Institutions in developed & developing countries

Institutions in developed & developing countries

Institutions have been known to form the backbone of the development edifice of a nation. The difference between the current per capita income in the developed and the developing countries invariably happens due to lack of institutions or those in formation and implementation of laws.

Democracy and the regulators

Banking institutions & regulators constitute the pillars that hold the system, a country depends on. These balance the exchange rate, maintaining a monetary policy such that interest rates are in a range that keeps excessive or too low an inflation number at bay.

Reserve Bank of India, IRDA, Securities Exchange Board of India (SEBI) are the regulators that are entrusted with the task of creating laws that are ratified by the legislature & implementing the laws that enable a fail-safe functioning of the web of financial institutions that are heavily invested into each other. Securitization of assets was seen as a method of spreading or dividing the risk associated with an asset. Unfortunately though these assets from non-banking institutions were not regulated and promised interest rates that could not be paid when the system experienced a cascading effect of stressed or non-performing assets.

Without further digressing from the topic, these regulators that prevent the fall of organizations that are then dubbed the ‘too big to fail organizations’, have transformed from institutions of minor importance to those that they have evolved into today wherein the systems can be bailed out through a buy-in or a buy-out by Government institutions.

In  near seven decades of independence, our democracy has flourished whereas it has never really taken off in the neighboring countries. China too is no exception as the emphasis has been on building systems that control and regulate, even though these were dictatorial and cannot be appreciated. It forms the global commodities and manufacturing base which cannot be said of African countries where colonial powers and the subsequent dictators never made an effort towards initially propping up and supporting and then allowing them to flourish on their own account.

Income per capita: since Independence

Income per capita in countries like India or others that have previously been on colonial rule is higher if European settlements existed in the country in 1900, there were constraints or an institution keeping a tab on power of the executive in 1900 or a democracy existed in these countries immediately post independence. This is as per a paper published by Acemoglu et al on ‘Colonial Origins of Comparative Development’.

These days it is the demographic dividend and the ability of a country to attract investment that is counted as a major factor that enables the increase in income per capita. Therefore, a Fannie Mae and Freddie Mac may have been bailed out and may have helped the buying of assets and Lehmann may have had to bite the dust but the systems as a whole remain in place. The recovery takes a few years but it does not suffer a permanent damage. Banks, businesses and currency of a country are inter-related as policies that support these egg the other in the three under consideration.  Institutions and per-capita income observed in economies today have their base in what existed in these countries almost a century ago.

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