institutions do matter; however, as they await institutional improvements small but growing numbers of entrepreneurs in developing countries are developing and implementing strategies to create successful businesses in spite of higher risks and uncertainties, difficulties in accessing financial and human capital and the absence of mentors and role models.

Institutional weaknesses in developing countries

When discussing the relationship of institutions to entrepreneurship in developing countries it is important to emphasize that developing countries do not lack institutions—each of those societies have certain “rules of the game” that economic actors are expected to follow; however, according to North, in many instances the institutional frameworks found in developing countries do not reward production and exchange but rather provide incentives for expropriation and redistribution of a static stockpile of economic-based resources.  In North’s own words, institutions in developing countries “overwhelmingly favor activities that promote redistributive rather than productive activity, that create monopolies rather than competitive conditions, and that restrict opportunities rather than expand them”.[15]  While this may be somewhat of an overgeneralization, there is credence to the conclusion when one reviews the evidence in those developed countries where larger percentages of the population appear to be mired in hopelessness and poverty while small groups control resources, appropriate rents and manipulate the rules in a manner favorable to them.

Baumol identified a set of entrepreneurial activities that appear in all countries and argued that divergent economic performance among countries can be explained by the allocation of entrepreneurial efforts among these activities rather than by the total supply of entrepreneurial activities in those countries.  Specifically, Baumol identified the following six types of entrepreneurial activities, the first five of which were based on the prior of Schumpeter: introduction of new goods; introduction of new methods of production; identification and opening of new markets; discovery and exploitation of new sources of supply for needed raw materials or intermediate goods; new organization of industries (i.e., creation or destruction of a monopoly position); and, finally, “rent seeking” (e.g., legal and illegal lobbying of regulators and politicians for favors, commencing legal actions to impede the progress of competitors, engaging in military activities to achieve and/or maintain power and imposing taxes that impact incentives to engage in certain activities).[16]  Activities constituting “rent seeking” are considered to be unproductive, or even destructive, entrepreneurship and Baumol concluded that countries with cultures, policies and/or institutions that incentivize rent seeking (or lack of institutions that encourage entrepreneurial activities other than rent seeking) are likely to have poor performing economies.[17]

Evidence to support Baumol’s arguments can be found when examining the situation of Romania following the collapse of the Communist regime in that country in 1989.  Boettke et al. attributed Romania’s difficulties in transitioning to a market economy on policies and environmental conditions that tended to incentive unproductive entrepreneurship.[18]  They cited a World Bank survey of Romanian respondents that concluded that “constant changes in the laws and regulations are a main obstacle to doing business”[19], particularly executive decrees referred to as “emergency ordinances” that announced substantial legal changes without warning and made it difficult for businesses to engage in long-term planning.  Romania also suffered from widespread corruption by government administrators and judicial officials.  As a result, “a large amount of resources [in Romania] is dedicated to rent seeking in order to obtain privileges from those in positions of power” and one Romanian entrepreneur commented that “[t]he sole profitable business in this environment is to have a connection in the government and make money from cheating and stealing”.[20]  Poorly functioning land and capital markets and weak formal property rights were cited as additional problems and contributed to the emergence of a large, and inefficient, informal sector in Romania. Boettke et al. concluded that substantial reforms would be needed in Romanian institutions in order to provide a stable environment for entrepreneurship to flourish.

Institutional requirements for productive entrepreneurship

In order to understand how policy makers in developing countries might address shortcomings in their institutional frameworks that might be impeding productive entrepreneurship it is first necessary to identify the institutions that are related to economic performance.  A number of studies have attempted to do this very thing[21] and Milo reported that “[t]he consensus institutions that have been associated with economic performance commonly relate to measures of government risk of expropriation, rule of law, bureaucratic quality, corruption, government repudiation of contracts, civil liberties, and openness to trade”.[22]  For example, an index developed by the Frasier Institute and published in Economic Freedom of the World is based on the proposition that development requires “economic freedom” and that economic freedom can be measured and compared by analyzing five areas: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labor and business.[23]  The Heritage Foundation/Wall Street Journal announced an Index of Economic Freedom with ten variables: (i) trade policy, (ii) fiscal burden of government, (iii) government intervention in the economy, (iv) monetary policy, (v) capital flows and foreign investment, (vi) banking and finance, (vii) wages and prices, (viii) property rights, (ix) regulation, and (x) informal market activity.[24]

The World Bank, which has been a forceful advocate for institutional development and reform in developing countries in the course of its financial and technical assistance efforts to those countries, developed its own measures of “governance indicators” based on the following six key dimensions or “Worldwide Governance Indicators” as described by Milo[25]:

• Voice and accountability, the extent to which a country’s citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and free media;
• Political stability and absence of violence, perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including political violence and terrorism;
• Government effectiveness, the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies;
• Regulatory quality, the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development;
• Rule of law, the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence; and
• Control of corruption, the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests; voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption.

Accepting that institutions matter and the “rules of the game” should be set to encourage productive entrepreneurship, the question becomes just what steps should be taken in developing countries to enhance their competitiveness.  Lawson makes a strong case for the proposition that productive entrepreneurship requires an institutional environment grounded in economic freedom and property rights and concluded that “the empirical evidence is overwhelmingly clear: [s]ocieties that organize themselves with private property, rule of law, and free markets outperform, on almost every measurable margin, societies that are less economically free”.[26]  In a similar vein, Olson has argued that the lack of impartial third-party enforcement of contracts causes economic actors in developing countries to lose gains that should normally be realized in economic exchanges; the failure to create institutions for recognizing and securing property rights leads to the loss of most of the potential gains from capital intensive production; private and public predation, which occurs due to a lack of institutional policing, also holds developing economies back; and, finally, the inability of create a sophisticated array of markets deprives developing countries of the potential advantages of social cooperation.[27]

Llosa argued that entrepreneurship in Latin America would only be successful if and when the rule of law was established and reforms were implemented that would result in “the liberation of the individual from the phenomenal accumulation of state power in Latin America”.[28]  He suggested that substantial changes were needed across laws and regulations pertaining to business, finance, labor, social issues and justice and law and order.  With respect to business laws, he advocated for the reduction of extensive and burdensome permit and licensing requirements and criticized the stifling of competition caused by “sanctioning and supporting government-owned companies”.[29]  Also subject to criticism was the use of price controls, subsidies and tariffs and antitrust policies that hindered efforts to achieve competitiveness through economies of scale.  In the finance area, Llosa criticized the lack of competition and regulation in the banking and insurance sectors, which drove up the price of services for entrepreneurs.  With respect to the other categories of laws mentioned above, Llosa took particular note of shortcomings with respect to collective bargaining, excess political interference in the delivery of educational and health services and, finally, as to justice and law and order, “many laws that create special jurisdictions—and therefore privilege—as well as norms that give the political authorities a strong say in the judiciary”.[30]

Impediments to institutional reforms

Once some sort of reasonable consensus has been reached on what type of institutions are needed in order for developing countries to effectively promote growth attention turns to determining the best way to develop those institutions which are lacking or “reform” existing institutions that are inefficient.  Unfortunately, while the need for reform is largely recognized and has become a popular topic among scholars, reliable prescriptions for change have been hard to come by and the experiences of institutional reforms have been mixed and often dismal.  Milo commented that institutional change has been “hard to accomplish . . . due in particular to the complex interactions between the different typologies of institutions (i.e., interaction between formal and informal institutions, between different levels of institutions, and between economic and political institutions), which have different horizons for change and are therefore subject to very different evolutionary dynamics”.[31]  One problem that has been consistently encountered is that the imposition of formal political and economic rules from one country, such as the US or some other developed country, to a developing country has failed to produce the “expected” results within the desired timeframe because the informal institutions in the developing country, which must legitimize any formal rules, are slow to change.  Moreover, economic actors in developing countries who are benefitting from the “old rules” can be expected to resist institutional changes that may deprive them of the property and power that they possess.[32]

Milo analyzed the fit between policies and institutions in the Philippines and the economic performance achieved by that large developing country over the last several decades.  She noted that while the policies and institutions found in the Philippines are consistent with “conventional wisdom” as to what is needed for economic growth and development (e.g., free and reasonably fair elections, more civil rights and freedom of the press), actual performance has been much poorer than expected.[33]  She provided several explanations for this puzzle.  First of all, she argued that the “Philippine state is weak” and that the effectiveness of formal institutions is severely undermined by the lack of state autonomy from “the vested interests of dominant Filipino social classes, powerful political families and clans, an influential landed elite, and wealthy Filipino capitalists”.[34]  As a result, “politics of privilege” and “crony” capitalism became dominate themes in the Philippine economy and rent-seeking activity provides too much enticement to entrepreneurs in an environment where weak governance, corruption and mismanagement dominates.  Second, while policies were adopted to liberalize the deregulate the economy and “replace the state with the private sector and markets”, the state has failed to aggressively pursue specific steps such as effective enforcement of property rights and contracts and ensuring competitive and fair market processes.[35]  As a result, foreign investors have been reluctant to expand their participation in the Philippine economy since the political and legal system is still perceived to be run by vested interests.  Milo cited de Dio and Hutchcroft for the conclusion that “the most fundamental need in the Philippines is to improve the overall performance of government, insulate it from the plunder of oligarchic groups, and promote new types of private sector initiative”.[36]

Llosa described the institutional shortcomings in Latin America that have held countries in that region back in spite of lavish endowments of natural resources.[37]  For example, he noted that land reforms that occurred after countries achieved their independence from colonial rule did not create private property rights but instead vested ownership in the government, thereby reducing the incentives for the citizens who were enlisted to work the land.  Another issue was the distrust that Latin American leaders had for the richer nations and the steps that were taken to “correct” for what the Latin Americans viewed as structural disadvantages that would prevent their countries from being able to compete with the richer nations: barriers to inbound foreign investment and technology transfer; import restrictions; subsidies and nationalization of certain “key industries”.  Attempts at reform occurred during the 1980s and 1990s; however, Llosa argued that they largely amount to exchanging old forms of intervention in the economy for new ones: “reform meant replacing inflation with new taxes, high tariffs with regional trading blocs, government monopolies with private monopolies, price controls with regulatory bodies”.[38]  A related issue was the failure of the judiciary system to protect individual rights and Llosa claims that the courts of Latin America were simply corrupt arms of the ruling political groups.

After years of experimentation the general conclusion appears to be that good economic performance will not logically and automatically follow after importing formal political and economic rules from developed countries into developing countries.[39]  As a result, policy makers have had to abandon the notion of “one-size-fits-all” with respect to programs for institutional reforms in developing countries and recognize the shortcomings of the “global standard institutions” argument which is based on the presumption that countries all over the world must adopt a prescribed menu of mostly Anglo-American institutions in order to survive and prosper in the global economy.[40]  As Milo pointed out, “pure institutional imitation is rarely enough” and “[m]aking imported institutions work would require some degree of adaptation”.[41] The adaptations themselves must be unique and innovative and forging effective institutions in developing countries must take into account “local context, traditions, habits, and political culture”.[42]  This means that policy makers with local knowledge must be involved since they are best positioned to know how current institutions are working and what changes can reasonably be made to reform them.

Ayittey argued that from colonial times onward much of Africa has focused its economic activities on resource extraction rather than development and that in many cases the reaction to independence was a shift away from anything that reminded the locals of their colonial oppressors, including capitalism.[43]  The results has been a number of African states operating on a foundation of socialism; however, when African leaders were unable to successfully deploy socialist policies they transformed their economies into what Avittey referred to as “vampire states” which existed only to enrich the rulers and those close to them.  As conditions for most of the people worsened these states declined into civil war and the result has often been decades of bloodshed and extreme poverty for most of the population in many African countries.  Ayittey’s recipe for development in Africa calls for an end to “top-down” aid to the leaders of the vampire states and a shift toward providing support for indigenous institutions and the efforts of potential entrepreneurs in the traditional and informal sectors where most of the citizens of Africa have been working.  Like others, Ayittey calls for changes that strength property rights, incentives and the “rule of law”.

Not only are “localization” and “customization” important to effective institutional reform in developing countries, timing, policies and planning are also key determinants of success.  While the usual prescription is to undertake a large number of institutional reforms simultaneously, Rodrik advised that “[t]he onset of economic growth does not require deep and extensive institutional reform”[44] and Milo pointed out that large developing economies such as China and India achieved success through “modest changes in institutional arrangements and in official attitudes towards the economy . . . [and] . . . focusing reform efforts on the most binding domestic constraint on growth”.[45]  Institutional reforms must also be supported and explained by governmental policies that describe the intended “rules of the game” for the country and its economic actors.[46] Finally, the need for planning has been emphasized by the following approach suggested by Rodrik: “first, a diagnostic analysis must be undertaken to identify the most significant constraints on economic growth in a given setting; second, a creative and imaginative policy design needs to be formulated to suitably target the identified constraints; and third, the process of diagnosis and policy response must be institutionalized to make sure the economy remains dynamic and growth is sustained”.[47]

Questions for further research

Acemoglu has argued that while progress has been made in understanding the relationship between institutions and economic development there are still several key research questions that warrant the attention of scholars, such as the following[48]:

• Why do institutions persist? There is evidence that the institutional features of national economies will be strongly influenced by historical factors, such as the events that occurred during the colonial periods of developing countries, as well as by political and social beliefs.  However, Acemoglu believes that more research is needed to understand which factors within a society contribute to resistance to institutional change.
• What enables institutional reform and why do many attempts at reform fail and even backfire? This question is, of course, recognizes that while institutions often persist and are resistant to change there are numerous examples of successful reforms that have altered the trajectory of growth and development for countries such as Botswana, China and Korea.  In order to create effective policies for institutional change it is important to know why some countries have been successful and why others have failed.
• What specific combinations of economic and political institutions are most conducive to economic growth? Acemoglu notes that while the items on the menu for policymakers have become relatively well-known there is still much to learn about “which combinations of property rights, financial institutions, judicial institutions, education and various dimensions of social institutions are most conducive to economic development”.
• How can policymakers determine the appropriate balance between state action and the private sector? It is understood that the state can play an important role in creating and protecting property rights and establishing political stability; however, there is still no clear answer on how strong a role the state should play in the economy.  Many East Asian economies have prospered under a firm government-driven industrial policy but there is a danger that too much state control can lead an environment, such as has often been found in Africa, in which political elites appropriate all the benefits from exploitation of the country’s resources.
• What is the role of democracy and checks on political power in fostering an environment conducive to innovation and economic growth? Acemoglu noted that while many of the more successful developing countries in recent years have been relatively democratic, “in the postwar era democratic countries do not have appreciably higher growth rates than nondemocratic ones” and pointed out China, led by a highly authoritarian regime, has been an obvious example of the possibility that economic growth can be achieved in a political environment that is far from open.  He suggested that further research is needed on interactions between political regimes and economic growth.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship.

[1] For further discussion of the influence of institutions on entrepreneurship, see “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).

[2] D. Acemoglu, Challenges for social sciences: institutions and economic development,

http://www.aeaweb.org/econwhitepapers/white_papers/Daron_Acemoglu.pdf

[3] Id.

[4] K. Chu, “Collective Values, Behavioural Norms and Rules: Building Institutions for Economic Growth and Poverty Reduction” in R. van der Hoeven and A. Shorrocks (Eds.), Perspectives on Growth and Poverty (Tokyo:  United Nations University Press, 2003).

[5] M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 23-29.

[6] Id. at 20 (citing T. Eicher and A. Leukert, “Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity”, Paper presented at the European Economic Association and Econometric Society Parallel Meetings, Vienna, 24–28 August 2006, 2).

[7] M. Olson, “Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 25-53.

[8] B. Powell, “Introduction” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 1-22, 3.

[9] M. Olson, “Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 25-53, 44.

[10] Id. Olson’s article also includes citations to other studies that he and other conducted that provide “direct evidence of the linkage between better economic policies and institutions and better economic performance”.  Id. at 47.

[11] Id. at 45-46.  Olson noted during the 1970s the fastest growing countries in the world (apart from the oil-exporting countries) were poorer countries that grew at rates that far exceeded the growth achieved by the US economy during that period.  Id.  A similar spree of spectacular growth rates, relative to industrialized countries, has been achieved in countries such as China and India in recent years.

[12] R. Holcombe, “Entrepreneurship and Economic Growth” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 54-78.

[13] Id. at 71.

[14] D. Lingelbach, L. De La Vina and P. Asel, What’s Distinctive about Growth-Oriented Entrepreneurship in Developing Countries? (San Antonio, TX: UTSA College of Business Center for Global Entrepreneurship Working Paper No. 1, March 2005), 3.

[15] D. North, Institutions, institutional change, and economic performance (New York: Norton, 1990), 9.

[16] W. Baumol, “Entrepreneurship: Productive, Unproductive, and Destructive” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 79-111, 82-83 (citing and quoting J. Schumpeter, The Theory of Economic Development (Cambridge, MA: Harvard University Press, 1912/1934), 66).

[17] It should be noted that what Baumol might consider “unproductive” avenues for entrepreneurs can also be found in industrialized countries such as the US if one considers the potentially adverse consequences of expensive and time-consuming litigation as a competitive tool and/or financial incentives that divert highly-educated young professional toward jobs in the financial sector rather than launching and building new and dynamic businesses.

[18] P. Boettke, C. Coyne and P. Leeson, “Entrepreneurship or Entremanureship? Digging Through Romania’s Institutional Environment for Transition Lessons” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 223-249.

[19] Id. at 229 and 231.

[20] Id. at 233.

[21] J. Aron, “Growth and Institutions: A Review of the Evidence”, The World Rank Research Observer, 15(1) (2000), 99–135.

[22] M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 20 (citing T. Eicher and A. Leukert, “Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity”, Paper presented at the European Economic Association and Econometric Society Parallel Meetings, Vienna, 24–28 August 2006).

[23] Id. at 25 (see Appendix 1 of Milo’s paper for further elaboration of each of the areas).

[24] Id. at 27 (see Appendix 2 of Milo’s paper for further elaboration of each of the variables).

[25] Id. at 28 (citing D. Kaufmann, A. Kray and M. Mastruzzi, Governance Matters V: Aggregate and Individual Governance Indicators for 1996–2005 (Washington, DC: World Bank Policy Research Working Paper No. 4012, 2006)).

[26] R. Lawson, “Economic Freedom and Property Rights: The Institutional Environment of Productive Entrepreneurship” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 112-133, 131.  Specifically, Lawson attempted to show, using data from the Economic World of Freedom Report and other empirical evidence, that “higher levels of economic freedom are associated with higher levels of per capita income, higher rates of economic growth, higher levels of entrepreneurial activity, higher rates of domestic investment, larger amounts of foreign investment attracted, longer life expectancies and better access to safe water”.  B. Powell, “Introduction” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 1-22, 9.

[27] M. Olson, “Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 25-53, 48.

[28] A. Llosa, “The Case of Latin America” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 189-222, 214.

[29] Id. at 215.

[30] Id.

[31] M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 20.

[32] M. Shirley, “Institutions and Development” in C. Menard and M. Shirley, Handbook of New Institutional Economics (Dordrecht, Netherlands: Kluwer Academic Publishers, 2005).

[33] M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 23 (citing L. Pritchett, “A Toy Collection: A Socialist Star and a Democratic Dud? (Growth Theory, Vietnam, and the Philippines)” in D. Rodrik (Ed.), In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton, NJ: Princeton University Press, 2003)).

[34] Id.

[35] Id. at 24.

[36] Id. at 29.  See E. De Dios and P. Hutchcroft, “Political Economy” in A. Balisacan and H. Hill, The Philippine Economy: Development, Policies and Challenges (Quezon City: Ateneo University Press, 2003).  They noted that improvements were needed with respect to the quality of the bureaucracy in the Philippines and commented that this was an area in which Singapore, a well-performing country from an economic perspective, had excelled.

[37] A. Llosa, “The Case of Latin America” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 189-222.

[38] Id. at 202.

[39] D. North, The New Institutional Economics and Development (St. Louis: Washington University, 1992).

[40] One extensive menu of institutions included “political democracy; an independent judiciary; a professional bureaucracy, ideally with open and flexible recruitments; a small public-enterprise sector, supervised by a politically independent regulator; a developed stock market with rules that facilitate hostile mergers and acquisitions; a regime of financial regulation that encourages prudence and stability, through things like the politically-independent central bank and the Bank for International Settlements capital adequacy ratio; a shareholder-oriented corporate governance system; labor market institutions that guarantee flexibility”.  M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 21 (citing H-J. Chang, Understanding the Relationship between Institutions and Economic Development: Some Key Theoretical Issues, Paper presented at the UNU/WIDER Jubilee Conference, Helsinki, 17–18 June 2005, 6).

[41] M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 22.

[42] Id.  See also D. Rodrik, In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton, NJ: Princeton University Press, 2003), 12 (“[g]ood institutions can be acquired, but doing so often requires experimentation, willingness to depart from orthodoxy, and attention to local conditions”).

[43] G. Ayittey, “The African Development Conundrum” in B. Powell (Ed.), Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development (Stanford, CA: Stanford Economics and Finance, 2008), 137-188.

[44] D. Rodrik, In Search of Prosperity: Analytic Narratives on Economic Growth (Princeton, NJ: Princeton University Press, 2003), 15.

[45] M. Milo, Integrated Financial Supervision: An Institutional Perspective for the Philippines (Tokyo: Asian Development Bank Institute, ADBI Discussion Paper 81, 2007), 22.

[46] Id. at 23.  See also R. Hasan, D. Mitra and M. Ulubasoglu, Institutions and Policies for Growth and Poverty Reduction: The Role of Private Sector Development (Manila: ERD Working Paper Series No. 82, Asian Development Bank, 2006).

[47] Id. (citing D. Rodrik, “Goodbye Washington Consensus, Hello Washington Confusion?” Draft, Harvard University, 2006).

[48] The following discussion is adapted from, and quotes are as appearing in, D. Acemoglu, Challenges for social sciences: institutions and economic development, http://www.aeaweb.org/econwhitepapers/white_papers/Daron_Acemoglu.pdf