Page 91 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.72, # 2, 2015, pp. 87- 97

North, 2000). First, let‟s determine what the transaction cost is. In his paper of Oliver
E. Williamson, Williamson defines the transaction, quoting a 1932 book by John R.
Commons: “the ultimate unit of activity must contain in itself the three principles of
conflict, mutuality and order. This unit is transaction” (2000: 599 quoting by John R.
Commons, 1986). Therefore, Williamson argues (2000: 599) that governance can
create an institutional system so that it can regulate mutual gains and minimize
conflicts within human interaction. There is a need for institutional arrangements
(property rights, legal rules) as well as effective organization to ensure institutional
provisions to decrease the transaction costs in agriculture of developing countries.
Therefore, the NIE is an innovative field which proposes institutional analysis to find
out what kinds of institutions are needed to decrease high transaction costs hampering
agricultural growth in developing countries (Kherallah and Kirsten, 2001: 17).
A causal relationship between institutions and economic growth must be taken
into consideration from the perspective of the NIE. It basically proposes that
developing countries must have good governments and well functioning institutions
to manage fair and sustainable rules in economic and political life. The fair rules in
economic interaction will not only create trust and favorable environment for private
investors to invest, but also increase incentives of market agents to interact without
fear. While criticizing the failure of Washington Consensus, Rodrik (1990: 933)
argues that “illiberal policies” are the major reasons of failure of “structural
adjustment programs”. For filling this gap, the NIE has contributed to the PWC by
proposing the idea of “developmental states”. Tornquist defines developmental
states as “states whose politics have concentrated sufficient power, autonomy and
capacity to shape, pursue and encourage of explicit development objectives, whether
by establishing and promoting the conditions and direction of economic growth or
by organizing it directly, or varying the combination of both” (1999: 89). Taking this
into consideration, the NIE also contributes to the agenda of the PWC by proposing
the importance of transparent, legitimate, democratic, accountable, and responsible
governments as well as their policies which can play a crucial role in the
development issues (Tornquist, 1999: 94).
The contributions of the NIE to the PWC are a group of ideas which supported
prescriptions within the PWC. These prescriptions were described by Stiglitz in his
lectures and promoted by the World Bank through many policies and programs in
the developing world. Let‟s review what the contributions of the NIE to the PWC
are and how they are effective in modern development agenda. As mentioned

91