The single biggest problem facing the world may be the problem of bad institutions. Due to bad institutions, a number of secondary problems persist—poverty, subjection, corruption, disease, hunger, and war. In other words, leading scholars have come to realize that ineffectual and corrupt socio-economic systems impede development and prosperity, but how can we spur positive change?

What We Do Know: Institutions Matter

Institutions are the DNA of healthy societies. We know through the work of luminaries like Hernando de Soto and Douglass North (and before that Adam Smith and David Hume) that certain man-made fixtures provide societies with an infrastructure that encourages prosperity and peace--for example: property rights, independent judiciaries, open markets, and the rule of law. There are informal institutions that affect economic development, as well. Cultural and religious norms are types of informal institutions. The object of institutions should be to reduce what economists call "transaction costs"— or the costs of interaction and exchange among people. Since interaction and exchange underlie development, institutions are vital. Of course, that is because in order to solve global problems, individual people need wealth.

By facilitating economic exchange, institutions may encourage growth and prosperity. While institutions can facilitate growth, they can also lead to stagnation and decline. Recognizing this, many economists (and a whole branch of economics, New Institutional Economics) research what institutions look like that encourage growth. This is perhaps the most formidable challenge to economists, i.e.: how can we facilitate institutional change that will necessarily promote growth?

While institutions can facilitate growth, they can also lead to stagnation and decline. This is perhaps the most formidable challenge to economists, i.e.: how can we facilitate institutional change that will necessarily promote growth?

Consider what the Copenhagen Consensus takes to be the some of the world's most severe (but soluble) problems: HIV/AIDS, malaria, water sanitation, and malnutrition. In rich nations, these problems are either non-existent, or not nearly as severe as in the developing world. Of course, in almost every case, wealth (and health) correlate with the existence of institutions that sustain human freedoms. So while the world's biggest problems seem endemic in developing countries, we must ask why it is that these countries continue to be poor. And on the other side of the coin, how is it that rich countries are rich? The answer, we think, lies in the role of institutions. And such an understanding is gaining consensus among academics and development bureaucrats alike. (Recently, the World Bank released its 2005 World Development Report, which touted the work of De Soto and others working on institutional issues that facilitate growth.)

Why Can't Institutions Easily be Changed?

There are very powerful forces at work that impede gradual steps towards positive institutional change, and revolutionary changes can be a dangerous--even violent. Gradual change may be limited by perverse incentives that allow a handful of people or groups to hold onto the majority of wealth and power. In fact, economic theories of public choice describe how individuals seek to maximize their returns, while minimizing inputs. Corruption, including dictatorial regimes and countries in the clutches of political elites, frequently negate opportunities for institutional change and prosperity. This multiplicity of negative forces holds a stunning 80-85 percent of the world's people in penury.

In truth, however, nobody really knows how to best hasten institutional change.

In truth, however, nobody really knows how to best hasten institutional change. Large development banks have been trying since the Bretton Woods conference of 1944 to infuse large sums of money into structurally unsound nations—with little result. To many, such folly marks the end of the Keynesian planning paradigm and the realization of the insights of Friedrich Hayek. Only recently has the term "good governance" become a qualifier for aid. And, mammoth NGOs are light years from creating the proper incentives to make real progress in top-down development.

Many scholars believe institutional change is simply a matter of internal evolution, i.e. "bottom up." Without getting into the debates about "endogenous" and "exogenous" change, we may have to confront the possibility that there may be no answers found in any external human artifacts at all—and that desired change must come from popular responses to crises at home. Evolution or revolution. But could there be another way?

International Development Prize

The contest model is emerging as a powerful force for motivating and mobilizing people. Consider the recent Ansari X prize that awarded $10 million to the first team to get a private craft into space. SpaceShipOne, the US entry in the contest, emerged as the winner—all without a dime of government funding. Many other very promising entries were also quite close. Why was the prize so successful?

The payoff in a contest is much bigger than just the prize money. It represents prestige, visibility, and captures humanity's aspiration to expand and discover. But unlike an award such as the Nobel Prize, the Ansari X prize addressed a discrete problem—so all the contestants know what the goal is, and are able to put effort towards that single end. But how one gets there is his or her own story.

My modest proposal is that some movers and shakers create a kind of X-prize for institutional change. Such an international development prize would be unique in that it treats the problem of institutional change as a discreet goal for contestants.

Such an international development prize would be unique in that it treats the problem of institutional change as a discreet goal for contestants.

Still, the term discrete should give us pause, as institutional change is a highly complex process of altering the economic and legal systems of nation-states. The goal is only discrete in the sense that it lies within a single subject domain.

But there are a number of ways you could design such a contest: You could have scholars enter proposals, which could be judged by a distinguished panel. If the prize pot were larger, ideas could be judged based on their results (for example, one might refer to the US Millenium Challenge for measurement suggestions). In any case, prizes are a great model for putting good minds to work. Who? Academics. International business leaders. Politicians. Virtually anyone motivated by the possibility of winning money and prestige.

Systemic, global corruption and want of proper institutions are far greater challenges than launching a rocket-ship into space. As I said before, institutional change is the biggest problem facing humanity. But even though the problems loom large and the goals are ambitious, the problems are neither insuperable nor the goals unattainable. At the very least, the existence of such a prize would make more and more people aware of the problem of institutions, and the need for institutional change to facilitate development. And that, alone, might be enough to get good memes started towards the end of global prosperity.




Contributed by Max Borders, Senior Editor of aWorldConnected.org. Reprinted with permission from aWorldConnected.

To read another Global Envision article about innovative solutions to global poverty, see Donating More Than Money.



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