Institutions and Development

Definition of Institutions

Definition of Institutions

• We will use broad definitions

• North - „rules of the game in society“

• Lin and Nugent - set of humanly devised behavioural rules that govern and shape the interaction of human beings, in part by helping them to form expectations of what other people do

Informal Institutions

• Informal institutions – norms, customs, ethics – often may be related to culture

• „Carriers of history“ – go through generation to generation

• Reflect current set of values

• Sanction are not by the state (private enforcement, moral condemnation, ostracism, loss of reputation)

• Role of tribal chiefs, religious leaders…

• Meaning of the institutions – shaping human behavior

Formal Institutions

• Formal ones – typically for example constitution, laws, regulation in general

• They determine political, economic and enforcement system

• They are being formed and enforced by the state – sanctions, fines, executions

Relation between formal and informal institutions

• Informal institutions play very significant role in shaping formal ones

• Formal ones may in a long term shape informal ones

Role of the Institutions

• They structure incentives for human behavior

• They raise certainty in the world of imperfect knowledge and different perceptions

• As they shape behavior, they influence whole-society outcomes – the form of democracy and economic performance

Impact of institutions on development

Origin of Institutions

• Institutions are never neutral, they have a „political origin“

• They reflect ideas, values and interests of those who had created them (rational actors)

• They are often outcome of a political bargain and compromises

• In practice they may function differently from what was intended

Institutional History

• Current institutions in developing countries are often influenced by the institutions imposed by former colonial powers

• Different types of settlement = different institutions?

• Difference between North and South America

Institutional Change

• Institutions do not have a fixed character

• Rapid changes are not usuall (unless there is a revolution)

• Internal or external threats

• Change of ideas or interests of the key players in society

• Institutions are subjects to a long-lasting political struggle – the winner is able to change them

• Some actors are more powerful to change institutions than others (poor, low-caste are weak)

Virtuous vs. Vicious Circles

• Acemoglu-Robinson – theory of institutional change

• Virtuous circle – a positive change tends to bring more positive changes and brings new interests into play

• Vicious circles – there are forces that keep the old system together

• Interplay of political and economic institutions

Governance

• Set of traditions and institutions that create rules for performing of autority in a given country

• 1. Processes by which the government is created, monitored and changed

• 2. The capacity to govern – to formulate and implement politics

• 3. Respect of the citizens to the government

Separation of Powers

• First made up by Montesquieau

• Legislative, executive and judiciary branch

• Several principles

• Division of powers

• Indipendence of powers

• Balance of powers

• None of the powers is accountable to the others

Rule of Law

• The state has to obbey its own laws – it has to act in accordance with the law

• States gives the guarantees for justice

• Judiciary branch oversees the executive one

• Principle of legal certainty

Constitution

• Basic law of the country

• Sets „rules of the game“

• Creates a basic legal framework, divides the powers between various actors

• Rules of the competition for pover, its use, distribution and control over it

• There are rigid constitutions and more changeable ones

• Informal institutions like political culture play an important role in keeping the consensus on the basic rules

Type of State and its organization

• Unitary vs Federal – more centralized or less centralized organization

• Presidential vs Parliamentary democracy – tips of the balance to one side or the other one

Political Parties

• Most common are mass based parties that try to agregate large number of votes

• Free political competition legalizes their governance

• Political parties serve as stabilizators of the regimes

• Ethnic or regional parties might undermine the integrity of the state

• Participation in the excersise of political power – either form government or opposition

• Multiparty, two-party and single-party systems

• Phenomenon of the pro-poor parties

Function of State

• Security

• Clean and efficient bureaucracy necessary

• Protection of property rights

• Guarantee of the rule of law

• Protection against economic shocks and provision of basic social security

• Fight against corruption

Worldwide Governance Index

• Created by World Bank

• Voice and Responsibility

• Political Stability and Absence of Violence

• Effectiveness of the Government

• Quality of the Regulation

• Rule of Law

• Control of Corruption

Protection of property rights

• One of the basic functions of the state

• Property rights are an incentive to investment and inovation

• De Soto – inadequate property rights are slowing down development

• In some states there is a problem with expropriation

International Country Risk Guide (IRCG)

• Measures the quality of the investment climate

• It composes of 22 indicators:

• Government Stability

• Quality of Bureucracy

• GDP Growth

• Risk of Exproptiation

Corruption Perception Index

• Created by Transparency International

• Index made up by polls, opinions of experts

• Why only perception – hard data are missing

• Poor countries typically have highest CPI