Business Strategies In Emerging Economies: Institutions PDF

Business Strategies In Emerging Economies: Institutions Economic Institutions  Nature and Role of Economic Institutions Institutions provide “rules of the game” of economic life Formal institutions – state bodies such as courts, legislatures, bureaucracies, state-en...

Business Strategies In Emerging Economies: Institutions Economic Institutions  Nature and Role of Economic Institutions Institutions provide “rules of the game” of economic life Formal institutions – state bodies such as courts, legislatures, bureaucracies, state-enforced rules (constitutions, laws, regulations). Etc. What do institutions do? Property rights Contract enforcement Restriction of coercive, fraudulent and anti-competitive behavior Provision of access to opportunities for the broad population Constraining the power of elites? Conflict management Other institutions provide improved coordination; social insurance; and predictable macroeconomic stability  Need to understand the role of political forces that created/sustained economic institutions (Acemoglu & Robinson, 2008). “Many dysfunctional economic institutions are supported by a system of specific laws and regulations that relate to economic institutions.” (Acemoglu & Robinson, 2008, pp 11). Structural adjustment programmes in Africa by international financial institutions.  Institutions and economic development Institutions are the ultimate determinants of economic performance (Acemoglu et al., 2005; North, 2005). Causality can be in opposite direction Economic development -> strong institutions How?  Economic growth to stronger institutions Increased prosperity/wealth due to growth may create higher demands for higher-quality institutions (e.g., demands for political institutions with greater transparency and accountability). Growth makes better institutions more affordable. Institutions are costly to establish and run, and the higher their quality the more ‘expensive’ they become. creates new agents of change, demanding new institutions. growing power of working class (in 19/20th cent. led to the rise of the welfare state and protective labour laws).  Institutions and economic development But relationship between institutions and economic development is not linear. differs across societies, and changes over time even in the same society.  Institutions and business development Institutional theory (North, 1990). the environment determines individual’s decision to become an entrepreneur, and also the characteristics of new ventures, with a subsequent effect on growth levels and country development (Baumol, 1990; Minniti and Lévesque, 2008). Necessity vs opportunity entrepreneur Necessity - builds on a difficult environment that gives limited opportunities, Opportunity - identification of an attractive business opportunity.  Empirical evidence Sobel (2008) – Examines relationship between measures of the quality of state political and legal institutions and measures of productive and unproductive entrepreneurship. 48 US states  Sobel (2008) – Examines relationship between measures of the quality of state political and legal institutions and measures of productive and unproductive entrepreneurship. 48 US states  Herrera-Acheverri et al (2014) – panel data for 87 countries (2004 – 2009) to study relationship between institutional strength and business creation. Effects on foreign direct investment Du et al (2008) – examine impacts of economic institutions on location choice of FDI  Informal Institutions Informal institutions are important in developing and emerging economies. Unwritten rules that often shape incentives in systematic ways (see Helmke & Levitsky, 2003). Informal institutions can have problem-creating roles (e.g. via corruption, clientelism, clan politics) that undermine markets, states, and democratic regimes. Informal institutions can reinforce failing institutions or undermine formal institutions.  Informal Institutions Outcomes/dimensions Ineffective formal institutions Effective formal institutions (dysfunctional/problem- (functional/problem-solving) creating) Compatible goals between Substitutive informal inst Complementary informal inst actors in formal and informal (achieves what formal inst were (coexist with formal institutions institutions - CONVERGENT designed for but failed to – expect formal rules o be achieve). Emerges when state enforced – judicial norms) structures are weak. Conflicting goals between Competing informal inst Accommodating informal actors in formal and informal Formal rules are not enforced inst institutions - DIVERGENT (mafias, clientelism, clan-like (operating large informal/shadow networks) economy even in countries with developed property rights and high regulations) Helmke and Levitsky (2004)  Role of informal institutions: BRIC Estrin & Prevezer, 2010 Institutions in Africa  Institutions in Africa Weak and state of dysfunction Few countries have effective property rights regimes or independent judiciaries. Judiciaries are often politicised Weak parliamentary system  Institutions in Africa Many African states have embarked on institutional reform since the early 1990s. Led to relatively functional institutions Strong and effective leadership, private sector development, civil society  Institutional dysfunction in Africa Colonial legacy of authoritarianism Driven by the subjugation and exploitation Rules and structures of government were designed without taking into consideration the interests of the local population. European colonial adulterated and completely obliterated traditional African institutions of governance. Left behind artificial states with frail identity legitimacy or administrative capacity.  Institutional dysfunction in Africa Prevalence of one-party system or military regimes (in early years of post-independence) Neo-patrimonialism Governance is characterised by patronage, clientelism. This is a system where corruption is not only embedded in the system of government but a fundamental mechanism of its inner working Role of politicians and government officials?? Fighting corruption and strengthening institutional quality: success stories from India and Botswana The Andra Pradesh e-Governance story No laws changed, no regulations eliminated The Botswana Case Moving beyond Africa’s crisis of institutions As of 2000s, had one of the fastest average Case of Botswana rate of economic growth in the world  Moving beyond Africa’s crisis of institutions Case of Botswana Foreign aid played a key role Africa’s biggest success story in terms of good governance Political stability; Servant leaders and often incorruptible Effective and supportive economic system Less dependent on foreign aid (although can be important when used for the right purpose): Reduced from 100% in 1970 to 40 – 60% in the 70s < 15% in 1992 Declined to less that 3% by late 90s How did Botswana do this? By 1998, Botswana was declared UMIC by the World Bank  Moving beyond Africa’s crisis of institutions Case of Botswana factors: Institutional development converged with the economic interests of politically powerful groups in the polity: Create strong incentives for compliance Cattle farming as example (most influential group) Political security of the ruling elite Encouraged them to put in place good institutions of governance without fear of losing their grip on power Moving beyond Africa’s crisis of institutions Case of Botswana Agency of political leadership the commitment and visionary choices of post- independence political leaders, including Khama, Quett Masire and Festus Mogae, were critical in putting Botswana on a sound institutional path. E.g. transfer of property rights over sub-soil minerals away from his (Khama) tribe to government. Reduction of political powers of tribal chiefs to the government. Moving beyond Africa’s crisis of institutions Lessons from Botswana Strengthening institutions requires strong incentive structures that bind economic interests of different groups. Requires interventions to transform and diversify African economies from over- reliance on public sector. private sector development (recall Prahalad??) Moving beyond Africa’s crisis of institutions Lessons from Botswana Embedded autonomy (“state structure in which the bureaucracy of the state is shielded from the negative influence of powerful rent-seeking actors, and is embedded in broader social networks”) Need for ethical and visionary leaders Moving beyond Africa’s crisis of institutions Need to address the socio-political and economic dynamics that reproduce neo- patrimonial logic Engendering a new generation of responsible African leadership. strong civil society to serve both as institutional entrepreneurs and as guardians of institutions of governance. Discussions