Institutions Matter, but Not for Everything

• Author: Jeffrey D. Sachs
• Position: Director of the Earth Institute at Columbia University
• Pages: 38-41

The role of geography and resource endowments in development shouldn't be underestimated

Page 38

The Debate over the role of institutions in economic development has become dangerously simplified. The vague concept of "institutions" has become, almost tautologically, the intermediate target for all efforts to improve an economy. If an economy is malfunctioning, the reasoning goes, something must be wrong with its institutions. In fact, recent papers have argued that institutions explain nearly everything about a country's level of economic development and that resource constraints, physical geography, economic policies, geopolitics, and other aspects of internal social structure, such as gender roles and inequalities between ethnic groups, have little or no effect. These papers have been written by such respected economists as Daron Acemoglu, Simon Johnson, and James Robinson; Dani Rodrik, Arvind Subramanian, and Francesco Trebbi; and William Easterly and Ross Levine.

Indeed, a single-factor explanation of something as important as economic development can be alluring, and the institutions-only argument has special allure for two additional reasons. First, it attributes high income levels in the United States, Europe, and Japan to allegedly superior social institutions; it even asserts that when incomes rise in other regions, they do so mainly because of the Western messages of freedom, property rights, and markets carried there by intrepid missionaries intent on economic development. Second, according to the argument, the rich world has little, if any, financial responsibility for the poor because development failures are the result of institutional failures and not of a lack of resources.

The problem is that the evidence simply does not support those conclusions. Institutions may matter, but they don't matter exclusively. The barriers to economic development in the poorest countries today are far more complex than institutional shortcomings. Rather than focus on improving institutions in sub-Saharan Africa, it would be wise to devote more effort to fighting AIDS, tuberculosis, and malaria; addressing the depletion of soil nutrients; and building more roads to connect remote populations to regional markets and coastal ports. In other words, sub-Saharan Africa and other regions struggling today for improved economic development require much more than lectures about good governance and institutions. They require direct interventions, backed by expanded donor assistance, to address disease, geographical isolation, low technological productivity, and resource limitations that trap them in poverty. Good governance and sound institutions would, no doubt, make such interventions more effective.

When economic growth fails

When Adam Smith, our profession's original and wisest champion of sound economic institutions, turned his eye to the poorest parts of the world in 1776, he did not so much as mention institutions in explaining their woes. It is worth quoting at length from Smith's Wealth of Nations on the plight of sub-Saharan Africa and central Asia, which remain the world's most troubled development hot spots:

All the inland parts of Africa, and all that part of Asia which lies any considerable way north of the Euxine and Caspian seas, the ancient Scythia, the modern Tartary and Siberia, seem in all ages of the world to have been in the same barbarous and uncivilised state in which we find them at present. The Sea of Tartary is the frozen ocean which admits of no navigation, and though some of the greatest rivers in the world run through that country, they are at too great a distance from one another to carry commercePage 39 and communication through the greater part of it. There are in Africa none of those great inlets, such as the Baltic and Adriatic seas in Europe, the Mediterranean and Euxine seas in both Europe and Asia, and the gulfs of Arabia...