IMPACT OF INFORMAL INSTITUTIONS ON ECONOMIC GROWTH AND DEVELOPMENT

Achieving the long-term economic growth rate and development is the aspiration of all economic policy makers. Contemporary economic theory recognizes institutions as fundamental sources of economic prosperity. According to Douglas North (1991), institutions represent designed limitations that manage political, economic and social interactions. Precisely, institutions are the rules of behavior in a society, or more formally speaking, the restrictions on which man has figured out how to shape human interaction (North, 2003:13). Besides formal institutions, i.e. constitutions, laws, property rights, informal institutions encompass customs, traditions and codes of conduct. Although more attention in developed economies is devoted to formal institutions, many authors deal with informal institutions as objects of their research. The purpose of this paper is to present institutions through the function of economic growth and development. Besides, the purpose is also to consider the relationship between formal and informal institutions. Informal institutions are thoroughly presented through a series of examples which define and analyze their impact on development outcomes.