# **2.2. The role of institutions**

Institutions are considered to have a large and fundamental impact on economic development. The results of a study estimating the respective contributions of institutions, geography, and trade in determining income levels around the world indicate that the quality of institutions essentially "trumps" everything else (Rodrik et al. 2004). Based on an extensive literature review, Kim, Loayza, and Meza-Cuadra (2016) find that effective institutions are one of the key determinants of economic productivity. Differences in economic institutions, rather than geography or culture, cause differences in per capita incomes (Acemoglu et al. 2005). Solving the problem of development will entail reforming economic institutions, however doing so depends heavily on the nature of political institutions and the distribution of political power in society (Acemoglu and Robinson 2008). How institutions operate and implement reforms can have a strong impact on the outcome of the reform and its impact on society and economic growth.

Policy making and policy implementation do not, however, occur in a vacuum. _The World Development Report 2017: Governance and the Law_ discusses in detail the importance of improving governance to meet today’s development challenges. By going beyond explaining the types of policies implemented, the report delves into _why_ policies do not always translate into development outcomes in the expected ways. Often policies and technical solutions fail to achieve intended outcomes. The report identifies _commitment, coordination, and cooperation_ as the three core functions of institutions that are needed to ensure that rules and resources yield the desired outcome.

In the aspect of business regulatory reform, successful implementation depends on a range of factors that can undermine successful implementation. Specifically, lacking coordination, overlapping responsibilities and blurred accountabilities between the government agencies involved in implementation of reform agenda, coupled with absence of consultation with the private sector, may significantly hinder the implementation of legislative reforms in practice (Beschel et al. 2018). A recent World Bank report based on country case studies from different regions, income groups, and political systems finds that strong institutional mechanisms can provide a basis for continuous improvement of business regulations and thus allow countries to sustain reform implementation and shape public officials’ incentives (Arlet et al. 2020).

Similarly, according to the OECD, effective and credible mechanisms inside the government for managing regulation are indispensable for reform. Successful regulatory practices in the OECD countries consistently include effective mechanisms for managing regulations and coordinating reform efforts, along with monitoring and reporting on outcomes (OECD 2002). Similarly, an OECD study documenting implementation challenges for regulatory reform recognized appropriate institutional arrangements as essential components of a comprehensive strategy for regulatory reform (OECD 2007). Deciding on which form is most appropriate generally depends on a variety of factors related to the legal and political culture of governance in each country, and its resources.

The strength, credibility, and effectiveness of institutions also lies in their ability to engage stakeholders. Consultative policy making and implementation has several benefits. It legitimizes a government’s reform agenda (OECD 2019), gives stakeholders ownership of the reform process, and ensures that reforms are embedded in practical realities. More importantly, firms and private sector representatives can provide critical insights into existing regulatory issues, thereby informing evidence-based decisions and policies (Davel 2016). Countries with constructive and actively used public-private dialogue platforms tend to have better business climates, a larger SME sector, and greater respect for the rule of law (World Bank 2016). Private sector consultations can further legitimize and boost trust in a government’s reform agenda as well 4