Institutions and Economic Transformation

The Broker, July 26, 2013

By Pradeep S Mehta and Bipul Chatterjee

Inclusive growth happens only when people have been empowered and when political and economic institutions play a much greater role in the economy

The issue is not about growth versus equity. It is about growth and equity. Is it possible to achieve both at the same time without one undermining the other? Yes it is, though the relative degree will vary depending on local dynamics, the quality of governance and the political will to address linkages that can result in more equitable outcomes of growth. It is also important to understand that excessive inequality can have an adverse impact on growth prospects and, therefore, both should be addressed concomitantly.

In order to do this, we have to look at how social, political and economic institutions have evolved in a country. They are the facilitating factors to transform economic growth into poverty reduction and well-being for all. In places where these institutions have evolved with greater participation of the people in shaping their form and function, growth has much more impact on the reduction of poverty and inequality.

The issue is not just about reducing income inequality. It is about whether growth reduces poverty. In an absolute sense, during a period of rapid economic growth, the income of the poor and income inequality can both increase. The distributional aspects of growth should be addressed as part of the growth process and its content.

While the evolution of social, political and economic institutions shapes the nature of a country’s growth, the most important question is about people’s ability to access and use these institutions so as to get more and better opportunities to take part in the growth process. This access to opportunities to take part in the growth process depends on various factors, of which socio-political and economic empowerment are the most important. The literature on experimental development economics has argued that the degree of this ‘empowerment’ depends on historical and political factors. There are many examples of affirmative actions for the ‘empowerment’ of marginalized communities and their success depends not only on the actions per se, but on how institutions are in place and develop over time.

Therefore, it is important that the state as well as non-state actors take affirmative action to help those who are disadvantaged to take advantage of opportunities to participate in the growth process. In this respect and because of the fact that social institutions take time to evolve and address the dynamics of the social contract, political and economic institutions have a much greater role to play. In other words, it is the quality of and access to social, political and economic institutions that determine a person’s and/or a community’s endowments. Does it necessarily allow them to take advantage of opportunities to participate in the growth process? The answer is no, as transforming endowments into entitlements depends on a number of factors which are mostly driven by social and economic policies.

If structural deficiencies persist in a country’s social-political and economic system, it will be difficult for people and their communities to transform their endowments into entitlements. One such example of structural deficiency is how policies are formulated and implemented. Are they inclusive enough to take into consideration the views and concerns of a diverse group of stakeholders to be affected by a policy? Is there any mechanism to bridge macro-micro gaps in policy formulation and implementation?

These questions need to be debated and addressed by the state as well as non-state actors. While right policies should be in place at local, national, regional and global level in order to address the most important question of strengthening social, political and economic institutions to facilitate people’s participation in the growth process, they are at best necessary but not sufficient. Inclusiveness in policy formulation and its implementation is equally, if not more, important. This means the degree to which intended beneficiaries are involved in formulating and implementing development policies and that, in turn, depends on socio-political and historical factors which affect the process as well as the outcomes of ‘empowerment’.

Therefore, one has to look at the subject of economic transformation in terms of normative economics and not just positive economics. The issue is not about ‘what it is today’ and ‘what it will be tomorrow’ in a comparative static sense; it is about ‘what it should be’ in a dynamic sense. The quality of the social, political and economic institutions of a country determines whether people have a say in ‘what it should be’. They have to be empowered to make it happen.

States cannot do this alone. Both the state and non-state actors should make a concerted effort, but this also depends on the relationship between the state and the civil society in a country. That relationship is evolving too and should do so in a mutually understandable, rather than antagonistic, manner.

(Pradeep S Mehta is secretary-general and Bipul Chatterjee Deputy executive director at CUTS International)

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