Let them have “Good Institutions”

The people in poor countries have the same aspirations as those in rich countries — to have the same chances and opportunities, good health care, clean running water in their homes and high-quality schools for their children. The problem is that their aspirations are blocked today — as the aspirations of black people were in apartheid South Africa — by extractive institutions. The poor don’t pull themselves out of poverty, because the basic ability to do so is denied them. You could see this in the protests behind the Arab Spring: those in Cairo’s Tahrir Square spoke in one voice about the corruption of the government, its inability to deliver public services and the lack of equality of opportunity. Poverty in Egypt cannot be eradicated with a bit more aid. As the protestors recognised, the economic impediments they faced stemmed from the way political power was exercised and monopolised by a narrow elite.

…… Making institutions more inclusive is about changing the politics of a society to empower the poor — the empowerment of those disenfranchised, excluded and often repressed by those monopolising power. Aid can help. But it needs to be used in such a way as to help civil society mobilise collectively, find a voice and get involved with decision-making. It needs to help manufacture inclusion.

That is Daron Acemoglu and James Robinson writing in The Spectator on Why foreign aid fails – and how to really help Africa.

I am a firm believer in the fact that “institutions rule” and are “the fundamental cause” of long-run economic growth and political stability.

That said, I think this latest addition to the “Aid Debate” also detracts from the real issues regarding the efficacy of aid. It also runs the risk of creating the impression that the promotion of good institutions is a substitute for all forms of aid, or worse, that aid has led to the persistence of bad institutions and endemic poverty in poor countries.

How would the Central African Republic look today if it hadn’t received any kind of foreign aid over the years? I, for one, don’t think that it would be a bastion of political stability and stellar economic performance.

Strong and stable institutions are absolutely essential for the achievement of political and economic stability and general improvement of human welfare. And we should definitely preach this gospel for all to hear.

But institutions, as equilibria, are fickle, and also take forever to emerge. In addition, they tend to depend on all sorts of localized variables (including culture) that an international institution builder would most certainly miss (also, see here). And in the meantime, we still have to deal with the challenge of making the lives of the poor better (and within their lifetimes, approx. 60 years). Under these conditions, single panaceas (aid-driven or not) will obviously not work, especially if they come in as vague a package as “good and inclusive institutions.”