INSTITUTIONS IN DEVELOPMENT

The June issue of Finance and Development (the IMF journal - online) has five articles dealing with the importance of institutions in development: "Root Causes: A historical approach to assessing the role of institutions in economic development" by Daron Acemoglu; "The Primacy of Institutions (and what this does and does not mean)" by Dani Rodrik and Arvind Subramanian; "Testing the Links: How strong are the links between institutional quality and economic performance?" by Hali Edison; "Institutions Matter, but Not for Everything: The role of geography and resource endowments in development shouldn’t be underestimated" by Jeffrey D. Sachs; and "Institutions Needed for More than Growth: By facilitating the management of environmental and social assets, institutions underpin sustainable development" by Christian Eigen-Zucchi, Gunnar S. Eskeland, and Zmarak Shalizi.

These summarize important research that challenges many of the underlying assumptions on which aid is based. Several of the authors defend the position that the current level of economic development is based solely on the quality of institutions. Acemoglu describes their key characteristics as “enforcement of property rights”, constraints on the actions of powerful groups”, and “some degree of equal opportunity for broad segments of the society. Rodrik and Subramanian classify the institutions they feel to be critical as “market creating”, “market regulating”, “market stabilizing”, and “market legitimizing”.

They thus indirectly challenge much of the basis of current aid assessment. If institutions are the key, and institutional development is the long term objective, then institution building should be the objective of development projects, and such projects should be long term in nature. There is still a place for humanitarian projects, but they should be judged in terms of humanitarian objectives and usually not portrayed as “development” projects.

Sachs provides an alternative position, which I find more acceptable – one focusing on many causes for underdevelopment, many paths to development, and several roles for development assistance.

From the point of Knowledge for Development the discussion raises issues that must be addressed. Surely the economic institutions that are discussed have important knowledge processes, and their development should be seen as significant within a knowledge for development strategy and program.

The arguments made are primarily based on regression analysis. I haven’t done so, but it would seem clear that as strong an argument could be made on the basis of correlations for knowledge and technology as the basis for development. Thus, per capita GDP depends on land (natural resources) and capital per worker, and the way that labor, capital and resources are used. At some point, growth depends on increasing productivity of inputs, and that increasing productivity must be obtained by using more productive technology or using knowledge more effectively.

It would seem likely that such improvements of productivity would not be achieved without good economic institutions and policies, but knowledge institutions are also needed. I don’t see how a country with no trained manpower, and no training institutions, and with no technological institutions could ever make the needed transformations of productivity – no matter how good its economic institutions.

In any case, I recommend the papers.