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Why Institution Matters for development? By: Mousse Abdi

In this article, I am arguing that the main determinants of differences in prosperity across countries are differences in economic institutions. To solve the problem of development will entail reforming these institutions.

Unfortunately, this is difficult because economic institutions are collective choices that are the outcome of a political process. The economic institutions of a society depend on the nature of political institutions and the distribution of political power in society. As yet, authors only have a highly preliminary understanding of the factors that lead a society into a political equilibrium which supports good economic institutions. However, it is clear that it is the political nature of an institutional equilibrium that makes it very difficult to reform economic institutions. The authors illustrate this with a series of pitfalls of institutional reforms. The author’s analysis reveals challenges for those who would wish to solve the problem of development and poverty. That such challenges exist is hardly surprising and believe that the main reason for such challenges is the forces authors have outlined in this paper.

Better development policy will only come when authors recognize this and understand these forces better. Nevertheless, some countries do undergo political transitions, reform their institutions, and move onto more successful paths of economic development.

The challenge ahead for think tanks from G-20 countries is to discuss the possible mechanisms to coordinate exchange rate policies across industrialized and emerging market economies. One conclusion we can reach from the recent great recession is that keeping the value of some currencies artificially low for a long period while others are freely floating will lead to imbalances that cannot be sustained in the long run. Those countries with fixed exchange rate policies should be asked to undertake periodic adjustments in their exchange rates to partially reflect their balance of payments position. As the currencies that are already in a free float regime automatically adjust in response to developments in the balance of payments accounts, a coordination in exchange rate policies will help the long-term orderly growth of the world economy. As the U.S. and other hard-pressed industrialized countries undertake expansionary monetary policy, depreciation of their respective currencies will allow them to recover from recession. In the medium-term, as the U.S.

Developed countries are the elision, not the rule. Large amount of dollars of aid and countless advice notwithstanding, most countries are not trying to improve their sustained growth and development of their societies. Increasingly research has tried to show that incomplete institutions are the main reasons of underdevelopment.
The challenges that developing countries need two different complementary institutions and they are lowering transaction cost and encouraging trust and the second one will be protect private property rather than exploiting them.

Not all of countries tried to create environment which helps the development of secured property rights, while other underdeveloped nations exploit the private property rights.
I am still arguing that questions of gradual institutional change can be understood as an evolutionary process that can be explained through the careful application of “generalized Darwinism.” We argue that human’s advanced cognitive capacities contribute to an evolutionary understanding of institutional change. In constantly generating new variation upon which mechanisms of selection and replication operate, cognition, cognitive schemas, and ideas become central for understanding the building of human institutions, as well as the scope and pace of their evolution. Evolutionary theories thus provide a broad theoretical framework that integrates the study of cognition, ideas and decision making with other literatures that focus on institutional change and human evolution.
With trade and specialization society’s wealth increases and demand for protection of property rights also increases, leading elites to accept an expanded government role, levies and taxes to cover policing expenses, and state monopoly over the use of force by demilitarizing private armies (Bates 2001, p. 65-66).
The reasons of underdeveloped institutions of developing countries in four different areas and they are;
a) Colonial heritage b) colonial heritage plus c) political conflict d) beliefs and norms

 

These different reasons are the key principles of underdevelopment of institutions for example colonial heritage believes that underdeveloped institutions are the products of the colonial powers countries had valuable resources, people that could be enslaved, or land suitable to plantation agriculture, enticing colonizers to design institutions to exploit these endowments; political conflict also worsens the development of institutions and if the country is politically stable institutions develop, the last and the final reason of underdevelopment of institutions will be the beliefs and the norms, if the countries norms and beliefs are basically built to mistrust, cheating and the other similar inhospitalities the country’s institutions will retarded.

 

About the Author;
Mr. Mousse Abdi Mohamoud, Senior Economist and commentator in Somali politics. Studied Master’s degree of Developmental Economics in Assosa University, Ethiopia.
Email: muuze438@yahoo.com