Institutions are the bedrock of a functioning society, and this is especially true in the context of development in poorer countries. The divide between the poorer countries of the global south and their wealthier counterparts in the global north is rooted in the quality and stability of institutions, which differ significantly within these nations.

There are both formal and informal institutions. These comprise laws, common practices, and organisations in society that influence economic and political outcomes. To achieve positive economic outcomes, institutions must provide incentives that motivate productivity and economic activity, inspire trust between citizens, and between citizens and their supporting economic and political institutions.

Inclusive economic institutions provide the best outcomes. In their book, Why Nations Fail, Daron Acemoglu and James A. Robinson state that “to be inclusive, economic institutions must feature secure private property, and unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers” (Daron Acemoglu 2012). In other words, nations with good public education, reliable infrastructure such as with transport and access to electricity, the ability to own private property and compete within markets, trust in the fairness of the legal system, and trust in government and political stability, are all conducive to positive economic growth.

Under such conditions, people are more willing to invest in their economic wellbeing and are free to choose career paths according to their own individual talents and wishes. They have the incentive to innovate, as they are confident in reaping the rewards of their commercial investments and personal professional development. The coercive capacities of the state are used to “impose order, prevent theft and fraud, and enforce contracts between private parties” (Daron Acemoglu 2012). Government departments and regulations are perceived to be legitimate protections of fair economic activity, rather than as obstructive or extractive bureaucracies.

Political institutions operating in support of inclusive economic institutions must be pluralistic and centralised. If a nation’s political power is too concentrated and unconstrained – such as in authoritarian states, absolute monarchies, and plutocratic oligarchies – its institutions become extractive. Such states tend to erect barriers to fair competition within open markets, exploit workers in ways that reduce or eliminate the ability to have agency over their own career paths, and expropriate sources of wealth and power from the many to the very few.

Centralised political institutions are better able to provide security through law and order enforcement, and are more effective at building infrastructure, and are therefore more conducive to better economic outcomes. Somalia is an extreme example of how even pluralistic nations – those with a broad base of political power – still needs centralised political institutions if they are to function beyond antagonistic tribalism. In such societies, there is no effective ability to enforce basic rules of law, provide security for citizens, or to support economic activity and trade.

The synergy between inclusive, pluralistic economic and political institutions, and supported by the stability of centralised government, allows nations to develop along more sustainable economic trajectories. Poverty is reduced through more equitable distribution of property and productive means. The rule of law in protecting property rights and private contracts fosters trust and keeps political power from being wholly usurped by wealthy elites for their own benefit. Colonial histories aside, the wealthy democratic nations of the global north remain economically strong in large part due to the structure of inclusive and pluralistic institutions.

The developing countries that are making the best progress toward prosperity, with long term economic sustainability and reduced overall poverty, are those who have adopted these positive institution models. Those nations which fail, or have the greatest wealth inequalities within the nation, are those who institutions are weak, extractive, and exclusive. Such nations disincentivise investment, productivity, and personal advancement. They do not innovate in what Acemoglu and Robinson call “creative destruction”, which can be a destabilising process in the short term, but transformative for positive economic outcomes in the longer term, because powerful elites do not wish to lose their political and economic privilege (Daron Acemoglu 2012).

In conclusion, if projects such as the United Nations Sustainable Development Goals are to be achieved, and international aid is to be useful in the development of poorer nations, then a significant portion of time, capital, and effort must be placed in helping those countries progress toward the economic and political institutions that will help them to flourish in both their local markets, and in the global market.

References

Daron Acemoglu, James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity, and Poverty. New York: Crown.