Deal­ing with dam­ag­ing in­sti­tu­tional in­er­tia

Financial Mirror (Cyprus) - - FRONT PAGE -

Deeply rooted, cred­i­ble, ac­count­able, and ef­fec­tive in­sti­tu­tions have long been deemed cru­cial for a so­ci­ety’s last­ing well­be­ing and pros­per­ity. They shield coun­tries from fre­quent and un­set­tling volatil­ity, be it eco­nomic, po­lit­i­cal, or so­cial, and they re­duce the risk of costly shocks. But, nowa­days, key po­lit­i­cal and eco­nomic in­sti­tu­tions are be­ing pres­sured by un­usual flu­id­ity in their op­er­at­ing en­vi­ron­ments and the ef­fects of a cu­mu­la­tive loss of trust on the part of their con­stituen­cies.

The i mpli­ca­tions vary, with a much higher prob­a­bil­ity of adap­ta­tion, in­clud­ing through a rel­a­tively or­derly process of cre­ative de­struc­tion and re-cre­ation, for pri­vate en­ti­ties com­pared to pub­lic ones. The lat­ter re­quire an in­ten­si­fi­ca­tion of re­form ef­forts, lest they con­sti­tute an­other ob­sta­cle to the global econ­omy’s abil­ity to de­liver high and in­clu­sive growth on a last­ing ba­sis.

Like a well-de­signed, well-func­tion­ing road net­work, strong in­sti­tu­tions em­power economies by en­sur­ing a sta­ble op­er­at­ing en­vi­ron­ment, smoother trans­mis­sion mech­a­nisms, less costly and less risky eco­nomic in­ter­ac­tions, a cred­i­ble set of prop­erty rights, and re­spect for the rule of law. They act not only as en­ablers of a wide range of win-win re­la­tion­ships, but also as trusted gate­keep­ers. Ac­cord­ingly, for decades such in­sti­tu­tions were widely viewed as the main fea­ture dif­fer­en­ti­at­ing ad­vanced economies from de­vel­op­ing coun­tries that are still sub­ject to a much larger ar­ray of dam­ag­ing cycli­cal and struc­tural shocks.

In re­cent years, how­ever, this char­ac­ter­i­sa­tion has been chal­lenged, as the stand­ing of pri­vate and pub­lic in­sti­tu­tions with sig­nif­i­cant sys­temic in­flu­ence has de­clined.

For an ex­pand­ing set of pri­vate firms, the main source of pres­sure has been tech­no­log­i­cal, par­tic­u­larly those ad­vances un­der­pinned by the in­creas­ingly pow­er­ful mix of ar­ti­fi­cial in­tel­li­gence, big data and mo­bil­ity. The chal­lenge has proven par­tic­u­larly se­vere, if not fa­tal, for those fac­ing in­tense com­pe­ti­tion from en­trants able to com­bine dis­rup­tive con­tent and big plat­forms – the most no­table ex­am­ples be­ing Ama­zon, Facebook, Google, Net­flix, and Uber. As il­lus­trated by the in­creased reg­u­la­tory in­ter­est they are now at­tract­ing, as well as the in­creased me­dia at­ten­tion de­voted to var­i­ous con­tro­ver­sies (such as those re­lat­ing to “fake news” and in­ter­nal cor­po­rate cul­tures), these com­pa­nies must adapt and re­main ag­ile as they gain greater sys­temic in­flu­ence and no­tice.

The ad­just­ment process is even trick­ier for pub­lic in­sti­tu­tions, es­pe­cially given their wide-rang­ing roles as gate­keep­ers, en­ablers, and reg­u­la­tors. Of­ten em­body­ing the prop­er­ties of “nat­u­ral mo­nop­o­lies,” they are not only shielded from dis­rup­tion but can also re­press and de­lay ben­e­fi­cial in­no­va­tions. In­ter­nal in­er­tia, in­com­plete in­for­ma­tion, risk aver­sion, and con­scious and un­con­scious bi­ases com­bine to im­pede recog­ni­tion of the ur­gency and im­por­tance of adap­ta­tion. Even more be­nign short­com­ings – such as slow­ness in mod­ernising laws to catch up to chang­ing re­al­i­ties – de­tract from eco­nomic well­be­ing.

The vis­i­ble and per­sis­tent fail­ure of ed­u­ca­tion sys­tems to adopt ex­cit­ing tech­no­log­i­cal break­throughs is a well-known ex­am­ple of this in­er­tia. Less ob­vi­ous is the lag among eco­nomic in­sti­tu­tions in up­dat­ing pol­icy ap­proaches, in­clud­ing through faster in­cor­po­ra­tion of im­por­tant in­sights and tools from be­havioural science, AI, neu­ro­science, and other dis­ci­plines. Then there are the per­sis­tent slip­pages in skill ac­qui­si­tion pro­grammes.

As a re­sult, there has been a no­table ero­sion of trust in the ef­fec­tive­ness of pub­lic in­sti­tu­tions. And the dam­age to their cred­i­bil­ity risks fur­ther un­der­min­ing their ef­fec­tive­ness and per­pet­u­at­ing a vi­cious cir­cle set in mo­tion by their fail­ure to gen­er­ate high and in­clu­sive growth.

Our un­der­stand­ing of how pub­lic in­sti­tu­tions should adapt and re­form is still evolv­ing. As such, a com­plete so­lu­tion is yet to emerge. But a few im­per­a­tives are al­ready clear:

· Limit harm, in­clud­ing by re­sist­ing the nat­u­ral in­cli­na­tion to pro­mul­gate in­creas­ingly in­ef­fec­tive, al­beit es­tab­lished ap­proaches, en­ti­ties, and mind­sets.

· Be much more open to the les­sons that can be learned from ex­ter­nal dis­rup­tors, and be will­ing to re­visit the un­der­pin­nings of pro­cesses and en­tire busi­ness mod­els.

· En­hance pub­lic-pri­vate in­ter­ac­tions, not just for di­rect con­tent, but also as a way to broaden the scope for greater cross-fer­til­i­sa­tion of best prac­tices.

· Im­prove meth­ods of pub­lic com­mu­ni­ca­tions, lest con­tin­ued in­for­ma­tion fail­ures, ag­ing chan­nels, and the cu­mu­la­tive ero­sion of trust short­com­ings.

Up to now, too many in­her­ently in­flu­en­tial in­sti­tu­tions have lagged in iden­ti­fy­ing and im­ple­ment­ing re­forms. This has am­pli­fied the dis­ap­point­ment, alien­ation, and marginal­i­sa­tion felt by seg­ments of the pop­u­la­tion vis-à-vis gov­ern­ments that do not hear or re­spond to a deeply en­trenched fear of eco­nomic in­se­cu­rity. It is a phe­nom­e­non that has been many years in the mak­ing, that can­not be elim­i­nated overnight, and that in­creas­ingly fu­els so­cial and po­lit­i­cal dis­rup­tions.

In­sti­tu­tions mat­ter, es­pe­cially in a pe­riod of eco­nomic, po­lit­i­cal, and so­cial flu­id­ity. The longer it takes to re­store con­fi­dence in key pub­lic and, to a lesser ex­tent, pri­vate in­sti­tu­tions, the greater the im­ped­i­ments to our well­be­ing and that of our chil­dren.

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