We continue to suffer profound institutional gaps on the local, national and international levels – especially in the areas of property rights, access to credit and effective governance. I attended the CIPE Democracy that Delivers for Entrepreneurs conference in Chicago on April 9-10 and shared views with thought leaders from Egypt, Kenya, Lebanon, Pakistan, the Philippines and Venezuela. While it may seem that citizens in such developing economies suffer more from institutional paralysis, the pain felt by the local start-up dealing with banks, bureaucracy and back room deals is just as real and just as prevalent on the south and west sides of Chicago.
Organizations decline when leaders and workers focus on function rather than mission. Across the wide spectrum of our global community, too many have lost sight of the core principles that make democracy work, including the right to associate economically, the right to own and finance property, and the right to have government work for everyone, not just the connected elite. The only way to dislodge this entrenched bureaucracy is to make noise – to make our voices heard. We have to demand that government at every level stop tinkering with half-measures and start integrating new thought, new technologies, and the next generation into our institutions.
The great Peruvian democracy advocate Hernando de Soto has spent much of his career focused on bringing informal entrepreneurs into the formal sector, where their rights are enshrined in and protected by law. When citizens have the tools to access to capital and a business environment that supports them, they are able to move up the development ladder from the survival entrepreneurship of the informal sector to the prosperity of the formal economy.
De Soto’s work encouraged an important new way of thinking about how to create opportunity where none previously existed. In so doing, he and his organization, the Institute for Liberty and Democracy (ILD) in Peru, have had a profound and positive impact on the lives of millions in Peru and around the world. CIPE’s first partner 25 years ago, De Soto’s and ILD’s work personifies the proven belief that strong markets require vigorous governance and vice versa, and that open participation in both markets and government are a foundation of democracy.
In this most recent Economic Reform Feature Service article, De Soto looks at the necessity of institutions—and specifically the rule of law—to create and nurture a successful entrepreneurial environment.
Article at a glance
- Creating wealth through entrepreneurship requires combining different resources (for example, the parts of a pencil or those of a watch). Institutions are crucial to facilitating that combination.
- To do all the things that entrepreneurs in developed countries take for granted – like dividing labor, using property as collateral, protecting personal assets, expanding markets, or creating economies of scale – entrepreneurs in developing nations need the standards that only legal institutions can provide.
- The wealthy in developing nations have convinced the poor that no matter how talented or enterprising they are, they will never succeed. In fact, the world’s most successful entrepreneurs just have access to superior legal institutions.
Read the entire article.
Fast-growing economies have institutions that allow entrepreneurs to take risks. (Photo: Businessweek)
Why is it that some economies adapt to change and produce long-run growth, while others stall? We observe that in the adaptive economies, entrepreneurs drive change and innovation. So why then do talented entrepreneurs play a leading role in a few societies and yet hit the wall in others? What causes entrepreneurs to make the leap from dealing in guilds and bazaars to participating in global markets?
Mary Shirley, President of the Ronald Coase Institute, digs deeply to explain how fundamental institutions make all the difference. In “Why Institutions Are Essential to Entrepreneurship,” new from CIPE’s Economic Reform Feature Service, Dr. Shirley offers clear insights into the mechanisms that facilitate exchange and reduce the risks of being an entrepreneur. Societies that lack these institutions — the limited access societies — fail to unleash the entrepreneurial drive. However, those that nourish creative business endeavors improve their long-run economic performance.
This article is part of a forthcoming CIPE report on Creating the Environment for Entrepreneurial Success.
Lack of technology — or weak institutions? (Photo: Wikimedia commons)
Sergio Daga is a CIPE-Atlas Corps Think Tank LINKS Fellow serving at the Heritage Foundation.
According to empirical studies, high rates of economic growth over the long-term (in per capita terms) result in better living standards for people in every country. The main force for high, long-term economic growth rate is productivity gains – finding better ways to efficiently use production factors such as natural resources, labor, physical and human capital.
Lora and Pagés explain that, compared to other regions in the world, the relatively lower growth of productivity is the main determinant of the poor economic growth rates in Latin American countries. They also argue that it has also prevented the region from closing income gaps and economic development levels with developed economies. Therefore, the achievement of higher productivity should be the epicenter of the current economic debate in Latin American countries.
How can we foster productivity? Productivity gains are usually associated with increases in technological progress of a country, but some argue that this is a complex problem that goes beyond that. In fact, depending on the country’s level of development, technological readiness could be a necessary condition but not a sufficient one.
For low-middle income countries, such as the majority of Latin American countries, productivity gains could be achieved by making progress towards what the World Economic Forum’s Global Competitiveness Report calls “the fundamental pillars for development.” One of the most important pillars is having a sound and fair institutional environment.
President of Burma U Thein Sein at the US-ASEAN Forum (Photo: The Nation)
In his speech at the July US-ASEAN Business Forum in Siem Reap, Cambodia, U Thein Sein explained that Burma “has embarked on a democratic path” and is “moving toward a new democratic era.” He went on to outline the reform efforts his country is presently undertaking, efforts that give reason for optimism following April’s dramatic electoral victories for Aung San Suu Kyi and the National League for Democracy.
In addition to promises of regular and free elections, increased media freedom, and constructive engagement with leaders of ethnic minorities, President Thein Sein announced plans “to transform [Burma’s] centralized economy into a market-oriented economy.” At this same event, US Secretary of State Hillary Clinton said that President Thein Sein is a leader “who has moved his country such a long distance in such a short period of time.”
Moving forward, a successful and sustainable transition in Burma requires that economic growth be widespread and that economic opportunities arise for more than the well-connected few. However, numerous key institutions that are necessary for the realization of this goal are either weak or completely missing in Burma today.
Paramount among these institutions are private property rights and the rule of law. If these institutions, which are fundamental for the development of a market economy, are not substantively reformed and strengthened in Burma, its economic and democratic transition will prove unsustainable.
(Image source: www.fundforpeace.org)
This year’s edition of the Failed States Index (FSI) is out. The Index is a ranking of 178 nations compiled by the Fund for Peace in cooperation with Foreign Policy magazine based on events in 2011. Perhaps somewhat misnamed, the index does not designate state failure per se but rather susceptibility to failure, quantifying pressures on states as well as their capacity to deal with these pressures. It consists of 12 key political, social, and economic indicators triangulated from content analysis of public reports and information, quantitative data, and opinions of experts. Based on these factors, nations are categorized into Alert, Warning, Moderate, and Sustainable bands.
Although the bottom of the ranking, Somalia, and its top spot, Finland, were occupied by the same countries as last year, the current FSI does show some dramatic shifts. Civil war in Libya and the tsunami in Japan caused the most precipitous drops in the ranking: 16.2 and 12.5 points year-on-year, respectively. Japan still is a distant 151st on the list of states most likely to fail while Libya is only 50th, highlighting the profound differences between the two. At the same time, Japan’s problems illustrate that even wealthy, democratic countries are not immune to shocks that test their strength.
The FSI raises important points about the factors that increase the risk of state failure, ranging from demographic pressures and uneven economic development to unaddressed group grievances. Whether a state can withstand pressures generated by these factors depends on the capacity of its institutions, which include leadership, law enforcement, the judiciary, the civil service, civil society, and the media. When pressures mount and these institutions are too weak to cope, states become susceptible to collapse.
This Economist chart shows the relationship between rule of law and GDP per capita.
Reasonable people can disagree about the role of state in economic affairs, especially in times of crisis, and what types of services governments should provide to citizens. It is up to each society, through its political process, to formulate economic and social policies that fit each country’s unique situation. However, what’s often lost in these debates is a key aspect of the role that any state plays in the economy: establishing the rules of the game.
In a market economy, that means creating and supporting institutions such as property rights, contract enforcement, freedom of enterprise, etc. States must also be able to provide basic infrastructure to facilitate economic activity in order for these institutions to meaningfully function. In most Western countries, the impulse fueled by the global financial crisis has generally been to reduce the size of the state. Yet for many developing countries the real question is not whether to reduce the size of the state but how to make the state perform better, whatever its optimal scope may be.