Surjeet Singh
One of the hotly debated question from the beginning of Economics is, why some nations are rich and some are poor? This is same as saying, why there exist a difference between nations in terms of poverty, inequality, and prosperity? Economic-growth theorist has a variety of points on this. Some say, there exist a difference between nations because of the economic policies pursued by them. According to them, rich nations are rich because they have adopted the growth-enhancing economic policies. If so, then what are these economic growth-enhancing policies? Economic growth enhancing policies includes the whole bunch of policies e.g. demand and supply side policies, tax policies, wage-rate policies, investment policies, and R&D policies.
On the other side some say, differences in the economic and political institutions are the main reason behind the differences in nations. The institutional difference means different laws and regulation, different political system etc. Some studies have found that growth and quality of the institution are positively correlated. There exist a huge set of literature that focused on the relationship between growth and institutions; see e.g. Rodrik and Wacziarg (2005), Barro (1996), Persson and Tabellini (2006), Nannicini and Ricciuti (2010).
Then the question arises what are economic and political institutions? Before answering this, we must understand that there exist a difference between economic and political institution. Douglass North said, “Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction”. Economic institutions mean economic rules of the game (banking system, enforcement of property rights, contracting institutions, patent law, commercial law, type of credit arrangements etc.), whereas political institutions mean political rules of the game (electoral laws, democracy versus dictatorship, constitution, the number of veto players etc.). According to Daron Acemoglu (2005) political institutions “Set the stage” in which economic institutions can be devised and economic policies implemented.
The next question should be, how well institutions adapt to the economic requirements of the society? Acemoglu (2003a) and Acemoglu, Johnson and Robinson (2005) has distinguished between several different views of institutions. There is efficient institutions view and social conflict view. According to efficient institutions view, institutions may matter for economic outcomes, but society will always choose the outcome that maximizes their total surplus and at the same time the distribution of surplus does not affect the choice of institution. On the other side, social conflict view says that institutions emerge as a result of economic agents’ choice and these institutions may not be efficient. Who are economic agents in this case? Here economic agents (according to social conflict view) consist of the groups that control political power at the time. These groups will choose the institutions that maximize their own rents.
Economic institutions are themselves categorized in two categories, extractive economic institutions and inclusive economic institutions. Extractive economic institutions are those who designed policies to benefit only a few people at the expense of many people. Inclusive economic institutions are those institutions that cover many people under their umbrella and these institutions create incentives to work, trade, innovate and generate economic growth. These institutions are the polar opposite of extractive institutions. They create the more equal power of distribution. They don’t let anybody to have complete political power. Extractive economic institutions support extractive political institutions and inclusive economic institutions support inclusive political institutions.