Role of Institutions in sustaining broad based growth

To sensitize on the importance of the role of institutions in sustaining broad based growth, the Royal Institute of Management (RIM) and QED consulting group conducted a seminar on September 17, here in the capital.

In his welcome address, President of Bhutan Chamber for Commerce and Industry (BCCI) Ugyen Tshechup Dorji shared the concept of institutions in a Bhutanese context. Citing examples of institutions such as the court of laws, patent offices and central banks as the representatives of the rules we have set for ourselves as a functional society, be it on recognizing a person’s rights over a piece of land or punishing criminal behavior. He also stated that the government as an institution plays an integral role in maintaining order and cooperation among economic sectors by enforcing the same set of rules without discrimination.

The institutions can also be informal that requires no law just like a young man giving up his seat on a bus to an elderly person. ”Institutions, then, are a manifestation of what we as a society agree is desirable, or proper, or right, or fair,” Ugyen Tshechup Dorji added.

Ugyen Tshechup Dorji also shared that institutions helps in building and maintaining order and trust in a community, thereby reducing uncertainty by creating stable and efficient structures for human activity.

On the prevalence of large informal economy in developing nations that has caused difficulty in taxation and regulation he said informal businesses exist because the cost of becoming formal being too prohibitive such as unfriendly licensing processes and unfair application of rules by regulators dissuade them from obtaining legal status.

Easier accessibility for people to do businesses, the president said shall encourage more people to do businesses and henceforth promoting a vibrant entrepreneurial spirit and lower the unemployment rate.

“All institutions play a role in facilitating economic growth directly or indirectly,” the BCCI President said. Citing examples of the Election Commission of Bhutan (ECB), Anti-corruption Commission (ACC) and Royal Audit Authority (RAA), he said ECB enforces laws to meet the stable and peaceful transition of government thereby attracting potential foreign investors. The ACC and RAA serves as building level of trust among the Bhutanese public and elected leaders duties and efficiency of spending of tax money.

“Bhutan must adopt a far more coherent and long term approach when it comes to pursuing broad-based growth”, he said.

“Equal growth in all sectors or all regions is not possible. High growth without some environmental impact or a rise in income inequality is also not possible,” the BCCI President said.

The Regional Director (South Asia) of the Friedrich Naumann Foundation in New Delhi, Siegfried Herzog talked on the role of institutions in sustaining broad-based growth giving some examples from Germany.

Herzog said Germany’s wealth did not come from colonialism but from strong institutional development framework that allowed the country to recover from various severe disasters.

He said the inefficient institutions can hinder economic growth by restricting the emergence of markets, allow the emergence of oligopolies and monopolies, and hinder capital formation by inefficient titling and securitization.

With regards to the development of institutions in Germany and transferring of property rights, Herzog said the land tilting systems were developed in the middle ages and the feudal property rights were abandoned before the industrial revolution. The land markets were largely efficient as explosive urbanization was managed by private developers and after unification, East German land privatization attempted restitution.

On the rule and infrastructure existence in Germany, Herzog gave insights on development of independent courts during the 18th century where professional bureaucracy mirrored as monarchs relied on competent bureaucracy to undermine nobility and keep middle classes docile by providing good governance and order.

Herzog also shared his perspective on the experience of different countries and cultures, drawing on his experiences from living and working in Germany, India and the Philippines.

Siegfried Herzog is the Regional Director (South Asia) for the Friedrich Naumann Foundation in New Delhi. He has also served as the head of the foundation’s Asia Department in Potsdam, Germany and the resident representative in the Philippines.

Herzog’s previous research efforts include a study of the framework conditions required for individual investment in Bangladesh and informal credit markets, also in Bangladesh.