Strong institutions bedrock of economic prosperity

As some countries write magnificent pieces of great economic achievements in modern history, most have often wondered why some nations (especially on the African continent) are poor, while others prosper abundantly.

By Victor Bhoroma

The most telling story is the journeys travelled by the two Korean states since their border separation in 1950.

South Korea has grown to be a world economic super power in the last 30 years, thanks to its strong institutions. Their kith and kin, North Korea is known for assembling nuclear arsenal at the expense of anything positive for the economy.

The economy of South Korea is 40 times bigger than that of the North Korea’s in terms of GDP. According to World Bank 2017 figures, North Korea’s GDP is estimated at $40 billion, while that of South Korea is $1,6 trillion.

GDP per capita is $33 500 in South Korea, while it is $1 800 in the North.

South Korea takes pride in exports of world-famous brands such as Samsung, LG, KIA and Hyundai Motors, while North Korea has its place in history as the most corrupt and hostile country in the world. ads Ads

It is difficult to conceive that the two Korean states used to be one with the same people, who speak the same language, with almost the same resources and in the same region yet they are miles apart economically.

The economic challenges that bedevil developing nations in the world such as Zimbabwe today have nothing to do, with lack of resources and knowledge but rather institutional decay.

To predict the prosperity of a country, you only have to look at its institutions. Together, the legal and governance systems that underpin every nation form what economists call an enabling environment for the creation of wealth.

In economic terms, institutions are the rules of the game in a business or, more formally, are the systems that shape human interaction.

Institutions are not physical organisations or buildings, but are the fabric that connects all economic transactions in a country from contracts, contract enforcement, the rule of law, protection of property rights, government bureaucracy, governance, leadership, tax systems, economic policies, free and open markets and financial market structures.

Institutions encourage entrepreneurship and investment confidence by providing policing and justice systems for the adherence to common laws and regulations.

As such, institutions increase the security that the risk of incurring in an economic transaction is matched by the full assumption of its commercial benefits. Key institutions in economic transactions include property rights, free and open markets and the rule of law.

Property rights refer to the ability of the people and businesses to own land and capital. Ownership allows people to produce, buy and sell goods and services at a profit.
Without secure property rights, not many people are willing to buy land or invest in a country. Free and open markets refer to the ability of people and businesses to buy and sell goods and services with minimum interference from government.

The government provides opportunities through regulations and policies but needs to ensure economic transactions are profitable so that it earns more in tax returns or public private partnerships (PPPs). Rule of law provides stability, trust and certainty in economic transactions.

This loosely translates to confidence in an economy.

So why are some countries poor and others rich? Rich or developed nations have strong institutions that are more powerful than individuals or organisations of the day.
These institutions are continuously developed to the benefit of present and future generations. Regardless of leadership changes, natural disasters, foreign engagements or economic movements, these institutions remain the bedrock of economic development.

On the contrary, poor countries have institutions that are mirrored on political leaders, organisations, ethnic compositions, patronage and relationships.

In essence there is no policy consistency, economic stability or certainty in economic transactions. The results to the community are poor business climates, low FDI inflows, corruption, inefficiency, poor infrastructure, civil unrest, less innovations, high unemployment, poverty or poor living standards, unequal distribution of wealth on tribal or political lines and capital flight.

Do these sound familiar in Zimbabwe? Yes, they do regardless of any excuse that pleases our understanding or the blame that may be apportioned to external forces.

Our government and local leaders try to fight these symptoms daily with little success.

Zimbabwe has vast opportunities everywhere you look — from tourism, mining, manufacturing, agriculture, ICT and financial services.

These opportunities are so glaring and lucrative to the eye such that it baffles the mind why investment and economic development is eluding our nation.

The answer yesterday, today and tomorrow is in the strength of our institutions.

Proper alignment and enforcement of these institutions can correct the ills of yesteryear in a period of time and ensure sustainable economic development for generations to come even if our natural resources are exhausted.

Above all, Zimbabwe’s economy will stand above individuals or organisations of the day and be guided by principles, policies and systems that are perpetual.
Victor Bhoroma is a business analyst with expertise in strategic marketing and business management aspects. He is a marketer by profession and holds an MBA from the University of Zimbabwe (UZ). For feedback, e-mail him on or Skype: victor.bhoroma1.

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