What do institutions mean for growth and progress? Part II

By | October 21, 2021

4: Inclusive and exclusive institutions

Countries with long-term and stable economic growth often have inclusive institutions, while poor countries have exclusive ones . The differences between the various governing bodies and institutions are illustrated by the differences between the United States and Latin America in the cities of Nogales – USA and Nogales – Mexico. Similarly, researchers believe that the economic differences between former East and West Germany, and between present-day North and South Korea, can best be explained by the fact that two parts of the same country and people were subject to different institutional systems : One part received exclusive and the second part including political and economic institutions.

Exclusive systems can also create significant economic growth, but only for a shorter period of time . Both the plantation economy in the Caribbean and the Soviet command economy are examples of this. By commanding labor from low-productivity agriculture to the more productive heavy industry, the Soviet Union achieved annual economic growth of 6 percent between 1928 and 1960. The positive assessments among many of the economists of the time – of the Soviet system’s ability to create growth and prosperity – are echoed in today’s admiration for the Chinese economic miracle . It has brought hundreds of millions out of poverty. But Chinese growth, like the Soviet one, may be in danger of stalling if political institutions are not made more inclusive.

In contrast to exclusive institutions and governance, inclusive institutions open up for pluralism and the spread of power in politics. In the economy, they open up for technological innovations and thus to change and growth.

According to percomputer, exclusive institutions, on the other hand, will be characterized by (enlightened) autocracy and economic conservatism. The story contains several examples of autocratic rulers who say yes to new technologies, but only as long as they secure or strengthen their own power. Technological changes that undermine their own power base, or that erode the political and economic power of groups they rely on , are met with fear and skepticism.

Therefore, the Ottoman rulers banned book printing. Printed books led to the spread of new ideas, which made it more difficult to control the population, they thought. Therefore, the autocratic rulers of Russia and of Austria-Hungary also opposed railways and factories. They rightly feared that thousands of jackals and maids would flee from the yoke of the landlords and join political movements that opposed autocracy. The rulers feared industrialization because it would undermine the agricultural foundation of their power and autocratic rule.

5: The aid illusion

Since the countries of Africa became independent, rich western countries have spent large sums on aid to help them with public health and economic development. When the aid has not had the desired effect, it may be because the donors are subject to what some call the aid illusion : transferring aid money is compared to pumping water into a pipe: If only enough water is filled at one end, it will flow water out the other end. Donorland, which is under this illusion, sees eradicating poverty and saving the lives of dying children as a technical problem, in line with repairing cars.

In more than 10 states in Africa, large parts of public expenditure are covered through foreign aid. These include Benin, Burkina Faso, the Democratic Republic of the Congo, Madagascar, Mali, Niger, Sierra Leone, Togo and Uganda. Here, assistance has in periods accounted for up to 75 per cent of public expenditure. The more dependent a recipient country becomes on foreign support, the less incentive they are likely to have to collect tax money and the less responsive they become to the population’s demands. In countries where the governing powers must base the state’s activities on taxes from the inhabitants, closer ties often arise between those in power and those in power – a social pact. The governing body must to a greater extent be able to account for and be responsible for government spending. And those in power want to “have a say in the team” since they pay taxes. They will be included.

6: Assistance with or without conditions?

Should aid depend on recipient countries meeting certain institutional conditions, such as increased market liberalization or democratic development? Such assistance is according to Acemoglu and Robinson as ineffective as giving unconditionally. Countries that do not meet the conditions continue to receive as much aid as those who meet the requirements. The reason is simple: These countries often need help more than those who are able to use aid. Attaching conditions to the aid therefore also does not seem to contribute to building more democratic institutions. In sub-Saharan Africa, a large part of public budgets is financed by development aid. But even there, a dictator will hardly – in order to meet aid conditions – take the risk of reducing his power in exchange for increased aid.

INVESTMENT OR ASSISTANCE? Most studies find a negative correlation between development assistance and economic growth. On the other hand, studies of investments – expenses for machinery, factories, telecommunications and infrastructure, everything that supports future prosperity – show a clear positive growth effect .

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