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Nobel Prize decision highlights significance of institutions

Elinor Ostrom (Image: Flickr, Adam P Schweigert/WFIU) : Click to enlarge

This year's Nobel Prize in economics was jointly awarded to the political scientist Elinor Ostrom, of Indiana University, and the economist Oliver Williamson, of the University of California, Berkeley (12 October).

The Directors of the DFID-funded Research Programme Consortium for Improving Institutions for Pro-Poor Growth (IPPG), Professor Kunal Sen and Dr Adrian Leftwich, have commented on how the recent award of this year's Nobel Prize in Economics to Elinor Ostrom and Oliver Williamson highlights the significance of institutions and indicate how the Laureates' ideas have influenced IPPG's research. Their blog article, posted on the IPPG website, is reproduced here:

Elinor Ostrom has been awarded the Economics Nobel for her pioneering work on the governance and decentralised management of common pool resources. For poor people and others living in natural resource-based development contexts, such resources, including pastures, forests and fish stocks, are vital. Prior to Ostrom's research, privatisation or state ownership were regarded as the main governance options to address what has been described as the "Tragedy of the Commons". Drawing on extensive and meticulous evidence, Ostrom highlighted and documented the success - and often superiority - of a third policy avenue, where local users had formulated and implemented rules and enforcement systems that ensured sustainable outcomes. Ostrom's ideas have influenced IPPG's research on the Forest Rights Act in India

Oliver Williamson's work provides a conceptual basis in the understanding of why informal institutions, such as social networks, are crucial in underpinning economic transactions in the early stages of economic development; and why individuals often band together to form organisations in order to reduce the 'transaction costs' of dealing directly with each other via contracts. Relating to other individuals through an internal organisational hierarchy, or through relational contracts such as networks, is often more efficient than relating to them through contracts in a marketplace. Williamson highlights the importance of non-market institutions in mediating economic activity in developing and transition countries, where formal institutions such as courts and bankruptcy laws are not yet in place.

Williamson's thinking has been important in many of the projects undertaken by IPPG researchers. See:

Moreover, and from an IPPG point of view, what is particularly interesting and important about this jointly-awarded Nobel prize and the work of the two distinguished Laureates is its implicit recognition that the processes which help to shape effective economic institutions are political ones. It highlights that the disciplines of economics and political science each have a significant contribution to make to our understanding of how effective institutions are formed, sustained and changed - a theme that has been central to much IPPG work.

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 02 November 2009
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