By N. S. Cooray –

Prof. N. S. Cooray

President Gotabaya Rajapaksa explained the government’s priorities in his address to the inaugural session of the new Parliament. He encouraged 225 members to go out-of-the-box thinking policies to revitalise the economy and bring progress. He also emphasised the need to have a new Constitution and to illuminate fraud and corruption. This article aims to bring institutional and governance perspectives to go out of the box thinking and bring wellbeing for the Sri Lankans.

Governance and the progress are interrelated

Recently many newspapers and media have also reported grave concerns about institutions and governance issues in the country. A statement by Justice Minister Ali Sabry said that “four state institutions–the Police, Prisons, Government Analyst’s Department and the Registrars of Courts–were so corrupt that the country faced a daunting challenge to rectify the situation.” Referring to explosive reportage of the Police Narcotics Bureau (PNB), Minister Sabry briefly discussed how law enforcement authorities, Prisons, the Government Analyst’s Department, and the Registrar of Courts contributed to an unprecedented deterioration of law and order. The minister also mentioned that the Registrars of Courts were among the most corrupt in the country. Recently, a group of lawyers engaged in a silent protest outside the Colombo Chief Magistrate’s claiming that the directive given by the Attorney General to the Colombo Crimes Division to obtain an arrest warrant against an interdicted High Court Judge was unlawful. Additionally, a former member of parliament was arrested with four mobile phones and hard disks containing call recordings exceeding 150,000. Some of which calls were connected with the members of the country’s judicial system. These problematic incidences are linked to the country’s legal system, one of three power centres under political institutions, namely the legislature, the executive, and the judiciary.

These institutions are supposed to strengthen the democratic system of governance. The Judiciary has the responsibility to investigate whether the legislature and the executive discharge the duties and responsibilities allocated them are following the constitution. Some other recent incidences, including the bond scam of the Central Bank and Easter Sunday attracts, provide ample evidence to prove where our institutions have utterly failed to implement the rule of law and maintain the peace and security of the country. Because of these reasons, it is quite difficult for citizens to fully trust the behavioural patterns of institutions that are supported by tax payer’s money.

We also read in media that the President had to instruct the acting Inspector General of Police to enforce and carry out their duties equally to all citizens of the country without fear or favour? Why does the President have to instruct like that? It is because the law enforcement institutions have failed to carry out their duties in line with established rules, damaging the economy and citizens’ liberty.  Sri Lanka has achieved many things for her credits since independence, while some areas need to be corrected. The institutional mechanism is one such area that needs to be reformed. The COVID-19 has created a disastrous economic impact on the country, but it has also created tremendous opportunities to undertake necessary institutional reform of the country. Moreover, the recently elected government has received a 2/3 majority in parliament. This is a golden opportunity to either destroy the country or bring it to the next level by establishing inclusive institutional mechanisms.

What are extractive institutions and inclusive institutions?

An institution is a structure in which people cooperate and influence how people behave, make decisions, and interact with each other. There are economic, political, and value institutions with their values and purpose. The political institutions are responsible for political stability, political competitiveness, and constraints on politicians, professional, and politically independent bureaucracy. The economic institutions are responsible for maintaining market perfection, rule of law, and corruption control. The value institutions enhance trust and openness of the society, self-initiatives, and individualism and post materialism values. The three types of institutions mentioned above can also be divided as extractive and inclusive institutions. In extractive institutions, a small group of individuals use their effort to exploit the resources. In the inclusive institutions, more individuals are involved in the governing process, and therefore, the exploitation is minimal. The following figure illustrates the characteristics of inclusive and extractives political and economic institutions.

Nexus of Institutions, economic growth, and the wellbeing of citizens

One of the ten economic principles says that the standard of living (or wellbeing) depends on the country’s production. Politicians and policymakers of any country are interested in improving the welfare of citizens by increasing production or growth. Therefore, nothing matters more in the long-term prosperity of citizens than its economic growth. Many have argued that economic policies, geography, culture, or value systems affect growth. Forget grand theories that try to explain the variations in prosperity between countries. The truth is far simpler. What really matters are economic and political institutions. This is what Acemoglu and Robinson, in their book “Why Nations Fail: The Origins of Power, Property, and Poverty” (2013), explain beautifully.

How are institutions linked with investment and growth? To increase production or economic growth, it necessary to increase productivity or output per worker, which tells how much one person can produce given the resources. Productivity depends on technology, physical capital, human capital, and natural capital (or natural resources). Investments can increase all these capitals. The economic growth of a nation is determined by the allocation of its resources for investment or consumption and stable political power, which depends on the structure of a nation’s political institutions. The outcome and the structure of rules, regulations, principles, and values of political institutions depend on many factors, including the nature of political regimes, whether democratic or non-democratic. Acemoglu argues that elites transfer political power to the citizens in democratization and enhancing social stability. Inclusive economic institutions create powerful forces towards sustainable economic growth by encouraging favourable business environment for investment, equal income distribution, and pluralism. This goes as a virtuous circle. However, extractive institutions generate corruption, deteriorate the business environment because of the heavy concentration of economic and political power on a few hands. This process goes as a vicious circle. The following figure shows how inclusive institutions enhance the welfare of citizens.

Why do the Nations fail?

Why are some countries wealthier than others? Why do some countries proliferate while others seem stuck in a poverty trap? Why has North America developed than that of South America? People from Europe migrated to South America and North America at the same time. However, one can witness a significant difference in both regions in terms of development. The US has become the number one economy in the world, leavening Latin American countries far behind.

In the same way, one can ask why North Korea has failed while the South has achieved a lot? Why is the West German economy better than that of East Germany? Why has Sri Lanka not achieved its due status since independence? Why these massive gaps among the regions? The answer is the crucial role played by institutions. Acemoglu and Robinson believe that nations fail because they are being ruled by a narrow elite group that has organised societies for their benefit at most people’s expense. The political institutions are vital for economic development because political institutions govern economic or financial institutions. The most successful countries have inclusive institutions.

Source: Balatsky Ye V. (2017) The Concept of Inclusive Institutions and Its Applications

Way forward

Sri Lanka has been described as a developing country for many generations. Prosperity and poverty in countries aren’t predetermined destinies, stemming from culture or geography. Instead, the main reason why some nations do better than others is their institutional landscape. The nature of a nation’s institutions, whether they are inclusive or extractive, determines prosperity. Despite Sri Lanka’s remarkable progress in many areas because of her institutional building throughout the long and rich history, she still needs more inclusive institutions.

How to create inclusive institutions and empower them to achieve the newly elected government’s expected policy goals? There are several ways of doing that, including depoliticization, improving efficiency and discipline, creating appropriate division of labour at national and local government levels, respecting professionalism, maintaining the rule of laws, and applying new technologies when and where it is most needed.

What should political authorities do? They should be maestros in orchestrating interactions among influential stakeholders, including the business community, political elite, the military, clergy, and the media. The President should become a statesman who will think of the next generation, not the next election, and help create inclusive institutions at national and local government levels. It is not that difficult now to become a statesman because he has the necessary administrative mechanism under him. For example, the President appoints the Governors of nine Provinces, 28 Secretaries at Ministry level, 40 Secretaries at State Ministry level, 25 District Coordinating Committee Chairpersons, 25 District Secretaries, and 331 Divisional Secretaries. Let the 225 members of the parliament create an inclusive legislature and let members of the country’s judicial system be inclusive and carry out their responsibilities to investigate whether the legislature and the executive discharge the duties and responsibilities allocated to them under the constitution.

Let inclusive institutions run by people with vision, mission, passion, and willpower. We need to be a smart and modern nation with the state of the art of technology and oriental wisdom. As Acemoglu says, let’s create inclusive institutions to achieve the growth and development of this country. Inclusive institutions will encourage efficient resource allocation for investment and consumption by generating broad-based participation and harnessing markets, states, and civil society. The members of the Viyathmaga (Path of Intellectuals), a group of professionals and intellectuals, are part of the civil society. They should help create inclusive institutions through professionalism. The clergy also has a vital role in bringing the country’s value system, not necessarily through formal politics in the parliament.

*The writer is a Professor in Economics at the International University of Japan, Niigata, Japan, and the President of the Association of Sri Lankan Academics in Japan. This article is based on the keynote speech the writer delivered in the International Research Conference of SLTC 2020, organised by the Sri Lanka Telecom University Campus on 17^th June 2020.