HomeBusiness DigestReviewing role of institutions in economic advancement

Reviewing role of institutions in economic advancement

Esther Mapungwana ECONOMIST

The role of diverse institutions in Africa has been significantly underrated; institutions have a critical part to play in the economic growth of a nation. The majority of African populations are living in abject poverty yet numerous strategies have been developed.

Up till now, there have been economic structures and institutions established in our esteemed countries to tackle poverty but their impact has not reached desired levels. The question that needs to be answered is why have these institutions failed to play their vital role? And can the challenges be resolved?

An institution can be defined as an organisation, establishment, foundation or society dedicated to the elevation of a particular cause, particularly one of a public, educational, or charitable character. Institutions can also be defined as the rules of the game, processes or mechanisms that shape social, economic and political interaction of individuals and groups, within the framework of an incentive structure.

Research has shown evidence that institutions are a significant cause of GDP per capita growth. Institutions, when incorporated in traditional growth models, have a direct partial impact on economic growth.

Market-creating institutions and market-stabilising institutions measured by the stability of monetary and fiscal policies show direct impacts on growth. In this regard strong institutions are vital for economic advancement.

African states have been regarded to have weak institutions. Weak institutions usually lack the ability to fulfil their mandate to the fullest potential, weak institutions are characterised by poor governance, inclusive of corruption, rent seeking behaviour, nepotism and inefficient operations. Institutions such as the justice system are the most compromised because of the lack of the separation of powers from political to legal and rule of law. Poor legal frameworks have a significant bearing on investment, whether domestic investment or foreign investment.

Unnecessary regulations also inflict substantial and negative impacts on economic growth. The excessive regulations, especially for investors and small businesses, cause bottlenecks in doing business. Research has shown that institutional quality is associated with faster growth even in a shorter time frame, hence its importance. Even after controlling for the level of development that the economy has attained and the characteristics of individual countries, negative impacts of regulations and institutional quality are more pronounced in the low and middle income countries.
According to Adolf A Berle (1895–1971) who was one of the first authors to combine legal and economic analysis (his work stands out as a founding pillar of thought in modern corporate governance), in his book with Gardiner C. Means, The Modern Corporation and Private Property (1932), he detailed the evolution in the contemporary economy of big business, and argued that those who controlled big firms should be better held to account.

Directors of companies are held to account to the shareholders of companies, or not, by the rules found in company law statutes. This might include rights to elect and fire the management, require for regular general meetings, accounting standards, and so on. In 1930s America, the typical company laws (eg in Delaware) did not clearly mandate such rights. Berle argued that the unaccountable directors of companies were therefore apt to funnel the fruits of enterprise profits into their own pockets, as well as manage in their own interests. The ability to do this was supported by the fact that the majority of shareholders in big public companies were single individuals, with scant means of communication, in short, divided and conquered. — Wikipedia

The scenario by Adolf should be taken to the macroeconomic levels of nations, where individual citizens should hold the relevant government institutions to account for the management of resources and taxes without having to wait for NGOs to do the work for them. It’s the role of the citizenry to demand accountability from office barriers so that there is transparency and efficiency of operations. This has a significant impact on the quality of service delivery that is given by the institutions. The other issue is to review the legal frameworks in relation to the economic targets or national development strategies, these need to be interlinked and not divorced for the promotion of economic growth. One may however argue that it’s not only about having good policies but it’s about the practical implementation of these policies and the enforcement of the much needed regulations to bring effective results.

The Institutionalism school of thought views that; economics cannot be separated from the political and social system within which it is embedded. Looking at most of the African states today this school of thought can be to some extent deemed true from a bird’s eye view. The political goodwill of policy makers becomes a difficult element to generate as it is a personal decision yet an essential component for economic growth. The issue then will be to focus on developing practical strategies to curb the root issues that deter the role of institutions.

Corruption is considered one of the significant contributors to the poor quality of Institutions and it is also considered a strong constraint on growth and development. Research has however shown different effects of corruption on economic performance. Other papers however argue that corruption only lessens economic performance but does not impede growth.

Corruption is an issue that needs practical steps to be resolved. Government needs to consider taking exemplary and committed steps and penalties in dealing with corruption.

Policy makers need to also assess their political will in resolving corruption issues in the state and really think about the legacies they want to leave behind for the next generation.

Despite the critics and different schools of thought, research evidence shows that institutions have an impact on economic growth. The issue now is for policy makers to continuously consider that institutional reforms are a critical element for economic growth and it should be emphasised that these reforms should not be paper based but practically implementable, measurable, time bound and achievable depending on the nature of the country in terms of its macroeconomic level and population structure among other factors.

I am sure most governments feel they have done a lot in terms of Institutional Strengthening and Capacity Building and the fruits of these investments should be seen by now. Some fruits are visible but others are not visible or may be impeded by underlying issues that have not been addressed.

The nation should continue to promote comprehensible and synchronised approaches to institutional agendas and explore new ways of institutional strengthening such as the adoption of more ICT software that monitor the operations of institutions. Governments should also promote more publicity of institutional operations and allow the public to access and analyse the functionalities of the institutions. Policy makers should also encourage the establishment or strengthening of existing authorities and mechanisms necessary for policy-making, coordination and implementation as well as the enforcement of laws.

Policy makers should promote public participation, including measures that provide access to information regarding legislation, regulations, activities, policies and programmes. They should also create an enabling environment for full public participation in policy formulation and implementation by practically reaching out to every citizen through all means possible and involving private sector players in policy development especially economic related policies that have implications on productivity. Women and people living with disability should be able to participate fully and equally in policy formulation and decision-making.

The government should also consider the establishment of councils and coordination structures at local, district, provincial and national level to foster a culture of responsibility, these can start at voluntary level and may help to assess the level of interest and trust the citizens have in the system.

The government can also enhance the role and capacity of local authorities as well as stakeholders in implementing national policies. There is a need for unity of purpose among major players within the nation. Government should enhance domestic relationships and partnership with other stakeholders such as, volunteer groups, NGOs, CBOs, Private Sector, Trade Unions among other stakeholders.

Government should also consider environmental implications and human rights in institutional capacity assessments, including the right to development.

Institutional strengthening is not limited to the few policy recommendations above; there are many recommendations that have been given and others that need to be explored in this modern economic day. Institutional reforms should be evolving with time and relevance and monitoring and evaluation is a vital key in measuring or assessing the economic impact of these reforms.

Mapungwana is a local independent economist and consultant. These weekly New Horizon articles are co-ordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. — kadenge.zes@gmail.com and mobile +263 772 382 852.

Recent Posts

Stories you will enjoy

Recommended reading