The paper aims to outline and analyse some important elements of institutional capital and their potential effect on sustainable development.
The paper presents four elements of institutional capital: public domain, institutional strength, good governance, and institutional equilibrium. The choice of these elements and the analysis of their economic, social and environmental impacts are based on literature study and interpretation and extension of existing analyses which rather focus on either economic or environmental issues.
The main argument of the paper is that institutional capital is a fundament of sustainable development, and that a lack of such capital is likely to cause unsustainable development.
The paper creates a general theoretical basis that may be a useful background for developing policy based on a system approach.
New institutional economics has often been used to analyse institutional determinants of economic growth and, to a lesser extent, to elaborate conditions for environmental protection and social development. The paper has tried to integrate and extend existing theory, focusing on economic activity, natural resource use and negative externalities, into a more general framework presenting the fundamental importance of social and economic order (institutional capital) for achieving sustainable development.
