No system — whether legal or economic — can sustain itself without institutionalism. Whatever system of government that a country may have, whatever its economic model, it cannot function without appropriate institutions.
Institutionalism — understanding it as a harmonious set of organizations, rules, policies and practices to achieve a specific goal –, is what makes possible the functioning of any community, society or nation. It is like the mechanism that allows an engine to run.
One of the main fields of study and research for FUNIDES is economic institutionalism. There is a concern in FUNIDES for strengthening the bases of social and economic development in our country. And it is because of this that this report on Economic Institutionalism, which we present today, focuses on property rights and legal assurance, presenting you with updated information. These are not the only topics of interest within the field of development, of course that there are other important issues. But FUNIDES has decided to focus on property rights and legal assurance since they are constantly mentioned by local economic and business sectors in the different consultations and surveys that have been carried out.
As a means to introduce this report on institutionalism, I will begin by saying that not only the existence, but the strength of institutions, are fundamental for the development of any country. Institutionalism does not only consist on formal and legal institutions working properly, but on the whole system functioning as a whole. If, for example, we want the free enterprise system to work, it is necessary that public policies, governmental attitude and governance, the principles and values that are enhanced, are all coordinated with the focus set on free enterprise. If one of these conditions is missing, economic growth and development may be achieved, but they will not be sustainable, as it has been proven in many countries throughout history.
“Formal institutions are not a cause, but an effect. They are a consequence; a reflection of fundamental principles and values, whose construction must stem from the bottom, from the fiber of society.”
As a whole, institutions strengthen each other, but, in order for them to be sustainable in the medium and long term, a favorable atmosphere is required, which only political institutionalism may offer.
A few weeks ago, FUNIDES invited James Robinson to speak, who co-authored the best-selling book Why Countries Fail. In this book, Robinson makes an interesting review of history, of how some countries prevail and others do not. Robinson makes us see that everything relies on institutions, making a difference between inclusive institutions (which are favorable to development) and extractive institutions (which are not). However, the background message is that neither the economy nor economic institutions can work, without a suitable political environment.
The Industrial Revolution in England in the XVIII century, which later expanded to Europe and the rest of the world, would not have been possible without the Glorious Revolution of the XVII century, which laid the foundations for industrial development, consisting mainly in the constitutional establishment and the respect of private property. This first revolution abolished absolutism, opening up the political system to pluralism and setting forth the bases for a republican democracy. Without this political environment development would not have been possible. The English Industrial Revolution was a logical consequence of a political revolution.
Another historical example, very illustrative of how institutionalism affects development, is the case of the extraordinary economic upturn in the United States during the 1920’s. President Calvin Coolidge, who was one of the architects of that economic boom, said that there were two fundamental motors to move the economy forward: private property and fair competition. And President Coolidge himself explained these concepts in his own words by saying that private property was not so much about having a title to a property, but about “…the intimate conviction that said property was guaranteed and protected by the State.” And that fair competition consisted in there being “…no privileges for anyone.”
These historical experiences show us that democracy and rule of law are the ingredients for an integral development. Democracy stems from the bottom up. It is an attitude, a culture. People have to make these values their own, get accostumed to them, in order to achieve a stable democracy. And at the same time, the efficiency of the rule of law is not only measured by simply following the text of the law, but also is expressed in how people feel in the day-to-day, in their daily lives, in their relationships with others. It is expressed through mutual respect and order.
It follows then that formal institutions are not a cause, but an effect. They are a consequence; a reflection of fundamental principles and values, whose construction must rise from the bottom, from the fiber of society. Institutions, whatever type they may be, are built, are risen, atop this base. If the base is not solid, institutions fall. That is the fundamental principle of institutionalism.
First, conditions must be met and then institutions must be built. It is pointless to create an institution if conditions do not exist for it to work.
If there is something in common between all these mentioned historical experiences is that property rights are pivotal for development, and that is why FUNIDES is concerned with this topic. To guarantee private property is crucial, since only those who have these rights (of possession, enjoyment and free disposal of property) are willing to invest and increase productivity. There is a close relationship between that intimate sense of assurance in one’s own property rights, which President Coolidge mentioned, and a country’s productivity.
And, on the other hand, as James Robinson rightly points out, there will always be a correlation between the political environment (which creates the conditions) and the way the economy performs. China is a clear example of this. Of how the government’s vision and public policies change the economic course of a country. The results of this transformation process, implemented by Deng Xiaoping in the late 1970’s, are unquestionable. This transformation is the product of a clear understanding between this relationship between the political environment and economic development, expressed by Xiaoping when he says that “Neither economic planning is exclusive of socialism, nor [free] market is exclusive of capitalism. It is about adopting the best from each system.”
Xiaoping and his allies planned a type of political revolution which would change dramatically the leadership and direction of the Chinese Communist Party, which led to economic reforms. This is how politics determined that communism should move on to free market initiatives, which transformed the Chinese economy into the second world power.
On the other hand, and returning to Nicaragua, there is something we cannot overlook. We must be aware that we are in the juncture of a change of an era. We are moving from the industrial era into the “information” era.
This is one of the reasons why, sometimes, some of our institutions do not work. Because they have not adapted, they are outdated. Political institutions normally fall behind, because they are slow by nature to evolve. It happens in every country, not only in Nicaragua. A small country like ours, which tends to copy others, does not have the capacity to take that institutional leap forward, we are not in the capacity to make abrupt structural changes.
In conclusion, we have to be clear not only on the importance of institutionalism, but also on the types of institutions that we need. We have to review our institutional systems to adjust them to the times, but we also have to be cautious with innovation. And more importantly, we have to stress the importance of property rights and legal assurance throughout history. They are still fundamental for the social and economic development of every country.
