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How is poverty linked to institutions?

Many researchers have analyzed the relationship between a country’s institutions and their rate of poverty. For example Tebaldi & Mohan[1] find that economies with developed institutions, meaning for example good infrastructure, robust systems to control corruption, effective governments and stable political systems, will have a better chance of creating conditions in their countries to foster economic growth, minimize income distribution conflicts, and reduce poverty.

Countries with more developed institutions, for example systems for expropriation laws and regulations of property rights, have a tendency to invest more in physical and human capital. These factors  are important for the development and solidity of a country, and can be used more efficiently to increase their country’s level of income[2]. It follows that countries with poor institutions do not have the same opportunities to create economic growth and increase their income levels. Often countries with a high poverty rate get stuck in a form of “resource or poverty trap”, where they neglect the tools they have to evolve. For some reason they are not able to extract the resource benefits.

In some countries, it might be the case that the heads of state often don’t want to improve the country’s institutions because they use the poor institutions as a means to extract money and resources for their own personal gain. Previous presidents, for example Mobutu Sese Seko in Kongo, Sani Abacha in Nigeria and Zardari in Pakistan, have deliberately withheld large sums of money from their countries. These money could have been used to enhance their countries’ institutions, but instead they hid huge amounts of money in tax paradises. It is estimated that Mobutu Sese Seko (president from 1965-1997) in Kongo stole 15-20 % of the national budget every year in the 1970’s. He hid the money in tax havens around the world, and by his doings the average income per capita for the population of Kongo in 1992 was half of what it was in 1960 before Seko’s reign began. Several poor countries have experienced something similar, the outcome being that they are robbed of a functioning political and legal system and developed institutions.

To have a well-functioning society we need healthy and fair institutions. Unfortunately, some countries suffer from bad leadership and a lack of development that might have helped to push them out of poverty.

 

Lene Hole Didriksen


[1] Edinaldo Tobaldi & Ramesh Mohan (2010), Institutions and Poverty, Journal of Development Studies, Vol 46, No. 6, 1047-1066

[2] Acemoglu, Johnson & Robinson (2001), The Colonial Origins of Comparative Development: An Empirical Investigation, The American Economic Review, 1369-1398

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Author: studentnovasbe

Master student in Nova Sbe

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