This approach categorises institutions along of range of general rules (for example, political, legal, social institutions), to specific rules (for example, electoral rules, rules affecting legislative bargaining). This perspective focuses on a comparative
analysis of the outcome or effect of institutions. This approach tends to focus primarily on the political rules that constrain government action or self-enforce government choice (Persson & Tabellini, 2003). It uses game theory to determine the relevance of different political rules, including the choice of polity.
An examination of the extant literature reveals various categorisations of institutions. This section will now explore the implication of adopting the
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macrosystemic approach to categorising institutions. ‘Good’, ‘bad’ and ‘weak’ are used by scholars in reference to their description of the efficiency of institutions within the economic system (Acemoglu, 2006; Aisen & Veiga, 2013; Tebaldi & Elmslie, 2013; Adams-Kane & Lim, 2016; Afonso & Jalles, 2016). Acemoglu and Robinson (2012) devised the terms ‘inclusive’ and ‘extractive’ to describe whether institutional frameworks encourage economic activity, technological development and knowledge creation and the diffusion of political power.
3.4.1.1 Institutions categorised as ‘good’, ‘bad’ or ‘weak’
Adopting a macrosystemic approach, it can be logically concluded that ‘good’ institutions are efficient institutions that cause better decision making and fill the gap of information asymmetry. When institutions are ‘good’, moral values and beliefs enhance cooperation among individuals within the society. Efficient institutions define the constraints within which individuals can carry out their activities; they enable transactions at a lower cost (Bhaumik & Dimova, 2014). ‘Good’ institutions are characterised by their ability to inter alia: i) ensure protection of private property rights and enforcement of contracts; and ii) filling the gaps of information asymmetry through providing opportunities to invest and retain control of the return on those investments, control of inflation and open exchange of currency (Diamond, 2012).
Using the same macrosystemic logic, it can be argued that institutions are categorised as either ‘bad’, ‘weak’ or ‘inefficient’ where rules are absent, suboptimal or poorly enforced. ‘Weak’ connotes failure (Acemoglu & Robinson, 2012). There have been empirical studies that suggest that ‘weak’, ‘poor’ or ‘bad’ institutions are the result of colonial and legal origins (Acemoglu et al., 2001; Glaeser, La Porta, Lopez-de-Silanes, & Shleifer, 2004), ethnolinguistic fractionalisation (Easterly & Levine, 1997), resource endowments (Sachs & Warner, 2001; Collier, 2010) and religious homogeneity (Glaeser, Scheinkman, & Shleifer, 2003). Alternatively, where rules do exist, they may also be counterproductive or impose excessive controls, also resulting in bad or weak institutions (Diamond, 2012).
Neither term is the absolute opposite of the other. Furthermore, ‘good’, ‘efficient’, ‘inefficient’, ‘weak’, ‘bad’ or ‘poor’ can only apply to ex post analysis of outcomes. The dichotomy between good, efficient, bad, weak, inefficient is by no means rigid and inherently depends on a subjective assessment of the resulting
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outcomes of economic actions. This raises questions of what specific form
institutions should take, to be good, bad, efficient, inefficient or weak and whether these would differ across economies based on their level of development, initial conditions or levels of investment in factor accumulation. Table (3.1) identifies empirical studies that categorise institutions as ‘good’; ‘efficient’; ‘inefficient’; ‘weak’; ‘bad’ or ‘poor’.
3.4.1.2 Institutions categorised as either ‘inclusive’ or ‘extractive’
Acemoglu and Robinson (2012) building upon the work of Engerman and Sokoloff (1997) also adopted a macrosystemic approach and identified a new categorisation to explain the difference between institutions that favoured inequality and those that favour the accumulation of wealth. Engerman and Sokoloff (1997) and Acemoglu and Robinson (2012) agree that ‘extractive’ institutional systems serve individual interests, rather than the economy as a whole, and inhibit economic opportunities. Extractive and inclusive institutions can only persist within a framework of certain types of political institutions (Acemoglu & Robinson, 2008; Acemoglu, Ticchi, & Vindigni, 2011). Extractive political institutions consolidate political power in the hands of a few, without constraints, checks and balances and give rise to extractive economic institutions. Likewise, inclusive political institutions allow expansive participation; impose restrictions, and constraints on politicians, producing inclusive economic institutions.
Acemoglu and Robinson (2010) opine that extractive institutions are the result of European colonialization. The colonization strategy determined the character of the rules established in individual colonies (Acemoglu & Robinson, 2008). These implanted rules ignored the pre-existing informal norms and
ideologies of these societies. Geography dictated the settlement strategy that would eventually give rise to the institutional frameworks imposed by the coloniser.
Acemoglu and Robinson (2008) maintain that these artificially imposed rules resulted in institutional frameworks that gave rise to structural inequality that supported accumulation of wealth, as opposed to accumulation of factors of production and inhibited efficiency within the economic system.
However, the distinction between extractive and inclusive remains arbitrary. Neither term is the opposite of the other. The opposite of inclusive is exclusive,
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while the opposite of extractive is insertion. These classifications are axiomatic, derived from observing actual outcomes that define them based on whether the economies were failing or not - ‘extractive’ institutions fail and ‘inclusive’ institutions do not. There is no sense of what should be ‘inclusive’ relative to ‘extractive’ from one society to another, other than exploring their historical context. However, factual examples do not support this distinction. There are examples of economies like China, Chile (1973 to 1990) and Taiwan with ‘non-inclusive’ political institutions that are exhibiting strong economic growth. Table (3.1) identifies empirical studies that categorise institutions as either extractive or inclusive.