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05.03.2000 Feature Article


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Former President Nkrumah once said "seek ye first the political kingdom and all other things shall be added unto you." In Nkrumaist parlance I would like to say that seek ye first the economic freedom - through institution building - and all other things would be added unto thee.

W hat does Ghana and the United States of America have in common? It looks like the two countries have few things in common: of course they are both sovereign states (in principle) but in Owellian parlance, in the comity of Nations (States' equivalent of the Animal Farm) the US is "more equal than Ghana"; then there is the kente-for-hip-pop cultural exchanges that are shaping the cultural tastes of a significant segment of the cultural constituencies of the two States through increased contacts made possible by modern technology and telecommunications; and finally it so happens that citizens of both countries go to the polls this year to choose a "new" set of leaders (and or re-affirm their support for the old ones) to steer them through national and international affairs for a 4-year period (barring any uninvited interruptions in our case). Presidential and parliamentary elections are about ten months away but it is time to start yawning.

Election year is interesting in its own right not only because of the excitement it can generate (if the game is played with clear and fair rules) but the rancor, divisiveness, the opportunity for dissention among members of same community and neighborhood and sometimes even among family members and the national anxiety all can be a source of comfort or discomfort depending on which side of the political aisle one belongs. Election year is a time for politicians to notch up the self-congratulatory boilerplate and heat up the rhetorical template few more degree Celsius. And oh yeah, it is a time for the rural folk to get something back from their "leaders" in the form of consumer goods (normally offered by politicians to bribe them for their votes).

But while Americans may be concerned about who becomes their next president, they may not be as concerned as Ghanaians. This is because in America, the president has very limited powers and people do not generally look up to the president (and for that matter the federal government) to bring about changes in their lives or in their communities. And that is true in most economically developed countries. The situation in Ghana, though is the opposite. In Ghana the president is all-powerful, and generally people tend to look up to the presidency to bring about socio-economic transformations in their communities and lives. In fact in Ghana, most people tend to have so much religious and blanket faith in personalities that we continue to look for the Moses that would lead us to the Promise Land. In virtue of this cult believe in personalities, it comes as little surprise that in the "Say it Loud Phorum" of the unofficial Ghana website, some Ghanaians have been romancing the idea of "Kofi Annan for President in Ghana"

While it would not hurt Ghana to have the UN Secretary General to be its president (maybe in the near future?), the question is does Ghana really need Kofi Annan to be president before the country could make progress? The obvious answer is no. There are many more Kofi Annans in Ghana and elsewhere who can lead Ghana. The problem in Ghana is not so much about a personality, even though bad political leadership has rubbed a lot of salt in our sores. It is about institution building and attitudinal changes. If we do not do this not even Jesus the Christ, who is generally considered and accepted as flawless, can do anything in Ghana. Let us minimize our religious and blanket faith in personalities and vouch for better institutions.

People come and go but good institutions endure. So while the US can afford to elect a not-so-great person as president without any significant political and economic costs, Ghana cannot afford to do that. Japan for instance, has demonstrated severally that the country could amorphously function without a prime minister without doing much damage to the economic and political life of the people: this is evidenced by the frequency at which Japanese prime ministers are dumped. So the basic question that must be asked is why do personalities matter less in some countries but not in ours? The answer lies in the level and nature of time-honored institutions in those countries compared to ours. What institutions matter From political economy point of view, the important institutions include, among other things, independent judiciary, rule of law, and free press, political representation, free and fair elections, independent trade unions, social insurance, etc.

Economists tend to look at the same institutional issues from a different angle. Thus for convenience and ease, I would like to look at these issues from an economist's perspective, but the institutions being discussed may serve both the needs of a market economy as well as non-market needs such as social stability and cohesiveness and social justice. Though institutions do not feature significantly in the training of economists, the importance of institutions in economic development has long been recognized by the profession such that now there is a whole field of Economics known as Institutional Economics solely devoted to the study of the impact of institutions on economic development. In addition most of the economic models designed by economists to help us under economic behaviors implicitly assume away the institutional underpinnings of markets economies.

Institutions are social arrangements. They may, as Dani Rodrik of Harvard rightly observes, include but not limited to a clearly defined system of property rights, a regulatory apparatus that help to curb fraud, anti-competitive behavior and moral hazard, a moderately cohesive society that exhibits trust and social cooperation, social and political institutions that mitigate risks and manage social conflicts, rule of law and clean and transparent government.

Thus as Lin and Nugent intimate, institutions should broadly be thought of as "a set of humanly devised behavioral rules that govern and shape the interactions of human beings, in part by helping them to form expectations of what other people will do" Given the importance of institutions, the question every policy maker must grapple with is no longer "do institutions matter"? but "which institutions matter and how does one acquire them?" The institutions that matter and identified by economists (notably Dani Rodrik of Harvard), include five types of market-supporting institutions namely, property rights; regulatory institutions; institutions of macroeconomic stabilization; institution of social insurance; and institutions of conflict management.

Property rights With the demise of communism and its concomitant inherent inefficiencies washed in the public eye, the 19th-and-20th century debates about the superiority of communism versus capitalism as economic ideology do not incite a lot of intellectual enthusiasm any longer. The evidence is overwhelming that today's prosperous economies have all been built on the basis of private property. As Nobel laureate Douglas North and others have argued, the establishment of secure and stable property rights have been a key element in the rise of the West and the onset of modern economic growth.

In this light, an entrepreneur would not have the incentive to accumulate and innovate unless she or he has adequate control over the returns to the assets that are thereby produced or improved.

Regulatory institutions Even in a full-dress market economy like the United States, the "invincible hand" of market forces of demand and supply is not necessarily the "Hand of God". In other words, the market forces have their limitations, and as such markets can and do fail. Markets can or do fail in a myriad of ways: they fail when market participants engage in fraudulent, corrupt or anti-competitive behavior; they fail when transaction costs prevent economic agents (such as firms) from internalizing the external advantages (the technical term is externalities) of say new technology; and markets fail when we have moral hazards (for example, purchasers of insurance will not take an appropriate care) and adverse selection (for example giving government loans to both high-risk defaulting and low-risk defaulting students) because information is incomplete. To deal with these issues, a society needs a panoply of regulatory institutions. In fact the freer are the markets, the greater is the responsibility of the regulatory.

No wonder the United States, generally considered as the country with the "freest markets" happens to be the one with the toughest anti-trust laws. We have our own regulatory institutions in Ghana: the Standard Board, the Environmental Protection Agency, the Bank of Ghana, the Electoral Commission, the Supreme court, etc. Unfortunately, however, most of our regulatory institutions are ineffectual because, more often than not, they do not have any perceptibly appreciable degree of autonomy and independence that would allow them to discharge their duties without any fear of retribution from the government of the day.

Macroeconomic-stabilizing institutions In spite of the obvious success of capitalism (vis-à-vis the alternative economic models), it has been realized that capitalist economies are not necessarily self-stabilizing. Since the days of Keynes, economies have been concerned about aggregate demand shortfalls and its attendant unemployment. More recently, economies have had to worry about financial crises - currency and banking crises - as demonstrated by the recent financial crises in Asia, and to some extent Latin America.

To ameliorate the effects of such destabilizing occurrences, societies (especially those in the economically advanced world) have come to realize the importance of, and acquire fiscal and monetary institutions that perform stabilizing functions. And there is little question, if any at all, that the most important of these institutions is the central bank - the lender of last resort. Thus in the light of the importance of the role of central bank (the Bank of Ghana), it is very imperative to strip it of political mechanizations and give it independence to dutifully fulfill its expectations. Institutions of social insurance As an economy modernizes, changes become a way of life and idiosyncratic (that is individual-specific) risk to incomes and employment become pervasive.

The transition from a static economy to a dynamic modern one brings in its trail the constant evolution of the tasks individuals (workers) perform and the volatility of movement up and down the income scale can be very breath-taking. While a dynamic society frees (or can free) individuals from their traditional entanglements (kinship, the village hierarchy, the church, chieftaincy, etc), it also divorces (or can divorce) them from traditional network of support systems and risk-sharing institutions. Thus, kinship ties or what is known in our societies as extended family, gift exchanges, the "wofa wo ho" social arrangements etc, all lose much of their social insurance functions. This means that members of this dynamic society would have to find alternative ways of socially insuring themselves against the risks associated with a modern economy.

Some societies do that through a variety of programs such as Social Security, medical benefits, unemployment benefits, etc - in what is technically referred to as welfare societies where by there is fiscal transfer of payments from the society to certain groups of people who are most vulnerable to the idiosyncratic risks of a modern economy. However, social insurance does not necessarily have to involve transfer payments from fiscal resources.

A society can, and should, institute social insurance schemes that are compatible with its social and cultural environment. In Europe and North America social insurance involves transfer payments provided by the welfare state. In Japan it is provided through a combination of enterprise practices (such as lifetime employment, company-provided social benefits, profit-sharing and bonuses), sheltered and regulated sectors (mom-and-pop stores), and the incremental approach to liberalization and external opening of the economy. Institutions of conflict management As a society made up of ethnically and linguistically heterogeneous populations as ours, there is bound to be social disagreements and conflicts here and there.

However social conflict is inimical to economic development because it diverts scare resources from economically productive activities and also because it generates a lot of uncertainty which discourages economically productive activities. We do not have to look too far to find examples of troubled societies that have collapsed or have been pushed to the edge of anarchy and disintegration by deep cleavages along ethnic or economic (income) lines - Sierra Leone, Liberia, Kabila's Congo, Rwanda, Angola, etc. Social conflicts occur because of coordination failure - social agents/factions fail to coordinate on outcomes which would be of mutual benefit to parties involved. Thus a society needs a wide range of institutions to minimize the coordination failure if that society is to become peaceful and healthy. Examples of institutions that can help in this regard are, rule of law, a high-quality, independent judiciary, representative political institutions, free and fair elections, independent trade unions, social partnerships, institutionalized representation of minority groups and social insurance. In conclusion, the question that every society, especially a developing one, faces is "how does it acquire "good" institutions?".

This is not an easy question to deal with. However, the first step towards dealing with it is the realization that there is no uniquely determined institutional basis for the proper function of a modern market economy. Thus we have to recognize that institutions differ, and they are as diverse as societies are: the American-style freewheeling capitalism is quite different from the Japanese-style capitalism, and they both differ from German style of capitalism. That is there is no one set of institutional arrangements that can fit all societies.

In fact with the triumph of capitalist over communism/socialism, the question confronting developing countries is no longer the choice between capitalism and communism/socialism, but rather what kind of capitalism to choose - Japanese-style, German-style, British-style, American style, etc? Each choice comes with a somewhat different set of institutional arrangements. However, there are some institutions that are universally present in these societies, and which we can adopt and adapt to suit our circumstances. More importantly, however, institutions need to be developed locally, relying on hands-on experience, local knowledge and experimentation but as a late comer we have the advantage to adopt the best of some of the time-honored institutions in other countries and mend them to suit our own cultural environment and societal needs.

Wholesale adoption may not be in our best interest because of the inappropriateness of some of the "foreign" institutional arrangements to our local circumstances. Instead of being seemingly overwrought with the illusion of the indestructibility of personality cults, let us put our faiths in institutions and direct our energies and resources to build them and make sure of their functional usefulness. That way it would be difficult for one person or group of persons to take our country for a ride no matter how they conceal their ill-intentions.

Maxwell Oteng
Maxwell Oteng, © 2000

The author has 28 publications published on Modern Ghana.Column: MaxwellOteng

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