I think that before defining roles it is important to outline commonalities and differences between institutions and organizations. North describes institutions with a football analogy: “Institutions are the rules of the game and the teams are the organizations playing by those rules”. In other words, Institutions are the organizations that constrain human interaction through the use of incentives and norms that can be formal or implied. A family may operate simultaneously within the constraints of the national constitution, the duties of marriage, gender roles, school and municipal regulations. In this case, families are the ‘players’ and the aforementioned institutions offer a structural framework of decision-making. It is also important to make a distinction between economic development, which focuses on GDP growth without regard for income distribution, and the definition of human development as defined by Sen (development as freedom of choice). The latter is highly correlated to the quality of life and well being of citizens for which economic development is a necessary but not sufficient condition
I argue that there are several factors that contribute to development, these are: institutions, organizations and civil society. Both institutions and organizations are equally important when it comes to improving economic development. Both are interrelated as one focuses on creating the operational framework (institutions) while the other (organizations) decides the level of compliance they are willing to apply to the execution of these norms. However, when speaking about human development measured by HDI, institutions and civil society plays a bigger role in setting the agenda. I will expand upon types of organizations and their incentives, as well as an introduction to institutional analysis in former colonies. I will draw evidence from Botswana and Sierra Leone to show the relationship of institutions to civil society foundations and the role they play in development outcomes.
According to Coase the role of institutions is to reduce uncertainty by establishing a stable (not necessarily efficient structure to human interaction). There are also several types of organizations, such as public and private enterprises, and their incentives to produce certain outcomes vary depending on the structure of the institutions that constrain them. For instance, different types of firms structures may be formed to either create profit for one small group, or a large group (cooperatives or corporations) or even non profits that are dedicated to delivering services to the community. Public institutions are varied and can be managed by government or self organizing group that seek to work together towards a common goal, whilst private firms adopt different organizations structures to produce profit. The dynamic between public and private institutions is again constrained by the different layers of institutional rules. In the US for instance, public policy and private property may incentivize economic growth through entrepreneurship and minimal provision of social nets dispensed by public and non-profit organizations. Therefore, in the US College level education and access to health care are a privilege that can only be afforded by those with enough wealth, or have the ability obtain credit or insurance. This is due to institutional policy and normalized violence that does not see access to health or college education as a citizen’s right. Thus, in terms of HDI indicator in the US (although they are high), the distribution and persistence over time is unstable and highly dependent on economic growth. In social democracies such as Norway, the policies responsible for economic growth incentivize public endeavors and emphasize entrepreneurship a lot less than in the US, resulting in better distribution of access to public services. And yet HDI indicators in Norway (1st place) are much higher than those in the US (15th place as per HRD.UNDP.org).
Acemoglu et. al. used settler mortality rate as an independent variable to explain how institutions are formed or imported and their persistent impact in civil society of former colonies even long after independence in achieved. He used this variable to demonstrate that unequal extractive institutions were formed in colonies where settler mortality rate was too high due to malaria and low agricultural yields. In colonies like the US, where climate was more tempered and people settled with families, laws and institutions were more egalitarian, as populations were more homogenous and settlers wanted their children to inherit wealth. As institutions are persistent over time and constrain the options of actors (political, individuals governments, etc.), by setting incentives for certain behaviors, in countries where entrepreneurship and legal careers are rewarded we can observe support in the form of monetary incentives to pursue these goals and form enterprises. The actors internalize these values and thus it becomes embedded in civil society as well. Thus, violence, inequality, corruption and coercion can also become normalized and persistent across history, hindering incentives for economic growth and human development.
Now we can compare Botswana so Sierra Leone to show how institutions and organizations are interrelated through foundations of civil society. Both countries were former UK colonies. However, Botswana was set up as a protectorate of the UK without having any exploitative interest in the region. The UK relied instead on existing tribal and kingship arrangements to rule instead of imposing their own institutions. This traditional arrangement was quite democratic in nature, where kings consulted with region chiefs and these held kings accountable on their promises. Sierra Leone on the other hand had been under UK rule until 1961. Diamonds were discovered and the British elite took ample advantage of mining. Institutions set up were unequal, violent and exploitative normalizing coercion and low living standards for the natives. After independence the elites held on to diamond trades and were able to send their children to study abroad while they made no investment in infrastructure, economic growth or public services. This situation led to a civil war that lasted decades.
Botswana on the other hand did much better after the discovery of diamonds because they were able to easily transition from their ancient political arrangement into a democracy after independence. Thus, political representation was broad and accountability was present. Botswana used the income from diamonds for heavy investment into public service, education, infrastructure that fueled foreign investment and increased their HDI standards. Through this stark contrast in outcomes we can see the importance of institutions and an existing organized civil society over organizations in setting the agenda towards improving human development instead of economic growth.
In conclusion, the cited evidence shows how economic and human development need more than institutions to improve. Both institutions and organizations are important in the achievement of economic growth. However, institutions and civil society set the pace in terms of human development goals that can be improved through gradual implementation of changes and temporary institutions.
Photo source: By Allice Hunter –