Institutional factors

Differential development trends between African economies and their Asian counterparts can also be explained by another important factor-institutional; frame-work.

Institutional frame in place in a given country and more so the quality of such institutions do account for and facilitate growth dynamics across countries researched so far.

Recent empirical works have stressed the importance of institutional qualities and economic outcomes. On such institution that is crucial to development is judicial.

The rule of law among Asian economies was actively developed and evolved such that it was divorced from the executive.

This has been conducive to the development of a vibrant private sector which has spearheaded Asia’s growth, as it not only facilitated the execution of private contracts and safeguarded property rights, but also was extremely conducive to both domestic and foreign direct investments.

A number of researchers argue that the relative measure of institutional quality discriminated very well between the winners and losers in Asian growth. This factor, as measured by ICRG (International Country Risk Guide, an index of quality institutional framework) gives Asia’s NIC (New Industrialized Countries) a score of 41.2 out of 50 possible points for the year 1998 (World Bank, 1999).

African economies on the other hand, inherited similar institutional frame works as Asia’ NIC, but later, particularly from the late 70s onwards, the quality of institutional framework deteriorated. This has seen the rule of law compromised and the legislature and executive have become almost synonymous.

This threatened the development of enterprise, which was made even worse, by institutionalised corruption (both economic and political), resulting from a lack of checks and balances. Thus, on the same ICRG score for 1998, African economies on average scored only 7 out of possible 50 points.

Given Transparency International Reports (TI), which put a number of African economies on high ratings among the most corrupt countries in the world, the earlier ranking is rather optimistic.

The institutionalised and systematic corruption noted in Africa today is a sign of the absence of a very weak institutional and legal framework which has compromised guarantees of property rights, whether public or private.

It has been argued therefore that, the first principle for economic development (the institutional framework) has been compromised in many African economies compared to Asia’s NICs.

Research conducted in this area emphasises the importance of political and institutional structures, which permit a strong yet predictable government, which is in turn conducive to innovation and central to investment activities.

These researchers further argue that,  poor countries lack structures of incentives which depend not only on what economic policies are chosen in each period, but also on long-run institutional arrangements: on legal systems that enforce contracts and protect property rights and on the political structures, constitutional provisions and the extent of special-interest lobbies and cartels.

The pluralistic society among many Asia’s NICs and the inherent level of awareness (educated society) have been conducive to the development of democratic institutions which safeguard all rights, human and property; and has been attractive to the development of an investment climate conducive to both local and foreign investors.

The diversity of their populations, particularly the migrant population, required protection and safety of their interests. This was only possible within an open and democratic environment, which the migrant populations sought to maintain and preserve dearly, as an insurance to their very existence in an otherwise ‘hostile’ environment.

This is not the case in many African economies who are view migrants in most negative sense possible when they are an invaluable resource by any standards. Managed migration has benefited many countries in their development path, an area that Africa has fared badly, except for creating an environment for the export of their best brains to develop other economies.

A government has not only to be able to protect property rights and enforce contracts but also to refrain from expropriation, repudiation of its obligations and capricious behaviour which may prejudice growth strategies. A number of economies in Africa have not been able to establish political, legal and indeed financial infrastructure conducive to the level of economic growth witnessed among Asia’s NICs, although it has the potential to do so given the right political will and direction.

With regard to openness and political accountability, a number of African countries have scored very low on any measure or scale, and this is compounded by the illiteracy levels of her population limiting the awareness of both political and to some extent property rights. These rights have then been distorted by the political elite to enhance their own economic and political agenda, a case in point is Zimbabwe of late.

This state of affairs has not augured well for the economic development of African economies, as lack of openness has only served to breed the highest level of institutionalised corruption for a decade or more, a situation that has retarded domestic investments and also hindered foreign investments.

Therefore, a number of researchers argue that economic development in Asia’s NIC has been effected by relatively capable, sufficiently mandated, and adequately insulated institutions that were subjected to high levels of accountability. 

In contrast, with regards to African economies, such institutions mandated key policy functions to independent bureaucratic organisations, which by and large have insulated a technocratic elite in charge from political influence, interference and patronage.

Economists have of late treated governments as institutions that reduce transaction costs, and thus argue that rational actors in the polity have an incentive to bargain politically until mutual gains have been realised.

They contend that democratic governments not only affect distribution of income but also produce socially efficient results that are for the benefit of the common good.

Perhaps the importance of democratic institutions is not only the idea of the right policies being put in place, but rather to ensure that rational parties, not only in economy but also polity, work in tandem to ensure that the economy in question attains its potential.

Commenting on the value of institutional factors, Coase (1992: 714) in his Nobel Prize lecture observed that
"…countries are advised to move to a market economy, and their leaders wish to do so, but without the appropriate institutions no market economy of any significance is possible”. To be continued…

The author is a Senior Presidential Advisor on Economic Affairs