Institutions and the Legal Framework for Business Development in the Caribbean: Private Sector Development Discussion Paper #3

Research shows that long-term sustainable growth depends on the quality of a country's institutions. Without well-functioning institutions, education and training policies are less effective and factor markets cannot function efficiently. Similarly, without well-functioning institutions, infrastructure investment, macroeconomic stability, and trade reform do not lead to competitive, growing economies. Financial systems, which are a central element in funding new investment, do not function effectively in a weak institutional environment. This paper discusses the ways in which legal, regulatory, and governance institutions affect business competitiveness in the Caribbean region through their effect on transaction costs, contracting, firm organization, and formality versus informality.