Our Institutions: They can make all the difference, for better or for worse

The Inter-American Development Bank’s (IDB) recent Publication “Nurturing Institutions for a Resilient Caribbean” argues that no factor is more important for socio-economic progress than institutions, which “shape the incentives of economic agents and frame the environment in which their interactions take place.”

The Caribbean faces weak fiscal positions, crime and violence, a sluggish private sector, weak productive development policies, skill-biased emigration, recurrent natural disasters, and relatively high poverty rates (Jamaica at 21.2%, T&T at 24.5%, Barbados at 25.7%, Suriname at 26.1%, and Guyana at 41.2%), according to the IDB.

What explains the institutional frameworks that have underpinned these undesirable outcomes?

The authors found that the commodity-dependent countries have weaker institutions than service-dependent countries, which is at least partially explained by historical but persistent factors. Fifteenth century European colonization strategy differentiated between “extractive states” (established to exploit abundant natural resources, so only institutions necessary for the maintenance of power and the extraction of wealth were created), versus “settler colonies” (which established institutions to assure and secure their rights, properties, and long-term wellbeing).

The Caribbean’s extractive institutions persisted in the post-independence era because of what is referred to as the “Parasitic Oligarchy” in T&T — “those with the means and the power to exploit the rents of the extractive society prevent institutions from evolving into “better” institutions that have the potential to benefit the whole country.” Equally disturbing is the fact that “early institutions affect present and future institutions and development outcomes even centuries apart”.

Does this mean that our institutions are unlikely to evolve, and therefore our socio-economic development is stagnated?

Institutional quality is a most important determinant of socio-economic outcomes

The book cites international evidence that “political and economic institutions can play a significant role in (1) limiting the incidence of several of those factors that negatively affect economic growth and social development, and (2) building resilience to uncontrollable exogenous factors, such as natural disasters. Political institutions lay the groundwork for the development of the other institutions that govern the behaviour of economic agents. Any major shift in political institutions can alter other institutional settings and thus force an alteration in the development path.”

But, barring a major shift in political institutions, urgent and purposeful institutional reform in the Caribbean is evidently more likely to be realized under an IMF supported program, as with Jamaica, Grenada, and now potentially Barbados. Jamaica’s Economic Programme Oversight Committee, Fiscal Council, and Economic Growth Council, are examples of purpose-built, relevant institutions, designed and equipped to support the socio-economic development goals of the nation. The Bank of Jamaica’s inflation-targeting regime brings more clarity and predictability to monetary and exchange rate policy making. These institutional reforms have arguably altered Jamaica’s socio-economic trajectory forever.

Hear more from the authors, in my interview with them below.