Prosperity Unbound

Elena Panaritis, institutional economist, social entrepreneur and Greek MP from the ruling Panhellenic Socialist Movement (Pasok) was quoted in the June 29, 2010 article: \”Greece: A marathon to sprint\” (FT article, June 29, 2010),  published in the Financial Times.

In response to the severity of the recently voted reform packages and the necessity to re-institute greater competitiveness in the Greek economy while dismantling vested interests and lowering transaction costs, Ms.Panaritis states:

“In the last six months the Greeks grew up by one century. Before that they didn’t understand the word market.”

In particular liberalization of the currently rigid labor market and opening up of the so-called “closed professions” is expected to add around 13.2 percentage points to Greek’s GDP.

But further reforms are needed. One in particular promises to bring an even greater economic impact, and that is the reform addressing the problem of informality and  property rights. Greece currently has one of the weakest property rights systems in the West.  Denmark, for example, has not been touched at all by the 2008 or 2009 economic crisis and has 0% informality.  Canada, Australia, and New Zealand are also among the countries that have consistently had very well established and enforced property rights systems.

Ms. Panaritis’ work in transforming illiquid property markets suggests high social, economic and even gender-equity returns.

This is probably the best opportunity to set Greece onto a new path to prosperity by conducting deep institutional reforms and not to fail its own citizens.

To read the entire article, visit FT.com: \”Greece: A marathon to sprint\” (FT article, June 29, 2010)

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.