Wednesday, September 23, 2009

The Power of the Poor... and institutions

The institutional framework in developing economies blocks economic opportunities for the world's poor. As the following video argues, a wall of paperwork stands between the poor and genuine economic opportunities.

The video is hopeful: The world's poor are an untapped resource, which is the key to ending poverty.

But the fact remains they are still excluded from the formal economies by a wall of paperwork. Burdensome regulations push well-meaning people into informal economies where the government offers no legal protection. If the government won't stand behind you (or worse yet, wants to take the fruits of your labor), what are your incentives for productive activity?

To mitigate the cost of expropriation, citizens in informal economies either produce less and don't save or expend effort on unproductive activities that make it difficult for the government to take their savings. In either case, citizens fearing expropriation are poorer on account of being excluded.

On this observation, the solution is obvious: simplify the complicated struture of the institutions. That will encourage the world's poor to join in the formal economies of the world. With protection for their private property, the world's poor can tap their own resource, and thereby, achieve prosperity.

That solution sounds simple, but it is not. In Institutions, Institutional Change, and Economic Performance, Douglass North explains that institutions evolve organically and incrementally over time. Moreover, a country's institutions are no accident. Institutions are a product of history, and in many cases, institutions are formed at the will of the country's elite. As a result, institutions are doggedly persistent. This nature of institutional change requires that reformers work within the institutional framework of underdeveloped countries.

Change has to come from within, but there is promise. For example, the National Institute for Judiciary Quality (NIJQ) is streamlining judicial institutions in Brazil. Surprisingly, the legal system in Brazil is so complicated that even some judges don't understand how bad it has gotten. Simple civil court cases that require several hours of work languish for months in courts, and contribute to the paper wall that excludes many from the formal economy.

The NIJQ works from within Brazil to reduce legal paperwork and expedite the legal process. They educate judges, and they push for a simpler legal structure, and importantly, their efforts come from within the legal system. As North would predict, the NIJQ's efforts are progressing slowly, but the NIJQ is a good first step toward reducing the size of the paper wall.

Informed people who work within the institutional framework of underdeveloped nations are the key to unlocking the potential of the world's poor. By encouraging organizations like NIJQ, we lay the foundation for improving the lives of the world's poor.

The solution is not simple, but it is not fundamentally misunderstood either. Do your part by tuning in to learn more. The Power of the Poor airs October 8, 10 PM ET (or check your local listings) on PBS, and tell your friends. We can improve institutions, one step at a time.


  1. Note: my source of information on the NIJQ came from meeting one of the people who works there (Rodrigo Santos) at The Ronald Coase Institute's 2008 Philippines Workshop ( Rodrigo is a passionate individual who cares very much about improving the economic institutions in Brazil.

  2. Cool Article Tony! Thank you!


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