Institutional Credibility and the Political Costs of Market Transactions

If the heart of the adjustment problem involves redefining the role of the state in society and the economy, the direction of change must be from higher to lower costs in market transactions. Eventually this entails lowering uncertainty concerning the definition and allocation of property rights. The higher the level of uncertainty, the lower the level of investment. The lower the level of investment, the greater the inefficiencies in production and so the lower the rate of economic growth. If the credibility or formality of institutions is defined as the convergence of the functional with the constitutional, an obstacle to this convergence is an inadequate legal, political and regulatory framework. ¹ Countries that enjoy above-normal extractive capabilities but have very low institutional credibility are unlikely to register very much success in whatever adjustment efforts they undertake, nor are they likely to achieve sustained economic growth for any length of time.