The article tries to advance our understanding of institutional economics by critically examining the currently dominant discourse on institutions and economic development. First, I argue that the discourse suffers from a number of theoretical problems – its neglect of the causality running from development to institutions, its inability to see the impossibility of a free market, and its belief that the freest market and the strongest protection of private property rights are best for economic development. Second, I point out that the supposed evidence showing the superiority of ‘liberalized’ institutions relies too much on cross-section econometric studies, which suffer from defective concepts, flawed measurements and heterogeneous samples. Finally, I argue that the currently dominant discourse on institutions and development has a poor understanding of changes in institutions themselves, which often makes it take unduly optimistic or pessimistic positions about the feasibility of institutional reform.

Ha-Joon Chang, in his article ‘Institutions and Economic Development: Theory, Policy and History’, raises doubts about the effects of institutions on economic development and questions the positive effects of entirely free markets based on secure private property rights. We respond by stressing that institutions structure the incentives underlying individual action, secure private property rights are indispensable for prosperity, institutions have a first-order effect whereas policies only have a second-order effect, successful institutional change comes from within a society, and, given the status quo of developing countries, first-world institutions are likely not to be available to them.

The discussion about the role of institutions in economic development should revolve around the relative performance of institutions and not around the alleged superiority of one system over the other.

In his critique of the newer approach in economic development emphasizing institutional reforms, Ha-Joon Chang, in his article titled ‘Institutions and Economic Development: Theory, Policy and History’, equates New Institutional Economics with the program of liberal reforms for least developed countries (LDCs) and blames the former for the alleged failure of the latter. He argues with some justice that the dominant discourse in New Institutional Economics insufficiently appreciates the complexity of institutions; as a consequence, the difficulty of transplanting institutions is largely discounted. His case, however, is marred by his attempt to push down his ideological biases by marshalling inchoate, highly questionable and often contradictory ideas as facts. Going beyond a critical examination of the New Institutional Economics inspired discourse in development economics, he advocates his own version of beneficial development policies for LDCs – namely, economic democracy and industrial policies. His proposals are not only highly questionable, but they amount to adopting a double standard of exempting himself from the very criticisms he levies against New Institutional Economics – ignoring the difficulty of importing foreign institutions. Presuming to play God, like many development economists, he ignores the essential fact that an unwilling horse cannot be made to drink.

Economics has changed enormously since Professor Ha-Joon Chang burst onto the scene in the early 1990s. His critiques of mainstream economics are far more applicable to the discipline at that time than they are now. Whatever the shortcomings of the current literature on institutions and development, progress is not being held back by conceptual blinders imposed by economic orthodoxy. Game theory and behavioral economics have enriched the menu of models acceptable in the professional journals. More important, empirical standards have greatly advanced. Behavioral models are being confronted with computerized games and even with in-the-field experiments, especially in poor countries where recruiting experimental subjects is cheaper. The recent literature does not merely undermine traditional assumptions; it offers parsimonious interpretations that help us to understand the economy and the polity better than before.

In his article ‘Institutions and Economic Development: Theory, Policy and History’, Ha-Joon Chang rightly argues that historical evidence does not irrefutably suggest that countries characterized by free markets perform better than those in which the state plays a much more prominent role. However, his method of substantiating his claims by means of examples from different sources and periods does not convince. A more systematic and theoretically founded approach is needed. This comment focuses on the cross-section versus time-series approach and the relation between culture, institutions and economic development.

This article complements Ha-Joon Chang's critique, entitled ‘Institutions and Economic Development: Theory, Policy and History’, of the ‘dominant discourse’ on institutions and economic development which takes the view that getting the institutions right (by strengthening private property rights and market freedoms) is a prerequisite for development. It does so by commenting on the concepts of economic development and institutions, discussing the theory of how institutional change affects development, and examining the possibility and desirability of such institutional change as a prerequisite of development.

Ha-Joon Chang, in his article ‘Institutions and Economic Development: Theory, Policy, and History’, provides a description and critique of the mainstream view of institutions and development. It applies well to Latin America in the 1980s and 1990s. However, the effort to introduce these Anglo-American institutional structures (Global Standard Institutions; GSIs) in the 1980s and 1990s resulted in uneven and unstable economic performance, not development. As a result, the relationship among institutions, development and economic policy in Latin America today has generally moved far beyond this ‘mainstream’. The institutions to insure macro stability have generally been preserved, and some countries do follow GSI prescriptions. However in most countries, especially in South America, the effort to find the right mix of institutions for development has moved far beyond this mainstream. The result has been innovative initiatives to address more fundamental development issues such as inequality, property rights and international economic institutions. This process is likely to continue, facilitated by the currently robust democratic political systems that grew out of the earlier turmoil.

Ha-Joon Chang, in his article ‘Institutions and Economic Development: Theory, Policy and History’, argues that the institutions and development literature is theoretically and empirically flawed, trapped by a failure to account for the contextual factors that influence the institutions that drive development. These judgments emerge from a lack of appreciation of the methodological standards of that literature and, especially, from a description of the institutions and development literature that few contributors to it would recognize. At the same time, despite the emphasis he gives to contextual factors, his critique ignores the role of politicians and the progress made in the institutions literature in understanding their incentives to pursue development.

In recent years, there have been major advances in the empirical analysis of the link between institutions and development. However, a number of methodological problems – both theoretical and empirical – remain unresolved and have been well articulated by Ha-Joon Chang in his article ‘Institutions and Economic Development: Theory, Policy and History’. These problems raise valid concerns about the policy relevance of the evidence arising from the studies. A more reliable approach to study the link between institutions and development and overcome the inherent problems of cross-country empirical analysis is to direct focus to microeconomic analysis of institutions. Such an approach avoids ideologically driven normative judgments about the superiority of particular institutional arrangements and also offers a more credible and tractable avenue to investigate institutional change.

This comment criticizes Ha-Joon Chang's assessment of contemporary institutionalism, in his article entitled ‘Institutions and Economic Development: Theory, Policy and History’, for failing to show fundamental problems in the discourse. I argue that the current discourse's insights are structurally biased because it fails to satisfactorily address methodological problems of doing meaningful comparative research. The discourse is characterized by a limited focus on differences of degree, a neglect of interaction, and a tendency to represent societies from a partial perspective. The result is an unbalanced debate that tends towards equating developed country institutions with economic success.

This article draws on several of the major breakthroughs in the institutions and development field to demonstrate that criticisms of work in this field as a whole based on its allegedly universal and unquestioning support for liberalizing institutions and the simplistic rationale and deficient empirical methods that have been used to buttress that support are outdated, inappropriate and misleading.

In his comprehensive analysis of the relationship between institutions and economic growth, Ha-Joon Chang, in his article ‘Institutions and Economic Development: Theory, Policy and History’, reviews the empirical evidence on this relationship emphasizing the contrast between the conclusions that one can derive from the time-series evidence and the claims often made in favor of ‘liberalized institutions’ based on the results of cross-section studies. Does the time-series evidence contradict the results of cross-section studies regarding the relationship between institutions and growth? In this comment, I argue that in stressing the contrast between these two kinds of evidence, Chang falls short of a full criticism, consistent with his theoretical analysis, of cross-section studies while at the same time failing to infer what the time-series evidence really shows.

Ha-Joon Chang effectively criticizes the mainstream approach to the institutions of development, on theoretical, empirical and historical grounds. He also creates an opening for a different kind of discussion about institutions and development, between heterodox institutional and Marxian economics. But he overlooks the opportunity to analyze the relationship between class and the institutions of development.

Should scholars, like columnists, exaggerate and aggregate opposing views into men of straw? I analyse an example of scholarly criticism that characterizes the treatment of development in institutional economics as a simplistic and extremist paradigm. I argue that scholarly standards demand a complete and honest portrayal of contrary opinions and that straw men should be banished from scholarly discourse.

Ha-Joon Chang (2011), in his article ‘Institutions and Economic Development: Theory, Policy and History’, argues that economists place too much faith in ‘liberalized’ institutions. Institutions matter for growth, he contends, but not the way institutional economists think they do. In this article, we offer a defense of the hypothesis that ‘institutions matter’ for economic growth and present several objections to Chang's arguments.

This article provides comments on the article titled ‘Institutions and Economic Development: Theory, Policy and History’ by Ha-Joon Chang.

This article is a reply to the comments made on my target article, ‘Institutions and Economic Development: Theory, Policy and History’, at the beginning of this issue.