Institutional ambiance and its impact
Economic literature highlights a link between a country’s institutional quality and its economic growth
The writer is the adviser/executive director general, Ministry of Finance, Government of Pakistan. He can be reached at khaqanhnajeeb@gmail.com
Why do institutions matter? What defines ‘institutions’ and ‘quality institutions’? Economic literature highlights a convincing link between a country’s institutional quality and its economic growth and development. Douglass North, an institutional historian, defines institutions as the formal and informal rules that organise social, political and economic relations.
Informal and formal institutions can interact with each other in multiple forms: either in a complimentary manner where they coexist and mutually reinforce each other; a substitutive manner, where one set of institutions is ineffective and the other plays an operationally equivalent role; or a conflicting manner when the two systems of rules are incompatible. The performance of an economy is based on a combination of formal rules and informal constraints in its society. However, governments and policymakers place a rather overwhelming emphasis on improving formal institutions with little recognition that institutions, by their very nature, are deeply embedded in society. In the same vein, institutional quality is functionally measured using indicators such as rule of law, voice and accountability, whereas theoretical and empirical analysis also highlights the significance of culture in a society as an essential part of institutional quality.
The socio-cultural framework and informal norms can be understood in the context of social capital and social cohesion prevailing in a community. Social capital is the glue that binds societies, and is a prerequisite for economic growth and human welfare. Notably, a major hypothesis in the social capital literature is that it reduces transaction cost thus facilitating economic performance. Hence, human agency plays a key role in improving the institutional ambiance in any society. The idea is to move towards thinking about people’s ability not only in terms of knowledge, but also in their capacities to associate with one another and work together.
The World Value Survey (WVS) — conducted by a non-profit association in Stockholm — is used to measure people’s social norms, including attributes like trust, cooperation and other survival versus self-expression values. Trust, the level of confidence people have that others are reliable, at the individual and community level, is an integral building block for efficient and meaningful economic exchange and smooth functioning of society, leading to a holistic socioeconomic development. According to the WVS 2014, 74% Pakistanis have a low level of trust in other people’s behaviours and actions. In case of people’s trust in institutions, the picture again is not encouraging.
So how can societies build trust to improve their social capital? Childhood is the formative phase of an individual’s life. Cognitive and non-cognitive skills, including awareness of social norms and cultural values, are embedded during this period. The nature versus nurture debate is far from over, but it has been empirically shown that parents have a defining impact on children’s upbringing, determining their behavioural pattern during adulthood. It is an irony that 47% Pakistani parents do not consider “tolerance and respect for other people” as a trait worth teaching. Moreover, other important childhood traits, which play a role in well-rounded grooming and civic sense, sense of self perception, independence, self-expression and perseverance, all rank low on Pakistani parent’s priority list. It is, however, pertinent to note that low-trust societies do not suffer from a complete lack of social capital, but the average radius of trust of cooperative groups tends to be small and inhibited.
Development of well-functioning institutional structures requires domestic settings of cohesiveness which are facilitated through general education and more widespread access to that education. It is imperative to focus on the underlying factors to make the process of institutional reform, sustainable. Hence, any worthwhile effort to strengthen institutional structures in Pakistan must be supported by a transformative drive for modifying the traditions, obligations, morality and behavioural patterns in the country. In essence, institutional reform may need to be complemented with a structural reform of society.
Published in The Express Tribune, December 30th, 2018.
Informal and formal institutions can interact with each other in multiple forms: either in a complimentary manner where they coexist and mutually reinforce each other; a substitutive manner, where one set of institutions is ineffective and the other plays an operationally equivalent role; or a conflicting manner when the two systems of rules are incompatible. The performance of an economy is based on a combination of formal rules and informal constraints in its society. However, governments and policymakers place a rather overwhelming emphasis on improving formal institutions with little recognition that institutions, by their very nature, are deeply embedded in society. In the same vein, institutional quality is functionally measured using indicators such as rule of law, voice and accountability, whereas theoretical and empirical analysis also highlights the significance of culture in a society as an essential part of institutional quality.
The socio-cultural framework and informal norms can be understood in the context of social capital and social cohesion prevailing in a community. Social capital is the glue that binds societies, and is a prerequisite for economic growth and human welfare. Notably, a major hypothesis in the social capital literature is that it reduces transaction cost thus facilitating economic performance. Hence, human agency plays a key role in improving the institutional ambiance in any society. The idea is to move towards thinking about people’s ability not only in terms of knowledge, but also in their capacities to associate with one another and work together.
The World Value Survey (WVS) — conducted by a non-profit association in Stockholm — is used to measure people’s social norms, including attributes like trust, cooperation and other survival versus self-expression values. Trust, the level of confidence people have that others are reliable, at the individual and community level, is an integral building block for efficient and meaningful economic exchange and smooth functioning of society, leading to a holistic socioeconomic development. According to the WVS 2014, 74% Pakistanis have a low level of trust in other people’s behaviours and actions. In case of people’s trust in institutions, the picture again is not encouraging.
So how can societies build trust to improve their social capital? Childhood is the formative phase of an individual’s life. Cognitive and non-cognitive skills, including awareness of social norms and cultural values, are embedded during this period. The nature versus nurture debate is far from over, but it has been empirically shown that parents have a defining impact on children’s upbringing, determining their behavioural pattern during adulthood. It is an irony that 47% Pakistani parents do not consider “tolerance and respect for other people” as a trait worth teaching. Moreover, other important childhood traits, which play a role in well-rounded grooming and civic sense, sense of self perception, independence, self-expression and perseverance, all rank low on Pakistani parent’s priority list. It is, however, pertinent to note that low-trust societies do not suffer from a complete lack of social capital, but the average radius of trust of cooperative groups tends to be small and inhibited.
Development of well-functioning institutional structures requires domestic settings of cohesiveness which are facilitated through general education and more widespread access to that education. It is imperative to focus on the underlying factors to make the process of institutional reform, sustainable. Hence, any worthwhile effort to strengthen institutional structures in Pakistan must be supported by a transformative drive for modifying the traditions, obligations, morality and behavioural patterns in the country. In essence, institutional reform may need to be complemented with a structural reform of society.
Published in The Express Tribune, December 30th, 2018.