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Reconstructing Institutional Quality or How To Ensure Investments

July 5, 2017 3:52 pm A+ / A-

Aldo Abram, economist and executive director of  Fundación Libertad y Progreso explains why stability and respect for the rule of law are important for an economy to grow. 

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  Argentines are still waiting for the promised increase in investments. It is clear that moving away from a course that would lead to a certain crisis and, moreover, solving the problem that arose from the trial regarding payment to the holdouts in New York was not enough. Solving both of these issues was key to giving Argentina access to external financing, which is fundamental for the government to achieve its goal of gradually lowering the deficit. However, this was not enough to secure long-term investments.

  A significant fact to keep in mind is that legal security in Argentina has decreased for several decades. According to the 2017 International Index of Institutional Quality, which includes data and rankings from 192 countries around the world, Argentina is second only to Venezuela in terms of the number of positions it descended over the last 22 years. It fell from 94th place to 138th. However, we did see an improvement of 4 steps between our performance in 2015 (142) and our performance in 2016 (138). It is great news that after 10 years of institutional decay, in which our performance decreased by 45 steps, we can now see an improvement for the first time.

  We expect this government will continue to foster our institutions. However, we should remember the words of a former minister who once argued “legal security” was a horrible concept. Furthermore, we had a third-tier official who had so much power he could call someone and illegally tell them how to run their business. Someone who aims to start a business, or buy one, expects to recover their investment in 20 or 30 years. However, in the democratic republic of Argentina, an alternation in power is to be expected. No matter how successful the current administration may be, eventually we will have a president from a party currently in the opposition. Hence, local and foreign investors will also look at their potential policies and will realize that they still retain the old vices that would lead to the destruction of institutional quality.

  The well-being of a country’s citizens and the opportunities afforded to them depend on the development of their creativity, work ethic, and investments. These societal qualities can only be enhanced if the rule of law is respected. A set of legally enforced rules can only be consolidated within a strong institutional framework. Hence, as citizens, we should require that politicians respect the Constitution. The deeply rooted argument that the end justifies the means, which is implemented to solve problems quickly- even if this requires stepping over a few rights or institutions- is blatantly false. The truth is that Argentina’s problems can be solved within an institutional framework. It is true that this requires more work and may cost more in the short term. However, countries throughout the world that have done this have shown that it has many long term benefits. If you look at the 20 countries with the highest ranking institutions, it shouldn’t be surprising that they coincide with those that give their inhabitants the greatest well-being.

  It is possible to alter the course of affairs. New Zealand (that is currently  ranked number 1), Canada (8) and Australia (11), along with Argentina, were among the countries with the stronger institutions and fastest-growing economies at the beginning of the 20th century. Like our country, these countries also faced decay in the 1930s. However, over the second half of that century, these societies decided to end their regression and face the strenuous path of institutional reconstruction. They knew it would take time to see results, and they were right. Argentines, on the other hand, decided to persevere in the path of civic irresponsibility and disrespect towards the law and the Constitution. Today we see the institutional detriment that can be expected from that attitude. The per capita GDP in New Zealand and Canada is over 3 times higher and in Australia it is over 4 times as high. In those countries, inhabitants can trust that contracts are going to be fulfilled, that the government will not confiscate their savings or keep a big part of their profits in the form of abusive taxes, that the three branches of government will control that the others comply with their respective functions and that these branches will set limits to the others so none of them can override the rights of citizens or steal money through corruption. Let’s hope that Argentines have learned from our poor history of emigrating to those countries because our country could provide the same opportunities for development and self-realization.

Reconstructing Institutional Quality or How To Ensure Investments Reviewed by on . Aldo Abram, economist and executive director of  Fundación Libertad y Progreso explains why stability and respect for the rule of law are important for an econo Aldo Abram, economist and executive director of  Fundación Libertad y Progreso explains why stability and respect for the rule of law are important for an econo Rating: 0

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