I believe that before defining roles, it is important to outline the 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 organizations that constrain human interaction through formal or implicit incentives and norms. For example, 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 provide a structural framework for decision-making. It is also important to distinguish between economic development, which focuses on GDP growth without regard for income distribution, and human development, as defined by Sen, development as freedom of choice. The latter is highly correlated with the quality of life and well-being of citizens, for which economic development is a necessary but not sufficient condition.
Several factors contribute to development: institutions, organizations, and civil society. Both institutions and organizations are equally crucial for improving economic development. Both are interrelated, as one focuses on creating the operational framework (institutions), while the other (organizations) determines the level of compliance they are willing to apply in executing these norms. However, when discussing human development measured by HDI, institutions and civil society play a greater role in setting the agenda. I will expand on the types of organizations and their incentives, and provide an introduction to institutional analysis in former colonies. I will draw on evidence from Botswana and Sierra Leone to show the relationship between institutions and 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 for 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 institutions that constrain them. For instance, different types of firm structures may be formed to create profit for a small group, a large group (cooperatives or corporations), or even a non-profit dedicated to delivering services to the community. Public institutions are varied and can be managed by the government or by a self-organizing group seeking to work together towards a common goal, whilst private firms adopt different organizational structures to produce profit. The different layers of institutional rules again constrain the dynamic between public and private institutions. In the US, public policy and private property may incentivize economic growth through entrepreneurship and minimal social net provision by public and non-profit organizations. Therefore, in the US, college-level education and access to health care are privileges that can be afforded only by those with sufficient wealth or the ability to 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 the HDI indicator in the US (although it is high), the distribution and persistence over time are 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 far less than in the US, resulting in a 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 the settler mortality rate as an independent variable to explain how institutions are formed or imported and their persistent impact on the civil society of former colonies, even long after independence. He used this variable to demonstrate that unequal extractive institutions emerged in colonies where settler mortality was too high due to malaria and low agricultural yields. In colonies like the US, where the climate was more temperate, 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 persist over time and constrain actors’ options (political actors, 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 they become 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 and Sierra Leone to demonstrate how institutions and organizations are interconnected through the foundations of civil society. Both countries were former UK colonies. However, Botswana was established as a protectorate without any exploitative interests in the region. The UK relied on existing tribal and kingship systems to govern instead of imposing new institutions. This traditional structure was quite democratic, with kings consulting regional chiefs, who held them accountable for their promises. Sierra Leone, on the other hand, was under UK rule until 1961. Diamonds were discovered there, and the British elite extensively benefited from mining. The institutions established were unequal, violent, and exploitative, normalizing coercion and low living standards for locals. After independence, the elites maintained control of diamond trades and sent their children abroad for education, while investing little in infrastructure, economic development, or public services. This situation sparked a civil war that lasted for decades.
Botswana, on the other hand, performed much better after discovering diamonds because they could easily transition from their old political system into a democracy after independence. As a result, political representation was broad and accountability was maintained. Botswana used the income from diamonds for significant investments in public services, education, and infrastructure, which attracted foreign investment and raised their HDI standards. This clear contrast in outcomes shows the importance of institutions and an organized civil society over organizations in shaping the agenda for improving human development rather than just economic growth.
In conclusion, the cited evidence shows how economic and human development need more than institutions to improve. Both institutions and organizations are essential for achieving economic growth. However, institutions and civil society set the pace for human development goals, which can be advanced through the gradual implementation of changes and temporary institutions.
Photo source: By Allice Hunter –
Forwardeconomics 
