INSTITUTIONS AND ECONOMIC PERFORMANCE'

Institutions provide the incentive structure of an economy and therefore the way they evolve shapes long-run economic performance. Institutions, composed of rules, norms of behaviour, and the way they are enforced, provide the opportunity set in an economy which determines the kinds of purposive activity embodied in organizations (firms, trade unions, political bodies, and so forth) that will come into existence. If the institutions reward productive activity then the resultant organizations will find it worthwhile engaging in activities that induce economic growth. If, on the other hand, the institutional framework rewards redistributive and non-productive activities then organizations will maximize at those margins and the economy will not grow.