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Institutions and development

First Posted 15:26:00 12/01/2010

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Today, the Philippines is the 12th biggest in the world in population size. Some people, including two former presidents and classmates Bill Clinton and Gloria Arroyo, see nothing wrong with having a large population. They are not necessarily correct if you look around the country and see that one-third of its people are in poverty or either unemployed or underemployed. The last time the United Nations Development Programme (UNDP) released its Annual Human Development Report, the Philippines? Human Development Index (HDI) was 0.638, which was good only at number 97 when compared with the HDIs of other countries included in the study.

Why is the Philippine low in its achievement in development?

According to Massachusetts Institute of Technology?s Daron Acemoglu, there are standard explanations for underachievement. One is physical capital differences. Poor countries, like the Philippines, do not save and invest enough. Investments make up the physical capital that helps the country to produce more. Less savings means less capital available per worker and that also means lower output per worker.

Another is human capital differences. Poor countries, like the Philippines again, do not invest enough in education and skills development. There are also differences in technology. Poor countries don?t invest enough in R and D and technology adoption and don?t organize their production efficiently. The result is again lower output per worker.

Markets, likewise, do not function well in poor countries. Competition is low and monopolies abound, which when highly profitable to their owners is detrimental to the people. Finally, poor countries have bad or inconsistent policies that drive away investors. All these, however, are mere proximate causes, according to Acemoglu.

Acemoglu says that what we should understand is why poor countries don?t save and invest enough, don?t innovate and use modern technologies, don?t have well-functioning markets and don?t have good policies. Might the answer be found in differences in economic and political incentives? Where do incentives come from?

In explaining where incentives come from, Acemoglu has this quote of Adam Smith, the father of economics: ?Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.?

In other words, what explains why some countries are poor while others are rich could be institutional differences?the organization of society, the rules of the game that determine what the different groups or individuals in a society do and so forth. Thus, to understand the differences in the wealth of nations, one must also endeavor to understand their institutional differences.

What are these institutions?

They can be economic, according to Acemoglu. Examples of economic institutions are property rights, contract enforcement, etc., that shape economic incentives, contracting possibilities and distribution of income and wealth. They can also be political, that is, the form of government, separation of powers, constraints on politicians and elites, and so forth. In short, institutions can be any established system or form of organization and ways of doing things within that system. That may also include the informal rules or norms affecting the group or individual?s economic, social, and political life.

Acemoglu says that institutions are not necessarily exogenous or historically predetermined but they often persist for a long period of time. One of this is the iron law of oligarchy, which refers to the succession of bad rulers over times and which also explains why some countries, like the Philippines, remain underdeveloped for long despite their great potentials for faster growth.

While some institutions can also change such as the one seen after the last war when former colonies finally succeeded in becoming independent and free to chart their own destinies, there could still be some tendencies for the past to resurface in another form such the case of government-sponsored encomiendas during the Spanish period in the Philippines and Latin America that are merely replaced by privately held haciendas today. In the government we also see that the practice in the past of letting the caciques gain power over their own people continues until today with the way we elect our local officials, which is decided more by local connections and possession of wealth.

If we want faster economic growth and development, it will require not just changing our government officials every three or six years, for example, but it may also involve more and bigger changes in the way we live, the way we organize and the rules that we make that govern our actions.

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