Institutions and Economic Development - Essay Example

s and Economic Development I agree with Acemoglu, Johnson and Robinson‘s proof that s are the ultimate cause of economic development. According to them, the application of the institutional dimension in the context of an exploration of the ultimate enablers of growth portrays institutions as humanly engineered limits that define human relations. Consequently, they shape human behaviour via economic and political interactions in the society. In addition, institutions do not often have to be designed to be socio-economically efficient. Instead, they, or in the worst case scenario the official rules, are developed to assist those who possess the bargaining power to develop new rules. As a result, in societies where political and economic power has been distributed for a long time on a consistent basis, institutions are usually path-reliant. This occurs even in societies where the institutions are socioeconomically below the optimal standards of operation. Acemoglu et al. (2001:1395) state that many scientists and economists hold that contrasts in institutions and government policies are the primary causes of huge disparities in income per capita among countries. They further claim that contrasts in colonial experience may be a genesis of exogenous disparities in institutions. This claim is based on two logics. The first is that Europeans employed very different strategies when colonizing other nations, and these strategies spawned different institutions. On one hand, such as in New Zealand, America, and Australia, they established institutions that implemented the rule of law and promoted investment. On the other hand, in countries like Ghana (Gold Coast) and the Congo, they established exploitative regimes aimed at quickly extracting resources. These institutions impeded economic growth and investment. Secondly, the institutions established in both extremes of the world remain in place today and have led to the differences in economic development and stability of the affected countries (Acemoglu, Johnson, & Robinson, 2001:1395). According to Acemoglu et al. (2002:572), Atlantic trade catalysed European growth via ancillary institutional media as well as its more pertinent root effects. However, the crux of their argument, which relates to this paper, is that Atlantic trade earned huge profits for merchant interests in favour of institutional reform in states that satisfied two vital preconditions: democratic initial institutions and convenient access to the Atlantic. The result was a shift in political influence away from the monarchy and implementation of major changes in political institutions. This in turn inspired more progressive property rights and enabled more innovations in economic agencies. With their newly acquired property rights, Dutch and English countries invested more, practiced more commerce, and accelerated economic growth (Acemoglu, Johnson, & Robinson, 2002:572). This shows the power of institutions in catalyzing economic development, and reveals that sound foundations The simple existence of explicit property rights is not a guarantee of good economic results in the long term (Albouy, 2012:3063). Property rights may be flawlessly secure, but unequal or biased distribution and consolidated in the hands of a few, elite, socio-political institutions tend to be partisan and biased, causing the creation of economic institutions that impede long-term development both through warped access to civil rights as well as economic opportunities. Albouy (2012:3073) deviates from the subject matter by critiquing instead of adding to the discussion. Rather than explain how institutions affect development, he punches holes in Acemoglu et al. (2001) argument that institutions have a huge influence on the economic growth of nations. He comes to the conclusion that the authors’ claims are shallow and their hypotheses are empirically weak. This is mostly due to the poor authenticity of data, especially in relation to mortality (Albouy, 2012:3073). Avellaneda (2006:3) adopts a critical perspective on the relationship between institutions and economic development. Instead of supporting or opposing the notion, she examines the whole subject. She states that although efforts to define the relationship are commendable, there are still worrying gaps in the conceptual and analytical frameworks that have so far been employed by proponents of the relationship. In all fairness, the author appears to have a legitimate point that is supported by sound evidence and comprehensive analyses. Economists have argued, in recent times, that institutions are one of if not the most, crucial aspects of contemporary economic development (Rao, & Van Ark, 2013:64). Other scholars even consider institutions to be the ultimate enablers of economic development. Many investigations claim to reveal a general link between good institutions and stable economic growth. However, individual cases do not show the particular impact of institutions, which is commonly indirect. It is simple to outline specific institutional structures, which seem to have positively influenced at least one aspect of economic growth, usually in conjunction with other issues, and to outline the ones that have been challenges, the don’ts of economic growth, institutional organization which are creators of the poverty cycle holding back the vast majority of people from enjoying the positive results of modern economic development (Rao, & Van Ark, 2013:73). Comprehensive institutional reforms are scarce and often happen in revolutionary conditions, following a drastic change in political influence. This is reflected, for instance, in the subsidence if a standing structure. At times, profound reforms are the product of external meddling. The common pattern is that institutions change, growing in distinctive and unanticipated ways (Hofman, Cimoli, & Mulder, 2010:36). At this juncture, it is necessary to examine the subject of “good” institutions. The main difference in regarding the potential for economic development is between economies that can implement any institutions effectively, and economies that cannot implement any economic institutions well (Austin, 2008:1012). Good institutions promote the enforcement of tasks involving drafting and implementing contracts and settling disputes, securing property rights, and supporting individuals or companies to keep the profits made on their investments (Vries, 2013:41). Zanden and Marks (2011:5) state that scholars have graduated from a subtle supposition that institutions will emerge easily and endogenously as a consequence of economic growth to the perspective that they are vital pre-conditions and influencers of economic development. This shows that institutions have evolved from passive determinants of economic development to being virtually irreplaceable aspects of economic growth in any country. References Acemoglu, D., Johnson, S. & Robinson, J. (2001) The Colonial Origins of Comparative Development: An Empirical Investigation, American Economic Review, vol. 91, no. 5, pp. 1369-1401. Acemoglu, D., Johnson, S. & Robinson, J. (2002) The Rise Of Europe: Atlantic Trade, Institutional Change, And Economic Growth, American Economic Review, vol. 95, no. 3, pp. 546-579. Albouy, D. (2012) The Colonial Origins of Comparative Development: An Empirical Investigation: Comment, American Economic Review, vol. 102, no. 6, 3059-3076. Austin, G. (2008) The ‘reversal Of Fortune’ Thesis And The Compression Of History: Perspectives From African And Comparative Economic History, Journal of International Development, vol. 20, no. 8, pp. 996-1027. Avellaneda, S. (2010) Review Article: Good Governance, Institutions and Economic Development: Beyond the Conventional Wisdom, British Journal of Political Science, vol. 40, no. 1, pp. 195-224. Hofman, A., Cimoli, M. & Mulder, N. (2010) Innovation and economic development, New York, Edward Elgar. Rao, D. & Van Ark, B. (2013) World economic performance past, present and future, Cheltenham, Edward Elgar Publishing. Vries, P. (2013) Escaping poverty the origins of modern economic growth, Göttingen, Vandenhoeck & Ruprecht. Zanden, J. & Marks, D. (2011) An economic history of Indonesia, 1800-2010, Milton Park, Abingdon, Oxon, Routledge. Read More