Climate Change 2001:
Working Group III: Mitigation
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5.3.6 Institutional Frameworks

Economic actors interact and organize themselves to generate growth and development through institutions (and policy making). While organizations are material entities possessing offices, personnel, equipment, budgets, and a legal character; institutions are systems of rules, decision-making procedures, and programmes that give rise to social practices, assign roles to participants in these practices, and guide their interactions. Organizations may administer institutions (Young, 1994). Institutions exhibit substantial continuity and offer narrow and infrequent windows of opportunity for reform (Aghion and Howitt, 1998; Rip et al., 1998). Institutions operate in larger settings characterized by material conditions such as the nature of available technologies and the distribution of wealth, by cognitive conditions such as prevailing values, norms, and beliefs, and by transaction costs, costs of co-ordination, laws, etc. (Young, 1994; Coase, 1998). The market is a “set of institutions, expectations, and patterns of behaviour that enable voluntary exchanges” based on the willingness to pay of the parties to the exchange (Haddad, 2000). One major concern of the new institutional economics is the boundary between the market on which transactions are negotiated and organizations such as the firm (Simon, 1991).

On one level, all barriers can be considered institutional in origin, because markets, firms, governments, etc. are all institutions. In this section, however, the focus is on those barriers that derive from widespread or generic attributes of institutions. The distinctions are necessarily arbitrary, and some overlap between the discussion in this and other subsections is inevitable.

Institutions are a form of capital, social capital (Coleman, 1988). Social capital, like natural and human capital, is at the same time an input and an amenity. As an input, it enhances the benefits of investments in other factors and, thereby, shares the “shift” feature of technology (World Bank, 1997). Social capital is a public good and suffers, therefore, from underinvestment. Generally, weaknesses in social capital resulting from prevailing beliefs, norms, and values are an important generic barrier to the effectiveness of institutions. At the microeconomic level, social capital may be viewed as a social network, and as associated norms which may improve the functioning of markets and the productivity of the community for the benefit of the members of the association (Coleman, 1988; Putnam, 1993; World Bank, 1997; Young, 1999). At the macroeconomic level, social capital includes the political regime, the legal frameworks, and the government’s role in the organization of production in order to improve macroeconomic performance as well as market efficiency (Olson, 1982; North, 1990). Institutions may remedy market failures due to asymmetric information through information sharing (Shah, 1991). Societies in which trust and civic co-operation are strong, a component of social capital, have significant positive impact on productivity and provide stronger incentives to innovate and to accumulate physical capital. Trust and civic co-operation tend to affect human capital productivity especially (Knack and Keefer, 1997).

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