Lesson 11: Institution and governance

Institution as Rules of the game

• the formal and informal rules within which economic, political, and social interactions occur.

• structure incentives, shape human behavior, and establish expectations between actors.

Two type of institutions as rules of the game

• Formal: Laws, contracts, property rights, government bodies.

• Informal: Norms, traditions, social networks (e.g., kinship, community trust).

Institution as as Organization

• non-market coordinating systems, like bureaucracies, state enterprises, and banks.

• activities are coordinated not by price signals but by internal administrative decisions.

Luca Ferrini

he identify the four key functions through which institutions affect development:

1. Reducing Transaction Costs

   • minimize search, bargaining, enforcement, and policing costs

2. Securing Returns to Investment

   • In Ghana, lack of secure land tenure reduces investment in agriculture

3. Constraining Expropriation and Oppression

   • limit state abuse of power (latin america)

4. Encouraging Social Capital and Cooperation

   • Democratic and inclusive institutions promote trust, networks, and information sharing

Hall & Jones (1999), Acemoglu et al. (2001)

explain why some countries are rich and others poor. Institutions explain differences in output per worker.

Rodrik, Subramanian, and Trebbi et al. (2002)

 Institutions matter more than geography or trade in explaining income differences.

Banerjee & Iyer (2005)

 Different colonial land tax systems in India led to long-lasting differences in development outcomes. Case: Colonial land revenue systems in India

Pande and Udry (2005):

 Case: Land rights in Ghana - secure tenure leads to higher investment and output.

Neoclassical (Market-Failure) Approach

• emerge to correct market failure\

• rational choice theory

Structuralist and Marxist Views

Emphasize power structures, class interests, and inequality.

ROLE OF THE STATE IN INSTITUTIONAL DEVELOPMENT

1.  influence the "rules of the game" – through property rights, land reforms, market regulations, etc.

2. Effective states build an “enabling environment” for private and civic actors.

3. But state-led development is risky if bureaucracies are weak or capture occurs.

Dysfunctional Institution

Not all dysfunctional institutions are “inefficient”—some are intentionally structured to serve elite interests.

CHALLENGES IN INSTITUTION

1. Path Dependency

2. Informal vs. Formal Clashes

3. Collective Action Problems

4. Context Specificity

Solutions for Effective Institutions

1. Prioritize Property Rights

2. Strengthen Checks on Power

3. Leverage Informal Institutions

4. Foster Inclusive Organizations:

CORRUPTION

form of dishonesty or a criminal offense that is undertaken by a person or an organization that is entrusted in a position of authority.

examples of corruption

1. bribery

2. embezzlement

3. Nepotism

4. Kickbacks

EFFECTS OF CORRUPTION ON DEVELOPMENT

1. Weakening of Political Institutions

2. Loss of Public Trust and Participation

3. Environmental Degradation

4. Stunted Economic Growth

5. Corruption in the Philippines

 Corruption Perceptions Index (CPI) (1995)

the leading global ranking of public sector corruption.

rank philippines 114/180 in 2024

Rent seeking behavior

any practice in which an entity aims to increase its wealth without making any contribution to the wealth or benefit of society.

-done by manipulating the political environment and can result in social harm.

EXAMPLES OF RENT-SEEKING

• Lobbying for monopolies 

• license requirements for professions

• Creating barriers to entry for new businesses

• Grants 

• Subsidies 

• Tariff protection

• Tax exemptions through political favors

Direct costs

 actual, measurable expenditures incurred by individuals, firms, or interest groups while engaging in rent-seeking activities.

Opportunity costs

 developmental losses that occur when financial and human resources are diverted away from productive sectors due to rent-seeking.

Moral costs

decline in institutional trust, market fairness, and ethical norms caused by widespread rent seeking behavior.

Legal Systems

framework of rules, procedures, and institutions that a community uses to interpret and enforce their laws.

Property Rights

give the owner or right holder the ability to do with the property what they choose.

Property Rights in the Philippines

1. Philippine Constitution Article III Bill of Rights Section 1 & 9

2. Intellectual Property Code of the Philippines (R.A. 8293)

3. Civil Code of the Philippines (R.A. 386)

Stare Decisis 

•  decisions of a superior court on a point of law are binding on all subordinate courts.

Special Economic Zone (SEZ)

area in a country that is designed to generate positive economic growth. An SEZ is normally subject to different and more favorable economic regulations

Good governance

 participatory, consensus oriented, accountable, transparent, responsive, effective and efficient, equitable and inclusive and follows the rule of law.

8 MAJOR CHARACTERISTICS OF GOOD GOVERNANCE

1. Participation- mportant to point out that representative democracy does not necessarily mean that the concerns of the most vulnerable in society would be taken into consideration in decision making.

2. Rule of Law - requires fair legal frameworks that are enforced impartially

3. CONSENSUS ORIENTED-

4. Equity and inclusiveness

5. Effectiveness and Efficiency

6. Accountability

7. Transparency

8. Responsiveness

Development outcomes

 changes or results that occur as a consequence of a development intervention, such as a project or program.

• development organizations can demonstrate their accountability to stakeholders, including donors, beneficiaries, and taxpayers.