The Central Role of Institutions 1.2 Changing Institutions

Identification of the critical role of institutions in development leads to questions about how institutions are formed and their effects on different groups in society, particularly the poor and disadvantaged. Examination of both historical and contemporary development shows that in some societies institutions have at times changed in ways that broadly reduce transaction costs and risks, thus promoting production, trade and development, but at other times and in other societies institutions have suppressed these activities by increasing transaction costs. We therefore need to understand how institutions form and change, and why they may evolve along different paths.

Institutional change involves gains or losses for society as a whole and for different groups within society, but change itself is likely to be driven more by the interests of powerful groups with the greatest influence over those institutions. When evaluating institutional change, therefore, a delicate but important analytical task is to judge the overall efficiency gains from improved co-ordination under particular institutions and the benefits and risks for poor or disadvantaged groups against the potential for exploitation by vested interests.

See Case Study 1: Sharecropping in Sindh Province Pakistan: Feudal Tyranny or "Social Security System"?