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Institutions and Economic Performance: Implications for African Development

Author: John M. Luiz
Date: 2009
Size: 17 pages (127 KB)

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Summary

How are sub-Saharan Africa’s (SSA) institutions helping or hindering economic development? This paper from the Journal of International Development explores current theories on how institutions impact economic growth in SSA. ‘Good’ institutions could be the key to increasing the stagnant economic growth in this region. Any attempt to build ‘good’ institutions must consider the existing impediments of poor political institutions, weak social capital and weak state capacity.

Economic performance in SSA has been very poor in recent years. According to the World Bank, in 2006 10 percent of the world’s population lived in this region, but only 1 percent of global GDP was produced there. Based on recent work on the drivers of economic growth, this trend may suggest that SSA’s current institutions are counterproductive to the economic development process.

Institutions are the formal structures and informal rules and norms that govern our behaviour and expectations in interactions with others. Institutions can either help or hinder development depending on how they structure decision-making. Where institutions reinforce decision-making processes that are conducive to economic growth, they are considered ‘good’.

‘Good’ institutions promote economic growth in three major ways. They create environments conducive to protecting property rights, constraining the actions of elites and providing the population with investment opportunities in economic activities. On the contrary, ‘poor’ institutions promote the vested interests of elites to the detriment of the majority.

In terms of SSA, developing ‘good’ institutions is particularly difficult. This is the result of several existing impediments, including:

• A proliferation of currently underdeveloped and ineffective institutions that makes Africa a high risk and unattractive environment for investors.
• Poor political institutions that lead to economic mismanagement through kleptocratic dictatorships and political instability.
• Weak social capital and social polarisation in SSA that prevents the inter-group cooperation necessary for economic development. Additionally, such polarisation increases the risk of conflict.
• Lack of state capacity to reform or invest in institutions that promote economic development.

If policymakers are to base SSA economic growth strategies on institution-building, they must understand the importance of context and the limitations of current knowledge. They must recognise that:

• There is no prescriptive solution or a particular institutional framework that promotes economic development. It is imperative that an SSA institution-building strategy is context specific.
• More work needs to be done on how exactly institutions evolve and how we can affect them.
• Institution-building in Africa is particularly difficult due to existing ‘poor’ institutional arrangements. The most difficult to tackle in SSA are those that promote kleptocratic governments and perpetuate political and social instability.
• There is not enough knowledge on how indigenous African institutions and ethnic polarisation affects development in SSA.
• Institution-building should be part of a comprehensive development strategy that also includes direct interventions. An effective combination should address the issues of disease, geographic isolation, and poor infrastructure and poor human capital that contribute to the perpetuation of SSA poverty traps. 

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Source: Luiz J. M., 2009, 'Institutions and Economic Performance: Implications for African Development', Journal of International Development, Volume 21, Issue 1, pp. 58-75
Author: John Luiz , John.Luiz[at]wits.ac.za