It’s the institutions, stupid!


The above title is a riff on the famous James Carville quote, which sums up his understanding of what’s critical to a successful US presidential run. Just so, I take Carville’s lead, and (maybe blithely) try to distill something critical to an understanding of country “well-being”, as it were, and corresponding levels of country or sovereign risk.

As you can infer from the title, institutions must be important. When we think of institutions, we picture Doric columns, or presiding judges, or ranks of conservatively dressed officials addressing the people’s business. These of course are the props and means of institutions, but they do not comprise what institutions actually are.

Institutions – a country’s institutions – guide political, economic, legal, and for that matter, social behavior. Institutions are the agreed rules – “laws” – by which a country’s citizens lead their lives. When those institutions are clear, equitable, and impartially enforced, generally “good things happen” and the social contract is a robust one.

Unfortunately, in many instances and throughout much of human history, country institutions – certainly the political ones – are neither equitable, nor really that clear, nor that impartial. About this cruel reality, two social scientists, Daron Acemoglu and James A. Robinson, wrote some years ago very a thoughtful book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty”.

The authors spell out a critical divide, one distinguishing “inclusive” institutions from those that are “extractive”. Inclusive institutions are those that apply to everyone – and they are impartially applied.

Economic and political institutions that Acemoglu and Robinson describe as “extractive” are those that are molded and applied in a parochial way. They are tailored to benefit elites perhaps, or incumbents, or others that derive rents from them. Such is the way of human nature that extractive ones are ones we see often, as noted. Another insightful observer, Rachel Kleinfeld, recently wrote a book, “A Savage Order: How the World’s Deadliest Countries Can Forge a Path to Security”, which describes how, sadly for too many countries, violence – what she terms “privilege violence” develops as a necessary concomitant to sustain “extractive” institutions that benefit the few.

So, it really is the institutions…, (you supply the epithet). Without sound ones supporting our lives, trust becomes brittle, creativity becomes stunted, and even our concept of time – the breadth and imagination we allow ourselves to consider what we can do, and become – becomes compromised. I recommend both books.

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