Abstract
In an attempt to discuss neoliberalism with a reference to new institutional economics, this chapter problematizes the role of formal institutions in the neoliberal age by focusing on a specific type of formal institution, namely property rights in developing countries. New institutional economics (NIE) argues that secure property rights are important as they guarantee investments and thus, promote economic growth. This chapter discusses why the protection of property rights is weak and ineffective in certain developing countries despite their endorsement of neoliberalism by shedding light on the link between the institutional structure of the state and neoliberalism in the developing world. With the political economy perspective, the chapter aims to build a bridge between NIE and political economy, and thereby providing fertile ground for the advancement of NIE.
TopBackground: Institutions In New Institutional Economics
In simple terms, NIE aims to explain what institutions are, how they arise, what purposes they serve, how they change and how they can be reformed (Klein, 1998). It diverges from neoclassical assumptions by arguing that individuals have incomplete information and bound by rationality. Thus, for new institutionalists, individuals create institutions to reduce the risk stemming from uncertainty about unforeseen events and outcomes, and to lower the transaction costs induced by efforts to acquire information (Menard & Shirley, 2005). While NIE borrows from various social science disciplines, such as law, sociology, anthropology and political science, its primary language is economics.
Key Terms in this Chapter
Institutions: According to most NIE authors, institutions refer to the effective rules of a social game in which individuals and their organizations are the players. They help create constraints and incentives to shape the behavior of decision makers.
Economic Elite: Economic elite refers to a minority group who enjoys certain privileges and holds economic power in a society, independent of democratic elections.
Institutional Change: It refers to changes in an institutional context that make new bargaining and compromises between the players possible.
Developing Countries: The countries that have low levels of industrialization, income per capita and standards of living are known as Developing Countries.
Authoritarian State: It is a political system in which the political power is condensed into one authority figure. Authoritarian state is characterized by strong central power and limited individual freedoms. In authoritarian states, the emphasis is on the provision of private goods for the elites rather than providing public goods. Moreover, property rights of non-elites tend to be disregarded in such states.