Crabs in a Bucket

• Author: Raghuram Rajan
• Position: Economic Counsellor and Director of the IMF's Research Department

Why constituencies are as important as constitutions in battling underdevelopment

Why do poor countries remain stubbornly underdeveloped? A growing consensus in recent years suggests the answer is that poor countries lack the necessary institutions or, worse, have the wrong institutions for economic growth. Indeed, recent empirical work suggests that better institutions seem to accompany both economic growth and greater stability. For example, a country with a responsible legislature and a sound tax system can respond to an adverse shock to revenues by raising taxes instead of by printing money. If the country has good institutions, it survives the shock by allocating the burden to those who can best bear it and in a way that least impinges on production; the country with bad institutions cannot pass responsible legislation and succumbs to hyperinflation, which not only reduces growth but also imposes the greatest burden on the poorest members of society.

That institutions matter cannot, by itself, explain underdevelopment. Development would then be simply a matter of setting up the right institutions. We need another explanation-perhaps that bad institutions are persistent. One reason may be that they are really hard to change; they are ingrained in the national psyche. Some former colonies have an easy culprit: their colonial masters and the institutions of exploitation they left behind. Alternatively, bad institutions may be self-preserving because they create their own support. For example, laws biased toward the elite will strengthen the power of the elite, who, in turn, will ensure that those laws aren't changed.

These two reasons for why bad institutions persist offer radically different views of development. The first offers little hope. We're the product of our history, and history can't be changed. It leads to a culture of blame where all evil lies in the colonial past and where current generations bear little personal responsibility. The second offers perhaps too much hope: change the institutions to unleash a virtuous cycle of growth and development. Change typically will have to come from outside, since internal structures are self-perpetuating. So, for example, the outside world must stop wars, impose democracy, provide aid, and fight corruption to set a country on the path to sustainable development. Given how bleak the first view is, it's no...