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Institutions, Governace and Growth Akbar Noman.  A quick, critical review of literature on the relationship between institutions (especially governance)

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Presentation on theme: "Institutions, Governace and Growth Akbar Noman.  A quick, critical review of literature on the relationship between institutions (especially governance)"— Presentation transcript:

1 Institutions, Governace and Growth Akbar Noman

2  A quick, critical review of literature on the relationship between institutions (especially governance) and development.  Begin by noting the the difficulties of establishing causal links between institutions and development outcomes  Nonetheless there are some clear outcomes though mostly negative ones showing what institutions are are neither necessary nor sufficient

3  One such is that contrary to earlier views; democracy not necessarily inimical to development nor dependent on it. Also that democracy offers insurance against disaster: Autocracies at extremes  Another revolves around the so-called “Good Governance” (GG) agenda. Again it is neither necessary nor sufficient. More provocatively, it may even be inimical to development

4  What are institutions? Norms and rules (Douglas North)  Standard economics assumes implicitly existence of many institutions, including markets  Reasonably well-functioning markets and private economic activity in turn requires other institutions

5  Rule of law: property rights and contracts enforcement  But property rights themselves subject to regulation e.g……  Other non-market institutional requirements: Regulatory apparatus (fraud etc.); social trust; pol and soc institutions to manage social conflicts and mitigate risks

6  These underpinnings of well- functioning economies highlighted by “encounter between developing societies and neo-classical economics” (Rodrik)  Emphasis in 1980s –Wash Con- get prices right, leave it to the market – disappointments led to focus on institutions

7  In particular three disappointments: (a) poor results of the reforms in LAC and Africa ; (b) Russia and transition; and (c) Asian fin. crisis of late 1990s  One interpretation; nothing wrong with the policies: didn’t work because of institutional/implementation failures

8  At any rate, recognition that non- market institutions matter since markets are not (a) self-creating; (b) self-regulating; (c) self-stabilizing; and (d) self-legitimizing  Controversies around degrees to which this is so and policy implications: more or less role for state and markets

9  The dominant/orthodoxy on institutional reforms: focus on GG =“market-enhancing governance”(Mushtaq Khan)  These emphasize: property rights; rule of law; accountability and transparency (democracy); anti-corruption; liberalization  This based on institutions in developed countries. But the particular form of institutions varied between the developed countries, e.g. regulatory regimes; legal systems; forms of democracy; definitions and forms of corruption

10  No unique mapping of institutions and level of development  Even more important: direction of causality. No country established “good governance” (GG) first and then developed. Simultaneous, messy processes with complex interactions between institutions and level of development

11  Much made of relationship between growth rates and various indicators of governance (corruption etc.) but if take developed countries out nothing left  More precisely: Two groups of developing countries; one converging and one diverging and the mean and variance of GG indicators the same in the two groups

12  During periods when today’s rich countries were developing -- great deviations from the “market- enhancing” GG agenda  This agenda not feasible in low- income countries: public goods that are too expensive  But fortunately neither necessary nor sufficient for development

13  Not just history of now developed countries but experience of contemporary developing countries: e.g. China, Vietnam, more generally E. Asia  Fastest growers like China and Vietnam do not do well on WB’s Doing Business Indicators: ranked 91 and 98 out of 183 countries. India ranked 132 at the height of its growth around 2009/10 (Singapore #1 and Chad last)

14  The nexus of rents/ rent-seeking/corruption pervasive and central to capitalist development  Recognized right since Adam Smith –worried about monopolistic tendencies  Also in what Smith called “prior accumulation” of capital -- assumed as necessary condition of capitalist development

15  Marx followed Smith in making that assumption translating “previous” as “ursprunglich” in German, which his translator rendered back into English as the famous “primitive accumulation ”  Marx criticized Smith for being ahistorical in his explanation of how it came about but agreed on its essentiality

16  History replete with corruption/rents as accompaniments, indeed often hand-maidens of development  Not just East India Co. and other colonial exploits but also e.g. US, arguably the most protectionist country in the 19 th century and Europe’s catch-up with England (Gerschenkron).  Ha-Joon Chang also includes England’s industrialization as dependent on rent-seeking

17  If absence of corruption necessary for development  no developed countries in the world today  The issue is not rents/corruption but their form. Rents for what? e.g. …..  Neo-liberal reforms no less subject to capture than etatism. Enormous corruption in programs of liberalization and privatization

18  Not just in developing countries. Example: Finance in rich countries today -- rents and capture  Peculiar obsession with leakages of welfare or anti-poverty programs. Often pale in comparison with leakages of pro- rich programs including through tax loopholes and havens

19  Does not mean that much of the GG agenda not desirable. Democracy, rule of law. Reducing corruption etc. are highly desirable ends in themselves  But confusion of ends with means. Also explain why broad-based constituency: one platform on which Wash. Con/neo- libs and assorted CSOs come together

20  These reforms are worthy and should be pursued as ends in themselves  But not confuse with why policies failed and what policy reforms needed for growth and development  Further confusion: Gov’ts deemed incapable of intervening effectively in markets and generally incompetent, and subject to rent- seeking are expected to undertake highly ambitious agenda of institutional reforms

21  The best as the enemy of the good– what is feasible?  History: countries undertook NOT comprehensive institutional reforms before embarking on sustained growth but piecemeal reforms focused on overcoming particular constraints  Sufficient to get growth and development going and then making further changes as they went along:“growth-enhancing governance”

22  Most startling variance from the conventional GG agenda: China (and Vietnam)  Also institutional innovations experimental and as and when required to overcome particular constraints  Concern with social legitimacy –- two- track system, not dismantling existing enterprises etc but creating new ones

23  Acemoglu, Johnson and Robinson (AJR) paper immense attention  “Solved” endogeneity problem by use of instrumental variable which independent/exogenous. Settler mortality.  We know that settler colonies, faster growth and more developed. Also have better institutions. Also that they were not particularly advantaged in terms of resource endowments (though debatable)

24  They then jump to the conclusion that faster growth in settler colonies was because of better institutions, especially property rights and rule of law  This does not follow from their econometrics.  Actual history: rule of law and security of property rights in settler colonies the opposite of what AJR claim– first destroyed existing property rights and even lives (Native Americans, Aborigines, Zulus)

25  Superior economic performance of settler colonies compared with other colonies consistent with other explanations e.g. human K, access to tech., disease burden  Institutions rule. But which ones? In what form? When? Context- specificity

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