Institutions and Development
There is a wide understanding of the role of institutions in terms of
development of a country. The concept of institutions varies from privately
operated enterprises to government owned properties. Above all, they are the
main contributors in the step towards progress and growth.
Researches reveal that weak or corrupt institutions are the roots of
underdevelopment. Thus, it should have been a great lesson for the third world
countries that developed nations spend billion of dollars in aid and advice just to
nurture economic growth and social development.
Institutions must have necessary complementary qualities in meeting the
challenge of development. There are basically two sets of institutions. The first
set of institutions is the one that nurtures exchange by lowering costs and
increasing the stakeholders trust. It includes contract enforcement mechanisms,
commercial norms and rules, and favoring shared values in terms of
accumulation of human capital. The second set of institutions is the one that
influences the state in protecting privately owned properties rather than taking
over them. They are involved in constitutions, governing laws in education, and
civic norms. Poor countries must have these institutions to aid them in national
development, but under difficult financial situations because of tight competition
in the global market. These institutions require sumptuous funds in order to
acquire adept technology and employ highly skilled workers.
There are many people who live in countries where inadequate or inept
institutions failed to create or sustain foster exchange or protect property. Thus,
these individuals settle for an alternative way in protecting their interests
depending on the type of career they are involved. Politicians hire private armies;
companies exploit networks and connections in any possible threats; while
indigenous people use kinship and ethnicity in protecting their lands and
properties. The state is either incompetent in protecting the property or the state
itself is the one that threatens the property rights, thus, individuals have little or
no trust at all in subjecting to the processes set by the institutions.
Institutions determine the extent of development of a country. Nations with
persistently higher transactions costs have less trade, fewer firms, less
investment and lower productivity. It is the simple logic that stakeholders do not
want to invest in a country where the operational costs are high in compared to
the pace of earning back the capital and profit. Institutions are more likely a big
factor in the economy.
However, when there are institutions that are dedicated in increasing the
certainty of a contract regardless of the complexities of the situation, the
individuals or stakeholders are more willing take the risk in investing in sunken
assets and undertake complicated processes. The norms of trust and
cooperation are being manifested under these circumstances developing the
necessary harmonious relationship between the stakeholders and institutions.
But, contract enforcement and property rights protection is not enough to
achieve the goals towards success. Still, the major problem of third world
countries is the lack of financial investment and surplus money to be used in
capital. Given these, the knowledge and specialized skills of the workers became
the main attractors for additional investors just to expand the capacity of the
enterprise. Integration of productive knowledge from professionals and
universities is needed to gain this alternative route.
On the other hand, the persistent issue is what particular institutions would
make the big difference in the development of a country. Studies show several
fundamentally responsible institutions that will give significant change. And these
are the institutions that protect property rights and enforce laws; civil liberties;
political rights and democracy; institutions supporting social integration and
cooperation. Creating these institutions is a key towards national progress, but it
would be more effective if the state is willing to support these institutions for the
greater good.
There is no shortcut towards economic growth and national progress.
Thus, the state should be committed in taking the responsibility in alleviating the
current situation of the country. Institutions are critical to the development.
Deeper analysis of possible solutions and tested methods are important in
achieving the ultimate goal of progress.
References:
Bates, Robert, Institutions and Development
Pande, Rohini and Christopher Udry, Institutions and Development: A view from below, November 2005
Portes, Alejandro, Institutions and Development: A Conceptual Re-Analysis, November 2005
Credit:ivythesis.typepad.com
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