“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.”<\/strong><\/p><\/blockquote>\n\n\n\n As a whole, institutions strengthen each other, but, in order for \nthem to be sustainable in the medium and long term, a favorable \natmosphere is required, which only political institutionalism may offer.<\/p>\n\n\n\n A few weeks ago, FUNIDES invited James Robinson to speak, who co-authored the best-selling book Why Countries Fail<\/em>.\n In this book, Robinson makes an interesting review of history, of how \nsome countries prevail and others do not. Robinson makes us see that \neverything relies on institutions, making a difference between inclusive<\/em> institutions (which are favorable to development) and extractive<\/em>\n institutions (which are not). However, the background message is that \nneither the economy nor economic institutions can work, without a \nsuitable political environment.<\/p>\n\n\n\n The Industrial Revolution in England in the XVIII century, which \nlater expanded to Europe and the rest of the world, would not have been \npossible without the Glorious Revolution of the XVII century, which laid\n the foundations for industrial development, consisting mainly in the \nconstitutional establishment and the respect of private property. This \nfirst revolution abolished absolutism, opening up the political system \nto pluralism and setting forth the bases for a republican democracy. \nWithout this political environment development would not have been \npossible. The English Industrial Revolution was a logical consequence of\n a political revolution.<\/p>\n\n\n\n Another historical example, very illustrative of how institutionalism\n affects development, is the case of the extraordinary economic upturn \nin the United States during the 1920\u2019s. President Calvin Coolidge, who \nwas one of the architects of that economic boom, said that there were \ntwo fundamental motors to move the economy forward: private property and\n fair competition. And President Coolidge himself explained these \nconcepts in his own words by saying that private property was not so \nmuch about having a title to a property, but about \u201c\u2026the intimate \nconviction that said property was guaranteed and protected by the \nState.\u201d And that fair competition consisted in there being \u201c\u2026no \nprivileges for anyone.\u201d<\/p>\n\n\n\n These historical experiences show us that democracy and rule of law \nare the ingredients for an integral development. Democracy stems from \nthe bottom up. It is an attitude, a culture. People have to make these \nvalues their own, get accostumed to them, in order to achieve a stable \ndemocracy. And at the same time, the efficiency of the rule of law is \nnot only measured by simply following the text of the law, but also is \nexpressed in how people feel in the day-to-day, in their daily lives, in\n their relationships with others. It is expressed through mutual respect\n and order.<\/p>\n\n\n\n It follows then that formal institutions are not a cause, but an \neffect. They are a consequence; a reflection of fundamental principles \nand values, whose construction must rise from the bottom, from the fiber\n of society. Institutions, whatever type they may be, are built, are \nrisen, atop this base. If the base is not solid, institutions fall. That\n is the fundamental principle of institutionalism.<\/p>\n\n\n\n First, conditions must be met and then institutions must be built. It\n is pointless to create an institution if conditions do not exist for it\n to work.<\/p>\n\n\n\n If there is something in common between all these mentioned \nhistorical experiences is that property rights are pivotal for \ndevelopment, and that is why FUNIDES is concerned with this topic. To \nguarantee private property is crucial, since only those who have these \nrights (of possession, enjoyment and free disposal of property) are \nwilling to invest and increase productivity. There is a close \nrelationship between that intimate sense of assurance in one\u2019s own \nproperty rights, which President Coolidge mentioned, and a country\u2019s \nproductivity.<\/p>\n\n\n\n And, on the other hand, as James Robinson rightly points out, there \nwill always be a correlation between the political environment (which \ncreates the conditions) and the way the economy performs. China is a \nclear example of this. Of how the government\u2019s vision and public \npolicies change the economic course of a country. The results of this \ntransformation process, implemented by Deng Xiaoping in the late 1970\u2019s,\n are unquestionable. This transformation is the product of a clear \nunderstanding between this relationship between the political \nenvironment and economic development, expressed by Xiaoping when he says\n that \u201cNeither economic planning is exclusive of socialism, nor [free] \nmarket is exclusive of capitalism. It is about adopting the best from \neach system.\u201d<\/p>\n\n\n\n Xiaoping and his allies planned a type of political revolution which \nwould change dramatically the leadership and direction of the Chinese \nCommunist Party, which led to economic reforms. This is how politics \ndetermined that communism should move on to free market initiatives, \nwhich transformed the Chinese economy into the second world power.<\/p>\n\n\n\n On the other hand, and returning to Nicaragua, there is something we \ncannot overlook. We must be aware that we are in the juncture of a \nchange of an era. We are moving from the industrial era into the \n\u201cinformation\u201d era.<\/p>\n\n\n\n This is one of the reasons why, sometimes, some of our institutions \ndo not work. Because they have not adapted, they are outdated. Political\n institutions normally fall behind, because they are slow by nature to \nevolve. It happens in every country, not only in Nicaragua. A small \ncountry like ours, which tends to copy others, does not have the \ncapacity to take that institutional leap forward, we are not in the \ncapacity to make abrupt structural changes.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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 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