Until very recently, the role of institutions in fostering or hindering economic growth was poorly understood. Four institutions especially important for economic growth and development are:
- Those pertaining to property rights
- Those pertaining to contracts and trust
- Those pertaining to governance
- Those pertaining to conflict resolution
Social Scientists argue about the question – are well-functioning institutions a cause of economic growth, or are they a result ? There are no settled answers to that question. But clearly, some institutions are corrosive to economic growth and development. Slavery, that “peculiar institution,” is one example. Inheritance laws in some nations another. For example, wives in some Middle East nation can inherit at most only half of an estate.
Institutions have been of prime importance in facilitating or impeding economic progress for at least two and a half millennia, beginning with early Rome. Economic historians now understand the importance of both formal institutions, such as those pertaining to property rights and informal institutions. The latter include networks among traders, traditional arrangements for social conflict resolution. Such institutions played a major role in establishing Roman prosperity. As a result, overall standards of living for Roman citizens in 200 C.E. were just about as high as that of 17th and 18th Century Europe. Rome had better paved roads, better sewage disposal and better water supply than did the malodorous capitals of Western Europe in 1750, 1500 years later.
The institution of property rights turns out to be especially important. Everywhere, nations have found that a lack of well-defined property rights, or frequently in the past in socialist nations, government ownership of all property rights, is rarely consistent with efforts to make sustained inroads against poverty. And growth favoring property rights do not always have to be vested in individuals . They can be vested in groups , but they must be well defined.
Changes in property rights contributed to China ’s very rapid economic growth of near 10 percent since 1980 In China property rights in rural areas were still in some flux by 2014. . From 1949 to about 1980, Communist ideology prohibited private land ownership. Farmland was exclusively owned by the village collective. Then in 1984, farmers in mass regions were allowed to lease or sell their right to farm. Some rights to agricultural land were returned from the collective to the household level. Agricultural production increased sharply within a few years. In many urban areas over the past decade , ownership of housing has passed from government to private households. As a result the new owners are increasingly insisting on clean environments, and less pollution. The Government in China in 2014 was considering new revision to property rights to allow more private ownership of urban, not rural land.
Lack of well-defined property rights to agricultural land in Indonesia hobbled growth in agricultural productivity for decades. As we shall see in a later Module, in Ghana, the transfer of property rights to that nation’s formerly rich rain forests from traditional tribal owners to the central government in the 1960’s played a significant role in the later devastation of that nation’s tropical forest endowments. The vesting of the ownership of forested lands in the central government has also been a significant factor underlying rapid deforestation in Ivory Coast and Indonesia, while ambiguous property rights led to similar results in the Brazilian Amazon until very recently.