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What Role Do Institutions Play in The Process of Economic
Development?
1. Introduction
Understanding why some countries are poor while others are rich is the main issue that the
study of development economics attempts to address. Moreover, it has been argued that during
the last 250 years the world has witnessed remarkable improvements in the standards of living
and the amount of well-being that individuals have. Nowadays, people are not only healthier,
wealthier, and more educated, but they also enjoy greater freedom to practice their civil and
political rights. However, while the last two centuries have seen some countries achieving high
levels of economic and human development, other countries have failed to climb the
development ladder. As a consequence, not only the gap between developed and less-developed
nations has widened, but also inequalities within countries can be realized (Deaton, 2013).
Further, the neoclassical economics literature is full of theories that attempt to explain the
divergent development outcomes between countries. Yet the main focus has been on studying the
impact of factors such as trade liberalization, geography, technology, and the accumulation of
physical and human capital on economic growth and development more broadly. While these
factors may have a significant impact on the economic performance of many countries, the
question that should be examined is why some countries have been able to engage in
international trade, introduce superior technology, and accumulate greater stocks of human and
physical capital, while others have failed to realize the gains from those activities (North, 1994).
Moreover, it would be useful here to distinguish between the proximate causes of economic
growth such as technological change, and physical and human capital on the one hand, and the
''deep'' determinants of economic growth such as institutions on the other. In other words, while
factors such as geography, technology, and human capital may have an exogenous effect on
economic growth, the political and economic institutions that underlie those factors are expected
to arise endogenously. Therefore, it is suggested that the emphasis should be on understanding
how much of the variation between countries in terms of their economic development is due to
exogenous factors and how much is due to endogenous factors, and to specify the different
mechanisms and channels in which the endogenous factors (e.g. institutions) exert their influence
on economic performance (Rodrik, Subramanian, & Trebbi, 2004).
In addition, it has been argued that the process of economic development cannot be isolated
from the evolution of the institutional structure that plays a critical role in determining the choice
set that people have when they engage in economic activities. In other words, it is assumed that
the institutions in a particular society determine the incentive structure that agents face by
influencing the costs of economic transactions, and thus, the development path of nations cannot
be clearly understood without recognizing the choices that have been made by people under

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different institutional structures (North, 1991). For instance, how industrialization shaped the
development path of some countries and why some countries industrialized faster than others can
be understood by examining the choices made by the powerful political elites during the earliest
stages of industrialization and technological change. Precisely, whether technological
innovations and economic progress can occur is largely influenced by the attitude of political
elites and the state towards ''the introduction of new technologies and economic institutions
necessary for industrialization, such as the production of well-functioning factor markets,
property rights, and legal systems'' (Acemoglu & Robinson, 2006, p. 115). However, while it
could be argued that the focus in the development community has shifted towards highlighting
the necessity of institutions that protect property rights, enforce contracts, and reduce uncertainty
in transactions in achieving sustainable economic development, nevertheless, there is still a lack
of consensus over the precise framework in which the efficient institutions can be created. On the
other hand, the specificity of each case implies that the most efficient institutions are those that
emerge endogenously while taking into account the importance of local knowledge which plays
a crucial role in ensuring the sustainability of a well-functioning market system (Rodrik, 2000).
The aim of this essay is to explore the role that institutions play in the process of economic
development. Moreover, it argues that achieving sustainable economic development requires the
presence of institutions that protect property rights, enforce contracts, and reduce uncertainty in
market transactions. However, as this essay suggests, although those institutions are a necessary
condition for enhancing the economic performance of market-based societies, they are not
sufficient in maintaining the continuation of economic success. Thus, it is suggested that
sustainable economic development requires the existence of two conditions. First, the right kind
of institutions that support the effectiveness of markets and productive entrepreneurship should
be in place. Second, the efficient institutions are those that arise endogenously through a
spontaneous bottom-up approach that takes into consideration the significance of local
knowledge and the specificity of the actors in a particular context in contrast with the
conventional wisdom among the development experts which claims that the transplantation of
institutions can put the poor countries on the right track of development (Easterly, 2007). The
essay is structured as follows; the next section defines what is meant by institutions and
highlights their importance, whereas the third section examines how institutions affect economic
development and attempts to specify the different mechanisms in which this effect could be
realized and enhanced. The fourth section considers the experience of Botswana, an African
nation that represents the case of an endogenously-driven economic success where the role of
institutions has been compatible with the role of culture and tradition, and the final section
concludes the discussion.
2. The meaning and importance of institutions
The present essay aims to concentrate on the institutional approach that is used for explaining
the divergent development paths pursued by different countries. Besides, it is suggested that
entrepreneurial innovation and the accumulation of both physical and human capital require the

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presence of the ''right'' kind of institutions that support the ability and willingness of individuals
to engage in those productive activities. Moreover, institutions are considered to be the ''rules,
enforcement characteristics of rules, and norms of behavior that structure repeated human
interactions'' (North, 1989, p. 1321). Strictly speaking, the previous statement says that the
behavior of individuals is largely influenced by the presence of institutions (both formal and
informal) in a particular society. In other words, as Douglass C. North (1989) emphasized,
institutions can be considered as the ''rules of the game'' that shape the way in which people
behave in different social, political, and economic contexts. In addition, it is crucial to
distinguish between the formal and informal institutions. While the former refer to a set of
formal and legal rules such as property rights, laws, and constitutions, the latter refer to the set of
traditions, norms, taboos, and values that exist in a particular society. However, the common
theme between the formal and informal institutions is that they both play a pivotal role in
establishing social order and reducing uncertainty in transactions. More crucially, it should be
mentioned that institutions are not only the set of constraints or rules that shape the behavior of
individuals and the interaction between them, but they also play a critical role in providing
incentives for individuals to engage in productive economic activities (North, 1991). In nutshell,
the institutional approach attempts to explain the divergent development paths of countries by
understanding the divergence in their institutional structures. Yet, if the economic performance
and the development outcomes of countries are supposed to be largely influenced by the kind of
institutions they have, then what is the form of institutions that should be created in order to
stimulate and sustain economic development? Equally important, why there are differences in
institutions among different countries in the first place? (Robinson, 2002).
As already mentioned, institutions are not only constraints on individual behavior, but they are
also the incentive structure that guides the actions of people in different social, economic and
political situations. In other words, institutions are constraints since the behavior of agents in a
specific society is governed by the kind of informal rules (e.g. beliefs, norms, and traditions) and
formal rules (e.g. laws, constitutions, and the legal framework) that exist in that particular
society. On the other hand, institutions provide incentives for individuals to engage in certain
activities such as the accumulation of capital and technological innovation, and the adoption of
new kinds of constitutional and legal rules. As North and Weingast (1989) argue, the emergence
of institutions that protect property rights and enforce contracts in England during the 17th
century provided incentives for the technological and financial innovations that contributed to
the rise of the industrial revolution and the tremendous economic growth that followed which
played a significant role in the rise of England as a global economic and political power.
Therefore, the experience of England in particular and that of the Western developed countries in
general demonstrate that the institutions that secure property rights and enforce contracts are
more conducive to economic growth. However, it should be noted that efficient institutions are
not merely about the protection of property rights and contract enforceability. The role of
institutions can be extended to include the regulatory arrangements that exist in a particular
market system in addition to the functions that institutions play in stabilizing the different

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financial and monetary transactions. Furthermore, institutions can play a critical role in providing
social security, reallocating resources, and resolving societal conflicts (Rodrik, 2000).
Additionally, it is argued that the social environment in which individuals interact with each
other is very complex and that it necessitates the introduction of institutional structures that
reduce the transaction and information costs if the gains from productive economic activities are
to be realized (North, 1994). However, the economic problem that people face in any society is
not simply that of how and what to produce or to consume, and how resources should be
allocated. The central problem is that of information in the first place, and how the diverse
knowledge in a particular society can be utilized to achieve the best use of resources in order to
satisfy the needs of the members of that society. In other words, while the knowledge of how
doing things in the best way is not centralized in the hands of one individual or one specific
group, the realization of the best economic and social outcomes requires efficient mechanisms in
which information can be fully used and communicated at the level of whole society (Hayek,
1945). Thus, we can think of institutions as the social structure that aims to achieve the best
allocation of resources through the use of institutional mechanisms (e.g. property rights, legal
contracts, constitutional constraints etc.) that ensure the effective communication of knowledge
in a given system. Moreover, since the transactions that people engage in are expected to occur
repeatedly and it is unlikely that a single individual can possess complete information, there is an
urgent need for the creation of institutions that increase the payoffs of sustaining cooperation
between people and minimize the payoffs of defection in order to ensure and sustain the best
level of economic performance (North, 1991). Hence, the creation of institutions that secure
property rights, enforce contracts, reduce transaction costs, and enhance confidence in bargain
''permit individuals to take actions that involve complex relationships with other individuals both
in terms of personal knowledge and over time'' (North, 1989, p. 1320 ).
Nevertheless, while some countries (mostly the Western developed ones) succeeded in
acquiring the kind of growth-enhancing institutions that protect property rights and enforce
contracts, other countries failed to acquire them and in some instances the introduction of those
institutions was blocked by specific interest groups in the society. In other words, the presence of
an efficient institutional framework enabled countries such as Great Britain (and thereafter other
Western European countries, the United States, and Canada) to take advantage of the division of
labor and technological innovations that were necessary for achieving high-quality modern
economic growth after the industrial revolution and its subsequent structural changes. On the
other hand, some countries got stuck in a path-dependent institutional structure that prohibited
the introduction of new technologies and undermined the ability of those countries to solve the
new sophisticated problems that appeared after the industrial revolution (North, 1994). However,
it is very fundamental to recognize how institutions emerge, change, and evolve over time on the
one hand, and why institutions do not change and persist on the other.
As Acemoglu et al. (2005) argue, there were some critical historical junctures that paved the
way for the emergence of ''inclusive'' institutions that create social order and provide incentives

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for innovation and economic growth. Precisely, Acemoglu et al. (2005) explore the role that the
expansion of the Atlantic trade after the Fourteenth century had played in the rise of Western
Europe, in other words, they argue that the expansion of the Atlantic trade provided greater
economic opportunities (incentives) for the merchants which culminated in the creation of new
political institutions that put restrictions/constraints on the power of the monarchy, and in the
emergence of economic institutions that protect property rights and support entrepreneurship.
More importantly, Acemoglu et al. (2005) argue that the Atlantic trade was a critical historical
juncture that contributed to the development of divergent institutional paths between Western
Europe and other regions of the world. Moreover, it has been argued that the creation of
institutions that protect property rights and enforce contracts is a necessary but insufficient
condition for securing long-term economic performance. In other words, it has been suggested
that the democratic government is more likely to respect the individual rights to property and
contract enforcement than a non-democratic government where the properties of individuals
might be confiscated by a predatory government (Olson, 1993). However, it should be mentioned
that there is still no conclusive evidence whether democracies produce more desirable economic
and social outcomes than non-democracies. As the remarkable economic performance of some
East Asian miracles (e.g. Thailand and South Korea before they democratized during the late
20th century) and the tremendous economic growth of China since the late 1970s have shown
that huge economic and social improvements can be feasible without democratic mechanisms
(Rodrik, 2000).
In addition to the existing literature that emphasizes the role of critical historical junctures (e.g.
(Acemoglu, Johnson, & Robinson, 2005))and the role of democratic mechanisms (e.g. (Olson,
1993)) in creating and sustaining the kind of institutions that are conducive to economic growth
and development, there has been a growing literature that focuses on the importance of local
knowledge in the success of institutions, and therefore their impact on economic development. In
other words, the knowledge of the local norms, traditions, and practices that prevail in a
particular society has a significant impact on the kind of institutions that can work in that society.
Moreover, the institutions that are more likely to achieve favorable development outcomes in a
given society have to emerge endogenously as a result of the ''spontaneous'' independent actions
of its individuals (Boettke, Coyne, & Leeson, 2008).
Thus, it can be deduced from the previous argument that the design of efficient institutions has
to take into consideration that institutions do not only include the formal institutions such as
legal laws and constitutions, but they also represent the set of informal rules, beliefs, customs,
and traditions that exist in a particular society, and therefore, it is unlikely to have the similar
impact of formal institutions on development outcomes when they are applied in different places.
Strictly speaking, solving the problems of underdevelopment in the poor countries cannot be
merely achieved by transmitting the formal political and economic institutions of rich countries
to poor ones without taking into consideration the local norms and rules of poor countries (North,
1994). However, the idea that efficient institutions cannot simply be transformed from one place

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to another does not change the main role that institutions have to play in constraining predatory
activities and the confiscation of private property on the one hand, and in providing incentives
for productive activities that are necessary for achieving sustainable economic growth and
development on the other.
3. Institutions and economic development
In order to better explore the role that institutions play in the process of economic development,
it becomes crucial here to understand what is meant by economic development, what are its
characteristics, and what are the various mechanisms that have been proposed to achieve it.
Similarly, it is fundamental to distinguish between economic growth on the on hand, and
economic development on the other. Strictly speaking, while economic growth is concerned with
the increase in the level of material well-being that the individuals of a given society have; such
as the increase in the level of per capita income in a particular country during a specific period of
time, economic development, on the other hand, is a comprehensive process that has to take into
consideration some non-material aspects of well-being. In other words, whether a country is
developed or not should be judged by recognizing the level of capabilities and freedoms that its
citizens have in order to be able to achieve the kind of decent life they aspire to (Sen, 2001).
Moreover, it is assumed that the goal of achieving global economic development has not yet
been realized despite the enormous amounts of development assistance that have been poured
into the poor nations of Sub-Saharan Africa and Latin America since the 1950s, and the massive
amounts of both financial and technical assistance that have been provided for the reconstruction
of the economies of Eastern Europe after the demise of the Soviet Union in the early 1990s. In
addition, it has been argued that sustainable economic development in the previously mentioned
regions cannot be realized without the necessary institutional changes in their legal, political, and
social framework (Boettke et al., 2005). However, the emphasis on the importance of
establishing the institutional structure that induces economic growth and achieves sustainable
development does not preclude the role that factors such as physical and human capital play in
enhancing economic performance and achieving macroeconomic stability. On the contrary, the
emphasis should be on the functions that economic and political institutions play in providing the
necessary environment for the thriving of technological innovations and the accumulation of
skills on the one hand, and ending poverty, and achieving fairer and more equitable distribution
of economic growth on the other (Besley & Burgess, 2003).
In addition, Acemoglu and Robinson (2012) explore and compare the impact of political and
economic institutions on the economic performance and development outcomes of many
countries across time and space. Using a historical economic analysis, they argue that the reason
why some countries are rich while others are poor is that while the now-rich countries have
succeeded in establishing a set of ''inclusive'' political and economic institutions that enhanced
and sustained productive activities, the poor developing countries got stuck in a vicious circle of
''extractive'' instiutional structure where the wealth and the gains from economic activities were

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continously expropriated by a powerful political and/or economic elite in the society. Moreover,
it should be mentioned that while Acemoglu and Robinson (2012) assume that the existence of
inclusive political and economic institutions is a necessary condition for prosperity, they
nevertheless argue that growth and wealth creation might be possible under extractive
institutions, but it is expected that the resulting economic growth is unlikely to be sustained
without reforms in the underlying political institutions. For instance, in a country that has an
abundance of natural resources and its economy depends primarily on the revenues from the
exports of primary commodities such as oil and natural gas, economic growth can be realized as
a result of a boom in the global price of those commodities. Yet, this resource-driven growth
cannot be sustained in that resource-rich country if there is no diversification in the structure of
its economy, nor the fruits of growth can be distributed efficiently if the gains from natural
resources are being exploited by an extractive government, and therefore, the abundance of
natural resources may turn from a blessing into a curse (Sala-i-Martin & Subramanian, 2008).
Another important distinction is that between institutional or state capacity on the one hand, and
the scope of activites that a state performs on the other. As Fukuyama (2005) argues, the state
can have a high level of state capacity by acquiring the institutions that are necessary for creating
law and order, enforcing contracts, protecting property rights, and providing public goods (e.g.
health care, education, public infrastructure, national defense, etc.), yet, strong state capacity can
be compatible with a limited state scope. In other words, state institutions can have a significant
role to play in the provision of the necessary conditions for economic development, but they can
also play an equivalent role in avoiding the counterproductive and detrimental consequences that
might be associated with the presence of a ''predatory'' state with unlimited scope (Fukuyama,
2005 , pp. 7-27). Hence, it could be argued that the growth-enhancing institutional framework is
the one that increases the capacity of state institutions, while attempts to constrain the scope of
state activities. Specifically, institutions have two important roles to play in the process of
economic development. First, they provide incentives for innovation and productive activities,
and this could be accomplished by securing property rights, enforcing contracts, and reducing
uncertainty in exchange (i.e. increasing state capacity). Second, as the experience of Western
advanced economies has shown, sustainable economic growth also requires imposing some
constraints on state power to preventing it from turning into a tool used by the powerful goups in
society to extract wealth and confiscate private properties (North, 1994).
However, the focus in the development community should not only be concerend with
economic growth per se, much greater emphasis should be given to understand the impact of
economic growth on the quality of life that people have. Strictly speaking, understanding the role
of institutions in economic development should take into consideration their impact on some
specific aspects of human well-being; such as health, education, and freedom. As Boettke and
Subrick (2003) emphasize, the institutional enviroment that respects the rule of law plays a
significant role in promoting prosperity and enhancing human capabilities. More importantly,
they posit that an institutional framework that secure property rights and reduces uncertainty in

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future transactions ''not only improves the human lot by raising incomes, but also improves the
meaningfulness of the human experience'' (Boettke & Subrick, 2003, p. 126). Thus, it could be
argued that the presence of sound institutions in society is vital for achieving economic growth
on the one hand, and for ensuring that the gains from that growth are going to be used efficiently
to improve the conditions of living of individuals on the other.
Further, there is little doubt that the history of human progress during the last 250 years is a
story of innovation and technological improvements. For example, the introduction of new
technologies in the field of medicine such as antiobiotics, vaccinations, and improved sanitation
and clean water has enabled people to have higher quality of life, live longer, and become
healthier. On the other hand, technological change and the associated increases in productivity
and the accumulation of skills have been the engines of the remarkable economic growth in the
twentieth century that has not only raised the standards of living in the countries of the Western
world, but also improved the lives of more than a billion people in the developing world by
lifting them out of poverty and destitution, especially in huge countries like China and India.
However, the world nowadays is still unequal both in terms of wealth and in terms of the quality
of life that people have (Deaton, 2013). Thus, the important question that arises is how poor
developing countries can close the gap with the rich developed ones?
The answer for the previous question is unlikely to be that rich countries have to keep providing
their technical and financial assistance to poor countries until the latter become developed. As
Coyne and Leeson (2004) argue, the problem of underdevelopment is not a result of the lack of
incentives or entrepreneurial spirit in the developing countries. On the contrary, incentives exist
in any society whether rich or poor. However, the real problem is that incentives in most
underdeveloped countries are tied with unproductive or even counterproductive economic
activities that harm economic growth and may lead to stagnation and regress. In other words,
individuals always attempt to exploit profit opportunities by realizing the options that yield the
highest payoffs. Therefore, as Coyne and Leeson (2004) suggest, solving the problems of
underdevelopment requires the creation of a ''general institutional framework that makes the
payoffs to productive entrepreneurship high relative to unproductive and evasive activities''
(Coyne & Leeson, 2004, p. 247). In addition, it is crucial to consider the local conditions when
creating the institutional structure that aims to induce economic growth, for the institutional
structure that performs very effectively in one context does not imply its success and
sustainability under varied local circumstances (Boettke, Coyne, & Leeson, 2008).
Furthermore, as it is argued in (Easterly, 2013), at first, building institutions that are conducive
to economic growth cannot assume a ''blank slate'' position without paying attention to the
historical experiences of the poor countries that the development community ''attempts'' to help.
Secondly, economic development should be aimed to enhance the well-being of individuals
rather than targeting and encouraging particular national goals. Finally, the process of economic
development should not bee seen as a set of technical issues that could be consciously solved by
development experts. Precisely, since the process of economic development should have the

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well-being of individuals at its center, the best solutions are expected to arise form the
spontaneous actions of independent individual actors who know their problems and how to get
them solved in the most efficient way. Therefore, efficient institutions are those that allow for the
individuals to realize the gains from economic transactions through securing their rights to
property and contracts, and reducing uncertainty and transaction costs (North, 1994). In other
words, economic development can be achieved with the presence of political and economic
institutions that enable the individuals in a particular society to solve the ''unique'' problems that
confront them through ensuring the best mechanisms for the communication of knowledge
within society (Hayek, 1945).
4. The case for endogenous institution-building: Economic development in Botswana
Despite being surrounded by some of the poorest countries in the world, Botswana has been
successful in achieving rapid economic growth since its independence in 1966. Moreover,
Botswana has been able to have free and fair elections, and it has avoided many of the negative
factors that undermined the economic development of its neighboring countries such as political
instability, civil wars, military coups, and corrupt governments. However, what is remarkable
about the experience of Botswana is that despite being a landlocked country in a region plagued
by many dictatorships and politically unstable countries, yet it has been able to accumulate
human capital, invest in education, improve health conditions (although the HIV infection rates
are still high), and enhance the quality of its infrastructure (Robinson, 2009).
In addition, while in many sub-Saharan nations the abundance of natural resources has
provided incentives for the exacerbation of civil wars and armed conflicts (Lujala, 2010), or has
been associated with fragile economic performance through the effect of what is known as the
''resource curse'' (Sala-i-Martin & Subramanian, 2008), Botswana, on the other hand, despite
having massive amounts of diamonds has been successful in overcoming those problems and it
has managed to benefit from the expansion of its export-led primary commodity sector
(Robinson, 2009). Thus, the question that arises is what could explain Botswana's economic
success in comparison with other sub-Saharan African countries? As the purpose of this essay is
to explain the role of institutions in the process of economic development, then it would be a
reasonable attempt to explain the economic performance of Botswana since its indepedence in
the late 1960s in terms of the characteristics and the evolution of its institutional structure. In
other words, it is suggested that ''the right way to think about the economic success of Botswana
is to see that it experienced a very different path of institutional development than has been the
norm in Africa'' (Acemoglu & Robinson, 2010, p. 44).
Nowadays, Botswana is classified by the World Bank standards as an Upper-middle income
country. Its annual GDP per capita based on purchasing power parity (PPP) stood at $15,640 by
the end of year 2013, this level of annual income per person is approximately four times higher
than the sub-Saharan average of $3,314 during the same period (World Bank, 2015 ). Moreover,
not only Botswana has achieved higher levels of income than other sub-Saharan African

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countries, but it has also performed much better on many other development indicators. For
instance, in 2013 the under-five mortality rate (which measures the number of children who die
before reaching their fifth year of age per 1,000 births) was 47and 92 per 1,000 births in
Botswana and sub-Saharan Africa, respectively. Moreover, in 2013 the youth literacy rate for
ages 15-24 (which shows the level of basic literacy and numerical skills that youths have
acquired through secondary and primary education) reached 96% of the population between the
age of 15 and 24 in Botswana in contrast with the 70% sub-Saharan average (World Bank, 2015
). Furthermore, as Beaulier and Subrick (2006) argue, Botswana has been successful in
establishing a legitimate and effective political system. As a result, Botswana also scores very
favorably on Freedom House measures of freedom, political rights, and civil liberties.
Specifically, on a scale from 1 to 7 (where 1 being the best rating and 7 the worst), Botswana has
achieved 2.5 for freedom, 3 for political rights, and 2 for civil liberties (Freedom House, 2015).
It could be argued that there has been a strong complementarity between Botswana's political
system and institutions on the one hand, and its economic institutions on the other. In other
words, Botswana has been able to enhance the ''inclusivity'' of its political and economic
institutions (Acemoglu & Robinson, 2012). Moreover, the effectiveness and legitimacy of the
political system in Botswana allowed its post-independence governments to adopt various
successful growth-enhancing policies that provided incentives for the accumulation of physical
and human capital, while minimized the risks of predatory activities and wealth expropriation
(Beaulier & Subrick, 2006). Moreover, the existence of huge amounts of diamonds did not lead
to civil war or the confiscation of diamonds revenues by an extractive political elite, instead, the
government used those revenues to invest in crucial public infrastructure projects. Precisely, the
reason why the wealth of Botswana was not confiscated by a predatory government is due to the
pluralistic nature of its pre and post-independence political institutions, where the pre-
independence tribal institutions (namely the Tswanas) formed the essential elements of the post-
independence political regime. Therefore, the presence of pluralistic political institutions paved
the way for the emergence of inclusive economic institutions that secure property rights, prevent
wealth expropriation, and as a result induce economic growth (Acemoglu & Robinson, 2012, pp.
404-414). As Beaulier and Subrick (2006) argue, the foundations for effective governance were
present in Botswana even before its indepedence, and thus, there was no need to import
democratic means of governance from abroad, and that the pre-indepedence tribal institutions
were designed in a way that recognize the specificity of Botswana. More importantly, Beaulier
and Subrik (2006) emphasize on the importance of traditional sources of authority (i.e. the
Tswana tribal institutions) in the creation of political institutions that promote development.
Furthermore, it is very fundamental to understand why Botswana has been able to build
competent political institutions consistent with its traditional sources of authority after its
independence in 1966. As it has been argued, colonization has played a critical role in shaping
the kind of institutions in the countries that were subject to colonialism during a particular phase
of their history. In other words, in many parts of the developing world the colonial legacy has

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undermined the creation of institutions that protect property rights, enforce contracts, and
provide security against expropriation (Acemoglu, Johnson, & Robinson, 2001). However,
despite being under the ''indirect rule'' of the British empire, the impact of colonialism on
Botswana's institutions was not as severe as it was in other African and Latin American nations.
As Acemoglu and Robinson (2010) suggest, ''the comparative neglect of the colony by the
British administration allowed these institutions not only to persist, but to develop further in
marked contrast to other experiences with indirect rule'' (Acemoglu & Robinson, 2010, p. 44).
Thus, it could be deduced from this brief examination of the contemporary history of Botswana
that its experience represents an example of how best outcomes can be achieved through
endogenous solutions. In other words, Botswana has not only been able to build its own political
system through harnessing the traditional sources of authority of its pre-indepedence tribal
institutions which formed the core elements of its government after independence (Beaulier &
Subrick, 2006), but it has succeeded in creating a set of institutions that secure property rights,
maintain political stability, and provide public goods (Robinson, 2009). Yet, it has been argued
that Botswana still has a long way to go until it achieves modern economic growth and inclusive
sustainable development (Hillbom, 2008), nonetheless, the incredible success that Botswana has
achieved since its independence should be seen as a source of hope for other developing nations,
and that economic development is possible if endogenous solutions and efficient institutions are
taken into account.
5.Conclusion
The gap between the rich and poor nations is still evident nowadays despite the remarkable
improvements that the world has witnessed throughout the last 250 years. While most people are
now healthier, wealthier, more educated, and enjoy their political and civil rights, still, many
people in the less-developing parts of the world are not able to escape poverty and destitution
(Deaton, 2013). Moreover, it has been argued that technological change and innovation are the
engines of economic growth, however, the ability of individuals in a particular society to
accumulate physical and human capital, introduce new technologies, and adopt policies that
support innovation and entrepreneurship is largely influenced by the type of institutional
framework that exists in that society. In other words, achieving economic growth and realizing
the gains from productive transactions require the existence of formal and informal institutions
that secure property rights, enforce contracts, reduce transaction costs, and provide protection
from predatory activities (North, 1994).
Moreover, despite the increased emphasis in the development community on the importance of
establishing the right kind of institutions that induce economic growth and promote inclusive
development, how the efficient institutions can be created is still a source of confusion among
many experts (Rodrik, 2000). However, as the experience of Botswana demonstrates, the best
solutions for the problems of underdevelopment are expected to arise endogenously. Precisely, as
argued in (Hayek, 1945), the real problem lies in the communication of knowledge within

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society, and building on this idea, it could be argued that the kinds of problems that prevail in a
particular society are not necessarily the same ones that exist in another society. Thus, solving a
specific problem requires unique solutions that are expected to arise through the sponatneous
actions of indepedent individuals (Easterly, 2007). Yet, as the experience of successful nations
has shown, the presence of ''inclusive'' political and economic institutions that provide incentives
for entrepreneurial activities and the accumulation of physical and human capital is necessary for
inducing economic growth and promoting sustainable development (Acemoglu & Robinson,
2012). More fundamentally, institutions have to play a critical role in providing incentives for
productive activities on the one hand, and constraining predatory activities on the other (North,
1991).
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Deaton,A.(2013). The Great Escape:health,wealth,and the originsof inquality . Princeton,New Jersey:
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Rodrik,D.,Subramanian,A.,& Trebbi,F.(2004). InstitutionsRule:The Primacyof InstitutionsOver
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