The Importance of Institutions and CAF Contribution to Development

Douglas North asserted that institutions are formal and informal rules of the game devised by humans in a society, which shape human interaction and exchange, whether politically, socially or economically. Formal rules include, for example: laws, regulations, ordinances; while informal rules refer to culture, traditions, etc. Take Ecuador for instance, a mega-diverse, intercultural nation, with features that date back centuries, which undoubtedly shape the institutions of the country. Therefore, CAF seeks to understand institutional changes in our member countries, because they determine how societies evolve over time, and are key to understanding historical changes and the evolution of institutions.

Economic actors may mistakenly confuse two fundamental concepts, i.e. institutions and structure of a public, private or non-governmental organization. Institutions transcend organizations. It is a broader and more integral concept because it encompasses the interactions of civil society, national or local governments, businesses, and academia, including historical, political, economic, and social dimensions, among others. The relationship between these stakeholders and their characteristics should lead to a state of efficient and equitable cooperation to attain the well-being of society. The question in Ecuador is whether these achieve an effective articulation in favor of development. This is certainly one of CAF’s missions during development-focused interventions in each country or territory.

The 2018 Institutional Quality Index (Martín Krause, RELIAL) ranked Ecuador 24th out of 29 countries in Latin America, and 107th of 191 countries where this indicator is measured. While these indicators seek to link economics with political issues, for example, it is important to note that understanding institutions is a complex task, but an essential one in learning how these influence social welfare and to zero in on some of the challenges facing policy-makers in the countries. These include the need to understand that public policies and realities are not simple because they have different perspectives, activities are organized at various levels, and any political situation in a geographical area affects activities of other locations. No discipline comprehensively addresses all key factors in interactions in complex social situations. Thus, it is important to understand what is actually going on in different areas, whether politically, economically, socially, environmentally, culturally and historically. Therefore, CAF must strive to gather inputs from multiple disciplines, different levels of activity and different political and social contexts.

In its role as development promoter for the countries of the region, CAF understands that any action aimed at improving the well-being of the population efficiently and equitably, in any public or private context, must first study the origin, status and evolution of institutions of a country, city, region or territory.

In our experience as a multilateral entity, we have found that an institution succeeds when North’s formal or informal rules are upheld in good practices of productivity, competitiveness, equality, knowledge and ability to innovate. Laws are critical, but they are more powerful when combined with specialized human capital, leadership, efficient processes and an effective combination with new technologies.