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Effective institutions

Publication Date : 15-05-2012


It could be asked why two countries that gained independence at same time grow at varying rates. There are three schools of thought about this, one of the leading ones relating to institutional economics. This states that countries that have developed institutions in a democratic manner and have used them as such have a faster rate of growth.

The second school talks about educational levels: that nations that have given scientific, thought-provoking models and uniform education experience faster growth rates.

The third school of thought is about those who talk about international participation, which means that countries that have
integrated economically with the best international practices have grown more.

Many thinkers argue that all three together enable nations to grow. In the context of institutional economics, political society can be defined as constituting the government, opposition and the pressure groups. The economic part is defined as the private sector, which constitutes households which demand goods, services and the supply factors of production.

This political society also includes firms which supply goods and services, and demand factors of production. This definition can be expanded to include tribal society and the feudals in our very Pakistani context.

Institutions are defined as behaviours, norms and organisations by which people interact with each other. They implement rules, codes of conduct and enforcement mechanisms in order to achieve desired outcomes that support transactions among people. This is directly related to the large role that contracts play in the modern lives of citizens, since modern life consists largely of fulfilling contracts.

Civil servants, for instance, have some judicial, legal and administrative duties entrusted to them, and they also have a contract to the people of Pakistan, which gives them the authority of the state to fulfil it. Citizens’ right to life is a contract:

no one should die a manmade death in a state except through judicial decree. When this happens, it is the institutions that have gone wrong.

With regard to failure, one manifestation is the political dimension of poverty, which arises when institutions that are created to alleviate poverty fail to perform their job. Thus the emphasis on institutions that either create problems or alleviate them, and public servants that are responsible for ensuring effective institutions.

A template for effective institutions is given in a World Bank report regarding designing institutions to complement what exists in terms of supporting institutional and human capabilities, and available technologies.

The report mentions the role of innovation to design institutions that work and drop those that don’t, and connecting communities of players through the open flow of information and trade. This would promote competition among institutions to follow an efficiency model.

With regard to human factors that hinder institutional growth, hidden interests such as selfishness and contradictory community interests create coordination problems. Modern societies only work at the pace of existing technologies, and institutions have to gear themselves towards coming technologies.

Sometimes, institutions have to be totally revamped – sometimes more than once in a given period, even in highly ‘closed’ societies. An example is of communist Russia that introduced a new form of entities at the turn of the century and also after the end of the Cold War.

While looking at the cultural barriers to the delivery of institutions in the Pakistani scenario, a corollary to our feudal mindset is that we don’t like change. We pay lip service to change, but we don’t really try to implement it seriously except perhaps as a tool for our own interests. In actuality, public servants need to be the agents of change; they have to find their place in their offices and then try to find the place of their offices amongst others.

It is the role of institutions to ensure that services are supplied to consumers, and institutional entities are supposed to supply these services to the people, whether they are citizens or private-sector consumers. We have to first rationalise what sort of society we want and then choose a technology mix.

Another important human factor is behaviour, or the legality of behaviour, which is the average of values in a society. In an environmental sense, if one household was being cleaned and not harming society while the other was getting away with throwing garbage out on the street, and both were taxed the same, this would constitute injustice to the environmentally compliant home.

Institutions are responsible for rewarding the good household, but if they don’t, they are instead rewarding negative behaviour by allowing the rogue household to get away with it. In our context, many of us do not abide by the law, and that discourages citizens who try to obey the law as they see that offenders get away scot-free.

As regards the form of institutions, whether they operate in the public or private sphere, there is no problem about the government taking over the role of the private sector if it could deliver. But if it doesn’t, then naturally the private sector will take over.

When states act as centralised regulators of the economy in developing countries that have small markets, the state doesn’t ensure competition and thus passively or actively, allows lobbies or monopolies to be built. In Third World countries, there is no dearth of ideas, exemplified by how the CEO of Sony Corporation used to get his ideas from the universities of the Third World.

So, ostensibly, there are ideas out there in Pakistan somewhere as well, but official entities are not ready to patronise innovation. The older generation of Pakistan has not empowered the youth, while the multinationals have. Thus, official entities have failed to harness the latent potential of the Pakistani youth.

The most important concept in institutional economics is subjectively regarded as deliverance, and how this was to be rolled out effectively. Alvin Toffler introduced futuristic concepts such as knowledge economies, which are the very opposite of feudal economies of the sort we resemble. We in Pakistan are still in an agricultural and industrial era, not reaching any equilibrium. The most practicable way of bringing in reform is to just go ahead with weeding out rotting institutional entities and encouraging viable ones.

The writer is a security analyst.


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