• A recent article on the Economist magazine makes a very direct (if rather obvious, on the second thought) argument that try to pinpoint why underdeveloped states do not attract resources for development. The article states "lack of trust," particularly on societal institutions, as the root cause of economic failures. Specifically, in underdeveloped states, there is complete lack of popular confidence that bureaucracies will function as they are created for, laws will be enforced as written, and any written agreement will be honored as stipulated in their terms.

    The result of such systematic lack of trust in institutions is that transactions, business or otherwise, will be assumed as incapable of being completed as intended. The cost of transaction will be infinitely increased as investors deal with unmitigatable risks of not being able to keep even initial capital (not to mention returns) sunk into the underdeveloped destination, and contractors and suppliers fear labor and physical resources devoted will not be compensated by investors. With full expectations that legal enforcements f transaction terms will not happen, legal institutions are simply not incentivized to improve their accountability.

    While the article goes to argue that use of technologies to make transactions more transparent, and thus more accountable, could increase societal trust in institutions, the author is more interested in something else related to his own work. And that is, how the presence of aid help entrench a widespread sense of distrust in institutions. To limit the following argument, here, "institutions" are defined as those formalized by the state as written rules for economic operations (laws, policies, and state players that are created by the local government to govern how businesses are to be conducted).

    A previous blog post has already argued that current weakness of state economic institutions has led to some NGOs being perceived as viable substitutes for the state. But that post fails to note that because NGOs have no intentions to replace the state (that obviously, would lead to the NGOs being shut down overnight) and in most cases, work outside state institutions, their operations disincentivize local populations from providing feedback to state institutions for improvements (and thus capacity to gain trusts). After all, locals see a perfectly good alternative in NGO presence to go through the hassles of governmental displeasure.

    Moreover, distrust in governmental institutions are furthered by their trust in much less rigid "institutional alternatives" offered by aid-giving organizations. To take a simple example, getting agricultural or educational subsidies through government programs usually involve lengthy application process, hampered by the monetary and political costs of getting needed approvals and documentations from relevant authorities. In contrast, getting money from aid organizations is, more often than not, simply about begging harder and longer, triggering sympathetic response that lead to flexible change in "rules" that favor those who beg.

    The trust in those ever-changing "rules" are backed by a change in mentality toward emotional displays, usually through the means of shamelessly pandering a mix of factual and fictional economic difficulties at the individual level, fully believing that foreign aid organizations are basically charity cash cows with endless flow of cash to be doled out to the most needy. In the process, the economic rationale of aid, needed to ensure hand-outs are used in the most productive ways, are scoffed at as mere "stinginess," making government development programs using such methodology even less trusted by the populace.

    Such ignorance among locals that aid is fundamentally not sustainable over time is difficult to dispel. One aid organization that runs out of money is usually replaced by a whole bunch of other ones, even having their own "rules" of raining cash on poor communities. Spoiled for choices, locals feel much reduced need to undertake regular profit-seeking business activities, dampening any enthusiasm for local governmental authorities to create better business environments through focus on institution-building. As the focus dims, institutions languish, conceivably becoming even less trustworthy over time.

    It is hard to say whether great reductions in aid will automatically lead to refocus on governmental institutions. After all, institution-building requires resources, and aid-dependent economies will simply not have resources to spare when aid-giving stops. At that time, riots by a populace used to asking money from foreigners are more likely to destroy, rather than help improve, whatever that are left of the already weakened governmental institutions. Ironically, if that happens, it will happen because of popular trust in government capacity to alienate money-rich foreigners.

    Image Credit: http://thebricspost.com/