Lack of institutional cooperation between individuals in a marketplace reduces efficiency and prevents potentially beneficial contracts from being cemented. The reason behind this lack of trust is the fact that the government cannot be counted on to uphold contracts, property rights and the like. Without this legal guarantee, people are hesitant to do business with people they don’t know, or who are from different backgrounds, thus preventing business relationships from being established.

Feder and Feeny identify three categories of institutions: constitutional order, institutional arrangements and normative behavioral codes. The constitution describes the fundamental rules for society, the guidelines for making laws. For example, the First Amendment in the US Constitution prohibits the government from obstructing some individual freedoms such as freedom of speech and freedom of religion.

Institutional arrangements refer to laws, contracts, regulations and other legal instruments designed to maintain order and stimulate growth. A lease is a basic example of an institutional arrangement.

Finally, normative behavioral codes refer to the norms followed by a culture. In the developed world, the norm is for most marketplace activity to take place within the formal sector, where government institutions protect buyers and sellers and maintain competitiveness and fairness. Conversely, in many developing countries, the informal – or unregulated – sector is where most market activity occurs, resulting in diminished trust between buyers and sellers.

For example, land may be transferred according to a government regulation yet the transfer of this land to a certain ethnic group or tribe may be forbidden according to a normative behavioral code. Additionally, poor institutional arrangements such as lack of enforcement or registration procedures could be the issue.

In developed countries, these three institutions generally all follow and reinforce each other, but in developing countries one institution may be followed more by some and another more by others, creating different, opposing “laws” in the same place.

In many developing countries, where tribes and family lineages play a large role in social group formation, the lack of collaboration between unfamiliar groups leads to economic inefficiencies. More specifically, a culture that prefers to do business within the confines of family lineage only, will see less division of labor and a consequent lower degree of specialization as per Adam Smith’s theories. For example, Annen cites Rabellotti and Schmitz who suggest an interesting reason for Brazil’s superior performance to Mexico in the footwear manufacturing space. The authors note that social capital in the Sinos Valley manufacturing area in Brazil is created in local, open social networks supported by business associations that serve the entire district. In contrast, Mexican footwear manufacturers in Gaudalajara and Leon cooperate based on strong family ties, destroying the benefits of trading and collaborating based on normal economic incentives (Annen, 2001).

This leads to the important distinction between inclusive and exclusive social capital. Exclusive social capital describes the value created by collaborating within closed social networks, where entry is difficult and requires bribery, paying a fee or spending time getting acquainted and proving yourself to the exclusive social group. On the other hand, inclusive social groups have low entry costs and exist to further the interests of a broader community.

Aside from less division of labor, there are two other downsides to exclusive social capital: lack of innovation and rent-seeking activities. In industries with a high degree of technological change, the closed nature of these groups impedes potential efficiency innovations that come about from the diffusion of ideas. Granovetter also made a similar point in saying that few “strong ties” are a lot less beneficial than many “weak ties” (1973). It’s important to note however that the negative effects of exclusive social capital on innovation depend on how much dynamism is required in the industry in question. To illustrate, consider the software industry versus the precious gems industry. The former requires firms to constantly innovate and collaborate to stay competitive, however, given the relatively simplistic nature of the precious gems industry, a mine owner doesn’t need to collaborate or innovate as he or she is simply taking materials out of the earth and selling them to processors and retailers.

Lastly, exclusive social capital leads to rent-seeking activities, which get in the way of real economic incentives. When the likelihood of entry into a market is determined by the level of a firm’s influence vis-à-vis other firms, potential entrants tend to spend more on trying to obtain an item than it is actually worth to them (Davis and Reilly, 1998). Therefore we have inefficiencies taking place as firms waste resources on simply trying to get their foot in the door instead of investing all resources into the wellbeing of their business.

Although inclusive social networks result in higher economic efficiency than exclusive networks, there is major issue that arises and challenges the integrity of inclusive networks as they grow. Since inclusive networks rely on members having good reputations, cooperation within groups can only take place if every member is aware of other members’ past actions. With small networks, this is easy to manage but as the membership and heterogeneity of an inclusive network increase, it becomes more difficult to inform every member of every other member’s past behavior. This means that a network works best when it’s size is not allowed to grow to infinity, but rather to point where information sharing is manageable (Annen, 2001).

References:

Annen, Kurt. “Inclusive and exclusive social capital in the small-firm sector in developing countries.” Journal of Institutional and Theoretical Economics JITE157.2 (2001): 319-330.

Davis, Douglas D., and Robert J. Reilly. “Do too many cooks always spoil the stew? An experimental analysis of rent-seeking and the role of a strategic buyer.” Public Choice 95.1-2 (1998): 89-115.

Feder, Gershon, and David Feeny. “Land tenure and property rights: Theory and implications for development policy.” The World Bank Economic Review5.1 (1991): 135-153.

Granovetter, Mark S. “The strength of weak ties.” American journal of sociology(1973): 1360-1380.

In order for people to participate in and develop an economy, there has to be financing that lays the groundwork for innovation and entrepreneurship. Without this, poor people in developing countries are forced to spend all their time getting food, water and shelter; an entire life devoted simply to staying alive. Microfinance programs have been commended for their ability to raise people out of poverty while stimulating the economy and calming civil unrest. Basher finds three strong positive effects associated with the microfinance program run by the Grameen Bank in Bangladesh: a decrease in the relative preference for male children, higher participation in non-economic events such as elections and spillover effects due to individual empowerment (2007).

In Bangaldesh, there is a strong preference for male children because, in the Bangaldeshi culture, male offspring are responsible for supporting parents in their old age. Since females have been empowered and now have the ability to be their parents’ old age caretaker, we see an attitudinal change in families toward the desired gender of their child. Basher has also demonstrated that the Grameen Bank has had a direct effect on reducing fertility rates (2007). Luci and Thevanon studied the link between economic growth and fertility and found a J-shaped correlation between the two. This means that as a country develops, its fertility rate decreases (2010). Therefore, the Grameen Bank’s work seems to directly contribute to development in Bangladesh.

When rural women receive their loans from the Grameen Bank, they get to do activities that women generally do not do in Bangladesh. More specifically, these women have financial dealings with field officers, participate in group meetings and visit Grameen offices. This strengthens their self-confidence and encourages them to participate in non-economic events. Basher’s experiments revealed a positive correlation between duration of association with the Bank and likelihood that a person will vote in the national election (2007). This indicates that, generally speaking, getting financing from the Bank takes participants from being passive loan recipients to empowered, aware individuals who play an active role in their communities.

In the pre-1990 era of the Grameen Bank’s activity in Bangladesh, social attitudes toward women’s participation in the program were very negative – 81.1% of respondents faced objection from friends, family or the community at large when they discussed their plans to participate in the Bank’s program. Making money was an untraditional role for women in the country at that time. As more and more women joined the program, social attitudes started to change; it became more normative for women to participate in the economy. In the 1995-99 survey asking respondents the same question, only 6.25% faced any objection to them participating in the program (Basher, 2007). This indicates that the Grameen Bank’s activity in rural Bangladesh has helped modernize that society’s view on women’s roles in the face of longstanding values and custom. These broad spillover effects have empowered women and have created a more tolerant environment, which is an ideal breeding ground for progressive policymaking, economic growth and peace.

Although effective at helping the poor get on their feet, microlending programs could be used in more creative ways that would further development goals. For example, perhaps microfinanciers could partner with nonprofits to provide business training and advice that would result in loan recipients using their credit in more profitable ways. Right now, recipients are simply given loans without much direction on how to use the money. If there were advisors that helped these informal sector workers tailor their output to the demands of the local or global economy, this may cause a snowball effect and result in more exponential growth – providing jobs and stability. In addition, microlending could be linked to constructing houses, providing drinking water, sanitation and health services (Onyuma and Shem, 2005). By investing in locals to confront the huge tasks that governments have failed to do or NGOs aren’t able to do, infrastructural needs can be met while providing jobs for the people who need the infrastructure.

References:

Basher, Md Abul. “Empowerment of microcredit participants and its spillover effects: evidence from the Grameen Bank of Bangladesh.” The Journal of Developing Areas 40.2 (2007): 173-183.

Onyuma, Samuel O., and Alfred Ouma Shem. “Myths of microfinance as a panacea for poverty eradication and women empowerment.” Savings and Development (2005): 199-222.

In the past century, the rise of capitalism has led to a slow transition of corporations becoming the real world superpowers rather than nation-states. The fundamental issue behind this is that governments are there to look out for their citizens – they are inclusive institutions there to provide the necessities for a society to function and flourish – whereas corporations are only looking out for themselves. The selfishness of corporations coupled with their influence has challenged communities that are, by definition, generally altruistic groups of interdependent people who work together to propagate a common agenda of peace and productivity. Corporations know that if a sense of community flourishes, people may become hostile toward them. This is exemplified by ‘Keep Austin Weird,’ which was a campaign by locals and small businesses to prevent chain stores from building locations in downtown Austin, TX. This shows a resistance to corporations in favor of a more grass-roots approach to doing business. Given our market economy, where people respond to incentives, corporations are simply doing what any person would do: maximizing utility out of every situation.

Corporations and governments will often make their motives look different to the public compared to what they actually are. One example of this is the US invasion of Iraq after 9/11. Harvey notes how President Bush often said that the United States’ role in Iraq was to spread a key American constitutional right: “as the greatest power on earth we have an obligation to help the spread of freedom,” Bush claimed (2005). In Freedom’s Just Another Word, Harvey explains how the Bush Administration used this language to create a sense that America was fighting some sort of crusade for freedom when in reality they were just trying to have boots on the ground to protect their oil interests. This idea goes hand-in-hand with the ideas conveyed in the Rise of Corporate Power in America where the author insists, “it is the corporate interest more than the human interest that defines the policy agendas of states and international bodies” (Korten, 2001). The power that corporations and governments hold, especially when working together, allows them to accomplish their goals no matter what citizens actually want.

The proposed, and approved, Kinder Morgan pipeline gives another good example of this. This pipeline will run from the tar sands of Alberta to the southern British Columbia coast in order to increase oil exports. As lucrative as this may be, there are risks such as the pipeline leaking and causing environmental damage. In Burnaby, BC, the Vancouver suburb where the pipeline will end, people have squatted on the construction site to protest the pipeline. The land where the pipeline will end is Indigenous land that has not been ceded to Kinder Morgan; this corporation does not have permission from the Indigenous landowners to build on that site, yet they are going ahead anyway. They got permission from the government and that’s all the red tape they need to go through; the fact that the land is not ceded means nothing to Kinder Morgan. Fifty-three people have been arrested for getting in the way of Kinder Morgan surveyors and Kinder Morgan has also filed lawsuits against protesters in an effort to deter them. Shouldn’t it be Kinder Morgan facing legal action for building on land they don’t have permission to build on? This issue highlights the power that corporations and the government have when they work together.

More attention needs to be given to the benefits of corporations recognizing the ‘triple bottom line,’ in which financial, environmental and social costs are all accounted for. By assigning monetary values to social and environmental exploitation, corporations can be held accountable for their actions. Once multinationals start doing this, they will gain respect from communities as they will become inclusive institutions rather that extractive, exploitative ones.

Harvey, David. A brief history of neoliberalism. Oxford University Press, 2005.

Korten, David C. “Rise of Corporate Power in America.” When Corporations Rule the World (1995).

RCMP Arrest Protesters at Kinder Morgan Tar Sands Pipeline Expansion (2014). Environment News Service. Retrieved from http://ens-newswire.com. Accessed 2014, November 23.

European merchants had been trading with African communities for many years leading up to the beginning of the slave trade, which began around the year 1400. Slaves were great for western economies as they provided nearly free labor: a valuable input. While European businesses benefitted from this, groundwork of mistrust and ethnic fractionalization was being laid in Africa. Western slave traders employed Africans to hunt down slaves for them. This destroyed social networks since Europeans did not capture slaves themselves; the poaching was done by other African tribes and even by victims’ very neighbors. The effects of this early loss of trust between tribes and individuals can be seen today through weakened ties and strife between nation-states, tribes and ethnicities. This discourages the formation of broad ethnic identities, which are fundamental to establishing larger communities. Consequently, without trust and communication, most African countries have struggled to develop (Nunn, 2009). They lack the strong institutions needed to provide citizens with public goods such as education, infrastructure and health care.

Reference:

Nunn, Nathan, and Leonard Wantchekon. The slave trade and the origins of mistrust in Africa. No. w14783. National Bureau of Economic Research, 2009.