ECONOMIC AND PRIVATE SECTOR PROFESSIONAL EVIDENCE AND APPLIED KNOWLEDGE SERVICES HELPDESK REQUEST Indicators for economic institutions and business enabling environment in the post- 2015 development framework Zhenbo Hou Overseas Development Institute March 2014
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ECONOMIC AND PRIVATE SECTOR
PROFESSIONAL EVIDENCE AND APPLIED KNOWLEDGE SERVICES
HELPDESK REQUEST
Indicators for economic institutions and
business enabling environment in the post-
2015 development framework
Zhenbo Hou
Overseas Development Institute
March 2014
ii
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Indicators for business enabling environment and inclusive economic institutions
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4 Conclusions
This report has made an attempt to analyse the proposals that have been put forward to
include business enabling environment and inclusive economic institutions in the post-
2015 development framework. Unfortunately, the report has found very few explicitly
linked to these two areas; some of the proposals are simply re-branding existing policy
statements with the post-2015 agenda label.
All of this leads the author to suspect that the lack of proposals in this domain might be
an indication for that fact that there is some space for governments and NGOs to shape
these two agendas before 2015.
It might also be a worthwhile exercise to revisit the academic merits of Acemoglu and
Robinson’s argument that has inspired this query in the first place – countries prosper or
fail not because of its geography, values, cultures or natural endowments but because of
its political and economic institutions - more precisely, political institutions determine
economic institutions, which in turn determine a nation’s development trajectory. The
authors theorize that political or economic institutions can be divided into two kinds –
‘extractive’ institutions that a small of individuals do their best to exploit the rest and
‘inclusive’ institutions that a large number of people are involved in the governing the
process hence the exploitation is attenuated. Think of dictatorships and democracies here.
The first problem for Acemoglu and Robinson is that one has to quantify what a small
number actually means in extractive or inclusive economic institutions. For example, as
Boldrin, Levine and Modrica pointed out, in what sense were the institutional arrangement
of the Roman Empire inclusive ‘inclusive’ relative, for example to those of the Communist
Soviet Union. Secondly, Acemoglu and Robinson also pointed to the great contrast
between North and South Korea. Here the two countries have started at the same level
after the Korean War and ended up in very different places due to the extractive North
and inclusive South, but one has to remember that South Korea’s spectacular economic
success began under a military dictatorship. Other important examples of countries whose
economy took off under an ‘extractive’ political institution include Germany before the First
World War, Republic of China (Taiwan) under Generalissimo Chiang Kai-shek, Chile under
Augusto Pinochet, and the People’s Republic of China over the last three decades.
On the hand, this report is not convinced by Acemoglu and Robinson’s argument that
inclusive political institutions would necessarily create inclusive economic institutions and
therefore leads to growth. India has been the world’s largest democracy since the 1950s
but its growth remained slow until economic reforms were implemented in the 1990s and
yet, its growth trajectory remains fragile compared to some of the other large emerging
market economies. The other example is Russia, where every citizen nominally
participates in elections but corruption persists and economic benefits are confined to the
few.
Lastly, while the authors of ‘Why Nations Fail’ offers a compelling argument about the need for inclusive economic and political institutions, one needs to be critical
about the limits of their arguments. Mostly importantly, it is all very well establishing institutions but it is often a huge test for developing countries to carry out the duty and functions of these intuitions effectively.
Indicators for business enabling environment and inclusive economic institutions
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References Acemolgu D. and Robinson J. (2012) ‘Why Nations Fail? – the origins of power, prosperity, and poverty’ Crown
Business.
Boldrin M., Levine D.K., Modica S. (2012) ‘A Review of Acemoglu and Robinson’s Why Nations Fail’
http://www.dklevine.com/general/aandrreview.pdf
Collier P., (2007) ‘The Bottom Billion – why the poorest countries are failing and what can be done about it?’ Oxford University Press.
Higgins K., Melamed C. and Sumner A. (2010) ‘Economic growth and the MDGs’ ODI Briefing Paper 60.