{"id":4595,"date":"2020-02-20T21:32:27","date_gmt":"2020-02-20T20:32:27","guid":{"rendered":"http:\/\/melyakub.com\/?p=4595"},"modified":"2020-02-21T08:52:23","modified_gmt":"2020-02-21T07:52:23","slug":"musings-of-an-entrepreneur-of-gross-domestic-product-institutions-and-culture-in-a-developing-economy","status":"publish","type":"post","link":"https:\/\/melyakub.com\/?p=4595","title":{"rendered":"Musings of an Entrepreneur: Of Gross Domestic Product, Institutions and Culture in a Developing Economy"},"content":{"rendered":"\n

Summary:<\/strong> I want to suggest that the bane of underdevelopment in many countries is not necessarily the lack of institutions as is often argued by many professionals and commentators. If anything, many developing countries are actually \u2018over-institutionalised\u2019, leading to wieldy bureaucratization of otherwise simple issues and processes that leads to increased transaction costs. Furthermore, whilst most factors leading to the creation of national wealth are sufficiently understood by economists and policy makers, one factor is not getting the desired attention it deserves: culture. Indeed, there is actually a general acceptance that culture plays some role in the productivity of a people. However, as <\/em>David Landes(1) puts it, there is a discomfort with what can be construed as implied criticism on a particular culture and this has discouraged broader public discourse. I think that is a grave error and those of us at the receiving end must understand culture and its dynamics on our productivity, efficiency and effectiveness beyond what is ‘comfortable and sensitive’. In addition to that, we must work to remove its dull edges without compromising on agreed fundamental values. I also think there are well-meaning, decent and respectful ways of necessary and productive discourses on culture.<\/em><\/p>\n\n\n\n

I am of the opinion that part of\nthe problem of development or lack of it in many so-called developing nations,\nlike Nigeria, is the not the lack of understanding of what development is but the\ndynamics of achieving it. This challenge is not helped by the fact that we are\nrelying on those who do not understand our context to not only define\ndevelopment for us but to dictate the ways it can be or should be achieved. In\nfairness to those people, they are only trying to help and are equally confused\nas to why the theories and models that work for them do not work for us. But\nthe onus remains ours to understand how we can step up our ways in a very\ncompetitive, even ruthless, global village.<\/p>\n\n\n\n

One of the first books that further fired my initial curiosity as to why certain countries develop while others stagnate is Erik Reinert\u2019s How Rich Countries Got Rich \u2026 and Why Poor Countries Stay Poor<\/em>(2) \u00a0But that has been an issue to economists for centuries earlier, which got Adam Smith to publish, in 1776, his \u2018An Inquiry into the Nature and Causes of the Wealth of Nations\u2019<\/em>. Other scientists have gotten increasingly interested in the subject over the last two centuries. By now, most economists believe this is almost entirely and fully settled issue. Settled in the sense that the fundamentals of national wealth creation are sufficiently understood. <\/p>\n\n\n\n

In understanding the factors that\naffect the economic development of nations, approaches have been made from\ndifferent perspectives such as geography, biogeography, demography and economics.\n<\/p>\n\n\n\n

Geography, Biogeography and\nDevelopment:<\/strong> Hibbs and Olsson(3) agree with popular economic theories that\n\u2018emphasize the accumulation of human and physical capital as well as the\nsuccessful adoption of state-of-the-art technologies as the main explanations\nof variation in economic productivity<\/em>\u2019. However, \u2018Capital accumulation\nand technology adoption are now commonly viewed as proximate variables molded\nby the political institutions essential for the smooth functioning of markets,\nsuch as honest and efficient government based on the rule of law and promoting\nimpartial enforcement of contracts…<\/em>\u2019 But the scholars went further to\nargue that geography and biogeography were critical in determining the\nNeolithic transition from a nomadic hunter-gatherer to sedentary agriculture\nsome ten thousand years ago. This transition was responsible for population\ngrowth as well as the rise of non-food-producing specialists that necessitated technological\ngrowth and the industrial revolution that followed. The transition, they\nargued, occurred at different times in different regions of the world. They\nconcluded that \u2018…biogeographic initial conditions decisively affected the\ntiming of transitions to agriculture, and through that route they affect\ncontemporary levels of national prosperity<\/em>.\u2019 But while this argument may\nexplain the commencement of the transition in various societies, it doesn\u2019t\nsuffice in explaining  the widening gap between\nthose societies that transited early and those that did later in spite of the\nspontaneity of current information flow.<\/p>\n\n\n\n

Institutions and GDP: <\/strong>The gross\ndomestic product, GDP, per capita, is generally used as an indicator of the\naverage economic well-being of the people of a country. We can maintain this\nyardstick even as we know that two things vary from one country to another.\nFirst, the economic value<\/em> of a thousand US dollars in the United States can\nbe vastly different from its Naira equivalent in Nigeria. Secondly and not\nunrelated to the first, people of different nations and cultures may have\ndifferent perceptions as to the social meaning <\/em>of the same material\nwealth. This means the Congolese with a thousand US dollars bank balance may\nfeel differently about it than the French with the same amount in their bank. Nonetheless,\nwe shall focus on the absolute amounts. We shall also be ignoring the\nin-country difference in incomes between different groups and simply focus on\nthe inter-nation comparisons. <\/p>\n\n\n\n

The interesting challenge about\nwealth of nations that we all confront was summed up by Douglass C. North(4)\nwhen he said, \u2018Five or six hundred years ago, everyone was poor by present\nstandards, but the difference between countries was much smaller. What has\nhappened is that some countries, beginning with the Netherlands, then England,\nthen some Western Europe, and then the overseas colonies of Britain, developed.\nThe gap between those countries and others widened and is still widening today.\nIn fact, living standards in sub-Saharan Africa have been falling for most of\nthe last twenty-five years, and so the disparities not only are immense but are\ngetting worse. \u2026\u2026 Now this is puzzling; and it is puzzling because we know what\nmakes rich countries rich and what makes (other countries) poor. There is no\nsecret to it all\u2026..\u2019<\/em><\/p>\n\n\n\n

Perhaps there is!<\/p>\n\n\n\n

In discussing the wealth of\nnations, a recurring factor is institution. Scott A. Wolla(5), explains that economists\nconsider institutions \u2018as the rules of the game that create incentives for\npeople and businesses<\/em>\u2019. The general argument is that if people and\nbusinesses are allowed and able to earn profit from their efforts then they\nhave an incentive to \u2018not only produce but also to continually improve their\nmethod of production<\/em>.\u2019 Obviously, the corollary is that if people and\nbusinesses are not incentivized, their production capacity will diminished or\nbe entirely lost. <\/p>\n\n\n\n

Harvard\u2019s Samuel P. Huntington(6)\nexplained how in the early 1960s Ghana and Korea were, by and large, comparable\nin terms of income per capita as well as structure of production and foreign\naid. However, thirty years on and the contrast between the two nations is\nclearly pronounced. According to him, culture had a major role in explaining\nthe difference. He said, \u2018South Koreans valued thrift, investment, hard\nwork, education, organization and discipline. Ghanaians had different values.<\/em>\u2019<\/p>\n\n\n\n

Year                                   2018                                  1960<\/strong><\/p>\n\n\n\n

Country                            Current US$                     Current US$<\/strong><\/p>\n\n\n\n

Ghana<\/strong>                               2,202                                 183<\/p>\n\n\n\n

Nigeria<\/strong>                              2,028                                 92                        <\/p>\n\n\n\n

South Korea<\/strong>                     31,362                               158<\/p>\n\n\n\n

Malaysia<\/strong>                           11,373                               234                     <\/p>\n\n\n\n

(Source: World Bank GDP data)<\/p>\n\n\n\n

How do countries grow their per\ncapita GDP?<\/strong> Except for a few countries with, at least temporarily, a\nnegative population growth rates, we can assume that populations of most countries\ngrow even if only marginally over time. This means a positive and sustained per\ncapita GDP growth is only possible if the rate of growth of production outpaces\nthat of population. In other words, to become richer, a nation must continue to\nproduce more (output) per person.  <\/p>\n\n\n\n

Economists also teach us that to\nachieve any level of production at all, a nation needs the three so-called\n\u2018factors of production\u2019 viz; natural resources, labour, and capital\nresources.  But in addition to that, the\nTotal Factor Productivity, TFP, which loosely refers to the skills of the\nlabour and the usefulness of the capital resources needs to be positive. This\nmeans that for two hypothetical countries with the same factors of production,\nthe one with a higher TFP will be more productive and therefore richer over a\nperiod of time. <\/p>\n\n\n\n

Given the foregoing, investment\nin new technologies and in human capital development is key to creating wealth\nin a nation. But in addition to that, North(4) argues that another fundamental\nfactor to the creation of national wealth is incentives: \u2018incentives for\npeople to invest in knowledge, to invest in new technology, to build efficient\nfirms\u2026.<\/em>\u2019. This supports Wolla\u2019s incentivization position as well.\nUnfortunately, in poor countries, the cost of transactions is very high because\nof \u2018\u2026.the rules of the game that define the way the society works \u2013 the\ninstitutions.\u2019 \u2026 \u2018We must, then, understand what institutions are, and why they\nwork or do not work.<\/em>\u2019   <\/p>\n\n\n\n

North further explained how institutions\nare, first, the \u2018formal rules of the games<\/em>\u2019. These include the rules and\nlaws that are written to formalize processes and procedures. But beyond that,\ninstitutions are also intrinsically composed of the informal norms and\nbehaviors. \u2018We live by informal constraints, conventions, codes of conduct<\/em>.\u2019\nAnd that \u2018Informal norms are a lot tougher to deal with because it is hard\nto define them, hard to measure them, and hard to see how they work.\u2019<\/em><\/p>\n\n\n\n

What can we conclude so far?<\/p>\n\n\n\n