In this short volume, Nils Karlson makes an important contribution to the economics of institutions by providing stimulating theoretical insights and two interesting case studies. His narrative unfolds in three steps. After having acknowledged that good institutions are a key ingredient of sustainable growth, he draws attention to the lack of satisfactory and comprehensive explanations of their dynamics; he details his views about the components of successful institutional change; and he provides evidence by examining policymaking in Sweden and Australia during the 1980-2010 period.
In the first part of the book, Karlson joins the classical-liberal tradition initiated by Adam Smith and more recently reformulated by Douglass North. Institutions are virtuous when they include light government and the rule of law (no privileges): free trade, moderate taxation, restrained public expenditure, and judicious regulation.
Yet, free-market institutions are the exception, rather than the rule. Sometimes, they replace harmful or ossified laws. More frequently, bad lawmaking and poor growth performance persist, and reforms fail to take place.
Karlson examines the components that make it possible to move from a poor institutional context to growth-enhancing legislation. In particular, the author underscores the role of four necessary conditions. First, economic performance must be disappointing. The country must experience a negative shock (e.g., the oil shock that took place in the early 70s), or intolerably low growth, or structural problems and impending troubles (e.g., a large public debt or high unemployment). In other words, the public must realise that the status quo is undesirable and unsustainable, and that reforms are in order. Second, institutional changes need ideas and a fertile cultural environment. Thus, reforms cannot take off unless influential opinion makers (Karlson calls them "policy entrepreneurs", a label that includes eminent scholars, respected think tanks, influential journalists and junior politicians) succeed in persuading the political elites and the general public to consider abandoning the status quo and moving towards (free-market) alternatives. Third, the creation of new institutional features needs informed debate and flexibility. New fiscal and regulatory measures should be analyzed in detail before they are introduced, they should be monitored after they become operational, and they should be modified if they fail to...