The importance of New Institutional Economics in explaining of economic growth and development

Abstract

The aim of the article is to identify the general assumptions of new institutional economics concerning the role of institutions in explaining economic processes and the behaviour of the individuals who form part of these processes. In particular, the article pays attention to assumptions referring to the importance of institutions in economic growth and development. This goal is realized through a literature review within the scope of the issue being discussed. The article shows the main connections and differences between neoclassical economics and new institutional economics. The founders of new institutional economics attempted to extend neoclassical thought with categories not included in previous research. One of these categories involves institutions which influence economic processes and the behaviour of the participants in these processes. The consequence of introducing institutional aspects to the analysis has been a bounded rationality and opportunism for the individuals who make the choices. The analysis of the main assumptions of new institutional economics allows the conclusion that neoclassical models which have been used to explain economic growth cannot be used in economic development analysis and the qualitative changes that come with it. New institutional economics has emphasized that institutions matter. There has been a necessity to include institutional aspects in research concerning the regularities occurring in the functioning of the economy and economic processes and their economic and social consequences. An appropriate, stable and complementary system of formal and informal institutions with an effective mechanism to ensure their enforcement in a given economy has a positive influence on economic growth and development. It is necessary to determine which institutions can accelerate these processes, reduce disparities between the levels of development of the various countries, raise living standards, reduce poverty and equalize social inequalities.