Institutions: Economic and Political Pillars of Society

It is never too early to pull on the alarm bells since there is a prevailing impression that the strains on our democratic institutions are being tested on an almost daily basis

“When institutions are strong, citizens punish politicians by voting them out of power; when institutions are weak, politicians punish citizens who fail to support them. When institutions are strong, politicians vie for support and endorsement of interest groups; when institutions are weak, politicians create and control interest groups. When institutions are strong, citizens demand rights; when institutions are weak, citizens beg for favours.”
— Journal of the European Economic Association (April-May 2004)

Interrogations about the state of our institutions are high on the agenda of public opinion not only because of what is happening presently but also because of all that we have witnessed in the recent past. One can pick particular segments from the above propositions either to make the case that we have weak institutions (citizens begging for favours) or otherwise (voting a hapless government out of power). The fact of the matter is that we are currently in a zone of high turbulence.

To our mind the closest that we can come to a description of the prevailing state of affairs is probably captured in this quote from the Italian political philosopher Antonio Gramsci who wrote in his prison diaries that “the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear”.

The sordid revelations relating to the past and present practices which are most unfortunately ascribed to the “political class” are perhaps the most striking illustration of Gramsci’s “morbid symptoms.” The utter failure of policy-makers to usher in the innovative institutions – normative as well as structural — which would measure up to the new circumstances arising from a radically transformed economic environment characterized by openness, even as globalisation is taking its toll on economic growth as well as social stability.

Before proceeding further, it might be useful to clearly define what we understand by institutions. If in everyday parlance the term institution is generally associated with “organisations” or otherwise identifiable structures, it must be emphasized that in political economy institutions have a much larger connotation which includes social and legal norms or what can be generally described as the “rules of the game”, and the level of acceptance and respect for those rules by all the actors in the game.

These institutions can sometimes be harmful because they get ossified with the passage of time, and lack of adaptation. In which case they tend to enforce outdated solutions to problems which are viewed with the biased lenses of tradition. This is why the transformation of institutions and their constant adaptation to the new emerging environment are a vital part of governance.

In the mainstream economic strand, as epitomized by the World Bank and the IMF, local institutions were until recently treated as mere details. To the accusations which were regularly levelled against them to the effect that they were promoting “one size fits all” policy prescriptions, these institutions would unabashedly reply that what is good economics in the US must be good economics in Ghana or Thailand.

It was only following the 1997 Asian financial crisis that the IMF finally changed tack to start promoting improved institutions of corporate governance and bankruptcy management. The World Bank Annual Report of 2002 followed suit by focusing on the need to create the appropriate institutions to favour development, if only to entrap it in a straitjacket, in a report entitled ‘Building Institutions for Markets’. This was nevertheless a start of admission by the Washington sister organizations of the fact that “Institutions Matter” when it comes to the issues of economic development.

Admitting that institutions are critical for economic development does not resolve the many complex matters pertaining to their role in such development, nor does it improve our understanding of the relationship between institutional change and economic development. The most often quoted paradox about the importance of institutions for economic development relates to “property rights” which are considered as a fundamental precondition for economic prosperity. Yet the rapid economic growth in China, supported by heavy investments from western banks and private investors, has occurred in the absence of anything which can be remotely described as “property rights” as understood in the West. This is not to say that there is no need for some form of contractual obligations to exist for macro-economic development to occur, but rather that these may take forms which are determined by local contexts.

Such instances add weight to the arguments of all those who take the view that the design of economic development policies cannot be divorced from a proper assessment of local conditions and institutions adapted to those conditions. Many local economic analysts do not shy away from attributing the large-scale development of “Ponzi schemes” in Mauritius to the introduction of “tax at source” on interests paid by banks. We can find in this a graphic illustration of how what was motivated by good technocratic analysis can grow totally haywire due to failure to understand “context” – or in other words lack of political acumen.

On the political front the last elections have perfectly illustrated the consequences of failure by an incumbent government to appreciate the importance attached to a number of institutions by voters. The half-baked constitutional amendments and proposed reforms of some of the most revered constitutional posts quickly transformed the electorate into a hostile front against what was a purportedly unbeatable alliance of the two largest parties in the country.

Political institutions in a democratic setting are meant to be important instruments of the interplay between the governed and the government. Failure to appreciate this key factor and to promote its role in the day-to-day practice of governance inevitably leads to divergences which distance decision-makers from the people.

The threat to social cohesion and instability which can result from continued turmoil is best described by the following quote from an article by Rashpal Malhotra (‘Man & Development’ – Dec 1988): “When development is fast but interface is poor, we get terrorism. When both development and social change are slow and people’s awareness about the position and problems inadequate the consequences are even more serious. Development itself is blocked. Violence is spread and justice becomes a casualty.”

This may seem a tad too harsh to apply to the situation in Mauritius – but it is never too early to pull on the alarm bells since there is a prevailing impression that the strains on our democratic institutions are being tested on an almost daily basis.

• Published in print edition on 31 July 2015