The fact in order to deliver the same institutional function it does not require a particular institutional form. Likewise a particular institutional form can deliver very different functions in different country contexts. This challenge suggests that appearance can be deceptive. The distinction between formal and informal institutions illustrates this concern. Where easily observable formal institutions (f.e. written laws and regulations) come at odds with less tangible informal institutions (f.e. customs and traditions) it may be very difficult to enforce formal institutions. For example, a reformed legal and regulatory framework governing the exploitation of whichever type of natural resource can give rise to social conflicts if is not compatible with prevailing informal institutions, such as customary land use practices on which subsistence livelihoods are sustained.
If focus is narrowly placed on particular types of institutional forms, it can also undermine institutional diversity. Blue prints and best practice models that have guided institutional reforms across many developing countries, have tended to ignore that some formal institutional solutions work well in some contexts but are unsuitable for others. So if transferring particular forms of institutions across countries does not guarantee that the expected functions materialize, this suggests that it is not wholly irrelevant to consider how institutions relate to context characteristics and whether the formal institutions of a country political administrative system are internally consistent. For example, weak horizontal checks and balances in some democracies may be due to the fact that political systems have been modeled along a presidential system whereas administrative set ups have still retained features of a Westminster type democracy. New formal institutions may also have ignored older but persistent informal political institutions, such as traditional authorities at sub national levels. Fiscal decentralization programs have sometimes completely ignored the latter.
Another example where the adoption of special formal institutions has not achieved consistent results is the experience with natural resource funds. Despite them being at the top of the to do list for emerging mineral rich country,it was found that on average natural resource funds do not contribute to better fiscal policy. They suggest that political economy problems lie at the source of the problem and propose further research to identify additional institutional solutions.
Lastly, OECD countries have shown that institutional diversity across countries is not a hindrance to achieving similar economic and social outcomes. For these countries it is well researched that diverging institutional matrices deliver similar results, including with respect to social policy. They also point to the importance of institutional compatibility across sectors and across a political administrative system.
Some types of institutions have received more attention than others, suggesting that they are more important. Much emphasis has been placed on the stability of property rights as a condition for economic growth. The underlying argument has been that without asserted property rights economic agents face inhibitive uncertainties about whether investments undertaken today will generate the expected future returns that render current sacrifices worthwhile. Put simply, if economic actors are uncertain about retaining the gains from their efforts, they are unlikely to undertake potentially beneficial investments.
However, the emphasis on property rights has ignored that a property rights system comprises a whole set of institutions that does not easily aggregate. Promoters of the property rights argument have been able to pick and choose which and whose property rights they deem to be most important. It is argued that institutional reforms in developing countries have often focused on strengthening the property rights for a narrow group of economic actors, while for the wider public property rights have remained poorly defined. Those outside the bell jar are unable to improve their productivity because their lack of minimally secure rights undermines the provision of collateral and thus access to financial resources.
Associated with the emphasis on the stability of property rights is also the assumption that stronger protection of private property rights is always better. But although some protection of property rights is invariably absolutely and indisputably necessary, this does not mean that stronger protection is in fact always better. Changes to and the creation of new property rights along with changes in technology, population density or political balances of power have historically been beneficial for economic growth. Examples include historical research on the emergence of mineral rights in the American west.
More difficult is to acknowledge the fact that changes to property rights resulting in economic progress can come with huge social costs. Numerous studies on agrarian change and industrialisation have made this point. In the European context these studies have contributed to understanding differences and similarities in the development of social safety nets and other social policy features. In principle this points to a potential transformative role that social policies can play in the context of exploiting mineral wealth and generating revenue.
The success story is therefore less about providing incentives for private investors. It is about the political ability of the country leadership to build state institutions that have provided an effective infrastructure for advancing economic and social development.
Political elites have calculated that the likely rewards from amassing national wealth and constructing a coercive apparatus to keep others out were not worth the political risks that such a strategy could have given rise to. The calculations of elites may have been impacted by the fact that colonial institutions have balanced the power of central political authority for local political leaders and so these institutions may have affected policy choices at critical junctures in the country history.
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