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The Evolutionary Perspective on Institutional Divergence and Competitive Advantage

Especially after the Asian crisis, the conviction gained stronger acceptance that convergence of economic performance would also require convergence of economic institutions to some "institutional best practice". This paper challenges this view by distinguishing different paradigms of analyzing institutional convergence and divergence, such as the neoclassical view (standard set of institutions always applies), a developmental approach (divergence on lower levels, convergence oh higher levels of development) an others, culminating in the most complex institutional competition model, where meta-institutions might converge precisely to allow institutional diversity to persist. I argue that institutional competition manifests multiple equilibria, with diverse institutions showing a converging economic performance. One cause is the interaction among culture, informal institutions and formal institutions. This is further supported by recent developments in the theory of modular production functions. In a nutshell, institutional diversity is one determining factor of comparative advantage.