Prosperity Unbound

Guest Contribution by Henry Musa Kpaka

President Obama’s speech in Ghana outlined his commitment to sub-Saharan African economic and social development (see the Economist article, Barack Obama and Africa: how different is his policy). His message was to usher in a new strategy for development assistance from the U.S. and perhaps the rest of the West.  The debate over ending poverty and bringing economic and social development to sub-Saharan African has exhibited an increasing number of facets in recent years.   One stemming from the rather dismal results from the heavy use of aid, encouraged development agencies such as the World Bank to turn their attentions to the promotion of trade liberalization, macroeconomic and monetary stability, and privatization, all embodied in the structural adjustment programs aka “Washington Consensus”.  Following the poor results and frequent failures of this strategy, a new line of thinking emerged, one with a lot of potential to lift the continent out of poverty: institutional reform.  President Obama was quick to echo this in his Accra speech: “Africa does not need strongmen, it needs strong institutions”.

The focus on institutions as a means to lasting prosperity for all in sub-Saharan Africa has been around far longer than the Obama administration, but this administration is giving it some steam, and rightly so.  A few economists and development practitioners have written about the impacts of institutional reform in sub-Saharan Africa.  In criticizing traditional foreign aid in her book, Dead Aid, Dambisa Moyo observes that aid impairs African institutions. One implication she gives: public revenue/tax collecting institutions are largely absent because African leader build their budget with revenues coming mostly from aid.  Elena Panaritis also spends some time in her work, Prosperity Unbound talking about institutional reform in developing countries.  Panaritis, whose work focuses on transforming the informality of property and property right systems into formal legal systems in developing countries, describes the importance of institutions.  In her words, “institutions structure incentives in human exchange, whether political, social or economic. In other words, they hold together and protect the social contract by enforcing contracts and laws and providing a sense of certainty in human exchange”.

The immediate economic benefit from efficient institutions as various economists have outlined is that it reduces transaction costs of all kinds (i.e. time, money, imperfect information).  Markets work well when there is a predictable and legitimate set of rules that governs doing business.  Well-functioning institutions also promote accountability and give a voice to the poor. The Obama administration’s efforts (making a speech and creating new policy directives are two different animals, the question is how much weight will he put behind the rhetoric) to endorse this approach is certainly a step in the right direction.  My only concern is that this approach has already become another “Washington Consensus” that wipes out all other ideas.

The question of what kind of reform should be promoted is addressed by Dani Rodrik: “The type of institutional reform promoted by multilateral organizations such as the World Bank, IMF, or the World Trade Organization is biased towards a best-practice model. It presumes it is possible to determine a unique set of appropriate institutional arrangements ex ante and views the convergence towards those arrangements as inherently desirable. This approach,” Rodrik continues, “encourages cross-national comparisons, benchmarking.” All of which he rightly claims are based on first-best mindset. He proposes a second-best approach where institutional reform is promoted in a case by case basis, where focus is placed on areas of quick wins and high impact results. Growing up in Sierra Leone, it was easy at first to reject a second-best approach for my continent. However, Rodrik’s idea makes a lot of sense.  Different countries, even in sub-Saharan Africa have different approaches in doing business and rely on unique arrangements of formal and informal institutions. A “one size fit all” approach may cut transaction costs in the short run but has high potential to fail.  The heavy reliance on institutional performance indicators, like the Good Governance Index, can easily misguide us, lead to waste, and subsequently to yet another retreat of a potent solution to the poverty problem in sub-Saharan Africa.  Institutional reform holds a lot of promise for development in sub-Saharan Africa if applied appropriately.

Guest Contribution by Rachel Beach

Judge Sonya Sotomayor may be sailing through the senate hearings given her highly qualified track record, a White House and Senate majority in her favor, and appeal as the first Latina judge, but one might find some relief in the expression of a few well-placed reservations.  In paradox to her background of civil rights service and concern for the constitutional protections afforded to all citizens, Sotomayor’s track record on property rights should register concern among the underprivileged and  politically weak.  Her highly controversial decision in the 2006 case of Didden v. Village of Port Chester ruled against land owners Bart Didden and Dominick Bologna whose property was condemned after they refused to pay a local developer’s extortion demands. Sotomayor’s decision went beyond the procedural grounds of the Supreme Court’s 2005 decision in Kelo v. City of New London, Connecticut, allowing the expropriation of private property for the benefit of other private interests.

Should Sotomayor reach the Supreme Court, it appears that expropriation and extortion for personal gain – if the party in question is politically-connected and affluent – can hope for federal backing.  If a developer can convince the city to rezone an area for redevelopment, and has legal ground to request condemnation of private property for his own gain then the disenfranchised should have great reason to fear her decisions.  Sotomayor’s decision exacerbates problems of the insecurity of property, and those whose property is most likely to be expropriated inhabit the lowest strata of American renters and home-owners: tenants in the ghettos.  They suffer from semi-“unreal estate”.

Here is the account of a lady who went from poor tenant to homeless to middle-class lady in Washington D.C. after struggling with the mayor’s office for years to gain the rights to purchase the condemned apartment she was renting.  Deborah was once one of those who inhabited “unreal estate”.  Her’s is one of the rare stories of the poor successfully fighting for their rights (using the right-of-first-refusal under D.C. property laws regarding tenants) and gaining ownership.  However, Sotomayer’s ruling would make  the struggles of homeowners like Deborah more difficult.  The logic of the ruling suggests that developers have the power to deny rights to tenants, not for public gain, but for the private gain of the developer over tenants.  Granted, we do not know all the details of the ruling or the case, but as the most probable soon-to-be Justice of the Supreme Court, Sotomayor’s decision seems rather discouraging,.

The current economic crisis is a property right issues (i.e. an unstable valuation of the real estate market), but a clear and established property right system especially for private individuals can be a way out of this current mess and prevents further crisis. Like in the case of Deborah, ownership of property motivates investment and entrepreneurial ingenuity which is much needed in today’s economy. Sotomayer’s ruling is indeed a red flag to such success stories as that of Deborah’s.