The (Over)-Importance of Institutions...

I have come across the word "Institutions" several times over the last month and a half, in the context of sound macroeconomics. The only parameter that economists find has a positive correlation with a nation's economic health is the existence of strong institutions.

Geography does not matter. Natural resouces, perhaps counter-intuitively do not matter either. Indeed, natural resources in a country with weak institutions often leaves the country worse off. It breeds corruption, an over-reliance on the wealth generated from the resources and a consequent neglect of more sustainable sources of growth. Two cases in point: Saudi Arabia v Singapore. One sits on the largest known supplies of oil reserves and the other has...well...trees. I wont pain you with the economics of it...you get the picture.

Another theory is that the further you go from the equator, the more prosperous the countries become. Norway and Sweden are amongst the most properous of nations, while sub-Saharan afica and parts of Asia are the poorest. Hmmm....seemingly outrageous in that there is no underlying logic. Yet, it largely holds true. Does one buy it? NO! It is merely a reflective rather than a causal realtionship.

All of this raises the question: what are good institutions? OK, so this comprises of a strong & independent Central Bank and Judiciary, an efficient & incorruptible civil service, growth driven government policies, strong basic & professional educational institutes, sound financial markets, competitive product/service sectors, etc, etc. Seriously though, for the develoing world, targeting this "wish-list" will consume all output in itself.

Perhaps a more sensible approach for the government is to start with the 'no-brainer' stuff, such as cutting down on licence requirements to set-up an industry, speed up procedures to import valuable raw materials and tax breaks to export-based industries, etc. Do this and your industry and entrepreneurs will be free from their shackles. It needs a few strong, practical leaders at the top to set the ball rolling. The wish-list can be followed up with later. Keep things simple and simple things will be done right, they say. Perhaps...just perhaps this applies here too.