Institutional Change and Area Studies: A New Field for Development Studies

Abstract

A nation’s economic development depends on institutions, as argued persuasively in the 1990 book by Douglass North. But what kinds of institutions are needed depends on the stages of economic development and also varies from country to country, as shown in Japanese institutional innovations such as keiretsu and Japanese management methods. Therefore, what a researcher needs to do is not to judge institutions by a certain fixed model but to observe how institutions are functioning and see where institutional improvements are needed for sustainable economic growth.
New institutional economics, particularly the branch concerned with a nation’s economic development, evolved in close relation to neo-classical economics. This is probably because those who pioneered the field were mostly US-based economists, among whom neo-classical economics dominates. But neo-classical economics, which heavily depends on the deductive approach, is not an ideal discipline to go into new institutional economics, because the latter requires case studies and has to depend on the inductive approach. Although those who study the relations between institutions and economic development have to be familiar with the mechanism of productivity increase, if they go into the study from area studies, they do not have to be bound by the quantitative, mathematical requirements of neo-classical economics and can look closely at the relations between institutions and productivity increase. Such investigation is especially needed for developing countries, where the role of institutions is poorly understood. Therefore, the attention of area specialists to institutions is needed, and for them to go in that direction will be richly rewarded since they have a comparative advantage in studying institutions.