Institutions and growth — Development Econ Module 6

Why do some countries grow and others don't, after we control for capital, labour, and even technology? The institutionalist answer (Douglass North 1981, 1990; Acemoglu-Johnson-Robinson 2001, 2002, 2005; Why Nations Fail 2012): the deep cause is the rules of the game — the institutions that determine how power is distributed, how property rights are protected, how contracts are enforced, how political competition operates.

What 'institutions' mean here

Institutions are the formal and informal rules that structure human interaction. Formal: constitutions, laws, regulations, contracts, court systems. Informal: norms, customs, conventions, beliefs about how things are done. Both matter; both can be growth-promoting or growth-impeding.

Inclusive vs extractive institutions

Acemoglu and Robinson's binary, from Why Nations Fail (2012):

Inclusive institutions — broad-based political power, secure property rights, equal protection under law, competitive markets with low barriers to entry, public provision of education and infrastructure. Reward productive investment; encourage entrepreneurship; produce sustained growth
Extractive institutions — power concentrated in a narrow elite, insecure property rights for outsiders, weak rule of law, restricted entry to markets, public services that favour insiders. Designed to extract surplus from the majority to the elite. Can produce growth temporarily (Soviet-era industrial mobilisation; some authoritarian-resource-extraction successes) but not sustainably

The persistence of institutions

A.J.R.'s most distinctive empirical claim: institutions are deeply persistent — colonial-era institutional choices have shaped outcomes 200+ years later. This persistence creates a 'lock-in': once an economy is on an extractive institutional path, the elites that benefit from it have strong incentives to resist reform that would erode their position. The path-dependency makes institutional change much harder than the development textbook implies. The optimistic counter-reading: institutions DO change, especially during 'critical junctures' (war, crisis, demographic shift) when path-dependency loosens. The Glorious Revolution (1688) in England, US Reconstruction (1865-77), post-WWII reconstruction in Japan and Germany, the South African transition (1994), Botswana post-independence (1966). Critical junctures don't guarantee good outcomes but they open the possibility space.

The colonial-origins thesis

Acemoglu-Johnson-Robinson (2001, AER): the persistence of institutions can be traced to colonial-era institutional choices. The exogenous variation: settler mortality. Where European colonisers could survive (Australia, Canada, New Zealand, US), they established 'settler' institutions resembling their home countries — property rights, rule of law, eventual democratic government. Where they couldn't survive (most of Africa, much of Latin America, India), they established 'extractive' institutions — concentrated power in small administrative elites, designed to extract resources rather than support broad development.

The instrumental-variable strategy: today's institutional quality (measured by property-rights indices, rule-of-law indices) is regressed on contemporary GDP per capita, using settler mortality as the instrument. Higher settler mortality → more extractive colonial institutions → worse contemporary institutions → lower contemporary GDP. The coefficients are large and statistically robust.

Critiques of the colonial-origins thesis

The AJR work has been heavily debated: • Albouy (2012) — challenged the settler-mortality data, arguing that AJR's data sources are inconsistent and re-coding reduces the result substantially • Glaeser, La Porta, Lopez-de-Silanes, Shleifer (2004) — argued that what AJR call 'institutions' is partly endogenous to human capital. Their re-analysis: the persistent factor is human capital (the colonisers' education and skills), not the institutions per se • Spolaore and Wacziarg (2013) — emphasised that genealogical and cultural distance from successful economies explains much of what AJR attribute to institutions • The contemporary critics: Easterly and Levine (2003) — institutions matter but are themselves shaped by geography and culture in ways AJR's framework abstracts from The empirical core (institutions matter for growth) is robustly supported. The specific magnitudes and the exact channels remain contested. Treat the framework as foundational but not the final word.

The property-rights channel

How exactly do institutions affect growth? The clearest channel: property rights. If you don't expect to keep what you produce, you produce less. Specifically:

Investment decisions — uncertain property rights raise the implicit discount rate on long-term investments. Why plant trees, build factories, fund R&D if a future government will expropriate?
Asset markets — without secure title, land and other assets can't be used as collateral, restricting credit and investment
Contract enforcement — weak courts mean transactions are limited to those parties can self-enforce. Trade between strangers (the engine of specialisation) is constrained
Innovation — patents and IP need credible enforcement to justify R&D investment. Without it, public-good R&D is the only kind that gets funded

The Botswana exception

Botswana since independence (1966) has been one of the world's fastest-growing economies (averaging 6-9% real growth for three decades). Per-capita GDP rose from ~$70 (1966) to ~$8,000+ (current). HDI is the highest in continental Africa.

Botswana's institutional story (Acemoglu-Johnson-Robinson 2003 on Botswana specifically):

Pre-colonial Tswana institutions — relatively inclusive, with the kgotla (community council) providing accountability for the chief. Acemoglu-Johnson-Robinson argue this gave Botswana a foundation that other African societies lacked
British protectorate (not colonisation in the strong sense) — Britain protected Botswana against Boer encroachment but invested very little in colonial administration. Existing Tswana institutions were largely intact at independence
Discovery of diamonds — at independence. The key institutional question: who controls the diamond rents? Botswana negotiated a 50-50 joint venture with De Beers (Debswana) and used revenues for public investment in education, health, and infrastructure — rather than for elite extraction or rent-distribution patronage
Stable democratic transitions — Botswana has held competitive elections since 1965, with peaceful changes of government via electoral process

The institutional reading: Botswana shows that resource wealth + inclusive institutions can produce shared development; the same wealth + extractive institutions (Equatorial Guinea, Nigeria) produces the resource curse.

The recent African institutional record

Since 2000, several African economies have made meaningful institutional progress:

Rwanda — strong state capacity, professional bureaucracy, rule of law improvements, anti-corruption. Concerns about political pluralism and dissent
Ethiopia (pre-2018) — bureaucratic capacity and macroeconomic management improvements. Reversed substantially during the post-2018 political crisis
Senegal — democratic consolidation, peaceful transitions of power
Ghana — relatively stable democracy, regularly-tested electoral integrity, judicial independence improvements
Kenya — devolution (2010 constitution) created accountability points; judicial system reformed; but persistent corruption, fragile separation of powers
South Africa — strong formal institutions inherited; performance erosion during state-capture period (2009-2018); ongoing recovery

World Bank Worldwide Governance Indicators 2024: Africa's median 'rule of law' percentile has improved from ~25 (2000) to ~35 (2023). Slow but positive. Wide variation across countries within the continent.

The Kenyan institutional reform agenda

Kenya's 2010 Constitution implemented major institutional reforms:

Devolution to 47 county governments — created decentralised accountability and political competition. Implementation has been imperfect (county-level corruption, capacity gaps) but has shifted power from a centralised state
Bill of Rights — strengthened civil rights, including socioeconomic rights (right to health, education, housing — justiciable)
Independent commissions — Independent Electoral and Boundaries Commission, Ethics and Anti-Corruption Commission, Office of the Auditor-General, Office of the Director of Public Prosecutions
Public participation — constitutional requirement for public participation in legislative and budget processes. Imperfectly implemented but a real institutional change
Judicial independence — restructured judiciary, judicial-vetting board, transparent appointment processes

Implementation has been uneven. Persistent challenges:

Executive overreach during specific periods, particularly around resources and security
Corruption — county-level pending bills, procurement scandals, judicial bribery cases. Anti-corruption institutions exist but successful prosecutions of senior officials remain rare
Capacity constraints — qualified personnel shortage in many state institutions
Political-economy resistance — vested interests in the pre-2010 system continue to push back

Exercise

Kenya's Constitution (2010) created devolved county governments with substantial powers. After 14 years of implementation, the empirical record is mixed: some counties (Makueni, Machakos, Nyandarua) have built reputations for delivery; others have become byword for waste and corruption. (1) Apply the Acemoglu-Robinson framework: are devolved institutions inclusive or extractive in current Kenya? (2) What institutional design features distinguish the well-performing counties from the poor performers? (3) Propose three reforms that would make devolution more institutionally inclusive. (4) What's the political-economy obstacle to each reform?